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drmkshahzed Thursday, October 08, 2009 01:52 PM

world economy: After the storm
 
The new economic landscape will be grim unless policymakers act to foster growth

Illustration by Jon BerkleyIN THE political dictionary he first published in 1968, William Safire, who died on September 27th, devoted an entry to the word “normalcy”. The term was made popular by Warren Harding, campaigning for America’s presidency in the wake of the first world war. It was inescapable after the terrorist attacks of September 11th 2001. Normalcy is what people call normality when they no longer take it for granted. No surprise, then, that the word reappeared in the communiqué released by the leaders of the G20 group of big economies after their Pittsburgh summit on September 24th-25th. After the wrenching economic crisis of the past year, people crave stability and predictability—in short, normalcy. But how far off is it? And what will a “normal” world economy look like after the biggest financial bust since the Depression?

The new normal
Glance at share prices or short-term growth forecasts and you might feel comforted. Output has stopped shrinking in all the world’s big economies. In its latest forecasts the IMF reckons global GDP will expand by 3.1% next year, 1.2 percentage points faster than it forecast in April. Global stockmarkets have rallied by 64% since their trough. Corporate finance, once frozen, is thawing fast (see article). Bearish analysts are once again having to justify their pessimism (see article).

Yet closer inspection suggests caution. Despite a welcome return to growth, the world economy is far from returning to “normal” activity. Unemployment is still rising and much manufacturing capacity remains idle. Many of the sources of today’s growth are temporary and precarious. The rebuilding of inventories will not boost firms’ output for long. Across the globe spending is being driven by government largesse, not animal spirits. Massive fiscal and monetary stimulus is cushioning the damage to households’ and banks’ balance-sheets, but the underlying problems remain. In America and other former bubble economies, household debts are worryingly high, and banks need to bolster their capital. That suggests consumer spending will be lower and the cost of capital higher than before the crunch. The world economy may see a few quarters of respectable growth, but it will not bounce back to where it would have been had the crisis never happened.

That realisation alone should temper some of the optimism buoying financial markets. But the prospect of a “new normal” (a phrase popularised by Mohamed El-Erian, the boss of Pimco, a fund manager) still spans at least two distinct possibilities. One is that the world economy returns roughly to its pre-crisis rate of growth, without regaining the ground lost. That, the IMF points out, is what happens after most financial crises. The second, more depressing possibility is that growth stays at a permanently lower rate, with investment, employment and productivity growth all feebler than before.

The difference between these outcomes is huge, as our special report on the world economy points out. Persistent damage to economies’ growth potential would result in a darker future of sluggish income gains and diminished expectations. That, above all, is what policymakers must avoid. To do so, they must pull off several tricky manoeuvres: shoring up demand now without wrecking the public finances; containing unemployment without inhibiting the shift of workers from old industries to new ones; and, more than anything else, fostering innovation and trade, the ultimate engines of growth.

Shoring up demand is the most urgent task. It is no secret that global spending must be rebalanced: indebted American consumers must cut back, while thrifty countries should spend more and save less. In China this means a stronger currency, bigger social safety-nets and an overhaul of subsidies to increase the share of national income going to workers. Germany and Japan need structural reforms to boost spending, especially in services. What has long been lacking is the political will—and here the G20 seemed to make progress. The Pittsburgh communiqué promised to subject members’ economic policies to “peer review”. These reviews may prove toothless, but the commitment to them is a step forward.

Private spending in surplus economies will not soar overnight. The world economy will rely more on governments for longer than anyone would like. Premature fiscal repairs could jeopardise the recovery, as America learned in 1937 and Japan rediscovered 60 years later. Governments must eventually fix their balance-sheets, but only when the private sector is strong enough—and it must be done in a way that boosts economies’ growth potential. The bulk of the adjustment should come from spending cuts. Where revenues must rise, taxes on consumption or carbon are better than those on wages or profits.

Out with the old
Governments must also combat joblessness without ossifying their labour markets. High unemployment can do lasting damage, as people lose their skills or their ties to the world of work. This danger justifies efforts to slow lay-offs or encourage hiring. But not all such remedies are equal. Some of the most popular of today’s schemes—such as paying employers to cut hours rather than jobs, as in Germany—try to preserve the labour force in aspic. Economies must be free to reinvent themselves and allow thriving industries to replace ailing ones.

