DECEMBER 30, 2011

America's Play for Pacific Prosperity

The U.S. has quietly set up a bipartisan Asia policy that may be as influential as the Marshall Plan and NATO.


While the world has been obsessing over America's decline and its supposedly foolish interventions in the Middle East, the United States has quietly established a bipartisan Asia policy that may well be as influential on that continent as the Marshall Plan and NATO were in Europe.

At its core, the policy encourages Asian powers to get rich by participating in the most open trading system in the history of the world. In exchange for commitments to abide by that system's rules, countries such as India, Vietnam, Indonesia and China would have the opportunity to industrialize and to help shape the future of the global economy.

To some, this might appear like reckless philanthropy. Why should the U.S. facilitate the rise of powers that might one day become dangerous rivals? There are two underlying calculations.

The first is that countries busy getting rich are unlikely to seek to overturn an international system that facilitates their prosperity. This was the case with both Germany and Japan after World War II, and the U.S. hopes the same will be true for India and China.

The second calculation is that as countries deepen their participation in the global system, they become increasingly dependent on it. Hitler and Tojo learned the hard way what it meant to fight major wars without secure access to the resources and capital required.

The more China trades in world markets, then, the more hostages it places in American hands. China's domestic economy, overseas investments, energy resources and raw material supplies—and, therefore, its political stabilityall depend on its continued access to the world's sea lanes.

Moreover, the U.S. faces something different in Asia than the "inexorable rise of China" described by so many analysts. Consider a historical analogy. Germany in 1910 was a single rising power in a neighborhood of decline populated by France, Austria-Hungary, Russia and the Ottoman Empire. That was an inherently unstable balance of power. In Asia today, China is not a single rising power in a continent of decline.

Japan may not be going from strength to strength, but India, Vietnam, South Korea and many of their neighbors are industrializing and growing rapidly thanks to their participation in the global system. U.S. policy in Asia is built on the understanding that investing in this new balance of power can reduce any challenge a stronger China might otherwise pose.

Beginning with the Clinton administration, which ended the trade embargo with Vietnam in 1994 and normalized relations a year later, the U.S. has been deepening its relations with key Asian countries. U.S. engagement with India, Indonesia, Japan, Mongolia, Australia and Singapore is deeper and broader today than it was at the end of the Cold War. This engagement is economic in all cases, military in most. President George W. Bush even signed a nuclear-cooperation agreement with India in 2005, despite the cost of complicating relations with Pakistan.

This poses a strategic dilemma for Beijing. If it doesn't push back, the new U.S.-centered Asian system will continue to develop. But if it tries to block the system, it may frighten its neighbors into an even closer American embrace.

In the last two years, China chose to assert itself by stoking disputes over strategically vital (and perhaps energy-rich) areas of the South China Sea. This alarmed its neighbors, and in turn the Obama administration engineered a dramatic diplomatic revolution that will likely serve as the foundation of the region's security architecture in Asia for some time to come.

On his November visit to Australia, President Obama announced that U.S. Marines will be based in the northern city of Darwin, close enough to the South China Sea to reassure the neighborhood, but far enough away to limit the provocation to China. At the same time, Prime Minister Julia Gillard announced that Australia would begin uranium sales to India. And last week the State Department announced that Japan, India and the U.S. held the first of a series of trilateral security talks on Asian and global issues.

Also in recent weeks, Japan announced that it was purchasing F-35 fighters from the U.S. and joining negotiations to establish the Trans-Pacific Partnership, a U.S.-backed free-trade initiative covering the Asia-Pacific region. China is currently excluded from the initiative but could be invited in later.

India, Japan and the U.S. are also assisting the junta in Myanmar as it seeks to distance itself from China's suffocating embrace. Shortly after Myanmar canceled a major hydroelectric project intended to sell power to China in September, Secretary of State Hillary Clinton visited the country, Japan lifted a ban on aid, and India announced that it is helping Myanmar build a new port.

