There is one way forward on climate change

To succeed in tackling the emergency, we need dramatic policies that are effective, legitimate and global

Martin Wolf

Trump Hot Air Climate
© James Ferguson

Climate policy is dangling between the cynicism of Donald Trump and the radicalism of Greta Thunberg. The US president has just pulled the world’s second-largest emitter of greenhouse gases out of the Paris climate accord. Ms Thunberg demands significantly more than a 50 per cent cut in global net emissions by 2030. The former is certainly irresponsible. But the latter seems inconceivable.

The exasperation of radical climate activists is understandable. Despite decades of talk, emissions of greenhouse gases and global temperatures continue to rise. If the trend does not alter soon, the chances of avoiding an increase in global average temperatures of more than 1.5C above pre-industrial levels will be zero and those of avoiding a 2C increase will be tiny.

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As the IMF notes in its latest Fiscal Monitor, meeting the latter goal requires reducing emissions of greenhouse gases by a third below the baseline, by 2030. To keep below a 1.5C increase, emissions need to be half of the baseline.

The longer the delay in acting, the larger the required action becomes, until nothing can be done because it will be too late. It is already almost too late to avoid what experts view as destructive and irreversible changes in climate. For that reason, dramatic policies are needed.

Yet they are feasible, argues the Energy Transitions Commission, if they are firmly implemented over the next three decades.

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Unfortunately, the outright opposition of people such as Mr Trump, and the indifference of much of the population, are not the sole obstacles to success. Even some who favour action are a problem, because the climate cause is for them part of a wider campaign against the market.

Thus, many supporters of the Green New Deal view climate as a justification for the planned economy. As British journalist Paul Mason argues: “Labour wants to combat climate change through three mechanisms: state spending, state lending and the state direction of private finance.”

This approach allows opponents to argue that the left is more concerned with destroying market economies than saving the planet. The mess created by trying to plan an economy into zero net emissions in a decade might bring all attempts at mitigation into disrepute.

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In any case, climate change will not be solved by one country. To succeed, policy must be effective, legitimate and global.

To be effective, policy must combine planning, regulation, research and incentives. There is strong justification for government actions in research, spatial planning and finance. But there is also a need for incentives aimed at shifting behaviour. Command and control are rarely as effective all on their own.

The IMF report suggests $75 a tonne of carbon might be the price in 2030 consistent with keeping the temperature increase below 2C. Today, while there are a host of pricing arrangements, the prices themselves are mostly far too low and variable over time and across countries to be useful. Yet, in principle, a carbon tax, or an emissions trading system with a price floor, is the most effective (because most comprehensive) way to influence emissions.

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Schemes that generate fiscal revenue ought also to be attractive to politicians, because the money can be used for other valuable purposes. Taxing a “bad” (a form of pollution, in this case) always offers an opportunity to improve taxation or raise valuable spending.

An important point made by the IMF report is that such countries as China and India could benefit especially from a reduction in local environmental pollution, because of the benefits of reduced use of coal.

It is also vital that these countries do see such benefits from use of carbon taxes, because they are going to have to play a big part in bringing about the needed reductions in global emissions (relative to the baseline). It is in these countries, too, that a huge part of the needed investment in new energy systems must be made. So incentives matter greatly.

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To make policy legitimate, it is essential to compensate losers. It is not true that the poor are always proportionately most adversely affected by higher energy prices.

But protests by the rest of the population matter, too. Compensation for higher fuel prices needs to be visible.

As important, a convincing vision of a better future must be offered. Otherwise, the necessary changes in policy will never be accepted.

Finally, policy has to be global, with all the bigger economies involved. This creates huge problems of equity. Clearly we are never going to reach a perfect solution. But some solution will have to be found in generous assistance from high-income countries to emerging and developing countries, especially with the introduction of new technologies.

This also raises an important question: what is to be done with free-riders and, above all, the biggest free-rider of all, the rogue US?

The answer in principle is clear: it will have to be penalised quite heavily. If we accept, as we should, the urgency of the challenge, this follows quite naturally.

What, then, is to be done?

The answers include a programme of action over three decades, starting now; pragmatic resort to all policy tools, including market-based incentives; use of the revenue raised from carbon pricing to compensate losers and make the tax system and climate mitigation more efficient; a stress on the local environment benefits of eliminating the use of fossil fuels; and, above all, a commitment to climate as a shared global challenge.

In an era of populism and nationalism, is there any chance of all this?

Not obviously, alas. If so, we will indeed have failed.

But the young are surely right to expect better.

America’s Productivity Problem

Slowing productivity is cutting into the economy’s ability to grow, but there is some hope the future will be brighter

By Justin Lahart

Work at a furniture factory in North Carolina. A key measure of worker productivity posted its first quarterly decline in nearly four years Wednesday. Photo: Logan Cyrus/Bloomberg News

More than ever, the U.S. economy needs productivity to get going. Unfortunately, that isn’t happening.

The Labor Department on Wednesday reported that real output per hour—the standard measure of worker productivity—fell an annualized 0.3% in the third quarter from the second, marking its first quarterly decline in nearly four years.

The productivity data can be volatile on a quarterly basis, but the longer-term trend doesn’t look good either. From a year earlier, productivity was up just 1.4%. That is in keeping with the tepid pace in the 15 years since 2004. In the 15 years prior to that, productivity growth averaged 2.5%.

When it comes to how fast the economy grows, there are ultimately two factors at play: how much people work and how efficient they are at getting their work done. So economic growth depends on growth in the total number of hours people work plus productivity growth.

But with population growth slowing and the workforce aging, there are limits to how much total U.S. hours worked can grow, so productivity really matters for the economy now. Until it really gets going, neither will the economy.