The path of productivity growth will determine the nature of the new normal more than anything else. In the rich world, innovation sets the pace. Elsewhere, trade is often more important. Both are now under threat. Cash-strapped companies are skimping on research and development. Emerging economies are having to rethink their reliance on exports for growth. Both rich and poor governments will be tempted to intervene. They should avoid cosseting specific industries with subsidies or protection. Allowing market signals to work will do more to boost productivity than cack-handed industrial policy.

Add all this up and the difficulties are formidable. “A sense of normalcy should not lead to complacency,” the G20 communiqué says, with both rhyme and reason. The storm has passed. But policymakers have a lot to do—and a lot of mistakes to avoid—if they are to make the best of the recovery.

drmkshahzed Thursday, October 08, 2009 02:12 PM

Better safe than sorry
 
Civil-libertarians are falling out of love with the president

AP“WE REJECT as false the choice between our safety and our ideals.” So Barack Obama declaimed in his presidential inaugural in January. On his second full day in the White House he said he would close the Guantánamo prison in Cuba within a year and stop any American from using torture or mistreatment to extract information from suspected terrorists. Civil-libertarians were thrilled. Eight months on, however, they are less so.

Michael Macleod-Ball of the American Civil Liberties Union (ACLU) admits that Mr Obama started “with a bang”. On torture, Mr Obama has been absolute: no American is now allowed to torture or mistreat a detainee. He has shut down America’s secret detention centres overseas and allowed the Red Cross to visit the non-secret ones. He still intends to close Guantánamo, though the one-year deadline is in danger of slipping. The great disappointment for the liberties lobbyists is that when Mr Obama promised to close Guantánamo he did not mean that America would stop detaining and holding suspected terrorists without trial.


Of the 200 or so remaining Guantánamo inmates, the administration considers a few score too dangerous to release. It also thinks they are impossible to try successfully in regular federal courts, either because the evidence against them (sometimes extracted by torture) is unreliable or inadmissible, or because a trial could expose intelligence sources. Like George Bush, Mr Obama intends to keep such people locked up—just not in Guantánamo. In May, however, he said he would work with Congress to find an “appropriate” legal regime to hold suspected terrorists in ways “consistent with our values and our constitution”.

It emerged last week with rather less fanfare that Mr Obama has now changed his mind. He will not ask Congress to write a new law after all. Instead, he will continue to detain suspects indefinitely by relying on the broad authorisation to use military force that Congress gave President Bush after the September 2001 attacks.

The latest flip-flop has divided the president’s critics. On one side are the civil-liberties groups, such as the ACLU and Human Rights Watch (HRW), for whom no system of prolonged detention without trial could ever be consistent with America’s values or constitution. They were aghast at the prospect of Congress enshrining such a system in law, and mildly relieved that Mr Obama has reversed himself. Kenneth Roth, HRW’s executive director (and a former prosecutor), argues that many of the detainees in question could indeed be tried successfully in a proper court. As for the few that can’t be, America’s moral credibility and ultimate success against terrorism would be best served by letting them go.

To many experts on counter-terrorism law, however, this sounds like a counsel of impossible perfection. The difficult issue, they say, is not whether such detentions should continue—they should—but what the rules should be and what rights the detainees should enjoy. And these, argues Benjamin Wittes, a senior fellow at the Brookings Institution in Washington, are the sort of complex questions that the legislative branch has a duty to settle.

Mr Wittes believes that Mr Obama was right first time, when he invited Congress to help frame a clear law. Without one, the judges hearing these habeas corpus cases have had to make up the rules as they go along. In the end, says Mr Wittes, the Supreme Court will have to adjudicate, and the final say will in practice fall on one unelected individual—Anthony Kennedy, the court’s swing judge.

