Foreign Policy - #170 January-February 2009

that pride themselves on fighting, lack of infra- do you communicate with them? The answer is, structure, and so on. In such a situation, it is huge- through tribal elders, via hand-crank radios receiving ly important to be seen as serving the population, in transmissions from local radio stations, through shura addition to securing it. And that is why we’re con- councils, and so on. ducting counterinsurgency operations, as opposed to merely counterterrorism operations. FP: What people most want to know, of course, is: Where does this end? The counterinsurgency princi- FP: Tell me where you see lessons from Iraq that ples, your own statements in the past, have focused on might not apply in Afghanistan, and things that you the idea that such wars end with political solutions— will export. you don’t kill your way out of it. CHRIS HONDROS/GETTY IMAGES DP: We cannot just take the tactics, techniques, and DP: One of the concepts we embraced in Iraq was procedures that worked in Iraq and employ them in recognition that you can’t kill or capture your way out Afghanistan. How, for example, do you communicate of a complex, industrial-strength insurgency. The chal- with the Afghan people? The answer: very different- lenge in Afghanistan, as it was in Iraq, is to figure out ly than the way you communicate with the Iraqi peo- how to reduce substantially the numbers of those who ple, given the much lower number of televisions and have to be killed or captured. This includes creating the a rate of illiteracy in the Afghan provinces that runs conditions in which one can have successful reconcil- as high as 70 to 80 percent. Outside Kabul and other iation with some of the elements fighting us. Progress big Afghan cities, Afghans don’t watch much televi- in reconciliation is most likely when you are in a posi- sion; they don’t have televisions. In Iraq, one flies tion of strength and when there are persuasive reasons over fairly remote areas and still sees satellite dishes on for groups to shift from being part of the problem to many roofs. In Afghanistan, you not only won’t see becoming part of the solution. In Iraq, that was aided satellite dishes; you also won’t see electrical lines, and by gradual recognition that al Qaeda brought nothing you may not even find a radio. Moreover, you can’t but indiscriminate violence, oppressive practices, and achieve the same effect with leaflets or local newspa- an extremist ideology to which the people really pers because many Afghans can’t read them. So, how didn’t subscribe. Beyond that, incentives were created J a n ua ry | F e b r ua ry 2 0 0 9 49

[ ]How to Win a Losing War to persuade the insurgents that it made more sense to DP: It’s important to recognize the most important support the new Iraq. overarching doctrinal concept that our Army, in The challenge in Afghanistan, of course, is fig- particular, has adopted—the concept of ‘full spec- uring out how to create the conditions that enable trum operations.’ This concept holds that all reconciliation, recognizing that these likely will dif- military operations are some mix of offensive, fer somewhat from those created in Iraq. defensive, and stability and support operations. In other words, you’ve always got to be thinking not FP: Do you think that does involve speaking with just about the conventional forms of combat— warlords, people like [Gulbuddin] Hekmatyar, who up offensive and defensive operations—but also about to now have been absolute non-starters? the stability and support component. Otherwise, successes in conventional combat may be under- DP: Any such outreach has to be an Afghan initiative, mined by unpreparedness for the operations often not the coalition’s. In Iraq, frankly, it was necessary for required in their wake. the coalition to take the lead in some areas where The debate about this has been a healthy one, but there was no Iraqi government or security presence. we have to be wary of arguments that imply we have to choose—or should choose—between either sta- FP: Do you think there is something qual- itatively or quantitatively new and different about the insurgencies that U.S. forces have We should avoid notions that we can pick and encountered in Iraq and Afghanistan? DP: We looked at this issue closely when choose the wars in which we want to be involved. we were drafting the counterinsurgency manual. And we concluded that some aspects of contemporary extremist tactics are, indeed, bility-operations-focused or conventional-combat- new. If you look, as we did, at what [French military focused training and forces. It is not only possible to officer] David Galula faced in Algeria, you find, obvi- be prepared for some mix; it is necessary. ously, that he and his colleagues did not have to deal A wonderful essay that I read as a graduate stu- with a transnational extremist network enabled by dent captures the essence of my view on this. The access to the Internet. Today, extremist media cells essay discussed the different schools of internation- recruit, exhort, train, share expertise, and generate al relations theory, and it concluded that ‘the truth resources in cyberspace. The incidence of very lethal is not to be found in any one of these schools of suicide bombers and massive car bombs is vastly thought, but rather in the debate among them.’ That higher today. It seems as if suicide car bombs have is probably the case in this particular discussion. We become the precision-guided munition of modern would do well to avoid notions that we can pick and insurgents and extremists. And while there has been choose the kinds of wars in which we want to be a religious component in many insurgencies, the involved and prepare only for them. extremist nature of the particular enemy we face seems unprecedented in recent memory. FP: You said [that] even in 2005 when you were in Afghanistan, you reported to Secretary Rumsfeld FP: The counterinsurgency manual, an object of huge that this could be the longest part of the long war. praise, is seen as a key moment in the rethink that put the war in Iraq on a different course. But it has not been DP: I didn’t say it could be. I said it would be. My uncontroversial. There are people on the left who see assessment was that Afghanistan was going to be the it as a form of neocolonialism; conservatives are skep- longest campaign of the long war. And I think that tical of anything they see as nation-building, while oth- assessment has been confirmed by events in ers believe that by organizing to fight this kind of Afghanistan in recent months. war, the United States risks not being prepared for a more conventional conflict in the future. How much FP: Just how long did you have in mind? of an intellectual debate have these principles stirred up? What do you say to these critics? DP: Those are predictions one doesn’t hazard. 50 F o r e i g n P o l i c y

RELEASES JANUARY 2009! STATE OF TH E WOR LD 2009 Into a Warming World “State of the World 2009 is a research masterpiece, the single most important reference guide to climate change yet published.” —Alex Steffen, Executive Editor, Worlchanging.com “Top-ranked annual book on sustainable development.” —GlobeScan survey of sustainability experts • Available January 2009 This comprehensive guide conveys the profound, long-term consequences • $19.95 plus shipping of global warming for humanity and our planet and investigates a wide range of potential paths to change including: new technologies, policy and handling changes, consumption practices, and finance—with the ultimate goal of mo- bilizing nations and citizens around the world to work together towards com- ORDER TODAY ! bating global warming before it’s too late. Four Easy Ways to Order: • Phone: Table of Contents: toll free 1-877-539-9946 Chapter 1. The Perfect Storm within the U.S. Chapter 2. Safe Landing or 301-747-2340 internationally Chapter 3. Using Land to Cool the Earth • Fax: Chapter 4. Harnessing Low-Carbon Energy on a Grand Scale 1-301-567-9553 • E-mail: Chapter 5. Building Resilience [email protected] Chapter 6. Sealing the Deal to Save the Climate • Online: www.worldwatch.org From the Foreword: www.worldwatch.org “This publication comes at a time when governments are focused on reach- ing an agreement in Copenhagen at the end of 2009 to tackle the challenge of climate change. It will undoubtedly influence the negotiators from dif- ferent countries to look beyond narrow and short-term concerns that are far too often the reason for inaction. We all need to encourage and join them in showing a commitment to meet this global challenge before it is too late.” —R.K. Pachauri, Chairman, Intergovernmental Panel on Climate Change Special Features: STATE OF THE WORLD 2009 includes Climate Connections, 22 essays by experts on topics including: • Biodiversity • Economics of Climate Change • Cap and Trade • Health Implications • Carbon Tax • Green Jobs • Carbon Capture and • Technology Transfer Sequestration (CCS) • Other Greenhouse Gases • Cities: Mitigation and Adaptation Plus a Quick-Reference Climate Change Guide and Glossary of 38 key terms for understanding climate change. Visit our website at www.worldwatch.org for information on all of our publications or to sign up for our e-newsletter.