The U.S. isn't developing an Asian alliance on par with NATO, and at this stage U.S. policy there falls well short of containment. The goal isn't to drive China in on itself and force regime change, as the U.S. intended with the Soviet Union. The goal, rather, is to deter Beijing from mounting a quest for regional hegemony while holding out the option of greater participation in the international system.

Depending on China's response, the U.S. and the other members of the emerging entente are free to move toward either a closer or a more competitive relationship with Beijing. If reason prevails in Beijing, the road is open to long-term institutional and cooperative economic integration in the Pacific.

This approach to Asian economic and security policy predates the Obama administration and is likely to survive it. While Republicans and Democrats, liberals and conservatives might argue over emphases and priorities within this general strategy, the broad lines of a sustainable American policy in Asia are clear, and they're supported by everyone to the right of Dennis Kucinich and to the left of Ron Paul.

The Obama administration, like its predecessors, has moved to produce an Asia policy that is in line with the highest traditions of American statesmanship. Realistic, humane, forward-looking and enlightened, America's approach to Asia offers Asians as well as Americans the best available chance to create a Pacific Century worthy of the name.

Mr. Mead is a professor of foreign affairs and humanities at Bard College and editor-at-large of the American Interest.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

Financial terrorism

The war on terabytes

Policymakers worry about attacks on America’s financial system

Dec 31st 2011 NEW YORK .

THE financial industry has done such a good job of bringing itself to its knees over the past four years that it is easy to overlook the threats it faces from outside. High among them is electronic attack. In 2010 Symantec, a cybersecurity firm, estimated that three-quarters of allphishingattacks, in which people are deceived into surrendering private details such as account numbers, are aimed at the finance sector. Bob Greifeld, the boss of NASDAQ, has described his bourse as being underliterally constant attack”.

Many of these assaults are carried out by hackers bent on mischief.
Some are the work of organised criminal groups in pursuit of loot. But plenty of people fret that some attackers are aiming to cause more serious damage.

Leon Panetta, America’s defence secretary, has suggested that a cyberattack on financial markets, the power grid and government systems could be “the next Pearl Harbour”. In a move that received surprisingly little attention, Barack Obama signed an unprecedented executive order in July declaring the infiltration of financial and commercial markets by transnational criminal groups to be a national emergency.

It also pointed to “evidence of growing ties between [these groups] and terrorists”. In a sign that Congress, too, is twitchy, its latest appropriations bill calls for a report into the risks posed by financial terrorism.
Officials’ anxiety has grown amid circumstantial evidence that malefactors helped to exacerbate the market turmoil in late 2008.

A report on the risks of economic warfare by Cross Consulting—which was written in 2009 for the Pentagon’s Irregular Warfare Support Programme (IWSP) but which surfaced only in 2011—cites a paper prepared for law-enforcement officials by a group of anonymous moneymen who were alarmed by trading patterns around the time that Lehman Brothers failed.

The paper analyses trading data from American exchanges. It shows that a handful of small and midsized regional brokers saw their market share in equities trading skyrocket in 2008 to the point where some were, for a while, doing more business than giants such as Goldman Sachs and JPMorgan Chase. The brokers’ business was conducted under multiple trading symbols, the market-making identities used in electronic trading so that counterparties know whom they are dealing with.

The bulk of the trading appears to have been sponsored accessagreements, under which established brokers can in effect rent their identities to other traders so that the latter do not have to jump through the usual regulatory hoops. There is no suggestion that the brokers in question were doing anything wrong. They say they were doing business with regulated entities, including other brokers, but the report raises questions about the trades these sponsored entities were conducting. These trades were heavily concentrated in big, troubled stocks such as Citigroup and Wachovia, the survival of which was seen as critical to the stability of the financial system.