But Congress itself has shown little appetite for serious lawmaking on this subject. Members who care mostly want to ensure that none of its inmates will be moved to their own district. That is one big reason why Mr Obama’s plan to close the camp is running late. And now his guiding instinct, too, appears to be safety first.

drmkshahzed Thursday, October 08, 2009 02:13 PM

Home-grown bombers
 
The latest plots involve malcontents who have lived for some time in America

AP

Zazi, bus driver turned suspectWITHIN a week, at least five men have been charged with plotting terror attacks in America. On September 29th Najibullah Zazi, a 24-year-old Afghan immigrant, pleaded not guilty to conspiracy to use weapons of mass destruction in New York. On September 23rd Michael Finton was charged with trying to blow up the federal building in Springfield, Illinois. A Jordanian was charged last week with attempting to destroy a Dallas skyscraper, and on the same day new charges were brought against three men in North Carolina for planning to attack a Marine base.

The New York case was by far the most serious. Investigators found on Mr Zazi’s laptop specifications for triacetone triperoxide (TATP), the explosive used in the 2005 bombings on the London Underground. According to court documents, over the summer he and unidentified associates purchased “unusual quantities of hydrogen peroxide and acetone products”, and attempted to make the explosives in a Colorado hotel.

Mr Zazi lived in New York for a decade before moving earlier this year to Denver, where he drove an airport bus. On September 9th he drove from Colorado to New York City. Prosecutors suspect he was planning to plant a bomb on the September 11th anniversary. But he quickly returned to Denver when a Queens imam, who was a police informant, alerted him that he was being tracked.

Mr Zazi is a legal resident, who came to America with his family in his early teens. Mr Finton, a part-time fry cook, is a full citizen, who converted to Islam in prison and then went to Saudi Arabia. Along the way, he devised plans to kidnap and murder a congressman. In the end, however, he packed a ton of explosives into a truck and parked it by the Springfield federal building, a few blocks from Abraham Lincoln’s house, on September 23rd. FBI agents, who had him under surveillance, arrested him after he had twice tried to detonate the bomb with his mobile phone.

Since the 2001 attacks more than 23 publicly known terrorist plots have been foiled, according to the Heritage Foundation, a conservative think-tank. In part, this is thanks to niftier anti-terrorism tactics and better co-operation between government agencies. New York’s police department, for instance, has sent officers overseas. The city spent $300m last year on counter-terrorism, almost all “on our dime”, says Ray Kelly, New York’s top cop.

According to the most recent data from New York University’s Centre on Law and Security, 693 terror suspects have been prosecuted. Of these, about a third were actually charged with terrorism. And shockingly, about a third of the suspects, like Mr Finton, were citizens.

drmkshahzed Thursday, October 08, 2009 02:15 PM

How many Mexicans does it take to drill an oil well?
 
More than 140,000, and even then they’re not very good at it. For this, now acute, problem, blame the politicians

Eyevine
IT IS bad enough that Mexico’s economy is in deep recession, triggered by its close links to the ailing United States. To make matters worse, the country’s oil industry, its fiscal cash-cow for the past three decades, is declining swiftly (see chart). As recently as 2004 Cantarell, the country’s main offshore field, produced 2.1m barrels per day (b/d) of crude. Now its output is just 600,000 b/d. There are no obvious replacements: 23 of the 32 biggest fields are in decline. Barring big new finds, the world’s seventh-largest oil producer is forecast to become a net importer by 2017.

The Mexican treasury is ill-prepared for this. Taxes and royalties from Pemex, the state-owned oil monopoly, have accounted for almost two-fifths of federal revenues in recent years, compensating for one of Latin America’s weakest tax regimes (which collects just 11% of GDP). If oil output drops below 2m b/d, as many industry-watchers fear, the government would be forced to cut spending by more than 10%—or jack up taxes correspondingly, to avoid an unsustainable budget deficit. This might threaten economic recovery.

There is no mystery behind the decline. The constitution bans private investment in hydrocarbons. Ever since Lázaro Cárdenas expropriated foreign oil companies in 1938, the state oil monopoly has been seen by many politicians, especially from the formerly ruling Institutional Revolutionary Party (PRI) and its offshoots, as the untouchable bone marrow of Mexican sovereignty. To make matters worse, Pemex has been run more in the interests of its workers and their trade unions than of the Mexican people, its notional owners.