GeorgeThe Making of W.Obama The 2008 U.S. election was all about change. But that’s not what we’re going to get on foreign policy, says the longtime speechwriter for Condoleezza Rice. Instead of a radical departure from Bush, we’re likely to end up with a lot more of the same. And that may be just what we need. | By Christian Brose BROOKS KRAFT/CORBIS On December 1, Barack Obama, chosen words. For four years, I watched as a for- who won the U.S. presidency as eign policy took shape that was quite different from the candidate of “change,” that of Bush’s first term. It was a pragmatic inter- announced his national security nationalism based on enduring national interests team: President George W. Bush’s secretary of defense and ideals for a country whose global leadership is (Robert Gates), Secretary of State Condoleezza Rice’s still indispensable, even as the world is becoming special envoy for Middle East security (James Jones), more multipolar. and the doyenne of Democratic centrism (Hillary Clinton). Some saw this as the political cover Obama Unfortunately, the election didn’t shed much light needs to lead U.S. foreign policy in an entirely dif- on what this inheritance means for Obama. The cam- ferent direction after Bush. Perhaps. But I doubt it. paign was a two-year referendum on the Bush pres- My hunch, and my hope, is that Obama will be a suc- idency in which Obama ran against a caricature of cessful president, not because he’ll totally change Bush’s first term and John McCain ran desperately the foreign policy he’ll inherit from Bush, but because away from the whole thing. It was as if the past four he’ll largely continue it. years never happened. Until just a few weeks ago, I was a part of that But because they did, Obama will inherit a foreign policy. As Rice’s chief speechwriter and pol- foreign policy that is better than many realize. Yes, icy advisor, I traveled with her to 24 countries. And there will be changes ahead—most likely, to energy I helped write (and rewrite) her remarks—a body of and climate change policy (thankfully), to the war work I’d estimate to be north of 150,000 carefully in Iraq (winding it down), to the war in Afghanistan (winding it up), and to the detention facility at Christian Brose is a senior editor at Foreign Policy. He Guantánamo Bay, Cuba (closing it, which some in served as chief speechwriter and policy advisor for U.S. the Bush administration tried to do but couldn’t). But Secretary of State Condoleezza Rice from 2005 to 2008, despite all that, Obama’s foreign policy likely won’t and as speechwriter for former U.S. Secretary of State Colin depart radically from Bush’s. Powell from 2004 to 2005. Take the three states Bush once labeled an “axis of evil”—Iran, Iraq, and North Korea. After changing the J a n ua ry | F e b r ua ry 2 0 0 9 53

[ ]The Making of George W. Obama regime in Baghdad, his administration in the second Another part of this strategy for Obama is con- term fully committed to changing the behavior of tinuing Bush’s engagement on the Middle East peace Pyongyang and Tehran. As a result, Obama will receive process. A real insight of Bush’s first term had been the baton on a multilateral negotiation with North that the Israeli-Palestinian conflict was more than a Korea that has been and will be a frustrating marathon, border dispute, as Bill Clinton had framed it. Bush but he will likely pick up where Bush leaves off, sim- argued that peace required a successful Palestinian ply because there are no practical alternatives. On state and economy. But the first-term policy amount- Iran, Obama will almost surely proceed with Bush’s ed to telling the Palestinians to put their house in policy of sticks and carrots that seeks a diplomatic solu- order first, and then the United States would talk tion—a third option between acquiescing to Iran’s about ending the Israeli occupation. Only in the sec- behavior or attacking Iran to change it. To have a bet- ond term were both efforts pursued simultaneously. ter chance of success, this policy will need sharper sticks And because of it, Obama will inherit a Middle East and sweeter carrots, including the direct engagement peace process finally proceeding on both tracks at Obama has advocated. And if that fails, Obama will once: state-building and peacemaking. have to weigh his options—none of which, he has said, Just as importantly, Obama will find a changing he’s taking off the table. Middle East where freedom, opportunity, and the As for Iraq, Obama will inherit a war that Iraqis longing for dignity are bubbling up in ways that no themselves are mostly ending for him. The pace and one can control, Washington included. Something size of the U.S. troop reduction may be hotly debat- tells me that the leader of the Democratic Party isn’t ed, but few in Baghdad or Washington dispute that going to give up on supporting democracy, both in terms of institutions and elections. Obama may rebrand Bush’s poorly named “freedom agen- da”—he may expand it, as some of his advisors suggest, into a “dignity agenda”—but the basic approach will likely continue. So, too, will there be little change on issues of global grand strategy. A refrain from the cam- paign was rebuilding damaged ties with America’s allies. But those ties have largely been rebuilt already—in Asia, Europe, and Latin America. Obama can certainly improve these relations further, especially with real action on climate change. But another Regime change: As the reins of power pass to Obama, don’t expect a major shift in U.S. foreign policy. challenge may be managing the bubbles of overinflated expecta- such a withdrawal is now appropriate. This effort to tions for his presidency that will soon begin bursting end the war in Iraq will enable Obama to try to save in allied capitals. the war in Afghanistan, employing many of the lessons Bush will also bequeath to Obama a realistic strat- learned from the surge strategy he opposed in Iraq. egy for managing the rise of great powers. By push- A challenge for Obama will be to knit the Iraq ing China, India, Japan, Brazil, and others to be endgame into a broader approach to the Middle East. responsible stakeholders in the international order, JIM WATSON/AFP/GETTY IMAGES But here, too, it likely won’t look all that different the Bush administration showed that “the rise of the from Bush’s: support for an independent Lebanon; rest” need not be synonymous with America’s decline. attempts to elicit responsible behavior from Syria; In fact, it might actually enhance U.S. influence. In and security cooperation with Sunni Arab regimes that Asia, the most geopolitically dynamic part of the may not love freedom, but definitely hate what Iran, world, the United States now has better relations with and al Qaeda, are doing to the region. each major power than they do with one another. 54 F o r e i g n P o l i c y

Every state wants to hedge against the others, and the “soft power”—a goal that former Secretary of State partner of choice is Washington. Obama’s task will be Colin Powell, then Rice, and most famously Gates to continue inducing these emerging powers to share made into a personal crusade. Obama will inherit the a greater burden of managing a new set of global start of it—an enlarged diplomatic corps, a rudimentary challenges that no country, including the United States, civilian expeditionary force, and foreign assistance that can manage alone. has been increased more than at any time since the The asterisk here is less a rising China (though the Marshall Plan—and he looks poised to carry the torch. question is still open) than a resurgent Russia. And with The pragmatic internationalism that Bush will Russia, too, Obama will inherit a strategy that he’s pass to Obama was largely defined through changes likely to continue, simply because it’s better than the made during the past four years. And for that reason, alternatives. It seeks neither to isolate Russia (which there might be more continuity between the second is impossible) nor to give Russia the blank check it wants in its old imperi- al stomping grounds (which is irre- There might be more continuity between the sponsible). Rather, this policy seeks to balance cooperation with Russia on many shared interests with competi- second term of Bush and the first term of Obama tion when interests diverge. Maybe this balance could have been struck better than between the two terms of Bush himself. on issues such as Kosovo or missile defense, but that doesn’t signal the need for a new policy, just a recalibration of the current one. term of Bush and the first term of Obama than And if anything, the Georgia war showed that, if the between the two terms of Bush himself. This foreign United States wants Russia to be a responsible stake- policy is a valuable inheritance. And if Obama avoids holder, encouragement won’t be enough. spending his early years in office pursuing change There will even likely be a great deal of continu- for the sake of change—simply trying to disassociate ity in the fight against al Qaeda. There’s a consensus himself from his predecessor, as Clinton and Bush too now that preemption is necessary to fight terrorism; often did—he could create the makings of a new Obama himself has advocated for it. But in Bush’s bipartisan consensus on foreign policy. second term, the administration basically converged Obama might realize this, but the Democratic and on a new mantra: “We can’t kill our way to victory,” Republican parties, I fear, will not. They could each pre- a key tenet of counterinsurgency strategy. The focus tend as if Bush’s second-term foreign policy never hap- became not just fighting terrorists but building con- pened. At worst, Democrats could swagger righteously ditions of security, opportunity, and justice for the into power, believing their predecessors were rubes societies that terrorists seek to radicalize. It was even who screwed everything up, and now is the chance to accepted that the United States might have to rec- do everything differently. For their part, Republicans oncile with some terrorists, as it did in Iraq and as could tell themselves the comforting lie that they lost some now support doing in Afghanistan. Obama because Bush abandoned a real conservative foreign most likely—and correctly—will not refer to a “war policy—that his second term was all capitulation to the on terror” as the organizing principle of U.S. foreign striped-pants appeasers of the State Department. policy, but that doesn’t mean he won’t approach ter- One of my regrets about my work at the State rorism in much the same way. Department is that we were unable to convince the Such a strategy depends, as the Bush administration American people that Bush’s pragmatic internation- eventually conceded, on embracing nation-building as alism had within it the makings of a strong, sustain- a national interest. There is now a consensus that the able global leadership for the 21st century—and that, United States is threatened as much by failing and as such, it had the potential to heal some of the fraught poorly governed states as strong, aggressive ones. divisions over America’s role in the world that have Obama’s challenge will be to continue the Bush admin- plagued the country since the end of the Cold War. My istration’s effort to make nation-building a civilian-led hope is that Obama will not only continue this foreign effort—to demilitarize U.S. foreign policy by trying to policy, but strengthen it and expand support for it prevent states from failing in the first place. This effort among all Americans. Were he able to do that, it will require a transformation of U.S. institutions of would truly be a change I could believe in. J a n ua ry | F e b r ua ry 2 0 0 9 55

