Thursday, November 19, 2015

Paris and Western Military Intervention:
False Policy Alternatives

The events in Paris are unquestionably an abomination. A friend commented that this is France’s 9/11. Yet the response of media and public opinion is ominous. No one should condone such terror. But, we should try to maintain our objectivity and to carefully evaluate the complex history behind the events. We also should try to consider a full array of policy responses to these events from a perspective of enlightened and humanitarian goals for our shared future.
Samuel Huntington, some will say, predicted this clash of civilizations.  Alternatively, one may ask whether the historian’s work was prophetic or whether policies on all sides have become self-fulfilling prophecies. From my personal perspective what comes to mind is a verse from one of Donovan’s songs, I stand here with a fading dream
As a starting point we need to analyze the the historical context and to consider the facts. After World War One France and the United Kingdom carved up the Middle East into spheres of influence. These continuing colonialist policies failed to create stable nations, if indeed that was ever a goal. After World War Two, as nation states across the world increasingly gained independence, the world powers resisted independence for Arab Nation States. The founding of Israel was a cornerstone of US policy in the region, while the indigenous Palestinian population was denied self determination (Jeremy Hammond, Foreign Policy Journal). Instead Palestinians were forced from their land and left for decades in refugee camps in Lebanon and Jordan.
We can continue this list right up to the present. The US and UK invaded Iraq on entirely false pretenses, despite the fact that the UN efforts to inspect Iraq for WMD had failed to discover anything. More recently the West hijacked the Arab Spring to promote its own goals of regime change in Libya and Syria. Both of these interventions entailed aerial bombing and the supply of guns to local militias. The result is ongoing civil war in both countries.
The initial mobilization of Islamic resistance fighters took place in Afghanistan as a proxy war against the Soviet Union following its coup attempt and later occupation of that country. The financial support given to those Islamic revolutionaries lit a fuse which has continued to burn across the Muslim world. And the initial support for these groups was provided by the US, Saudi Arabia and Pakistan.
The historical context that I have just briefly presented here is a simple list of facts. Inconvenient facts for those in the West who are calling for war. The war didn’t begin with 9/11 or with the Paris terrorist attacks. It began decades ago and western powers were the perpetrators, the instigators. Acknowledging this is not an attempt to condone terror as a method of resistance. Rather it is an attempt to counter knee-jerk reactions that would support a continuation of failed policies, illegal military intervention by the West in the Middle East.
Since Israel’s founding violence has prevailed in the Middle East. Initially neighboring Arab States tried to face Israel with conventional armies. That attempt failed and resulted in additional loss of territory and eventually an uneasy detente between Israel and its neighbors. Within Israel and the territory occupied during the ‘67 war the world has witnessed an escalating war of resistance vs the Israeli State. The response from Israel has been to progressively enforce apartheid policies, while continuing to build illegal settlements on occupied territory. The response on the Palestinian side has been resistance through intifada and activity the Israelis and most in the West term terrorist attacks. In parallel Israel has pursued a policy of targeted killings and repeated military offensives on Gaza and Lebanon (Noam Chomsky quite rightly calls this State terror). 
There is little question that the efforts to reach a peaceful solution to the conflict in Palestine have been half hearted. It is also clear that Israel prefers either no solution or only a solution which is entirely on its own terms. Since the Afghan conflict, the first Iraq war, the invasion of Iraq and the policy of regime change in Libya and Syria, what we are witnessing is an expansion of the Palestinian-Israeli conflict to include the entire Arab world and the Western powers. Furthermore the methods of warfare are one and the same. The West is employing targeted assassinations, aerial bombardment and military incursions. The Arab resistance is employing terror tactics and is bringing the war to the West. So once again we are witnessing a contest of State terror vs resistance terror. Again, acknowledging this as a fact is not an attempt to condone terrorism. We need to recognize though that a military response to the Paris attacks will most likely serve the perpetuation and escalation of the conflict. By supporting the military option we may end up in a situation similar to that of Israel; no solution, rather perpetual war and terror.
We must consider policy options more carefully, more wisely. In doing so we also need to reflect upon other aspects of the problem. There are demographic and economic issues that we need to consider here as well. The West has an aging population. In the near future the West will have to face a twofold challenge: The collapse of state pension funds and a labor crisis for industry in the West. Industries which have production facilities in the West are faced with the choice of moving production off shore, pushing their governments for more open immigration policies or opting for full scale automation of production. An interesting observation here is that both problems, industrial production and pension programs, could be mitigated through open immigration policies. But there is a catch to such a policy response. Popular opinion is not in favor or such a solution and the evidence on the ground suggests that Western societies are incapable of integrating Muslim immigrants. Remember the Paris riots?
Across the Arab peninsula and North Africa we observe a clear, mirror image of the problem within the West. Demographically there is a population bulge of young people, who face no or at best poor economic opportunity. In addition these young people now face political instability, civil war and the West’s bombing campaigns. Given these facts their only realistic course is to try to emigrate to countries where they may find opportunity. We can argue ad infinitum over the cause of low economic growth in the developing world. But allow me to suggest that the problem has wide joint ownership. The Arab governments certainly share some of the blame as do the economic policies of Western governments. The UN and development banks have for decades talked about the problem, but have utterly failed to develop successful policies to promote sustainable growth.