Unfortunately, productivity isn’t going to turn higher just like that. Ever since the early 2000s, companies have been reining in capital spending, reducing the amount of labor-saving equipment getting put into place. There are plenty of theories as to why, including the long hangover from the 1990s investment binge, and the increased discipline investors are placing on companies when it comes to costs. In a note this week, economists at the Federal Reserve Bank of San Francisco argued that an intensification of competition among large firms cut into their ability to generate profits, ultimately discouraging them from innovating.

The good news—at least over the long run—is that rising labor costs may now be providing companies more reason to invest in productivity. Wednesday’s productivity report showed that unit-labor costs—a measure of how much businesses compensate workers for their output—were up 3.1% in the third quarter from a year earlier, registering the strongest growth in over five years. That could provide companies with an incentive to invest in new equipment, as well as training their current workers to become more productive. Indeed, Deutsche Bank economists find periods when workers are scarce and wage growth is accelerating tend to lead to gains in productivity.

Moreover, with the Fed willing to tolerate much lower levels of unemployment than in the past, the incentives to boost productivity may only increase. The news right now isn’t all that good, but there is reason for hope.

Inching Toward the End of the Conflict in Syria

By: Hilal Khashan

Starting a protracted conflict is much easier than ending it. That’s especially true when the regime in question is callous and fossilized and foreign countries are waiting for an opportunity to take advantage of a deteriorating situation. These two factors explain how the brutal armed conflict in Syria got underway. Before his death in 2000, Hafez Assad entrusted select members of his old guard with shoring up the safety of the future regime of his politically inexperienced son, Bashar Assad.

Instead of applying Hafez's Machiavellian approach in addressing a seemingly spontaneous and innocuous protest movement, the old guard recommended heavy-handed action. The regime's use of excessive coercive force militarized the uprising and invited foreign intervention – from Iran, to rescue the younger Assad, and Saudi Arabia, to bring Iran down and prevent the formation of the Shiite Crescent (that is, Iran’s overland route to the Mediterranean).

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Syrian army defectors established the Free Syrian Army, with the goal of bringing down their former commander in chief. But as uncoordinated material support from outside militaries flowed to rebel groups, jihadist militias arose in Syria’s overwhelmingly religious society.

Syria, a Geopolitical Chessboard

The United States did not seek to overthrow Assad's regime, despite what people may think. (This was borne out, in particular, when the Obama administration failed to punish the regime for crossing the notorious “red line” of using chemical weapons against the Syrian people.)

Rather, the CIA’s 2013 program was aimed at supporting the FSA against radical Islamic movements, such as the Nusra Front. But when the program proved ineffective, Langley terminated it in 2017 and recognized Russia's leading role in defeating jihadism in Syria and restraining Iran’s burgeoning power.

Russia, in partnership with the Syrian air force, had already begun in 2015 a systematic air campaign to support Assad’s army, which, despite massive backing by Iran and its multinational Shiite militias, had been forced into retreat. Russia also intended to help rebuild the Syrian state.

Turkish President Recep Tayyip Erdogan abandoned the core demands of Syrian rebels in favor of establishing a safe zone despite American, Russian and Iranian reservations. While moderating Turkish ambitions, clearly with tacit U.S. backing, Russia seems determined to rein in Iran’s influence in Syria.

Foreign power players share a desire to prevent Iran from extending its territorial control in eastern Syria and filling the vacuum caused by the withdrawal of most U.S. troops from the area. Russia has been keen to recruit young Syrians away from Iran; it invested in the formation of the Fifth Assault Corps that reports directly to Russian officers, and whose 50,000 members come from pro-regime groups and elements of the defunct Free Syrian Army.

Russia is also expanding its Hmeimim air base and naval facility in Tartus. Russia deployed FAC units last year in southwestern Syria and near the cease-fire line in the Golan Heights after reaching an understanding with the U.S. and Israel. Iran demonstrated its anger at Russian efforts to weaken its influence on the government in Damascus by ordering its Shiite militia allies to refrain from participating in the battle for Idlib in June, which rendered it an unnecessary war of attrition.

Contrary to media reports that Islamic militants sought to attack Russia’s Hmeimim air base near Latakia, the truth is that the Iranian-created 313th Battalion in Qardaha, the Assad family's hometown, sent drones to fly over the base only for harassment. The Russians ordered the Syrian regime to disband this battalion after implicating it in launching drones.

Competition between Russia and Iran in Syria goes beyond military influence on the ground to economic supremacy. Russia has a competitive advantage over Iran in winning big reconstruction projects. Russian President Vladimir Putin angered the Iranians when he negotiated to grant Russian businesses the lion’s share of postwar projects in return for propping up Assad’s regime. Assad is unhappy about Iranian attempts to control the centers of decision-making in Syria. He prefers to work with Russia because Moscow wants to be a junior partner, whereas Tehran wants to be the dominant partner.

Assad also understands that the United States, Russia and Israel have decided to disallow Iran's permanent presence in Syria. Russia has concerns that Iran will be an obstacle to its long-term economic interests in Syria. The Russians reason that Syria will emerge from the devastating civil war as a fragile state. Putin does not want to have rivals in determining Syria’s domestic and foreign policy, and he made this point clear to Assad before committing himself to rescuing Syrian regime.

Russia understands Syrian sectarian and ethnic sensitivities, and, unlike Iran, which promotes a strictly religious agenda, it has no reservations about dealing with the country's diverse groups. When Moscow secured the withdrawal of Islamist rebels from Greater Damascus last year, it used Chechen military police officers to communicate with them. The Russians want to work with an able Syrian government and avoid getting stuck there, whereas the Iranians prefer to work with a lackey administration.