The Other Housing Crisis Why can’t Israel and the Palestinians make peace? There are many complicated reasons, but the facts on the ground point to a simple answer: It’s the settlements, stupid. | By Gershom Gorenberg

HOWARD DAVIES/CORBIS Each time I drive out of Jerusalem into Rabin and Yasir Arafat shook hands and peace seemed the West Bank, it strikes me: The hills close enough to touch, about 4,000 people lived in are changing. Israeli settlements are Beitar Illit. Now, 34,000 live here, and more will redrawing the landscape—daily, insis- soon move in. tently. While governments change, while diplomatic conversations murmur on and stop and begin again, The message written on the landscape is simple: the bulldozers and cranes continue their work. Every day, the settlements expand. Every day, Israel grows more entangled in the West Bank. To a large From my home in West Jerusalem, the road that degree, the Israeli and Palestinian publics have accept- Israelis use to head south toward Hebron runs ed the need for a two-state solution. But time, and the through two tunnels in the mountains. Known sim- construction crews, are working against it. No one ply as the Tunnel Road, it was built in the mid-1990s knows exactly where the point of no return is—when during the Oslo peace process, when Bethlehem was so many Israelis will have moved into so many homes turned over to Palestinian rule and Israelis wanted a beyond the pre-1967 border that there is no going way to bypass the town on their way to settlements back. But each passing day brings that tipping point that remained in Israeli hands. nearer. If a solution is not achieved quickly, it might soon be out of reach. A turn from the Tunnel Road takes you past the Palestinian village of Hussan to Beitar Illit, a settlement The failure of slow-motion diplomacy can be told covering two hills. The streets are lined with apartment in numbers. In 1993, when the Oslo process began, buildings, faced in rough-cut, yellowish-white stone, 116,000 Israelis lived in the Gaza Strip and the West all with red-tile roofs, so alike they could have been Bank (excluding Israeli-annexed East Jerusalem). turned out by the same factory. In 1993, when Yitzhak Seven years later, when negotiations collapsed, the settler population had risen to 198,000. Gershom Gorenberg is the author of The Accidental Empire: Watching this steady march, Ehud Olmert, then Israel and the Birth of the Settlements, 1967-1977 (New Ariel Sharon’s deputy prime minister, stunned Israelis in late 2003 by renouncing his lifelong commitment York: Times Books, 2006) and a senior correspondent for The to keeping Gaza and the West Bank under Israeli rule. American Prospect. He blogs at southjerusalem.com.

[ ]The Other Housing Crisis “We are approaching a point where more and more The settlers’ growing power makes it harder for Palestinians will say: ‘There is no place for two states any Israeli leader to act. The head of the Shin Bet secu- between the Jordan and the sea,’” he warned. Instead, rity agency recently described “very high willingness” he said, they would demand equal rights in a single, among settlers “to use violence—not just stones, but shared political entity—one person, one vote. The live weapons—in order to prevent or halt a diplomatic only way to preserve a Jewish state was to process.” He was articulating a country’s half-spoken withdraw, he argued. By then, according to the Israeli fears: Withdrawal involves more than the social and Interior Ministry, there were 236,000 settlers. financial costs of moving hundreds of thousands of Olmert’s declaration presaged Sharon’s decision to people. It poses the danger of civil conflict, of battles withdraw from Gaza. In 2006, Olmert was elected pitting Jews against Jews. prime minister. Despite the Gaza evacuation, the set- The more settlers, the greater the danger. The tler population was then more than 253,000. longer the wait, the more settlers. The more settlers, Last year, when Olmert resigned and elections were announced, the num- ber of settlers in the West Bank had No one knows knows exactly where the point of no passed 290,000, living alongside 2.2 million Palestinians. (Another 187,000 return is—when so many Israelis have moved Israelis lived in annexed East Jerusalem, next to 247,000 Palestinians.) By the into the West Bank that there is no going back. time the next prime minister takes office, more than 300,000 Israelis are likely to be living in the West Bank, with the number continuing to climb. the more hesitant politicians are to talk about evacu- Why do the settlements keep growing? In part, ating them, much less do anything else about them. It’s because it has been hard for Israelis to accept the pre- anybody’s guess where the point of no return lies. 1967 borders. Successive leaders have hoped to hold But there are no good alternatives to pulling onto significant pieces of the territory seized in the back. Olmert’s plan to redraw the borders, with fin- Six Day War. Olmert, despite his warning in 2003, gers of Israeli land extending to major settlements, came to office seeking a border that would roughly fol- would slice up Palestinian territory, while the small- low the security barrier that Israel is building through er, more radical settlements would need to be evac- the West Bank. Officially intended to keep Palestinian uated. Some observers still cling to a one-state solu- suicide bombers out of Israel, the barrier loops around tion—a fantasy held by those who believe that clusters of large suburban settlements, putting places nationalism is about to fade away. Such a state would such as Beitar Illit on the Israeli side of the de facto bor- teeter between communal violence and mere politi- der. While negotiating with the Palestinians, Olmert cal deadlock as Jews and Palestinians would try and encouraged building in settlements inside the fence. fail to form a stable government. But building has also continued in smaller settle- So, time is in short supply. As U.S. President Barack ments beyond the fence—the strongholds of the set- Obama enters office, he might be tempted to put off tlers most committed to permanent Israeli rule of the dealing with the Israeli-Palestinian conflict. But delay West Bank. They have taken the initiative in may mean finding the road to a solution closed. The expanding their communities. But they also enjoy alternative is to exert pressure on the Israeli govern- backing from within the civil service. The Housing ment to freeze settlement—and then move quickly Ministry, for instance, still provides subsidized mort- toward a final-status agreement. gages for homes in such settlements. An entrenched Of course, the greatest responsibility falls on bureaucratic culture trumps orders from the top. Israeli leaders. The next prime minister will have the Olmert lacked the strength to crack down on that choice of learning from Olmert’s unfulfilled pledge or bureaucracy or risk confrontation with the settlers. Of repeating his failure to act. If Israel is to withdraw his potential successors, Benjamin Netanyahu is the from the West Bank, the essential first step is to order candidate of the pro-settlement right, and Tzipi Livni, an immediate stop to settlement construction. Con- the candidate of Olmert’s Kadima Party, has shown no fronting the settlers will require great courage. Yet fail- signs that she is willing or able to stop the building in ing to do so risks Israel’s existence as a Jewish state. the absence of a peace deal. That’s the lesson written on the hills. 58 F o r e i g n P o l i c y

