Friday, July 31, 2009

Worth Reading: It’s Time for the US to Declare Victory and Go Home

This memo ("It's Time for the US to Declare Victory and Go Home") from Army Colonel Tim Reese is gathering buzz after appearing in today's New York Times.

There are some blistering critiques in here, and they expose the limited opportunities remaining for U.S. influence in Iraq. Ultimately, COL Reese argues that the United States has done what it can do, and that U.S. long term strategic interests in Iraq and the region would be better served through an accelerated withdrawal.

Cui Bono?

The Wall Street Journal reports this morning that the China Investment Corporation - China's Sovereign Wealth Fund - has selected Morgan Stanley and Blackrock (with which it has a colorful, if not depressing history) to manage a portion of its $200 billion portfolio.

Elsewhere, Bloomberg reports that Warren Buffett made two lucrative decisions last September. First was Berkshire Hathaway's investment in Chinese carmaker BYD Co., whose Hong Kong-listed stock has increased five-fold since Buffett's investment. Paper profits to Berkshire: $1 billion.

As if that wasn't sweet enough, Buffett's capital injections for Goldman Sachs - for which he received favorable warrant terms - have netted Berkshire $2 billion in paper profits.

Not bad for a week's work.

And if you're one of the countless Americans who snagged a new car through the Cash for Clunkers program, congratulations! It turns out that the $1 billion program ran out of money after six days. Assuming each participant received the maximum $4500 subsidy to purchase a new car, that means auto inventories shrunk by more than 200,000 cars. Chalk up a "W" for the American auto industry and the 200,000+ Americans who bought new SUV's with taxpayer money. The American taxpayer continues its losing streak - a trendline that looks set to continue through the next decade.

Wednesday, July 22, 2009

China Looks to Go on a Shopping Spree

In case you missed it, Chinese Premier Wen Jiabao announced yesterday that China is looking to spend its foreign exchange reserves. When Western politicians and economists called on China to bolster its consumption and demand, I don't think this is what they had in mind.

As part of its continued efforts to reduce exposure to the U.S. Dollar, China will use portions of its $2.132 trillion - yes, trillion - forex reserve chest to purchase tangible and corporate assets abroad. The announcement comes less than one week after China appointed Yi Gang as the new head of the State Administration of Foreign Exchange (SAFE).

Ostensibly energy and natural resources firms will be first on the acquisition list. Prepare for an uptick in xenophobia and anti-Chinese sentiment on Capitol Hill as China's state-owned companies take advantage of depressed asset prices to buy up U.S. companies and business units of multinationals with sensitive technologies.

One wonders which banks stand to gain from the underwriting and due diligence requirements coming in the months and years ahead, and whether outside consultants are advising SAFE on its investment strategy.

It will be interesting to see if/how this impacts Chinese demand for U.S. Treasuries. Without the Chinese government's continued purchases of U.S. debt, the costs of the Obama Administration's ambitious policy agenda will escalate further. On top of the declining support for his policies, an inability to acquire debt financing would leave his initiatives stillborn.

Tuesday, July 14, 2009

The Geopolitics of the Indian Ocean: Sino-Indian Tensions on the Rise

Yesterday, the Financial Times published an excellent piece on growing Sino-Indian geopolitical tensions.

With China's three decades of uninterrupted economic growth, the country is seeking to expand its influence throughout South Asia - from the Indian Ocean to the Persian (Arabian) Gulf. As the FT notes, often this influence takes the form of infrastructure projects - such as deep water ports, arms deals, energy investments, and diplomatic support.

The so-called "string of pearls" of Chinese influence appear to leaders in New Delhi as elements in a strategy of encirclement. No wonder the Indians are eager to begin sea trials of their first nuclear-powered, ballistic missile capable, submarine later this month.

This portending conflict is a subject that Robert Kaplan expanded upon in the March/April 2009 issue of Foreign Affairs, in an essay titled "Center Stage for the 21st Century: Power Plays in the Indian Ocean."

While it is tempting to believe that the forces of history will inevitably lead to major war between these two powers, it is worth pausing and remembering that history isn't linear. The recent unrest in Xinjiang Province points to the tenuous hold the Chinese Communist Party has over domestic stability. An increase in unrest of any kind within China likely would compel the government to focus on its domestic situation, and forego the uncertain benefits of foreign intrigue. Of course, leaders in Beijing might redirect domestic anger and unrest, by channeling the population's latent nationalism toward a foreign enemy.