They were mostly short-selling, the paper concludes, and a good deal of the shorting may have been of the illegalnakedkind, where the short-seller does not bother to locate and borrow the shares first. (Borrowing a broker’s identity could have made this easier, since marketmakers were exempt from the ban on naked shorting in certain circumstances.) Supporting this conclusion is a huge spike in trades that failed to settle at the time—in Lehman’s case, the number shot from tens of thousands to tens of millions.

One cause of “fails” is naked shorting, because you cannot deliver a share that you have not really borrowed. Sponsors not being thanked Trading data alone are insufficient to draw firm conclusions about motives, but the anonymous paper raises red flags.

If the brokers were inadvertently greasing the wheels for bear raiders, then who was doing the raiding? The obvious suspects are hedge funds looking to make a killing. But rumours persist of involvement by those with non-economic motives.

Regulators have been tightening the rules. In November America’s Securities and Exchange Commission (SEC) voted through various restrictions on sponsored access, which Mary Schapiro, the SEC’s chairman, had previously likened to handing car keys to an unlicensed driver. In private, SEC staffers worry that some of the driving might be deliberately dangerous.

Not every jurisdiction is moving as fast as America. In an October report, the International Organisation of Securities Commissions (IOSCO) expressed concern that some countries’ monitoring of sponsored-access agreements was inadequate. Sponsored access is not the only way that a determined assailant could create havoc.

The “flash crash” of May 6th 2010, in which American equities spectacularly nosedived, showed the damage that can be done by high-speed algorithmic trading. It is much easier to drag markets down when they are already reeling, by the use of such things as short-selling, options and swaps, points out James Rickards of Tangent Capital, an expert on financial threats.

This is what the military would call a “force multiplier”. Just how much danger America’s financial system is in from deliberate attack is hard to judge from the outside. What is clear is that politicians, regulators and the industry have struggled to forge a coherent response. The Financial Services Sector Coordinating Council (FSSCC), an industry group that works under the auspices of the US Treasury, has developed a “threat matrix” in consultation with a group of financial regulators with an equally snappy name, the Financial and Banking Information Infrastructure Committee.

But information is not always shared promptly. Banks were miffed that regulators did not tell them about a big attack on NASDAQ in 2010 until more than three months later.

Within government, responsibility is fragmented. In America the Treasury, other financial regulators, the Department of Homeland Security, the Pentagon, the FBI, the National Security Agency and others all have a hand in financial cybersecurity. Dots are not always joined even within departments.

The Treasury has been keenly focused on combating the financing of terrorists, for example, but appears to have given less thought to how they might use that money to undermine banks and markets.

That is unfortunate. As policymakers wrestle to protect finance from its own instability, they shouldn’t neglect the potential for threats from outside.

The downward slide continues – the great revolt will come later

Mark Malloch-Brown

December 28, 2011

Next year is not going to be better, and one might just stop there. Whatever temporary economic fixes are applied to the eurozone, American deficits and unemployment, the overheated Chinese real estate market, petering Indian reforms or stalling Brazilian growth, the downward slide will continue. This is because all are symptoms of a structural global economic dislocation that is becoming increasingly disorderly. Yet the second half of this prediction is that politics may be deceptively calm in 2012calm before the storm.

To start with the economics. Two trends are underway that have drawn much comment. One is between the old western economies and the formerly emerging economies, notably those in Asia. The second, which heightens the pain of the first, is that the globalisation of markets that enabled the first trend (by giving Asia access to western markets) has also created two new classes of winners. The first is a global super-rich, made up of the innovators, traders and bankers. The second is made up of the Asian and other emerging market manufacturing and service sector workers, who have undercut western labour costs.

The big losers are western middle class and blue collar workers, who (with notable exceptions such as Germans) have lost out dramatically. The real source of this crisis is a decades-long loss of competitiveness and income for these groups that politicians have tried to cover up with unserviceable levels of sovereign and household debt. Now the bill is due and, as the global economy is so interlinked, nobody will be left unscathed. Chinese developers will struggle as much as western business leaders with turbulence and recession.