“As a global citizen, to whom do I pledge allegiance?” NYU’S The traditional state-to-state mindset may be at odds with the CENTER FOR realities of our increasingly globalized planet. GLOBAL AFFAIRS Energy policies set locally impact business The NYU Center for Global Affairs is Our diverse and motivated student body strategies around the world. An NGO a unique institution rooted in lower is guided by a faculty of accomplished wages a PR battle against a multinational Manhattan and located astride the international practitioners, whose corporation. Ongoing health crises drain world’s crossroads. We provide a range of experience is drawn from government, a continent’s economic resources. Today, exceptional educational opportunities— trade, finance and investments, journalism, more than ever before, an appreciation of including a Master’s degree, a professional non-governmental organizations, and the world’s great challenges and the ability certificate program, provocative public more. Careers with a global dimension to create meaningful change both require events, and numerous courses—all have never been more challenging, a global perspective. designed to help you grapple with the rewarding, or in demand. Find out how the issues we all face as global citizens. NYU Center for Global Affairs can shape your global future. GRADUATE PROGRAM: CONTINUING EDUCATION includes: PUBLIC EVENTS SERIES include: t .BTUFS PG 4DJFODF JO (MPCBM \"õBJST t 5IF %PMMBS BOE *UT 3JWBMT t 8PSMEMZ $POWFSTBUJPOT XJUI t 5IF %FWFMPQNFOU BOE 'JOBODF PG SUMMER INTENSIVES: 'PSFJHO $PSSFTQPOEFOUT t 6/ JO (FOFWB 4UVEZ 1SPHSBN $BSCPO .BSLFUT t 1PMJUJDT BOE \"SU JO $JOFNB t 4VNNFS *OTUJUVUF JO (MPCBM \"õBJST t 5IF 1PMJUJDT PG *OUFSOBUJPOBM t *OUFSOBUJPOBM $BSFFST 1SBDUJDBM \"EWJDF &DPOPNJD 3FMBUJPOT BOE 3FBM-JGF &YQFSJFODF t -BCPS 8BS 4FY \" 5SBöDLJOH 4UPSZ t *O 1SJOU \"VUIPS TFSJFT QSFTFOUFE XJUI t *SBR \"OBUPNZ PG B $POnJDU Foreign Affairs NBHB[JOF Continuing Education Information Session: Wednesday, January 14, 6–8 p.m. Woolworth Building, 2nd Floor 15 Barclay Street (btwn. Broadway and Church St.) Reservations aren’t necessary, but please be punctual. scps.nyu.edu/x629 '*/% /:6 FYU New York University is an affirmative action/equal opportunity institution. ©2008 New York University School of Continuing and Professional Studies

The White House and the World: A Global Development Agenda for the Next U.S. President Nancy Birdsall, editor How will the Obama administration tackle the challenges of the twenty-first century? CGD fellows offer practical suggestions for improving U.S. policies in aid, trade, technology, migration, global health, investment, climate change, and more. The result is a cost-effective global development agenda to improve the lives of poor people in developing countries and help restore America’s credibility in the world. \"VHVTU  t *4#/ QBQFS  t  The Center for Global Development is an independent, non-profit think tank dedicated to reducing global poverty and inequality. Visit our website to buy our books, sign up for event invitations, follow our blogs, or subscribe to our lively e-newsletters: t $(% 8FFLMZ %FWFMPQNFOU 6QEBUF t $POGSPOUJOH $MJNBUF $IBOHF /FXTMFUUFS t (MPCBM )FBMUI 1PMJDZ /FXTMFUUFS t )*7\"*%4 .POJUPS .$\" .POJUPS BOE NPSF Independent research and practical ideas for global prosperity www.cgdev.org

SIPA Video Online sipa.columbia.edu/multimedia Are you interested in local and global policy but too busy or too far away to attend SIPA events on the Columbia University campus? We invite you to view many of SIPA’s major events online at sipa.columbia.edu/multimedia A selection of the past Kishore Mahbubani on “The New Asian year’s events includes: Hemisphere” Matt Dowd, Rodolfo de la Garza, Stuart Gottlieb, Richard Bulliet on “Three Decades of the Islamic and Frederick Harris on “What’s Race Got to Do Revolution in Iran” with It: A Discussion of the Role of Race in the 2008 Presidential Election” Gerhard Schröder, former Chancellor of Germany, on “Russia and the Future of European Energy Joseph Stiglitz, José Antonio Ocampo, Richard Security” Robb, and Christian Deseglise on “The Crisis in Emerging Markets: Impacts on Jagdish Bhagwati and Arvind Panagariya on Emerging Markets and Future Consequences” “India—An Emerging Giant” Zbigniew Brzezinski on “U.S. Foreign Policy: David N. Dinkins, former NYC Mayor, David Beyond 2008” Jones, and others on “Wealth and Poverty in Global Cities” Edward Glaeser on “Urban Colossus: Why Is New York America’s Largest City?” Alfred C. Stepan on “Islam and Democracy” Michael R. Bloomberg, NYC Mayor, and others on “Governing a Diverse City in a Democratic Society” To learn more about SIPA and the School’s degree programs: sipa.columbia.edu



Five economists whose prophetic warnings went unheeded preview the next stage THEof the global financial crisis. They tell us: IS COMEYET TO ILLUSTRATIONS BY NENAD JAKESEVIC FOR FP NOURIEL ROUBINI expect. Corporate earnings reports will shock any equity analysts who are still deluding themselves that Warning: More the economic contraction will be mild and short. Doom Ahead Severe vulnerabilities remain in financial markets: Last year’s worst-case scenarios came true. The a credit crunch that will get worse before it gets any global financial pandemic that I and others better; deleveraging that continues as hedge funds had warned about is now upon us. But we are and other leveraged players are forced to sell assets into still only in the early stages of this crisis. My predic- illiquid and distressed markets, thus leading to cas- tions for the coming year, unfortunately, are even cading falls in asset prices, margin calls, and further more dire: The bubbles, and there were many, have deleveraging; other financial institutions going bust; only begun to burst. a few emerging-market economies entering a full- blown financial crisis, and some at risk of defaulting The prevailing conventional wisdom holds that on their sovereign debt. prices of many risky financial assets have fallen so much that we are at the bottom. Although it’s true that Certainly, the United States will experience its these assets have fallen sharply from their peaks of late worst recession in decades. The formerly mainstream 2007, they will likely fall further still. In the next few notion that the U.S. contraction would be short and months, the macroeconomic news in the United States shallow—a V-shaped recession with a quick recovery and around the world will be much worse than most like the ones in 1990–91 and 2001—is out the win- dow. Instead, the U.S. contraction will be U-shaped: Nouriel Roubini is professor of economics at New York long, deep, and lasting about 24 months. It could University’s Stern School of Business and chairman of RGE end up being even longer, an L-shaped, multiyear Monitor (www.rgemonitor.com), an economic and financial stagnation, like the one Japan suffered in the 1990s. consultancy. As the U.S. economy shrinks, the entire global economy will go into recession. In Europe, Canada, Japan, and the other advanced economies, it will be J a n ua ry | F e b r ua ry 2 0 0 9 63