The crippling sanctions against Iran curtail its ability to preserve its achievements in Syria. The eventual readmission of Syria to the Arab League, which Assad is eager to realize, threatens to distance its regime from Iran.

The cost of staying in Syria is high and useless. In addition to business opportunities in Syria, Putin is more interested in flexing military muscle to project the surge of Russian military might and win concessions in Europe. The Russian public sees no strategic reason to squander scarce resources on such a volatile country, while poverty-stricken Iranians are unable to comprehend their mullahs' ideological drive in Syria. In terms of articulating their Syrian policy, Russia is pragmatic, while Iran is dogmatic. Thanks to Russian mediation, there is increasing evidence that Turkey is willing to work with the Syrian government whose forces, even if token, are positioning themselves in specific border posts. The release of 18 Syrian soldiers recently arrested by the Turkish army, despite Assad's anti-Turkish rhetoric, points in that direction. Erdogan had to shelve his ambitions to overthrow Assad's regime and install a pro-Turkish government in Damascus. He's now resigned to the establishment of a safe zone along the Syrian border under strict American and Russian surveillance after halting Operation Peace Spring.

Iran’s heavy involvement in the Syrian conflict generated the false impression that its influence there has become paramount. This claim is far from reality. Iran faces a fundamental weakness in determining the future of Syria, mainly because of its overbearing political style and the small size of Syria’s Shiite community. Shiite proselytization is not as widespread as the Iranians think it should be, since Sunnis have an aversion to it and Alawites disfavor it. Despite Iran's best efforts, there are less than 300,000 Syrians who follow Twelver Shiite Islam – the branch of Shiite Islam favored by Iran. Even though Iran founded Syrian Shiite militias (such as Imam al-Rida Forces in Homs and al-Baqir Brigade in Aleppo), the main forces commanded by the Islamic Revolutionary Guard Corps are Iraqi and Afghan Shiites.

Postwar Syria

No matter what shape postwar Syria takes, the country will look different than what it was before 2011. Nearly 600,000 Syrians have lost their lives, and more than half of the country’s population of 21 million on the eve of the uprising have been displaced, both internally and externally. Even though Assad escaped the fate of other presidents in the countries of the Arab Spring uprisings, he did not win the war; in fact, he is the biggest loser in the battle for Syria.

Syria is economically devastated, and he is presiding over a shattered country, whose cost of reconstruction could reach a staggering $1 trillion. (For reference, Syria’s gross domestic product in 2010, just before the war, was about $60 billion.) It is doubtful whether reconstruction can occur in Syria's massively corrupt business and bureaucratic environment. Postwar reconstruction efforts in Iraq and Lebanon do not bode well for Syria.

The regime lost critical oil and water resources and the fertile agricultural areas of northeastern Syria. Iran’s IRGC and Russian forces control the command structure of most Syrian military and security formations, and the Turks established their much-sought security belt to prevent the Kurds on both sides of the border from linking up. The perceived Kurdish threat remains a top priority for Turkey and a stable determinant of its foreign policy choices.

The ongoing understandings among the major actors in Syria, be they bilateral or multilateral, are setting the stage for military action in Idlib, the site of the last major battle in the Syrian armed conflict. Syria's march toward the final settlement of its conflict will commence only then. One must not assume that Iran's presence there is about to end. It will not, but its scale would not live up to the expectations of Iran's conservative ruling elite. Unlike Iran’s sway over Iraqi politics, Syria is reemerging as an arena of inconclusive regional competition.

How to Deal with a Declining Russia

It seems unlikely that Russia will again possess the resources to balance US power in the same way that the Soviet Union did during the four decades after World War II. But declining powers merit as much diplomatic attention as rising ones do.

Joseph S. Nye, Jr.

nye196_ BRENDAN SMIALOWSKIAFP via Getty Images_trumpputinuncomfortable

TOKYO – The Kremlin is on a roll. Under President Vladimir Putin, Russia has replaced the United States in Syria, continues to intervene in Eastern Ukraine, and recently hosted an African summit in Sochi. Appearances, however, can be deceptive.

True, Russia retains a vast nuclear arsenal, equal in size to that of the US, and it used force effectively against Georgia in 2008 and Ukraine in 2014; provided military assistance to save Bashar al-Assad’s regime in Syria; and has used cyber means to disrupt US and other elections. But Russia can only be an international spoiler. Behind the adventurism, it is a country in decline.

In 1959, the Soviet leader Nikita Khrushchev famously boasted that the Soviet Union would overtake the US by 1970 or 1980. Instead, in 1991, the Soviet Union collapsed, leaving a significantly shrunken Russia, with three-quarters of the USSR’s territory, half its population, half its economy, and one-third of its military personnel. Its GDP is only $1.7 trillion, compared to $21 trillion for the US.

In 1989, the Soviet economy was twice the size of China’s; today, Russia’s GDP is one-seventh that of China. Moreover, Russia is heavily dependent on energy exports, with high-tech products accounting for only 11% of its manufactured exports (compared to 19% for the US).

While language, history, and labor migration provide Russia with some soft power in its near-abroad, few foreigners elsewhere watch Russian films, and Russian universities are not ranked among the top global 100. The political institutions for an effective market economy are largely missing, and robber-baron state capitalism lacks the kind of effective regulation that creates trust.

The public health system is weak, and average Russian life expectancy, at 72 (male and female), is five years shorter than in Europe. United Nations demographers project that Russia’s population may decline from 145 million today to 121 million by mid-century.

Many futures are possible, but at this point, Russia is a “one-crop economy” with corrupt institutions and serious demographic and health problems. Former President Dmitri Medvedev laid out plans to surmount them, but little was implemented and pervasive corruption has made modernization difficult. While Putin has been a successful tactician in restoring Russia’s presence on the world stage, he has not been a skillful strategist in addressing the country’s long-term problems.