So why will the politics be calmer? Because at least during 2012, it will be driven by tactical and electoral timing. The great revolt, despite the sit-ins on Wall Street and outside St Paul’s cathedral, will come later.

The old prediction that incumbents cannot survive high unemployment and recession is likely to be replaced next year by the lesson that tactically adept incumbents can survive, by offering stability during a time of chaos and so slipping back in under the claim that ‘the devil you know is better than than the devil you don’t’.
Their chances are particularly high if they can identify with their citizens’ pain more effectively than weak challengers.

Presidents Nicolas Sarkozy and Barack Obama may slip through their elections on these terms, while Angela Merkel and David Cameron may survive the year better than the economic facts would appear to warrant.

The writer is chairman of global affairs at FTI Consulting, and former UN deputy secretary-general. He is author of ‘The Unfinished Global Revolution’

December 29, 2011 7:17 pm

Egypt: A religious revival

By Roula Khalaf and Heba Saleh
As Islamists emerge from elections as the country’s leading political force – to the alarm of democracy campaigners and regional autocrats alike – western governments will have to adapt to a power shift they have long sought to prevent

The Muslim Brotherhood's Freedom and Justice party holding a campaign rally
The Muslim Brotherhood's Freedom and Justice party holding a campaign rally

Back in January, as popular protests against President Hosni Mubarak gathered pace, the Muslim Brotherhood was easy to spot, its young women in headscarves and youths taking charge of security checkpoints in Tahrir Square. But, as just one of the many groups organising daily life in the encampment that formed the nerve centre of the uprising, the 80-year-old Islamist movement was not especially prominent.

Yet within nine months, the Brotherhood had reclaimed its status as Egypt’s most powerful political force following decades of suppression. In the country’s first free parliamentary elections, its newly created Freedom and Justice party won more than 35 per cent of the vote in the first round, and slightly more in December’s second round.

Even more worrying for those hoping the Arab world’s largest nation would adopt a liberal, pro-western face, fellow Islamists from the puritanical Salafi movement emerged with more than 25 per cent, a score likely to be confirmed in the third and final round of voting in January.

“This is the real Egyptian revolution,” says Jon Alterman of the US-based Center for Strategic and International Studies and one of the international observers at the Egyptian elections. “In February, the military removed Hosni Mubarak. This is the revolution that reorients power in Egypt.”

In both a domestic and a broader Arab context, the political events of the past few weeks in Egypt represent a political earthquake, one that Arab regimes and western powers alike had long sought to prevent.

For decades, the region’s rulers defended their authoritarianism to western partners by raising the spectre of an Islamist takeover as the only alternative. Any prospect of the US or other western allies holding a dialogue with Islamists was seen as an affront.

For their part, western governments played along, largely because foreign policy in Cairo and several other Arab capitals was accommodating to their own interests – particularly in terms of preventing excessively aggressive policies towards Israel.

Today, however, 20 years after Algeria’s military staged a coup to prevent a parliamentary landslide by the Islamic Salvation Front, and five years after Hamas rode to victory in the Palestinian territory only to face a western boycott, Islamists are demonstrating their power of survival.

As policymakers around the world adapt to the new realities of the region, their biggest concern will be to develop new ties with Islamist groups as they stand for the first time on the brink of power without constraint.

The most critical test will be in Egypt. The Muslim Brotherhood, the oldest Arab Islamist group, is the inspiration for other movements, and its first effort to share power is likely to have wider regional ramifications.

Even before Egyptians went to the polls, Tunisia’s Islamists had set the tone of the new political order. The Nahda party, persecuted under the fiercely secular previous regime, regrouped with astonishing speed following the fall of President Zein al-Abidine Ben Ali in January. The party’s exiled leaders, some of them turned successful businessmen in Europe and the Middle East, returned to run an efficient campaign in which Nahda won more than 40 per cent in the October vote for the constituent assembly, the country’s first democratic poll.