[ ]The Worst Is Yet to Come “Because the United States is such a huge part of the global economy, there’s real reason to worry that an American financial virus could mark the beginning of a global economic contagion.” – Nouriel Roubini, March 2008 severe. Nor will emerging-market economies—linked As orthodox monetary tools become ineffective, to the developed world by trade in goods, finance, and policymakers will turn to unorthodox approaches. currency—escape real pain. We’ll see traditional fiscal policy, in the form of tax cuts and spending increases, but also worldwide bailouts What constitutes a “recession” will depend on the of lenders, investors, and financial institutions, as well country in question. For China, a hard landing would as borrowers. Central banks will inject massive mean annual growth falls from 12 to 6 percent. China amounts of cash into financial systems to unclog the must grow by 10 percent or more each year to bring liquidity crunch. More radical actions, such as outright 12 to 15 million poor rural farmers into the modern purchases of corporate and government bonds or sub- world. For other emerging markets, such as Brazil or sidization of mortgage rates, might also be necessary South Korea, growth below 3 percent would represent to get credit markets functioning properly again. a hard landing. The most vulnerable countries, such as Ecuador, Hungary, Latvia, Pakistan, or Ukraine may This crisis is not merely the result of the U.S. experience an outright financial crisis and will require housing bubble’s bursting or the collapse of the massive external financing to avoid a meltdown. United States’ subprime mortgage sector. The cred- it excesses that created this disaster were global. For the wealthiest countries, a debilitating com- There were many bubbles, and they extended bination of economic stagnation and deflation might beyond housing in many countries to commercial happen as markets for goods go slack because aggre- real estate mortgages and loans, to credit cards, gate demand falls. Given how sharply production auto loans, and student loans. There were bubbles capacity has risen due to overinvestment in China for the securitized products that converted these and other emerging markets, this drop in demand loans and mortgages into complex, toxic, and would likely lead to lower inflation. Meanwhile, job destructive financial instruments. And there were losses would mount and unemployment rates would still more bubbles for local government borrowing, rise, putting downward pressure on wages. Weaken- leveraged buyouts, hedge funds, commercial and ing commodity markets—where prices have already industrial loans, corporate bonds, commodities, fallen sharply since their summer peak and will fall fur- and credit-default swaps—a dangerous unregulat- ther in a global recession—would lead to still lower ed market wherein up to $60 trillion of nominal inflation. Indeed, by early 2009, inflation in the protection was sold against an outstanding stock of advanced economies could fall toward the 1 percent corporate bonds of just $6 trillion. level, too close to deflation for comfort. Taken together, these amounted to the biggest This scenario is dangerous for many reasons. A asset and credit bubble in human history; as it goes number of central banks will be close enough to set- bust, the overall credit losses could reach as high as $2 ting interest rates of zero that their economies fall into trillion. Unless governments move with more alacrity a triple whammy: a liquidity trap, a deflation trap, and to recapitalize banks and other financial institutions, debt deflation. In a liquidity trap, the banks lose their the credit crunch will become even more severe. Loss- ability to stimulate the economy because they cannot es will mount faster than companies can replenish their set nominal interest rates below zero. In a deflation balance sheets. trap, falling prices mean that real interest rates are rel- atively high, choking off consumption and invest- Thanks to the radical actions of the G-7 and oth- ment. This leads to a vicious circle wherein incomes ers, the risk of a total systemic financial meltdown has and jobs are falling, with demand dropping still fur- been reduced. But unfortunately, the worst is not ther. Finally, in debt deflation, the real value of nom- behind us. This will be a painful year. Only very inal debts rises as prices fall—bad news for countries aggressive, coordinated, and effective action by such as the United States and Japan that have high policymakers will ensure that 2010 will not be even ratios of debt to gdp. worse than 2009 is likely to be. 64 F o r e i g n P o l i c y

STEPHEN S. ROACH asset and credit bubbles that fueled a bubble-depend- A Lethal Shakeout ent U.S. economy. That virtuous circle has now been broken. And because Asian economies lack vigorous Before the year is over, no major region of the support from internal private consumption, regional world will remain unscathed by recession. growth risks have tipped decisively to the downside. Indeed, I suspect that 2009 will go down in A similar verdict is likely for the commodity- producing regions of the world—not just the oil- history as the first truly global recession of the mod- dependent Middle East, but also the resource-intensive ern economy. economies of Australia, Canada, Brazil, Russia, Yes, it began in the United States in the summer and Africa. As global growth slows, so does the of 2007 with the so-called subprime crisis. But there demand for economically sensitive commodi- were bubble-dependent growth models in a ties—resulting in a sharp correction in the bub- surprisingly large number of countries—all ble-distorted commodity prices and growth now bursting. rates of the major commodity producers. In the United States, asset-depend- A second megaforce at work is global- ent growth was con- ization—the cross- centrated in two border linkages that parts of the econ- during the past omy: home- decade have increas- building ingly taken the form activity and of trade flows, cap- personal ital flows, informa- consump- tion flows, and tion. Sus- labor flows. The credit tained crisis itself is essentially weakness is a powerful now likely in cross-product both sectors, contagion—a which at their virus that began with peak accounted for subprime mortgages but nearly 80 percent of then quickly spread to U.S. gdp. asset-backed com- That brings mercial paper, export-dependent mortgage-backed and Asian economies into the equation. In effect, they auction-rate securities, and other instruments through- were driven by export bubbles, which, in turn, were out the credit markets. But because financial engi- a levered play on the U.S. consumption bubble. Asia neers were so adept at distributing the complex was also aided and abetted by sharply undervalued products they created, there is a critical cross-border currencies. And to keep their currencies cheap, coun- dimension to this crisis as well. Little wonder this is the tries such as China had to recycle massive amounts of worst financial crisis in 75 years. foreign exchange reserves into dollar-based assets— Driven by the confluence of post-bubble shake- suppressing U.S. interest rates and sustaining the very outs and increasingly robust global linkages, this recession is likely to be the worst of the post-World Stephen S. Roach is chairman of Morgan Stanley Asia. War ii era. That means it could be more severe than “If, as I suspect, the American consumer now enters a sustained slow- down, there will be unmistakable reverberations on U.S.-centric export flows in many major regions of the world.” – Stephen S. Roach, October 2006 J a n ua ry | F e b r ua ry 2 0 0 9 65

[ ]The Worst Is Yet to Come the sharp downturns of the mid-1970s and early 1980s. Back then, it was the aggressive anti-inflation resolve of central banks that led to deep recessions. This time, an implosion of bubble-dependent glob- al imbalances has done the trick. But don’t count on a vigorous (V-shaped) rebound from the post-bubble global recession of 2009. With no other major consumer likely to step up and fill the void left by the United States, a lopsided, bubble-dis- torted world will experience an anemic recovery at best. It will be a long time before global growth returns to the nearly 5 percent rate of the four and a half years that ended in mid-2007. Post-bubble shakeouts are lethal for any individual economy—to say nothing for the world as a whole. D AV I D M . S M I C K Good Luck, Barack Barack Obama arrives at the White House with an ambitious agenda. But with the global economy in the midst of a brutal finan- cial deleveraging—in which virtually every asset in the world is seeing its value decline—he and his interna- tional counterparts are in for a world of pain. Begin with U.S. domestic policy. Obama’s first budget deficit could easily exceed $1.5 trillion. Vari- U.S. Treasury introduced its bailout plan, and the ous bailout packages and fiscal stimulus plans will push Federal Reserve’s balance sheet liabilities have jumped up spending, while the economic contraction will lead 100 percent. Financial markets are essentially pro- to lower tax receipts. State governments are lining up jecting that three to four years from now, the world’s for federal aid. Private pension funds will be next. The central banks, after a period of disinflation, will be fdic, dealing with the mortgage mess, will no doubt forced to confront this massive increase in debt. need a healthy injection of capital from Uncle Sam. Obama could be confronting a banking night- And that’s before you tally up Obama’s spending and mare reminiscent of Japan in the 1990s. Today, U.S. tax cut promises. banks are flush with capital ($400 billion on the side- The bill for all this debt will likely come due before lines at last count, much of it taxpayer-provided), but 2012. Mortgage interest rates quickly rose after the they aren’t lending. It’s a bit of a chicken-and-egg problem. The banks aren’t lending because of the David M. Smick is editor of The International Economy weakening U.S. economy. The economy is weakening magazine and author of The World Is Curved: Hidden Dan- because the banks aren’t lending. Short of national- gers to the Global Economy (New York: Penguin, 2008). ization, Obama can do little to force their hand. “The size of the financial markets ... has become so monstrously huge, there is no other means of maintaining stability than to establish a psychology of confidence. The governments themselves can only project to the markets a sense they know what they’re doing.” – David M. Smick, March 2008 66 F o r e i g n P o l i c y