One of Putin’s successful tactical maneuvers has been an alignment with China. After incurring Western sanctions for his attack on Ukraine, Putin declared China “our key strategic partner.” In return, President Xi Jinping declared Putin “my best friend and colleague.”

Traditional balance-of-power politics would predict such a response to US power. In the 1950s, China and the Soviet Union were allied against the US. After Nixon’s opening to China in 1972, the US and China cooperated to limit Soviet power. That alignment ended with the collapse of the Soviet Union. In 1992, Russia and China declared their relations a “constructive partnership.” That became a “strategic partnership” in 1996, and in July 2001 they signed a treaty of “friendship and cooperation.”

They have cooperated closely in the UN Security Council, taken similar positions on international control of the Internet, and have used various diplomatic frameworks such as the BRICS grouping and the Shanghai Cooperation Organization to coordinate positions. They now share non-nuclear military technology and conduct joint exercises.

Nonetheless, there are serious obstacles to a close Sino-Russian alliance that goes much beyond tactical coordination. Residual mistrust persists. In the nineteenth century, no country took more land from China than Russia did, and the current demographic situation in the Far East – where Russians number six million, and the population on the Chinese side of the border is up to 120 million – is a source of anxiety in Moscow.

Russia’s economic decline has increased its concern about the rise of China. While trade has increased, investment lags, and Russia ranks only tenth among China’s export markets. As the Economist recently reported, Russia worries about becoming the alliance’s junior partner – more dependent on China than China is on Russia. According to Feng Yujun of Fudan University, “the most important relationship for us is the one with America. We don’t want to repeat the mistakes of Stalin and Mao.”

America, however, must not take comfort in the decline of Russia and treat it like a second-rate power. After all, declining powers tend to be less risk-averse, as was true of Austria-Hungary in 1914. They have less to lose than rising powers. Russia still poses a potential threat to the US, largely because it is the one country with enough missiles and nuclear warheads to destroy it. And Russia’s relative decline has made it more reluctant to renounce its nuclear status.

Even a declining Russia possesses enormous scale, an educated population, skilled scientists and engineers, and vast natural resources. It seems unlikely that Russia will again possess the resources to balance US power in the same way that the Soviet Union did during the four decades after World War II.

But, because of its residual nuclear strength, its oil and gas, its skills in cyber technology, its proximity to Europe, and the potential of its alliance with China, Russia will have the ability to cause problems for the US, and Putin’s reliance on populist nationalism provides an incentive.

Declining powers merit as much diplomatic attention as rising ones do. At some point after President Donald Trump leaves office, the US will need to develop the serious Russian strategy that it now lacks.

Joseph S. Nye, Jr., a professor at Harvard University, is the author of Is the American Century Over? and the forthcoming Do Morals Matter? Presidents and Foreign Policy from FDR to Trump.

A third way for Argentina: reprofiling

With its debt neither sustainable nor unsustainable, Argentina meets the test for maturity extensions

Carlos Abadi

Argentina's forward player Lionel Messi controlling a ball during a match in the Russia 2018 World Cup
The path to a deal will be fraught with danger; both sides must put their best players forward © AFP/Getty Images

Despite allegations to the contrary, “reprofiling” is not an Argentine euphemism for debt restructuring. It is a distinct liability management exercise that is optimal, from a welfare standpoint, for certain well-defined sovereign debt crises. In our (preliminary) opinion, Argentina’s situation meets the required criteria for a reprofiling that would defer its maturities for a relatively short period, while not reducing either the face value of its obligations to private creditors or their contractual coupons.

In fact, the IMF incorporated reprofiling to its access policy in 2014, in response to criticism it suffered after its alleged procrastination in requiring private sector involvement (PSI) during Greece’s debt crisis. Until then, there existed only a binary choice for any member seeking exceptional access: they either qualified (as a result of the Fund’s debt sustainability analysis (DSA)) as able to repay “with high probability”, or they didn’t. In the former case they were considered for exceptional access of a “catalyst” nature, and only subject to meaningful PSI in the latter.

However, the 2014 rethink brought the Fund to realise that DSA is not an exact science, especially in that it relies on policy commitments from the debtor to be implemented in the future. Consequently, the IMF allowed a third way for exceptional access: the reprofiling. In the Fund’s view, the reprofiling remedy (which is a form of PSI because, unless the exit yield is less than or equal to the contractual coupon, any maturity extension entails an NPV reduction) is appropriate for sovereign debtors lying in the grey area of their debt being neither sustainable nor unsustainable, in each case under the “with high probability” standard.

While we have not yet concluded our DSA (we expect to do so in the next week or so), we expect that it will place Argentina in that grey zone, at least in the Fund’s mind (if nothing else, because policy undertakings would be made by a new, unfamiliar, administration). Additionally, the Fund subjects exceptional access to the window allowing for a reprofiling to two constraints:

1) The member must have already lost market access — clearly fulfilled in Argentina’s case; and

2) There must be considerable uncertainty regarding the member’s debt sustainability (and, accordingly, doubt about whether market access can be regained) — our intuition is that our analysis will reflect this.

Thus, assuming that Argentina qualifies for a reprofiling, the negotiating variable will be the number of deferral years. I would argue that the extension period should be such that no maturity of the reprofiled bonds should fall due before the later of i) Argentina regaining market access, and ii) the IMF having been repaid in full.