All this has curbed the country’s ability to capitalise on its geological wealth. Since many oil-exploration projects take longer than the six-year presidential term to bear fruit, the politicians have a powerful incentive to spend oil revenues rather than reinvest them. From 1983 to 2000 Pemex’s annual investment budget was a paltry $3 billion. Until recently Cantarell’s bounty disguised this. After the conservative National Action Party (PAN) broke the PRI’s seven-decade grip on power in 2000, Pemex started to invest more. But higher labour and equipment costs absorbed much of the increase. Much of the new money was ploughed into Chicontepec, a project in the state of Veracruz that Pemex hoped would replace Cantarell. But this is yielding just 29,000 b/d so far.

Opportunity beckons beneath the deeper waters of the Gulf of Mexico, where some 50 billion barrels of oil are thought to rest. In the American part of the Gulf, 300 or so deepwater wells are drilled each year. Last month Britain’s BP found a big new field (with perhaps 3 billion barrels) there. Pemex has drilled just ten deepwater wells, but found little oil. It lacks the expertise, technology and capital it needs.

Even if Mexico allowed private companies to explore for oil, they would have to invest $10 billion a year to halt the decline in output, reckons David Shields, who edits a specialist magazine on Mexican oil. Under today’s law, in which private firms can only act as service providers for Pemex, that investment would be much higher, he says.

Felipe Calderón, the president, has tried to address the problem. A law approved last year is supposed to make Pemex more agile, by appointing independent directors and separating its contracts from government-procurement procedures. But to gain the opposition’s votes in Congress he dropped a key proposal that would have allowed contract prices to vary according to the success or failure of exploration. Pemex will be able to pay extra in some circumstances, but is explicitly barred from linking these incentives to production.

To implement this vaguely worded legislation, Mr Calderón last month appointed Juan José Suárez Coppel to head Pemex. He was once its finance director, and has private-sector experience. His job will be to pilot the negotiations with private oil-service firms. The government has not yet published guidelines for these contracts, and no deals are expected until next year. Few are optimistic about them. “Companies are used to calling things by their names,” says Luis Miguel Labardini, an energy consultant. “This game of syntax, of finding a semantic formula to match ‘productivity improvements’ or ‘cost efficiencies’ to output, is going to be too much for them.”

Mr Calderón last month called for a second energy reform. Much could be done even without changing the constitution, by linking the value of service contracts to production and slimming Pemex, where the payroll of 143,000 is at least 30,000 too big. But it is hard to see discussion on a new law before the previous one has even been implemented, and harder still to foresee its approval, since the PRI and its allies gained a majority in the lower house of Congress in a mid-term election in July. Some PRI leaders have ties to the oil workers’ union. And big lay-offs in the trough of recession would anyway be politically toxic. Sooner or later fiscal reality will force change. But by then the oil age may be over.

drmkshahzed Thursday, October 08, 2009 02:17 PM

The law in whose hands?
 
The army’s triumph over the Taliban in the valley risks turning sour

APTHE mayor of Swat, a pretty valley in north-west Pakistan that the army has just wrested back from the Taliban, has now returned to work. But instead of overseeing the rebuilding of the schools and roads, he has gathered his own lashkar, or traditional tribal militia, 2,500-men strong, to defend his village and nearby areas.

In late September Jamal Nasir, who used to feature near the top of a Taliban hit-list, returned to the Matta area of Swat two years after militants burned his house. He says that repairing infrastructure and damaged buildings can wait. Organising anti-Taliban forces comes first. “You have to involve the people in their own defence,” he says. “The army won’t stay here forever.”

Armed lashkars, or “village-defence committees” to employ the less aggressive term now in vogue, are being set up across Swat as unpaid private armies to guard individual districts. Swat was a relatively developed area, so the lashkar tradition is having to be relearnt. Such militias did not exist when the Taliban staged a near-complete takeover of the huge valley with ease in the autumn of 2007.

Militia members bring their own firearms. The better-off have Kalashnikovs; others have old shotguns or rusty pistols. Some white-bearded old men turn up with an axe or just a stick. At the airport outside Swat’s main town, Mingora, a lashkar about 10,000-strong rallied on September 24th (see picture), and was addressed by an army brigadier. This was a sign of the sanction the lashkars enjoy from the army and the government. Some see this as a dangerous abdication of authority that could spell trouble in the longer run.