“I am worried that the collapse of home prices might turn out to be the most severe since the Great Depression.” – Robert J. Shiller, September 2007 Globally, the brief period of schadenfreude toward overshoot. Some indicators show that we are already the United States’ economic woes is over. That’s approaching pre-bubble price levels. The price-to-earn- because Europe’s exposure to risky, emerging-market ings ratio in the U.S. stock market is about at its long- trade debt turns out to be six times its exposure to U.S. run average. Housing prices are probably more than subprime mortgages. In some economies, including halfway back down to their late-1990s level, when the Britain’s, banks’ exposure dwarfs the national gdp. bubble began. In some U.S. cities, they are almost completely back down. Here’s why this is a huge problem: Developing economies allowed themselves to become danger- No one can say, though, when exactly the market ously export dependent, while tying their currencies will bottom out. In some sense, the process is a self- to the U.S. dollar and building mountains of excess fulfilling prophecy. The euphoria ends, and negative savings. That growth model is crumbling fast as glob- expectations lead to plunging asset prices, which in al demand is plummeting. But if too many of these turn seem to justify those expectations. Given the emerging markets go down, the imf lacks the neces- poor outlook on the economy for the next year, hous- sary resources to mount rescue operations. To put ing prices might continue to decline well into 2010, things in perspective, Austrian banks have emerging- as the futures markets in Chicago suggest. market financial exposure exceeding $290 billion. Austria’s gdp is only $370 billion. History tells us there is some precedent for a protracted, weak housing market. After the last The one silver lining is that the world does not lack housing boom in the United States peaked in 1989, capital. It’s simply sitting on the sidelines, including it took a typical city five years to hit bottom. This $6 trillion in global money market funds alone. The time, prices have only been going down for two faster Obama and his global counterparts can fash- years. We might look with caution to Japan, where ion credible financial reforms that enhance trans- urban land prices fell for 15 consecutive years, parency while preserving capital and trade flows, the from 1991 to 2006. sooner that sidelined capital will reengage. In the end, markets crave certainty—in this case, certainty When the market does reach bottom, it may be that our leaders have a credible game plan. That plan with a whimper, not a thud. Generally, there are no is not yet in place. sharp turning points. Home prices might remain flat for a few years before they start rising again. Along ROBERT J. SHILLER the way, it will be hard to identify the road markers with any certainty until we have spotted them in the Are We There Yet? rearview mirror. Speculative bubbles are ultimately a matter of So far, the measures we’ve taken to resolve this psychology. People develop extravagant crisis have thrown the rational principles of finance expectations about the wealth their invest- out the window. We are going on a crash diet—con- ments will bring them, forgetting the valuable les- tradicting mortgage contracts on an ad hoc basis and sons of financial crises long past, and a dangerous giving away handfuls of money—when we should be bubble builds. coming up with an eating regime we can live on indefinitely. Instead of making whatever short-term But the psychology of the ride down can be just as patches seem necessary, we might take a more sys- perilous. As asset prices now decline, markets might temic, market-based approach, such as stipulating that mortgage values always be linked to housing Robert J. Shiller is professor of economics at Yale University prices and adjusted each month. and chief economist at MacroMarkets LLC. He is the author Speculative excesses are an endemic problem of the market system, but capitalism also provides its of The Subprime Solution (Princeton: Princeton University own self-correcting mechanisms. There’s no reason to abandon those tools now. Press, 2008). J a n ua ry | F e b r ua ry 2 0 0 9 67

[ ]The Worst Is Yet to Come “If housing prices fall back in line with the overall rate price level ... it will eliminate more than $2 trillion in paper wealth and considerably worsen the recession. The collapse of the housing bubble will also jeopardize the survival of Fannie Mae and Freddie Mac.” – Dean Baker, September 2002 DEAN BAKER For Americans, the effect of a sharp decline in the dollar will be considerably higher import prices and a Watch the Dollar reduced standard of living. If the U.S. Federal Reserve becomes concerned about the inflation resulting from T he housing bubble was the first to burst, but higher import prices, it might raise interest rates, which it will not be the last in this global recession. could lead to another severe hit to the economy. These days, it’s the impending bust of the dollar bubble that should be getting more attention. As for 2009, the ongoing collapse of the hous- ing bubble, the coming collapse of the commercial The U.S. dollar has been severely overvalued since real estate bubble, and the ensuing wave of bad the late 1990s, which has led to an debt will all be enormous trade major sources of deficit that peaked drag on the U.S. at almost 6 percent economy—even of U.S. gdp in if the dollar bust 2006 ($900 billion happens later. in today’s econo- my). This is unsus- Indeed, sub- tainable. Eventu- prime mortgages ally, it will force were just the trig- the dollar to fall to ger for a much a level where trade broader crisis. is close to balance. Plunging house prices are now That process leading to record was already gradually underway. The recent crisis, default rates on however, has sent investors scrambling to the dollar prime loans as well, with most of the fallout ahead of for safety, causing it to soar against most other cur- us. We’ll also see much higher default rates on car rencies. The rising dollar, coupled with recessions in loans, credit card debt, and other forms of consumer much of the rest of the world, will cause the trade debt, because homeowners can no longer draw on their deficit to rise again. home equity to pay other debt. Commercial real estate faces its own reckoning. But once the financial situation begins to return to When the housing market began to fade at the end normal (which might not be in 2009), investors will of 2005, it kicked off a boom in nonresidential con- be unhappy with the extremely low returns available struction. In less than three years, this sector expand- from dollar assets. Their exodus will cause the dollar ed more than 40 percent. There is now considerable to resume the fall it began in 2002, but this time, its excess capacity in retail space, office space, hotels, decline might be far more rapid. Other countries, and other nonresidential sectors—leading to falling most notably China, will be much less dependent on prices, plunging construction, and another major the U.S. market for their exports and will have less source of bad debts for banks. interest in propping up the dollar. In short, beware the happy talk from those who say we are “turning the corner,” ignore the daily Dean Baker is codirector of the Center for Economic and ups and downs of the market, and tighten your belts. This is going to hurt. Policy Research. 68 F o r e i g n P o l i c y