Regardless, as David Lampton points out in his excellent book The Three Faces of Chinese Power: with 14 land neighbors, China faces a delicate balance between overt demonstrations of power and influence, and maintaining a peaceful regional environment conducive to its own continued economic growth. If China manifests its power obtrusively, it may find its neighbors bandwagoning against it.

For those interested in geopolitics, competition over resources, the great swath of land stretching from the Near East through South and Central Asia to China, as well as those who believe the world's future lies more with the G-20 than with the G-8, this story is one to watch.

Saturday, July 4, 2009

The Irresistible Illusion

The London Review of Books just published Rory Stewart's blistering essay "The Irresistible Illusion." The essay exposes the hubris and delusion with which Westerners view their efforts in Afghanistan.

The essay is available here.

This is a must read.

Thursday, July 2, 2009

Afghanistan: An Incomplete Strategy

Yesterday, Bob Woodward had a piece in the Washington Post titled "U.S. Says Key to Success in Afghanistan is Economy, Not Military."

The BBC reported late yesterday: "U.S. Opens 'Major Afghan Offensive.'"

One could imagine a Monty Python sketch originating from the titles of these two stories; sadly, they are indicative of a stillborn U.S. strategy for Afghanistan. The heart of the problem is a failure to elucidate the United States’ attainable objectives in the country, and to link appropriate means toward those ends.

The Woodward piece chronicled National Security Advisor James Jones and his meetings with commanding officers in the field. It was a depressing article, largely because it underlined how transitory U.S. efforts to reconstruct Afghanistan have been, and revealed that despite the rhetorical emphasis on economic development, U.S. policymakers view the problem through military optics.

This passage struck me:
"This will not be won by the military alone," Jones [a former Marine General] said in an interview during his trip. "We tried that for six years." He also said: "The piece of the strategy that has to work in the next year is economic development. If that is not done right, there are not enough troops in the world to succeed."
First of all, it is disingenuous to say that U.S. policy toward Afghanistan during the Bush Administration was solely a military effort. The Bush Administration contributed significant efforts toward reconstruction and development, and worked with the international community to forge the Afghanistan Compact (full text available here), which laid out the Interim Afghan National Development Strategy.

Second, economic development takes more than one year. The vaunted “Ring road” linking the cities of Kabul, Kandahar, Herat, and Mazar-e-Sharif is reportedly 18 months away from completion - work on the road began in late 2002. And what kind of development are we talking about? Infrastructure? Agricultural? Private sector? What will Afghans produce? Who will buy their products? How will they be transported? Is the United States supposed to make these decisions?

What is most striking is that after seven years of efforts to reconstruct Afghanistan, the United States faces the same problems. The majority of the Woodward article deals with U.S. lamentations over the lack of capacity among Afghan National Security Forces - despite several years and billions of dollars of investment in training and equipment. American soldiers and Marines, as well as those from a few NATO countries, continue to engage in fierce firefights and suffer casualties under the auspices of extending the writ of the Afghan national government. Yet the ANSF are neither sufficient in number nor in quality to fill the void after coalition forces have secured an area. The Obama Administration’s declaration that building the capacity of the ANSF is a top priority calls to mind 2006, the Bush Administration’s “Year of the Police” in Iraq and Afghanistan.

This is to say nothing about the Obama Administration’s counter-narcotics strategy, which appears to be a rehash of the strategy used over the last few years, with more of a focus on “Alternative Livelihoods” to wean farmers off of opium production. These efforts likely will not bear fruit unless and until: European demand for opium goes down, someone identifies a lucrative cash crop suitable for Afghanistan’s climate, crop financing is extended to farmers (the Taliban act as bankers), and the Afghan people trust that their government will keep them safe at night. In other words, don’t hold your breath.

After seven plus years of U.S. involvement in Afghanistan, perhaps policymakers should be chastened and come away with a lesson about the limits of American power and capabilities. There seems to be a mismatch between the “inputs” of U.S. power and its ability to affect sustainable outcomes, or at least in how policymakers conceive of them. Despite the hard-fought counterinsurgency successes, at the macro level Afghanistan is in a state of paralysis.

And the Bob Woodward article may help to illustrate where the mismatch between inputs and outcomes lies. In the article the word “force(s)” appeared 17 times, “economy/economics” 5 times, and “development” 3 times.

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