Europe needs to analyze the failure of past policies, both economic and military, before rushing into an escalation of military conflict. As I noted earlier the military response is most likely to result in permanent war and terror. It will also result in continued, massive migration from the Middle East to Europe. The pressure of migration in turn will result in calls for the end of Schengen and further centrifugal force toward the break up of the Union itself. The terror attacks in Paris were an abomination, but the rational response to our trauma is not a call for revenge or war. Despite the frightening number of casualties, Western civilization is not in imminent danger. Thousands more innocent civilians have been killed across the Muslim world by Western bombs than by the terror attacks within the West (This is but one more inconvenient fact.) Unfortunately though popular opinion fed by mass media sensationalism and misguided political leaders is leaning toward the wrong policy response. As another friend said, this is just going to lead to more racism and madness.

Monday, October 5, 2015

Neocolonial Air Power: The Kunduz Crime

Neocolonial Air Power:
The Kunduz Crime

The NATO air attack in Kunduz is a dual tragedy. Innocent lives were lost and 'Doctors Without Borders' has withdrawn from a country in need of medical support. But in the wake of this tragedy it is useful to reflect on the use of air power today.

During the colonial period Western nations built empires by occupying less developed countries. The popular consensus today is that the practice was egregious and exploitative. Furthermore, most people believe that the wave of independence that began following WWII was a positive trend, even if the full potential of independence has not been realized.

You might ask what connects these two observations? Just this: Western nations and alliances have not ceased intervening in the political affairs of smaller, less developed countries throughout the world. Usually this intervention is managed through economic leverage; hence, the term neocolonialism. Occasionally however, and all too often, western powers revert to the use of military force. Herein lies the connection, but with a new twist.

Today when the US, the U.K. or France employs military force to impose political solutions, they rely overwhelmingly on air power. The reason behind this preference in favor of air power is clear. There is little support within the American electorate for placing ground troops in harm's way. Political and military leaders, however, assure us that modern technology permits precision strikes with limited 'collateral' damage. 

Obviously the strike on a hospital in Kunduz refutes the technology claim. But the more damning conclusion remains obscured. What right does the US or any other super power have to intervene militarily in foreign, sovereign countries? 

The case of Syria is a perfect example. US leaders have been insisting for several years that President Assad must leave. They say he has used violence against his own people. Yes, the civil war in Syria is deplorable. But how does that empower the US to decide the political fate of Syria or Libya or any other country? And when the US or NATO send their air forces in bombing raids against targets within Syria or Afghanistan how does the situation differ? The simple fact is that they are using military power to impose a political outcome. And they are using such power not within their own sovereign territory, but rather against a foreign people.

During the colonial period western nations occupied colonies. They controlled the police and imposed peace on the ground. Popular opinion rejects the practices of that historical period, because the colonies were denied their political rights. And furthermore we recognize that the economic policies implemented by colonial powers were generally in their own interests and not the interest of the indigenous population. Yet today public opinion is far too complacent about military intervention across the world, as long as 'our casualties' are few.

Clearly we need to deepen our analysis. The dots are not difficult to connect. Should sovereign nations around the world be free and independent to chart their own political and economic course? Yes! Should it be permissible for major powers to pressure smaller, independent nations to recognize and accede to demands that cater to those major powers' national interests? No! No nation should have such extended power. In fact the concept of overseas national interests is blatantly contradictory. All transactions beyond national borders should only, must only, be matters for negotiation on equal terms. Any balance to the contrary evidently smacks of neocolonialism.

Was the bombing of the hospital in Kunduz a war crime? There is no need for an inquiry. The US has been an occupying power in Afghanistan for over a decade. If President Assad is guilty of war crimes against his own people, then President Obama is guilty of war crimes against the Afghan people.    