Obviously, should Argentina regain market access, there is no reason for the maturity of the reprofiled bonds to occur much later. The maturity extensions need not be identical for each bond as Argentina i) will be in a position to start repaying shortly after the market opens up, subject to the ceiling set by market appetite, and ii) an identical across-the-board extension could be perceived as unfair by holders of short maturities, since their NPV impairment would be proportionally larger than for those holding long maturities.

We attempted to simplify things here because our goal is to show that there is a path to an orderly restructuring in the form of a reprofiling. But that path is narrow and fraught with danger. As we have argued before, both sides will need to play their A-teams to achieve this value-maximising result. This is because, while any reprofiling transaction will trigger credit default swaps and put Argentina in selective default until closing, it is my expectation that if no deal is reached by the first half of 2020, Argentina will enter a moratorium and its cost-benefit analysis may change.

In particular, Argentina will need to:

1) Be persuaded with convincing econometric evidence that the utility (in terms of future growth) of a market-friendly deal consistent with its economic fundamentals outweighs the sugar high of a strategic default resulting in a reduction in principal and/or interest, and short-term relief from current expenditures;

2) Understand that the NPV reduction resulting from the reprofiling can be communicated internally as a victory, under almost any scenario;

3) Internalise that the economic benefits derived from formulating and implementing a credible path to meaningful primary surpluses will translate into political gains before the end of the next presidential term. Once more, the Argentine side will not take dogmatic generalities about the virtues of fiscal discipline and market reputation at face value; to get the point across, the alternative macro paths will need to be modelled with a robustness nearing the dispositive (an exercise we will start working on immediately following the DSA’s completion); and

4) Realise that a reprofiling deal provides Argentina with the best of both worlds: optionality. Should the government, whether because of externalities, social pressures or mere vagaries, decide that it is not in a position to fulfil its fiscal undertakings, the option to default will remain.

Creditors, on the other hand, will have to struggle with the following internal and external challenges to ensure a satisfactory resolution:

1) Maintaining the cohesion of the creditor group so that precious time is not lost in internal bickering or the formation of competing representative bodies, creating delay and confusion.
Several divisive issues will have to be addressed, including the issue of equity between holders of short and long maturities mentioned above;

2) Negotiating with a party that holds an ace in its sleeve: the ability to strategically default. It is axiomatic that, however costly default may be for a sovereign issuer, it will never be as costly as the same conduct for a domestic corporate debtor. Argentina’s creditors will have to be professional in substantiating with compelling models and data the utility to Argentina (and related agency benefits) of a reprofiling deal consistent with the timing of Argentina’s expected return to market access;

3) Using collective action clauses (CACs) as both a sword and a shield. Creditors will need to:

a. Strive to represent or speak for blocking minorities of substantially all sizeable outstanding issues subject to reprofiling; and

b. Be mindful of the implications (both internal and external) and the effect on potential deal-killing holdouts of the strategic differences between the post-2005 dual-limb vote CACs and the significantly more debtor-friendly more recent single-limb vote issues. To continue with the same example, creditors should be aware that single-limb issues are relatively new, that their “uniformly applicable” condition has not been tested in the courts, and that a uniform extension that causes some bondholders to suffer a greater relative NPV impairment than others may be challenged in court and that such litigation may frustrate the desired resolution;

4) Information asymmetry is another advantage a debtor holds over its creditors, amplified in the case of a sovereign issuer such as Argentina with financial data that are opaque for some periods and outright unreliable for others. Creditors will have to derive or gather reliable data (such as the true quantum of the debt owed to other public sector entities) from private sources in order to rebut potentially abusive demands for further NPV concessions (we are also in the process of plugging those fuzzy data holes).

Finally, no reprofiling (or even restructuring) can happen without an IMF agreement. Much has happened at the IMF in the past five years, including its change of leadership and the 2014-2015 revised exceptional access framework on which a reprofiling deal hinges. But it still has a rigorous credit process, which relies on getting as collateral a credible fiscal programme and trusting that the sovereign’s policy commitments can be implemented.

Given Argentina’s economic and social condition and even though the incoming administration is an unknown, the IMF will probably have to accept that Argentina will be unable to deliver more than a primary balance for the next 12 to 18 months and that such relative fiscal laxity is a necessary condition for the subsequent delivery of sustained primary surpluses.

Argentina’s burden of proof is not as exacting as it could be if it were seeking exceptional access of the catalyst variety. The kind of support Argentina should aim for does not require proof that its debt is sustainable.

Indeed, exceptional access for a standby facility supportive of a reprofiling requires only rejecting the null hypothesis that Argentina’s debt is unsustainable under the “with high probability” standard. To borrow an analogy from law, Argentina’s strategy (with the creditors acting at its amici) should be to introduce reasonable doubt to a hypothetical IMF finding of unsustainability “with high probability”; in other words, to avoid a Type I error.

My opinion has not changed: an orderly debt restructuring is possible, even likely, but if, and only if, both Argentina and its creditors put their respective Messis on the field.

Carlos Abadi is managing director of DecisionBoundaries, LLC, a New York-based international financial advisory firm.

On Viewing Rembrandt’s ‘Aristotle Contemplating the Bust of Homer’

By:George Friedman



Last weekend I was in New York City, with a rare moment for indulgence.

I chose to visit an old love, one who taught me about my life and what it would cost me.

That love was a painting by Rembrandt, the centerpiece of an exhibition of Dutch masters at the Metropolitan Museum of Art.

It is called by several names, but for me, its name will always be “Aristotle Contemplating the Bust of Homer.”

It is a painting about philosophy, politics and beauty, and the longing for what no one can have: all three.

Aristotle is at the center, dominating the painting.

He is dressed lavishly in cloth of extraordinary luxury, with an ambiguous hat, barely visible, atop his head.

But the true center of the painting is a magnificent gold chain that encircles his body.