Earn a Master of Arts in GOVERNMENT The Master of Arts in Government Program at Johns Hopkins’ Washington, DC Center maximizes the synergy between the study of politics and practical work experience — it’s where the theory and practice of government merge. Discover the next phase of your career with Hopkins in the Capital. Concentrate your studies in: MA in Government/MBA Security Studies Legal Studies Certificate in National Political Communication Security Studies Evening and weekend classes are available. Take advantage of great networking opportunities and rolling admissions. Apply online anytime. Learn more online now. government.jhu.edu Advanced International Studies at the Capital of Europe Now accepting applications for January and September [email protected]/ brussels • MA in International Relations • LLM in International Law with • MA in International Conflict Analysis International Relations • MA in European Public Policy • MA in Migration Studies • LLM in Public International Law • MA in Political Strategy and • LLM in International Economic Law • PhD in International Relations Communication • PhD in International Conflict Analysis • MA in International Political Economy

faith Main rtheket The champions of Islamic finance—banking and investing based on the Koran—believe that if Islamic principles had been applied to Wall Street, the global economic crisis never would have happened. The handful of men who decide which mortgages, car loans, and credit cards are spiritually sound are cashing in. But critics smell a con. | By Carla Power A mid the worst economic crisis in With his rare ability to move easily between ILLUSTRATIONS BY ALEX NABAUM FOR FP nearly a century, Yusuf Talal medieval Islamic texts and 21st-century financial DeLorenzo sells peace of mind. A instruments, DeLorenzo has emerged as one of Muslim convert who is the product the world’s chief gatekeepers for the fast-growing of both a Massachusetts prep school and a Karachi market in Islamic finance. madrasa, DeLorenzo issues pronouncements on the spiritual soundness of modern finance for the He’s a member of an elite group of fewer than world’s Muslims. 20 top-tier experts. Sheikh Nizam Yaquby issues fatwas for blue-chip institutions such as Dow Jones Islamic law, or sharia, forbids pious Muslims and hsbc from the back office of an electronics from paying interest or investing in morally ques- shop in a Bahraini bazaar. “There is no sin in the tionable companies. So, DeLorenzo serves as a Koran—not even drinking, not even fornicating, well-paid counsel to the international hedge-fund not even homosexuality—which could be as abhor- managers, bankers, and asset managers who are deter- rent and serious as dealing in riba [interest],” he has mined to invest in line with the Koran’s principles. said. Pakistan-born Muhammad Taqi Usmani, with the trademark cap of a religious scholar and his Carla Power is a London-based writer on Islamic and beard stained henna red, bears little resemblance to social issues. the Wall Street bigwigs who eagerly seek his advice. 70 F o r e i g n P o l i c y



[ ]Faith in the Market He is the chair of the powerful sharia board of the of these scholars take in—at times, six figures for a sin- Accounting and Auditing Organization for Islamic gle decision—only add to such critiques. Financial Institutions (aaoifi), a Bahrain-based reg- “There’s a whole industry now—supported by a ulatory institution that sets standards for the global show of religious authority provided by Islamic industry. DeLorenzo and Yaquby sit on the board, too, scholars—with banks promoting conventional prod- just as they both sit on the sharia board of the Dow ucts as Islamic,” says Mahmoud El-Gamal, a pro- Jones Islamic Market Index, which screens companies fessor at Rice University and author of Islamic for Muslim investors to make sure they don’t peddle Finance: Law, Economics, and Practice. “They’re in the defense or entertainment industries or are in any preying on the religiously insecure.” And as the way connected to forbidden activities such as pornog- financial crisis continues to unwind, there are a lot raphy, gambling, and pork production. of insecure people out there. That the same few names appear again and again on sharia boards—Yaquby sits on more than 60, according to the Islamic Finance Information Service— T H E B U S I N E S S O F A L L A H reflects the unlikely name-brand status these Islamic Whether scholars like DeLorenzo and Yaquby offer scholars have attained in the world of modern finance. merely pious packaging or a genuine reconciliation “It’s only natural that if it’s a big bank going out with of sharia and modernity, demand is growing enor- a big product, they want to make a big splash,” mously for their services. What began several DeLorenzo says. “I would rather have Tiger Woods decades ago with a few Middle Eastern banks try- endorse my product than some no-name golfer.” ing to circumvent the Koran’s ban on interest has become one of the world’s fastest- growing financial sectors. And it has been propelled by record oil To their critics, many Islamic finance scholars revenues in the Gulf, deepening Islamic sentiment in countries from are nothing more than rent-a-sheikhs. Pakistan and Egypt to Britain and France, and the flight of Arab cap- ital out of the United States after September 11. Until the credit crunch of 2008, Islamic finance was Islamic finance accounts for just 1 percent of the a fast-growing, if still relatively obscure, new global market, but the industry’s yearly value is esti- specialty of international finance. But after Wall Street’s mated at about $500 billion, with annual growth of implosion, Islamic finance’s champions have begun to 15 percent. In five years, it could hit $4 trillion, promote the sector as a safe haven from the ills of the according to a 2008 report from Moody’s Investors global economy. At a Doha conference in late 2008, Service. And its potential could be even greater. Sheikh Yusuf al-Qaradawi, arguably the world’s most Islam is the world’s fastest-growing religion, with influential Islamic scholar, asserted that “the collapse 1.3 billion adherents, many of whom are young and of capitalism . . . shows that the Islamic economic phi- new to personal finance. Standard & Poor’s esti- losophy is holding up.” DeLorenzo is even more mates that in the Muslim countries of Asia and the sweeping in his claims. “If you had sukuk [or interest- Gulf, 1 in 5 banking customers would opt for free bonds based on actual assets], the subprime cri- Islamic financial products over conventional ones if sis never would have happened,” he says. given the opportunity. By 2012, nearly a third of all But how truly Islamic is the Islamic finance these business deals in the Gulf will be done through men promote? To their critics, many are nothing Islamic finance, according to the Middle East Eco- more than rent-a-sheikhs, willing to give the spiritu- nomic Digest. Add a booming Muslim middle class al nod to just about any financial product for the right and non-Muslims eager to profit, and it is easy to price. Within their own ranks, the top sheikhs debate understand why some of the world’s biggest banks are vigorously over which new products and transac- spending millions to enter the market. The 300 tions are permissible—and which have been unjust- dedicated Islamic banks and funds worldwide, oper- ly allowed. One recent study from the aaoifi ating in 75 countries, are beginning to face stiff com- concluded that 85 percent of bonds marketed as petition from top-tier global firms such as Deutsche sharia-compliant were illegitimate. And the fees many Bank, hsbc, and Citibank. 72 F o r e i g n P o l i c y

This competition is fueling plus a certain amount of profit. The bank is technically even grander aspirations among a partner, rather than just a financier. These methods scholars such as DeLorenzo. are believed to meet the spirit of the law because they Islamic finance, he says, is not avoid the exploitation of the borrower. just a way for Muslims to turn an honest profit; it is the vehicle that Using this model, Islamic banks have created scores will make Islamic law relevant of financial products for Muslims to avoid Western- for the 21st century, a far cry style interest or risk. The result is a parallel system of from debates over “marrying and Islamic offerings that mirror those available from con- burying” that dominated his own ventional banks: Islamic mortgages, Islamic car loans, madrasa education in the 1970s. Islamic credit cards, Islamic insurance. An ijara, or Islamic lease, allows a bank to buy a car or a house for “Islamic finance scholars say a customer and then earn a profit by renting it to that what’s happening in the con- them. An Islamic investor who wants to start a busi- ventional world of finance is at ness can go to a bank and embark on a mudharaba, the heart of the difference between or partnership, in which the bank supplies the money Islamic and ordinary finance,” and the customer brings the business skills. Profits are says Davide Barzilai, a partner shared in a predetermined ratio; losses are borne by specializing in Islamic finance at the bank. For insurance, companies offer policies in the international law firm which a group of subscribers creates a pool of funds Norton Rose. Muslim investors that can then be invested and drawn on in cases of haven’t suffered from falling bank legitimate claims. Unclaimed profits are then distrib- stocks, Islamic scholars point out, uted among policyholders. because their faith forbids invest- ment in financial institutions. Since J a n ua ry | F e b r ua ry 2 0 0 9 73 the Koran bans gambling, the related practice of risk is forbid- den. So too is the short-selling of stocks (on the grounds that you can’t sell what you don’t own) and the sale of debt. Indeed, the practice of repackaging and trading debt, as well as credit-default swaps, both so central to the financial crisis, never could have happened under Islamic law. MARKET FUNDAMENTALISM Sharia scholars such as DeLorenzo see Islamic finance as the path to a distinctly spiritual end. Like political Islam, Islamic finance began as a search for authenticity and independence from the West. Its origins lie in the postcolonial Islamic identity that emerged in the 1950s and 1960s, when Muslim economists returned to the Koran to develop what they called Islamic economics. The central concept is justice. Transactions that could be unjust for either the borrower or the lender are discouraged. For any financial undertaking, risks must be shared. To get around the Koran’s ban on interest, Islamic banking has relied heavily on what is called murabaha: a loan or sale in which a markup is added to the transaction’s cost. So when a Muslim bor- rower goes to a bank to buy a car or house, he agrees to a contract in which he pays back the cost of the item,