More worrying for the time being is another development outside the law: extra-judicial killings. An estimated 300 to 400 corpses of suspected Taliban have turned up in Swat, dumped on street corners, bridges or outside homes. Last month Pakistani newspapers gave a figure of 251 bodies. Most show signs of severe torture. Some were killed with a single shot to the head, hands tied behind their backs. Often the dead were last seen alive being taken away by soldiers. The army claims they were killed in combat or by lashkars or others taking revenge on former tormentors.

Most of those who joined the Swat chapter of Pakistan’s fearsome Taliban movement were locals, from a Pushtun society that sets great store by vengeance. Swatis believe that most of the dead were genuinely involved in the Taliban, and so deserved their punishment. “Speaking not as a lawyer but as a citizen, I’d say that human rights are for human beings,” says Farid Ullah, a lawyer in Mingora. The Taliban he says, were not human. “Their acts were barbaric. They used to slit peoples’ throats with a knife.”

In early August the army dragged Ayub Khan away from his home in Mingora. Nine days later his body turned up on a nearby bridge. The 42-year-old newspaper hawker and father of five had been shot in the side of his head. He appeared to have been beaten all over including on the soles of his feet, with something like a belt. Several locals say that he had been a minor informer for the Taliban, spying on government offices on his paper rounds.

No official general investigation into the killings has been ordered and locals are terrified to speak about them. If the army is responsible, the purpose seems to be to show the people of Swat that the dreaded Taliban really have been eliminated. After several half-hearted operations in the past, Swatis were highly sceptical. This time however, the operation has been serious and remarkably successful. Some 2m people displaced in May were back in their homes by August, the Taliban routed.

Even locals tolerant of the torture and extra-judicial execution of Taliban members, however, are uneasy that some innocents have perished horribly. Akhtar Ali, for example, was picked up from the street at around 4pm on September 1st at a checkpoint in Mingora. Many passers-by saw the 28-year-old, who ran a popular electrical repair store, being taken away. His family were assured later that day that he would be released. But at 6am on September 5th his corpse was dumped on the doorstep of the family home, where many in the neighbourhood saw it. Every inch of his body showed signs of abuse, including burns made with an iron and the marks of merciless beatings. He was not shot, but tortured to death. It seems that he may have been a case of mistaken identity.

Asma Jahangir, chair of the Human Rights Commission of Pakistan (HRCP), an independent organisation, argues that even if the killings are being carried out by the militias, “these lashkars have been formed by the government.” The military spokesman in Swat, Colonel Akhtar Abbas, insists that there have been no killings in custody by the army, which is a “disciplined organisation”. However, in the one case of Akhtar Ali, an internal probe is under way, headed by a brigadier, the results of which may or may not be made public.

The HRCP says there is evidence of at least two mass graves in Swat. The army claims that retreating militants killed their own injured co-fighters, to prevent them passing any information to the authorities. Pakistan’s Western allies, though glad at the evidence of new vigour in Pakistan’s fight against the Taliban, are privately concerned about the killings, which risk sullying the army’s recent gains.

drmkshahzed Thursday, October 08, 2009 02:23 PM

From Saigon to Kabul
 
Vietnam haunts Barack Obama as he decides what to do in Afghanistan

Illustration by M. Morgenstern
MAO ZEDONG called it protracted war; the Spanish in Napoleonic times knew it as guerrilla; and Muslim militants from Indonesia to Mauritania call it simply jihad. Perhaps the best description of insurgency is “War of the Flea”, the title of a 1965 book on revolutionary warfare by Robert Taber, an American who witnessed Fidel Castro’s success in Cuba. “The guerrilla fights the war of the flea,” he wrote, “and his military enemy suffers the dog’s disadvantages: too much to defend; too small, ubiquitous and agile an enemy to come to grips with.” In the end, exhausted, the dog dies or gives up the fight.

It happened, among others, to the British in Palestine, the French in Algeria and, momentously, the Americans in Vietnam. The helicopters whisking evacuees from Saigon in 1975 still haunt America. “Vietnam”, synonymous with “quagmire”, is shorthand for an unwinnable war. So it was over the war in Iraq. And so it is now over the one in Afghanistan. President Barack Obama rejects the comparison with Vietnam—“You never step into the same river twice,” he says. But the V-word is back in vogue.