It is sensuous in its beauty, but the beauty can’t hide its strength.

What it surrounds it controls, and it surrounds Aristotle.

The reason he is wearing the chain is at first a mystery; he is, after all, a philosopher, a scholar who studied under Plato.

Such men neither have the means nor the appetite for such ornaments.

Then, if you look very carefully at the painting, you see a small medallion attached to the chain, and on the medallion is an image of Alexander the Great, the man who conquered the known world to the foot of the Himalayas and planted himself in eternity, with cities named after him scattered through his empires.

He used these cities as the foundation of his empire, linking them together in trade and weapons.

And in his short life, the Greek from the foothills of the Balkans reshaped the world.

The mystery begins to resolve itself with that medallion, for Aristotle was Alexander’s teacher and teachers bear at least some or sometimes all of what their students become.

Aristotle clearly was proud of his student; otherwise, why would he be clothed in silks and gold and bear the picture of his student so near to his heart?

His bearing is proud in the painting; a man who taught Alexander how to be great must be great as well.

Aristotle’s teaching was not of the art of war but rather of philosophy.

Philosophy teaches about the moral obligations that men bear.

It teaches them about justice, and it teaches them when justice requires kindness and when it requires cruelty.

Philosophy teaches about the city, the polis – or our modern-day nations – and teaches how they are constructed, how they should be ruled, and how they should avoid defeat and slavery.

In the end, philosophy teaches about a place, justice and injustice, and teaches the warrior who must choose the place, and choose what is just.

To me, Aristotle bears himself as a well-decorated soldier.

His hand on his hip, his posture straight, he appears to us as Alexander might, a warrior who has risked much, from his life to his soul, and has emerged with both intact.

When Napoleon visited the great German writer Goethe, Bonaparte is said to have exclaimed, “You are a man.”

He expected to meet another feeble scholar, one who I suppose infested the Bourbon court, uttering platitudes.

That a great writer, and truly a philosopher as well, should turn out to be both a thinker and a man in full astounded Napoleon, perhaps the greatest warrior since Alexander, does not surprise me.

There is a connection in my mind between the scholar and weakness, a willingness to imagine justice but not to fight and die for it.

But Rembrandt understood Aristotle, the philosopher.

The chain is the chain of office.

It is the chain an important adviser to a ruler might wear.

And in the end, philosophy becomes an adviser to the ruler.

A man who devotes himself to questions of justice and war and to truly understanding their necessity and the paradox that exists in them, is inevitably advising the ruler, whether the ruler understands it or not.

He shapes the time in which he lives, waging a war against the superficial and self-serving, and usually losing.

Aristotle had won.

He had honed an instrument of justice and war unlike many the world has seen, and Alexander understood – according to Rembrandt, at least – that he had been honed.

You can see the pride with which he wears the gold chain. But you can also see sadness.

To Aristotle’s right, clouded in the darkness Rembrandt had mastered, is the bust of Homer, the blind poet of the heroic age of Greece, without malice on the part of anyone, shunted off into the murk.

Aristotle’s hand rests on Homer’s head, gently and almost tenderly. His eyes do not face straight ahead like a soldier’s, or suspiciously in all directions as a politician’s would.

Aristotle’s hand rests on the bust like a lover’s, but the eyes aren’t focused. They see Homer, but they see something else, something that is not there but that rivets Aristotle’s attention.

He has one hand on his chain, another on Homer, and his eyes contain a deep sadness.

Forget that the chain is gold, forget that it is a reward for his greatness.

It is still a chain that binds him to Alexander, a bond forged because he was a philosopher who taught a conqueror how to conquer.

That is a triumph – the highest triumph philosophy can achieve – but is it enough to satisfy the soul of philosophy?

Homer was a poet, and poets hear and sing songs.

He knew that hearing the songs of the sirens was worth dying for.

He wrote of the battle for Troy as if dying were a small price to pay for having been there.

The poet’s song is the song of beauty and despair and makes no attempt to justify either.

This makes poetry the enemy of philosophy.

Philosophy must explain everything.

Its need, its compulsion, is to leave nothing as the philosopher found it but to examine it, twisting and turning it until he owns its soul.

Poetry celebrates the simple reality of being.

It does not weigh the good and the evil but gives thanks to the gods that both are there.

The philosopher is proud of what he knows and is proud of the mark he left on history.

The poet is a sensualist.

He wants to teach feeling by revealing it in language turned to song.

With this, the poet teaches what true joy and true sorrow feel like.

The philosopher lives by rigor, suppressing feelings in the name of truth and necessity.

The poet lives sensually, in the mind, soul and body, and contents himself with celebrating what is, whether victory or defeat.

In a way, the poet is an anarchist, subject to his tropes only when he chooses, in love with what he sees and with whoever listens.

The lover may be twisted and depraved, but that simply makes his lover worthier of the song.

Aristotle is caught between the power of the state, the rigor of philosophy and the voluptuousness of the poet.

Aristotle chose to be the adversary of the poet, and he achieved everything any reasonable man could dream of.

But the price he paid for both was the rigorous management of all his feelings, a constant analysis of why the world is as it is and why rulers rule as they do.

Homer never cared about either.

He accepted the world as it was, and he wanted to capture treachery, bravery, banality and the enchanted.

He never explained why the siren’s song was so seductive.

He was simply content to speak of women who generate urges that would cause men to knowingly go to their death.

Aristotle would have dissected it.

Homer might well have died simply to die hearing that song.

The tension is between experiencing life, understanding life and dominating life.

Aristotle ultimately chose the last two.

Homer chose the first.

Rembrandt portrays Aristotle, perhaps at the moment he realized what he won and what he lost, longing for the life of the poet.