There was a similar story in Morocco. In November elections, the first to be held under a new constitution giving the prime minister expanded powers, the opposition Justice and Development party emerged as the largest single bloc in parliament, even if well short of a majority. The leader of the Islamist grouping has now been charged with forming a government.

Political analysts say that in Libya’s conservative society, politics are likely to be dominated by Islamist-leaning parties, too. Meanwhile, the Syrian National Council, the umbrella group leading the battle to bring down the regime, is fighting perceptions that it is dominated by the Muslim Brotherhood, the party that the father of President Bashar al-Assad crushed brutally in the 1980s.

“The foreseeable future is Islamistthis much we know. It’s just a reality that people have to come to terms with,” says Shadi Hamid of the Brookings Doha Center. “People want to see Islam play a larger role in political life and liberals are going to have to learn to speak the language of religion and stop being the anti-Islamist choice.”

. . .

Islamists might share in the broad objective of establishing a state based on sharia law. But the commitment of the various groups to participatory politics, and their vision of government, in many cases differ widely.

At one end of the spectrum is Tunisia’s Nahda which sees itself as mildly Islamist, its leader, Rached Ghannouchi, insisting the state should be founded on the principle of citizenship not religion. If Nahda has a model, it is Turkey’s Justice and Development (AK) party, which has Islamist roots and has presided over a rare period of stability and economic prosperity.

At the other end are the ultraconservative Salafi parties, founded on a vision of an Islamic state that replicates the strict social norms of Saudi Arabia. Many see democracy as incompatible with this goal.

Somewhere in between is Egypt’s Muslim Brotherhood, a more mainstream Islamist organisation that considers Nahda too liberal but views democratic politics as the best means of bringing about the gradual Islamisation of society.

Western officials and policy analysts will be pondering what is driving societies that have rid themselves of tyranny to put their faith in Islamists, whether moderate or hardline. Yet the appeal of religious parties, particularly at a time of great political uncertainty, is not surprising.

In Egypt, secular groups with leftist and pan-Arab ideologies ossified under the weight of repression by successive regimes determined to abolish all potential challengers. The Brotherhood, with its message rooted in Islam and spread through mosques and charities, proved harder to eradicate. When Mr Mubarak fell, the organisation – with its long-standing structures and networks – remained the country’s most organised political force, even as new secular and liberal groups scrambled to form parties under the chaotic watch of the ruling military council.

Their brand recognition and history of victimisation by the previous regime made them the logical choice for many voters, who saw them as strong and credible agents of change. “We have tried many things, so this time let’s try those who are religious,” says Abdel Moneim Said, a carpenter in Ard al-Lewa, an impoverished district of Cairo, echoing a widespread sentiment. “Maybe they will prove honest. Anyway, we don’t see anyone else.”

But the Brotherhood is also an experienced political actor that has proved more astute than others since the revolution, judging the public mood better than liberal parties and managing a tricky relationship with the military council to its own benefit.

Even before the fall of Mr Mubarak, Brotherhood leaders played their cards well. They sent reassuring messages to the west that they would not seek to monopolise power, nor run a presidential candidate. In the aftermath of a youth-led and leaderless revolution, moreover, the army saw the Brotherhood as one of the few grown-up interlocutors with which it could seek accommodation, and appeared to give it preferential treatment in the drafting of constitutional amendments.

By the middle of summer, however, the honeymoon was over between the Brotherhood and a military seeking to protect its interests, privileges and control over sensitive issues such as Egypt’s peace treaty with Israel. Relations have grown tense, with the Brotherhood and the Salafis twice calling massive rallies to protest against plans by the generals to impose constitutional provisions that shield the army from parliamentary oversight and give it a permanent political role.

The issue has not been resolved – and the Brotherhood’s biggest power struggle in the near future will be with the military. For now though, the organisation’s leaders are attempting to play down the confrontation. “If there is a hair between us, we will not cut it,” Mohamed Badie, the supreme leader of the Brotherhood, said of the army in a recent television interview.

. . .