Thursday, July 16, 2015

Greece in Crisis

Greece's Third Bailout:
An Assessment of Circumstances and Policy Options

Following the vote of acceptance in the Greek parliament negotiations are ready to begin on the terms of a new agreement between Greece and its creditors. The negotiations will not be easy. Creditors have made it quite clear that they expect difficult reforms and austerity measures to be implemented. For Greece on the other hand this third program will allow the country to remain in the Eurozone and to pull back from the abyss. 
The question, however, which taxes one's mind, is whether this new package will successfully end the crisis. For the next three years, assuming Greece implements the terms of the agreement, new crises should be avoidable. But what will be the shape of the Greek economy after this three year program? Can we reasonably hope for renewed growth next year? Will the debt burden be any more or less viable in three years?
The only true way to exit a debt crisis is either through the restructuring of the debt or through rapid economic growth. For the past several months the Greek government has tried to negotiate the restructuring option. These efforts are certain to continue and the IMF appears to be an ally in the effort. However, success will not be easy. The difficulty is that most of the debt is now owed to the official sector (i.e. other governments or supra-national institutions). It is difficult to negotiate haircuts with such creditors, because the issue becomes a political conflict rather than a commercial discussion. That could have been an option at the outset of the crisis, when the debt was owed to financial institutions (e.g. the PSI program negotiated with the IIF in 2012). That was the strategy adopted by Iceland. However, Greece followed the alternative strategy of asking for support from the EU and the IMF. So, now most of the national debt is owed to the official sector. Consequently, growing the economy is a more promising alternative.
The problem of course is for Greece to promote economic growth, while simultaneously implementing austerity. Many well known economists have pointed out that austerity traps economies in recession and continuing austerity leads to a downward spiral of economic depression. There is a possible solution to this trap, however. Two policy measures could be adopted to shift the recessionary trend in favor of growth. First, Greece has a very inefficient public sector. Moreover, the balance between the private and public sectors in Greece is badly skewed toward the public side of the scale. Adopting measures to promote efficiency within the public sector could free up resources for growth. Such an effort is long overdue. The issue is how to communicate the need for enhanced efficiency.
The idea that rising productivity enhances economic growth is very well established. In fact it is essentially a tautology. Unfortunately there is often resistance to productivity enhancements. But the fact is that rising productivity permits increases in gross production. The difficulty lies in the fact that clashes between class interests over the fair distribution of the economic pie often lead to confusion and a rejection of productivity gains. The result is we all remain poor, but continue to argue over the spoils. Within the Greek public sector productivity is very low. In recent years progress has been made in the introduction of technology platforms. But at the same time antiquated procedures have remained in place to temper productivity gains.
The second policy option is to liberalize the rules of the market in order to encourage private sector investment. It is notoriously difficult to do business in Greece. Once the current crisis recedes it is absolutely essential that policy measures be taken to encourage private sector activity. How else might the government act to improve the balance between the private and public sectors?
Unfortunately both of these policy options have been anathema to successive Greek governments over several decades. Whether this government or any Greek government can successfully break out of this cultural entrapment is an open question. Yet, if Greece fails to shift policy directions, the chances are very high that in three years’ time we will end up more or less exactly where we are today.
Two specific issues may help to explain the current predicament. The first issue relates to the Greek banking sector. The second example is the problem of the public pension funds.
Banking in Greece had been highly regulated for decades. However, in the ‘90s the banking sector was deregulated and several state owned banks were privatized. Over a period of roughly 15 years banking flourished. Credit to the private sector was more readily available. New technologies and products were introduced. And banks were quite profitable. Two trends caused these positive developments to derail. The first problem was that bank lending expanded far more rapidly than deposit growth. The funding gap was covered by borrowings from other European banks. That left Greek banks dependent upon foreign sources of funding. When the financial crisis began in 2008, Greek banks suddenly were unable to access liquidity. The second problem relates to the fact that Greek banks invested heavily in Greek government bonds. This was a profitable business segment prior to the introduction of the Euro. Unfortunately the legacy strategy was maintained and indeed exposure was increased after the introduction of the Euro. When the financial crisis mutated to a sovereign debt crisis, the banks were left holding seriously impaired assets. In 2012 with the imposition of the PSI haircut, Greek banks instantaneously went bankrupt.
A great deal can be said and argued over the wisdom of the PSI. In the case of the Greek banks the agreement to take a 50% haircut and accept a low interest and long dated rescheduling of the balance proved fatal. The EU and the IMF recognized the problem and put up 50B Euro to recapitalize the banks. Oddly they counted this capital as new loans to the Greek state. The reasons behind such a convoluted structure are purely political. Europe was not prepared to take ownership of the banks directly, since measures had not been agreed on implementing policies toward an EU-wide banking union. So, the Greek government took on additional debt of 50B to recapitalize its private banks, despite the fact that Greek debt was already at an unsustainable level.
Under the new agreement the EU is proposing an additional 25B to recapitalize the banks once again. After 3 more years of recession and a bank run that forced a bank holiday and capital controls, the Greek banks were left with a huge confidence deficit and tottering capital adequacy.. So, yes the banks need fresh capital. But why lend the necessary capital to an already overburdened Greek state. The columnist Hugo Dixon (Reuters / INYT) pointed out this fallacy in a recent opinion article. The EU should extend the capital directly and take direct control of the banks. Such a move would be a tremendous stimulus toward regenerating public confidence in the banks. Of course there are contrary views on this proposal, both in Greece and the EU. However, banking should no longer be a national game. (Just as countries are eventually going to be forced to abandon national airlines.) A full fledged banking union within the EU should begin now as a resolution to the current crisis in Greece.
The problem of pension funds in Greece has somewhat similar origins. Greece does not have particularly generous pensions. However, over the years policies had allowed on the one hand quite generous early retirement benefits. On the other hand the pension funds were poorly invested. Much of the available liquidity was invested in government bonds (just as the banks had done). The PSI hit the pension funds too therefore. Hence, pension funds with inadequate actuarial viability were immediately left in a severe crisis. (Clearly the planning of the PSI failed to consider the full fiscal impact.) So, what can be done?
Reducing pensions is of course one option. But that measure will certainly be recessionary. An alternative is to shift the structure of the pension system for future generations in a manner similar to what was done over twenty years ago in Latin America. Defined benefit plans are notoriously poorly invested when run by national governments. By converting pension schemes to defined contribution and individualized, investment portfolios the impact could be a boon to overall levels of investment. Ultimately Eurozone countries need to move toward pension fund union. Campaigning for such changes will be far more effective than begging for debt forgiveness.
Policy alternatives certainly do exist. They may be initially painful, but they are far more effective than praying for miracles. However, taking steps to realign policies requires creative thinking. My fear is that such thinking is culturally inconsistent with the political scene in Greece. The risk of enduring three more years of austerity only to find ourselves in the same stagnant, economic environment at the end of the program looms ominously.