There is a sense given to all of us who are human, when the tension between being somewhere and cherishing it for what it is, competes with the mind wandering off to other things.

Homer was the siren, asking us to stop thinking and give ourselves over to his song.

And Aristotle was the philosopher and adviser to the great who realized he had never done that, and that it was now too late to do more than imagine that purity.

Rembrandt had to have understood this agony, or he couldn’t have painted the picture.

Philosophy, statecraft and poetry are far from the only moments, but they are at the extreme.

The painting is a monument to our lives, of the price we pay for Eden, where we learned of good and evil, and from which Cain could learn to kill Abel.

It would seem to be the tragedy of the human condition, that the search for justice and power destroys the pleasure of being human.

I myself have rarely found escape from the conundrum, but I have found a path.

She who lives hidden in plain sight.

China Needs Economic Stimulus

China’s GDP growth has been slowing steadily since the first quarter of 2010, and the prospect of slower growth has gained widespread acceptance, both within and outside China. But the downward trend is riskier than many observers seem to realize.

Yu Yongding

yu51_VCGVCG via Getty Images_chinastockmarket

BEIJING – China’s GDP growth may still be strong by global standards, but the annualized rate of 6% in the third quarter of 2019 is the lowest the country has recorded since 1992. In fact, China’s GDP growth has been slowing steadily since the first quarter of 2010, when it exceeded 12%, year on year.

This downward trend is riskier than many observers seem to realice.

In recent years, the prospect of slower Chinese growth has gained widespread acceptance, both within and outside China. A shrinking working-age population means that 8% growth is no longer essential for full employment, it is argued, so introducing more fiscal or monetary stimulus isn’t worth the risk.

Instead, China’s policymakers should focus on improving the quality of growth through supply-side structural reforms – an objective that, most economists in China argue, may in fact be easier to achieve in a lower-growth environment.

This approach is misguided. While structural adjustment is crucial, slower economic growth is not a prerequisite for success; on the contrary, it would impede reform. Moreover, given that the complexity of China’s labor market impedes data collection, it is likely that China’s employment situation is not as strong as many believe.

In this context, the Chinese government’s top priority should be to arrest the decline in GDP growth – not least to prevent a kind of snowball effect that will make restoring growth far more difficult later. After nearly a decade of continuous deceleration, with no end in sight, investors and consumers are becoming increasingly reluctant to spend.

Serious financial vulnerabilities will only deepen their concerns; ceteris paribus, declining growth will worsen all indicators of financial stability.

Fortunately, China has the policy space to pursue stimulus. To be sure, as a share of GDP, China’s broad money supply (M2) is among the world’s highest. The country’s fiscal position may not be as strong as official figures suggest, and its corporate debt-to-GDP ratio is also among the highest in the world.

But a closer look suggests that the associated risks are overblown.

The primary risk associated with monetary expansion is, of course, inflation. But Milton Friedman’s assertion in 1956 that “inflation is always and everywhere a monetary phenomenon” has been thoroughly debunked in recent years. Countries with high M2-to-GDP ratios have often maintained low inflation, and countries with low M2-to-GDP ratios have sometimes struggled with high inflation.

China is no exception. Although M2 has grown faster than nominal GDP consistently over the last decade, China’s core consumer price index has hovered around 2%, and its producer price index has often fallen into negative territory. This can be explained partly by Chinese households’ financial habits: they save a lot, boosting M2, but mostly in savings accounts, which aren’t inflationary. For China, deflation is now a more serious concern than inflation.

On the fiscal front, the figures are doubly deceiving. Officially, China has had an average deficit-to-GDP ratio of less than 2% over the last decade, and a government debt-to-GDP ratio of about 40%. Yet, in the first ten months of this year alone, local governments have issued CN¥2.53 trillion ($359 billion) in special-purpose bonds, intended to support public-interest projects.

Such bonds are not recorded as deficit financing, because it is assumed that the projects they fund will generate enough income to cover all debt obligations. If they were, China’s deficit and debt ratios would rise significantly.

Yet, even if these indicators were recalculated to account for all of the government’s contingent liabilities, China’s fiscal position would remain significantly stronger than those of most developed economies. More important, China’s government boasts net assets worth some $17 trillion in 2016, according to the Chinese Academy of Social Sciences – a powerful buffer against fiscal shocks.

The bigger risks arise from China’s corporate debt, which surpassed 160% of GDP in 2017. But even here, there is little reason to panic, because China’s corporate debts – largely the result of underdeveloped share markets – are financed mostly by domestic savings. (Despite having increased in recent years, China’s foreign debt remains relatively low.)

Moreover, the growth of China’s corporate debt-to-GDP ratio has slowed in recent years. The best way to bolster this trend is not to refuse to roll over corporate debts – potentially causing liquidity shortages that drive companies needlessly into bankruptcy – but rather to give firms the chance to grow out of debt. That requires a faster-growing economy.

China has the policy space to implement a powerful economic stimulus package. While the side effects and limits of such a package should be fully recognized, the risks of a continued slowdown – not only for China, but also for a global economy primed for recession – dictate that the government should use it.

Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.

Geopolitical Determinism

By: George Friedman

Having written a great deal on space and enchantment, it is time to come down to earth. I want to return to the central thesis of geopolitics as I practice it: the idea of geopolitical determinism.

I differ from other people who write on geopolitics in two senses. While I regard geography as a fundamental determinant in human behavior, I don’t regard it as being the sole determinant.

For me, Greek philosophy is pivotal in defining what it means to be human. I am not sure that Plato or Aristotle could have written in any place but Greece, or at any time other than they did. But regardless of that question, we are all, in the global civilization that has emerged, shaped to some extent by them as by the highest moments of all civilization. But this could not have come about without the European imposition of a global system on the world, so we are back to geopolitics.