In the most recent version of the allegory, the backdrop is the Hindu Kush, with an even fiercer reputation for breaking foreign armies than Indochina. President Hamid Karzai, besmirched by a fraud-ridden election, plays the role of Ngo Dinh Diem, South Vietnam’s repressive and corrupt prime minister and later president. General Stanley McChrystal who, having received 21,000 extra American troops wants up to 40,000 more, is cast as General William Westmoreland, whose answer to every problem was to use more force. Mr Obama’s role is undecided. The chorus asks: will he play John Kennedy, who rejected his generals’ demand for combat troops (he sent advisers); or Lyndon Johnson, whose misguided air- and land-war doomed his presidency?

The characters consult oracles, but the advice is ambiguous. Gordon Goldstein’s “Lessons in Disaster” tells the story of the Vietnam-era national security adviser, McGeorge Bundy, who later recanted his hawkish views. Rufus Phillips’s “Why Vietnam Matters” argues that America’s error was to take over the war from the South Vietnamese.

To many, Vietnam proves the futility of Western powers using force in somebody else’s country. The West’s record in colonial wars, and later interventions, is hardly glorious. Yet there have been some successful counter-insurgency campaigns, notably by the British in Malaya in the 1950s and by the Americans in the Philippines a century ago. Even in Vietnam, many scholars argue, the Americans belatedly got the knack for irregular warfare, blending political, economic and military action. South Vietnam, they note, was largely pacified after the 1968 Tet offensive; it succumbed not to the insurgents, but to the regular armies of North Vietnam, after the war effort was starved of support by Congress. America did not lose the fight; it lost the will to fight.

Such lessons have been learnt, or rather relearnt, by the American army and encapsulated in the now-famous counter-insurgency (COIN) manual, FM 3-24, issued in 2006. Seeking to exorcise the ghost of Vietnam, it says the main objective is to protect the population rather than kill the enemy. Such ideas were adopted with considerable success (and luck) in Iraq. Even as Mr Obama withdraws from Iraq, it looked as if he would apply the same theory to what he called the “war of necessity” in Afghanistan. He sent more troops there, approved a “comprehensive” counter-insurgency strategy for Afghanistan and appointed General McChrystal, a veteran of the Iraq war, to put it into action.

But suddenly Mr Obama is wobbling. He says he will consider the general’s request for troops with a “sceptical” mindset even though it should have come as no surprise. Protecting a population needs lots of boots on the ground. General McChrystal wants around another 200,000 Afghan soldiers—recalling America’s abortive attempt at “Vietnamisation”.

A’stan is not ’Nam
Yet the comparison between Afghanistan and Vietnam has obvious flaws. The Vietcong had the full-blooded support of North Vietnam which, in turn, was backed by China and the Soviet Union. The Taliban enjoy a haven in Pakistan (and perhaps the help of some of its spooks) but they have no state sponsor. The scale of fighting is much smaller today. In Vietnam America lost hundreds of aircraft and about 55,000 soldiers; in Afghanistan America has mastery of the skies and has suffered about 850 dead (one-fifth the losses in Iraq). NATO allies have lost some 570 soldiers. American opinion is ambivalent rather than hostile. There is no draft, and no taunts that American soldiers are “baby-killers”. The memory of the attacks on September 11th 2001, ordered by al-Qaeda leaders who lived in Afghanistan, is still powerful.

In some respects, though, lessons of Vietnam should be heeded. Winning over a population requires a credible and legitimate government. It must be tempting to dump Mr Karzai. But the American-backed coup that killed Diem in 1963 brought in an even less savoury bunch. Mr Karzai may be deeply flawed, but he is probably more popular than the other options. The message is that America should compel Mr Karzai to reform—or at least set a clearly better example than the Taliban.

Mr Obama’s understandable caution is starting to look like weakness—even Pakistan’s former leader, Pervez Musharraf, says so. Prevarication is encouraging the sceptics of counter-insurgency (the so-called COINtras) to call for withdrawal from Afghanistan, or for a diminished campaign that focuses on air strikes and raids by special forces to kill al-Qaeda leaders. America’s qualms will sap European allies’ readiness to stay in Afghanistan. And they will embolden the Taliban into thinking that, after eight years of flea-bites, the American dog is about to roll over.


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