David Hillstrom

Greece, July 16, 2015 

Tuesday, February 24, 2015

Directions and Challenges for the Greek Economy

Greece has now agreed with the EU creditor nations to a four month extension of the stability program with some amendments in commitments and processes. Whether the crisis is finally defused or not is unclear. There will be several milestones during the next four months which could rekindle scenarios of an impasse in Greece's relations with the EU and the Eurozone. The media clamor now is focused on an analysis of whether the agreement to provide a four month interim for further discussion and negotiation is a victory for the new government or a climb down from campaign promises. Unfortunately such discussions amount to political narcissism. They miss the point. The appropriate focus should be on what it will take to achieve an economic rebound in the country.

There are two aspects of economic policy for Greece and the Eurozone that are crucial (quite probably necessary and sufficient) to an economic rebound. The first issue relates to the need for economic reforms within Greece. Greece has now committed to producing a detailed list of such reforms for scrutiny by the Eurogroup. We may well learn over the coming days that Greece and its partners have very different concepts of what reforms are needed. The new government may intend to focus primarily on issues of tax collection and containment of the grey economy and tax avoidance. Certainly such measures are worthwhile. But the broader question is what additional reforms are necessary. I have insisted for several years now that the more essential focus for reforms should be on tackling the problem of inefficiency and low productivity within the public sector. The fact is that Greece has a very expensive public sector and yet low levels of service quality. (You get what you pay for doesn't seem to apply.)

There is a desperate need to reengineer all of the processes within the public sector. For example, some time ago I had to visit IKA, the Greek social security organization, to arrange a change to my profile on the system. Parts of their process have been automated, so the initial experience was favorable. I went to a service window where an employee entered the change on a computer screen and then printed out the application. I then was told to take the application to the office supervisor where I signed the application. But then when I returned to the service window the employee handed me an additional sheet, which required a signature from the supervisor. After visiting the supervisor this second time he said I needed to take the paper to the protocol department. This was a small room at the other end of the hall where a woman opened her large transaction book and entered the details of my request in long hand. She then signed my application as well. Then it was back to the supervisor for his signature and one last visit to the service window to complete the process. Quaint you might say, but such bureaucratic  problems are endemic to Greece's public sector. The current Minister of the Economy, Mr. Varoufakis, often sites the example of public sector processes where one bureau asks for a confirmatory letter issued by another bureau. Surely they should be able to access such data themselves. But citizens are forced to spend unproductive hours visiting various offices in order to complete their dealings. Without doubt these anachronistic procedures weigh heavily on attempts to raise productivity within the Greek economy as a whole and not just the public sector. One hopes that such a project to reengineer public sector process will feature prominently on the government's reform list. However, even if this is the case, the design and implementation of such a mammoth task will take years to complete.