But for Egypt’s Islamists, the real challenge lies ahead. Having waited decades for power, they might now be getting what they wished forhowever, they also inherit a state saddled with the legacy of decades of mismanagement; and an economy shattered by recent political turmoil.

Indeed, from Tunis to Cairo, Islamist victors are showing little appetite for ruling alone in the near future. Tunisia’s Nahda has already formed a coalition with two secular parties. In Egypt, Brotherhood officials say no group can govern alone given the magnitude of the nation’s problems, including pervasive poverty and rising rates of unemployment.

After initially clamouring for the right to form the government after the completion of the elections, the organisation now says it recognises that the military council is entitled to appoint an administration that governs until a new constitution has been drafted by the elected parliament. It has also distanced itself from the Salafis, suggesting it would prefer to form a coalition with liberal parties.

“It is not a condition that we should lead the government,” says Saad al-Katatny, a senior official. “We do not want to repeat the mistakes of the previous ruling party [which monopolised power].”

The Brotherhood’s dilemma is evident in its party’s detailed 160-page election manifesto. Freedom and Justice says it wants to reduce the budget deficit, attract investment and tackle expensive subsidies – all of which appeal to the business community and to potential foreign investors. At the same time, however, it wants to change the face of society in ways that could outrage liberal businessmen and alarm foreigners.

The programme, for example, launches a bitter attack on Egypt’s endorsement under Mr Mubarak of international agreements abolishing discrimination against women and assuring the rights of children. It also seeks a less pro-western foreign policy that could clash with a new government’s need to attract international assistance.

The challenge for Egypt’s Islamists will be to strike a balance between their religious aspirations and the pursuit of pragmatic political and economic policies. As Mr Alterman of CSIS argues, they cannot afford to alienate those who have the talent to take Egypt forward economically, many of whom are highly educated liberal-minded businesspeople.

The more tolerance Egypt’s Brotherhood shows, the more likely it is to succeed where it matters most – in improving the daily life of a population that rose against decades of repression, corruption and neglect.

Doctrine and democracy

When Egypt’s Salafi Nour party polled more than a quarter of the vote in the first two stages of staggered parliamentary elections, it confounded predictions that its purist brand of Islam would appeal to only a small fraction of the electorate, write Heba Saleh and Roula Khalaf.

Initial impressions are that its utopian rhetoric and literal reading of religious doctrine, presenting a simplifiedroadmap to paradise”, has appealed to a swath of poorer voters who distrust politicians and are more comfortable supporting those they considermen of God”.

Before the popular revolt that swept President Hosni Mubarak from power in February, the Salafis kept a low profile; many of their leaders were closely watched by the security services. A broad movement that has long eschewed political activismmany Salafi sheikhs preach obedience to the rulers – it was widely considered too disparate and disorganised to win a significant number of votes.

But the Salafis control a large network of mosques, several television channels and well-established charities with a formidable record of providing services in poor areas. The official press, citing unnamed justice ministry sources, said recently that Salafi charities received about E£400m ($66.3m) this year from donors in Gulf Arab states.

Thanks to their surprisingly strong electoral performance, the Salafis are certain to constitute an important bloc in parliament, a fact that is likely to have a significant impact on the calculations of other forces. Ever ready with accusations of apostasy, they are likely to inhibit the small contingent of liberal representatives in the assembly.

In addition, their presence will mean the Muslim Brotherhood’s Freedom and Justice party will not be the only group claiming to represent an Islamic point of view. The less pragmatic Salafis are likely to set the bar high, possibly forcing Freedom and Justice into more hardline positions.

The uneasy relationship between the two groups ensures that Egyptian politics will no longer be split only along liberal-Islamist lines. Throughout [the Middle East and north Africa], the divide between Islamist and liberal will remain one of the primary conflicts,” says Shadi Hamid of the Brookings Doha Center. “But that will go hand in hand with an intra-Islamist debate, and the two will be related.”

Copyright The Financial Times Limited 2011.