My point here is that geopolitics is far more complex and subtle than simply the physical reality of the globe, but also that the subtlety of the world constantly circles back to that physical reality.

More controversial is that I’m a determinist. I do not believe that we are shaped merely by mountains and deserts, but it is evident to me that each of us is shaped by both place and the forces emanating from place. In the simplest example, the life of an Indian born in the slums of Mumbai is profoundly different from the life of an American born in a wealthy Dallas suburb like Highland Park. Both are constrained.

The Indian is not likely to become a partner at a private equity fund. The Highland Parker is not likely to become a petty thief. The former must resort to his or other related modes of living, and everything he knows, including the culture of his slum, leads him there. Similarly, the Highland Parker is going to live a very different life. (Of course, since thievery is part of the human condition, he may become a thief – but at a far more exalted level.)

The existence of Mumbai’s slums is shaped by the land, the climate, the surplus of people and the minimal existence of resources. All of this places constraints on the life of someone born there. The existence of Highland Park is shaped by the vastness and relative underpopulation of Texas, the generous flow of oil, and the investments made in Texas infrastructure and higher education as a result of that oil.

Put those conditions and wealth in Mumbai rather than Texas, and while the two people might not change places, they would each likely have different lives. The very wealthy like to say that you are what you make yourself. Even that isn’t true, since you are surrounded not only by wealth but cultural expectations that grow from it.

An individual might escape his fate, but the statistical likelihood of divergence is limited. The sheaf of practical policies might expand or contract, but life is lived within that sheaf.

The place in which you are born makes it possible to escape. As I write this, I am in Dubai and am surrounded by an Indian underclass made up of people who clean hotel rooms and drive visitors to and from the airport. If anyone from Highland Park is here, then he is likely the recipient of these Indians’ services, as I am.

I don’t know where they come from, but if it’s not from the slums, then it’s likely near them.

The point is that even when you change your place in the world, you change it within the constraints of who you are.

Andre Malraux, the French writer (and forgive me if I repeat myself, but I value this very much), said that men leave their countries in very national ways. The American expatriate who has learned perfect Bulgarian is still an American expatriate living in Bulgaria. You can recognize an American student on their junior year abroad, with Columbia University emblazoned on their souls.

I was born in Hungary, and when I go back to Hungary, I shock my wife with how quickly I become Hungarian even though I left as an infant. Hungarians, on the other hand, know by whatever sense that I am American, and therefore that I should be sold a fake diamond.

The degree to which our lives and our souls are shaped by where we were born and where we live is astonishing. I lived in a neighborhood in the Bronx and went on to get a doctorate. The Puerto Ricans with whom I lived and fought for the most part had no conception of the value of a doctorate and no desire to have one. I lacked their understanding of the street but they had other needs, which I couldn’t fathom.

It’s not obvious which was more important. But my parents were shaped by the first half of the 20th century, by World War II and by the Holocaust. The Puerto Ricans were shaped by their families’ backgrounds, often impoverished, on a tropical island. Their imaginations and appetites were different from the moment of birth, and so I went one way and they another, and I could imagine no other path – with important exceptions on all sides. But we were both fleeing lives that we couldn’t bear, and fled them in very different ways.

The idea that place does not create constraints and imperatives that few can overcome is, I think, naive. This is the foundation of determinism, and we have no trouble imagining this in the markets. In economics, the assumption is that you predict the appetite for or revulsion of good or bad stocks.

I get endless emails from advisers who promise to make me wealthy (side note – if someone can amass vast wealth, why is he hustling me for few bucks?). The assumption is that markets have a degree of predictability. This is true even of market disruption. Amazon founder Jeff Bezos understood what the internet would do, and he aligned himself with what was inevitable.

Our lives are filled with forecasts. When you step off the sidewalk with a “walk” light, you are forecasting that the car approaching will stop. When you choose your profession, you are forecasting that it will serve your needs. When you marry your spouse, you do so based on expectations of happiness. That these may not occur does not change the fact that forecasting is inextricably bound up with human existence.

The argument I am making is twofold. First, that it is impossible to avoid forecasting but that the greater the risk and reward, the more your forecast must be refined. Second, since the behavior of nation-states can give you the greatest reward or risk, forecasting the behavior of nations is indispensable, and refining the forecast into a reliable guide is indispensable.

It seems impossible. But for the most part, the oncoming car stops at the light. Your reading of the situation is correct. In the same way, I will argue that forecasting how nations will behave is possible, if you begin with an understanding of how the forces of that nation define how individuals will behave.

Geographic determinism can be a form of superficial vulgarity. But if it is part of a general understanding of the manner in which humans see the world and their own souls, then predicting the movement of 330 million people becomes possible. In predicting what the United States will do, you must begin with the fact that Americans are human, that they differ from other humans based on where they are, and that like all humans, they experience imperatives and constraints the same way. Doing this allows you to predict the direction a nation will take both internally and toward other nations.

This is the foundation of Geopolitical Futures and what I am doing. It is imperfect, but all things are. It is not simplistic modeling based on geography. It is an attempt to consider how the geography of Greece forged the Greeks, how the Greeks created an extraordinary moment in human thought, and how they gave way to Rome.

You can predict, on the whole and with exceptions, the trajectory of someone’s life by where he was born and to whom he was born. You can describe what he will believe, who he will love, and who he will hate. And taking them together, you can see them crack under pressure, or stand astride their enemies. It may not be perfect, but life is far from random.

I will go from Dubai to Calgary to New York and Istanbul. I am sure there is a common thread that makes this necessary, and traces back to the Magyar tribes east of the Carpathians. I will find it.