Another perspective on low public sector productivity relates to the extended or periphery state sector. During the 80s, while Andreas Papandreou was PM, numerous private sector companies were nationalized. Most of them were on the verge of bankruptcy and were 'saved.' Since then those companies have been poorly managed by political appointees, but the companies have been kept afloat with consequent drain on public funds. In fact the amount of such drain on public funds from nationalized companies and various service organizations under public sector supervision remains poorly accounted for. During the previous government's tenure there was an admission that the state was not in position to determine how many staff were employed in the quasi public sector nor what salaries those staff were paid. Apparently the preference was not to resolve this slanderous lack of management information, but rather to maintain it so as to enable continuing political patronage. Proposals have been presented over the years to deal with this problem via privatization. SYRIZA, the party leading the current government, has been opposed to privatizations. In one sense they have a point. The present conditions within Greece's political economy will result in a fire sale of government owned assets. However, such political debates miss sight of the pressing economic reality. If the government owned assets are not for sale, it is still essential that measures be taken to stop the bleeding, which results in continuing drain on public funds. A case in point is Olympic Airways. The airline was poorly managed for decades. The government was funneling money to the company to cover losses. That practice was under investigation by the EU for illegal subsidies. When the airline was finally privatized, however, staff that were not hired at the new airline were either granted early pensions or absorbed into the public sector. So, the bleeding never stops. Consequently the lack of productivity within the broader public sector continues to weigh heavily on the entire economy. And, of course, the barrage of surtaxes and property taxes introduced by the previous government are seen as unjust and ultimately ineffective in dealing with the true problem.

The second aspect of the crisis relates to EU and Eurozone policies. The crux of the matter is that the German export juggernaut has a huge trade surplus with the rest of the world and with other Eurozone states. The result is a flow of capital from other Eurozone countries to Germany. Obviously policies are needed to promote the reverse flow of capital in order to promote economic development in depressed areas. Prior to the financial crisis the mechanism for such recycling of capital was that German banks bought government bonds issued by peripheral countries. That practice was not sustainable, as we have learned (the hard way). In fact the previous mechanism proved detrimental to peripheral economic development. As the Greek government was able to access almost limitless and cheap capital, they chose to expand public sector salaries by taking on additional debt. The result was no increase in productivity or competitive advantage. The question before us now is what to do next. The preferred solution of the Eurogroup has been to insist that states facing a debt crisis implement an austerity program in order to reduce expenses. But such measures do nothing to resolve the problem of capital flows. In fact, since the onset of the debt crisis there has been a flight to quality, so that ever more capital is concentrated in the developed North. What is needed of course is a program to encourage private sector investment of capital in the South. There are of course EU programs that intermediate such flows, but these are woefully inadequate. Unfortunately, the debate over the Greek program failed to address this need. The debate focused instead on procedure as opposed to substance. Now the counter argument of course is that with or without policies aiming to recycle capital little of the proceeds would end up in Greece due to political and economic instability as well as to issues of productivity and tax burdens here, which we analyzed above. So, again a first priority for the new government must be to reengineer the rules of the economic playing field.

A related question in examining EU policies is whether the Union will be capable of introducing new policies aimed at pan European growth and capital recycling. We may well have seen a peak in such policies supporting cohesion and economic convergence. The trend today within the EU is more toward nationalism than toward deeper union. A telling example is that the EU provided funds for the recapitalization of Greek banks (which were bankrupt as a result of the haircut on GGBs held by the private sector).. However, rather than take on the management of those banks themselves, as one might expect a new shareholder to do, they passed the funds through a national holding company, thus adding additional debt on to Greece's already unserviceable debt level. A further aspect of the question over EU policies is the continuing dearth of common Eurozone institutions. Pension systems across the EU continue to be national affairs. Greece is in an especially poor position, but other Eurozone economies also have hidden actuarial deficits. One of the first measures introduced during Greece's austerity program was a cut in pensions. Yes, in the short term that measure provided some liquidity relief to the pension fund, but it also was a deflationary measure. All of Europe needs well funded pension schemes, but most don't have them. It would seem to be an urgent need for all of Europe to run actuarial studies to determine the facts and subsequently to devise pan European policies to deal with the impending crisis before it happens. Here again there seems to be little desire to deal with the problem or even to analyze and publish findings. Without such Eurozone institutions, however, future crisis will prove impossible to confront.