[ ]Faith in the Market offered them. Saturna Capital, a Washington-based investment firm, estimates that 60 percent of customers for its sharia-com- pliant mutual funds aren’t Mus- lim. All of which raises the iron- ic possibility that Islamic finance, in its quest to develop a more spiritually pure alternative to modern materialism for the world’s Muslims, may have ended up creating a large and attractive market for Western investors. To many, including some Islamic scholars, such PIETY FOR A PRICE offerings look a lot like conventional finance in dis- guise. But for many devout Muslims, the fact that they But not everyone is convinced. are technically avoiding interest makes such prac- Take the claim of Islamic finance tices acceptable. Under sharia, money must be as a safe haven from the global exchanged for a real good or service. “Money itself economic crisis. “Now is a gold- creates no value,” observes Mohamed Elgari, a top en opportunity for Islamic sharia scholar. “[Under Islamic law], it is only a medi- finance to provide an alternative um of exchange.” It’s a nimble balancing act, and for model . . . just what the world those banks willing to attempt it, there are plenty of needs right now,” Islamic finance willing customers. conference organizer Swati Tane- ja recently told Emirates Busi- In Britain alone, the value of the Islamic mortgage ness 24/7. “There has never been market has topped $900 million, up 50 percent a more interesting time for cau- between 2006 and 2007. The global Islamic insurance tious investors burned in the con- market is growing 25 percent annually and is slated ventional credit crunch to begin to reach $14 billion a year by 2010, according to looking at what the Islamic mar- hsbc. And non-Muslims are increasingly keen tak- kets have to offer.” But even ers. Half of hsbc’s Islamic mortgages in Malaysia someone as bullish as Taneja concedes that a global- went to non-Muslims the first year the company ized market means Islamic investments are exposed along with mainstream ones. According to Standard & Poor’s, sharia-compliant stocks lost 23 percent of their value during the first three quarters of 2008, compared with a 25 percent fall for non-sharia-sanc- tioned stocks. And Islamic finance, just like conven- tional finance, is vulnerable to sloppy vetting of cus- tomers’ creditworthiness. Potential pitfalls for Islamic finance, then, are the same as those for conventional finance: greed and lax regulation. So, at what point do the scholars’ fatwas only serve to perpetuate the industry that feeds them, thereby consolidating their own power? “They’re not going to kill the goose that lays the golden egg,” El-Gamal says. “[By issuing bans on certain financial products], they want to continue to build up the religious insecurity of people who are afraid to use conventional [finance].” And banks that 74 F o r e i g n P o l i c y

benefit are happy to see the current system main- A larger issue is whether Islam and the modern tained. Very few scholars dominate the field, says economy can be reconciled at all. Is it enough to cre- Tarek El Diwany, an analyst at Zest Advisory, a Lon- ate banking products that mimic those of tradi- don-based Islamic financial consultancy, because tional finance but also meet the letter of Islamic law? “there’s a shortage of scholars who will give the Or must the goals of the financial system itself be judgments that the banks are looking for.” reworked fundamentally? The question, in short, is whether a growing Islamic financial sector can The industry’s chief critics see in Islamic finance really bring about the material and spiritual justice the same rhetorical spin as Islamist politics. “The that its advocates claim it will—or whether it will whole idea of giving [finance] a religious identity is enrich a select few. just a form of identity politics,” says El-Gamal. “The claim that Islam has the perfect solution is question- Such a debate cuts to the heart of whether able in economics, just as in politics.” Still others see Koranic admonitions must be strictly applied or can outright deception. Mohammad Akram Nadwi, a be subject to greater interpretation. That the prominent Britain-based scholar of Islamic jurispru- Islamic financial sector has largely been designed dence, advises his students against taking out by a small group of men paid handsomely for their Islamic mortgages, because he thinks their structure services has led some observers to declare that is merely interest-bearing debt in disguise. “At least much of what passes for Islamic finance today conventional mortgages are honest,” he shrugs. fails to meet the intentions of sharia. At industry conferences, there have been mutter- For every observer who thinks that sharia ings about too few sheikhs serving on too many scholars have become too reckless in their judg- boards, and even advising direct competitors. ments, there are many more who believe that a Malaysia, which arguably has the world’s best- broad rethink of the financial system should carry developed legal framework for sharia finance, banned the day. “To date, most Islamic financiers have scholars in 2005 from serving on more than one bank been looking at . . . examples of financing in board at a time. And in an effort to groom more Islamic history and figuring out how to apply young sheikhs to enter the field, Malaysia’s central them today,” says El Diwany, the London-based bank and the Saudi-based Islamic Development Bank Islamic financial consultant. “That’s a very narrow recently created a $53 million endowment to support way of doing things. There’s potentially much sharia scholarship. But, in an industry that respects more innovation we could be doing—and poten- longevity and seniority, especially among Wall Street tially, much less.” It may not win Islam more investors unfamiliar with the nuances of madrasa converts, but it could provide an entirely new education, breaking in can be tough. generation of customers. [ ]Want to Know More? In Islamic Finance: Law, Economics, and Practice (Cambridge: Cambridge University Press, 2006), Mahmoud A. El-Gamal recommends reorganizing Islamic finance to follow the spirit—rather than the letter—of the Koran. He also blogs on the subject at elgamal.blogspot.com. The “Shariah Report 2008” (Chicago: Failaka Advisors) offers biographical profiles of the most active scholars in the field, including their education, experience, and employers. For an in-depth look at Islamic finance’s growing pains and the emerging hubs of the industry, see a recent special report on the industry from the Financial Times (June 19, 2008). Forbes offers an overview of the people, places, and prohibitions central to the movement in a similar multi- article special report (April 21, 2008). Joanna Slater’s “When Hedge Funds Meet Islamic Finance” (Wall Street Journal, Aug. 9, 2007) describes how sheikhs are advising hedge funds on attracting capital from the Middle East. Additional resources on the industry are available at the Web site of Harvard Law School’s Islamic Finance Project. Publicly listed companies that are compliant with Islamic finance are found on the Dow Jones Islamic Market Index. J a n ua ry | F e b r ua ry 2009 75



burdenTHE POOR MAN’S Eighty years ago, a depression changed the way we think about poverty. It took decades for the world to recover and to remember that if people are given freedom, they will prosper. Now, in the wake of another massive meltdown, the fear that shocked us into depending on government to fix poverty is spreading once again—and threatening to undo many of the gains we’ve made. | By William Easterly ILLUSTRATIONS BY DAN PAGE FOR FP Will Richard Fuld, the disgraced ceo world was nearly three times higher than it was in of the now defunct Lehman Brothers, 1960. But those tremendous gains are now in peril. For go down in history as the father of this crash hit many poor countries from Asia to Africa Bolivian socialism? If we learn the to Latin America that are still experimenting with wrong lessons from the global financial Crash of political and economic freedom—but have yet to fully 2008, he very well could. embrace it and experience its benefits. For decades, these countries have struggled tremendously to realize That’s because the crash arrived at a crucial the potential of individual creativity as opposed to the moment in the global fight to reduce poverty. For smothering hand of the state. And it even seemed that Bolivia—and so many other countries like it—the the power of individual liberty might be winning. crash represents much more than a temporary down- turn; it could mean the end of one of the greatest It wasn’t happening because experts had handed openings for prosperity in decades. Amid today’s out some blueprint for achieving economic growth to gloom, it is easy to forget we have just witnessed half governments and then down to their people. What a century of the greatest mass escape from poverty in happened instead was a Revolution from Below— human history. The proportion of the world’s popu- poor people taking initiative without experts telling lation living in extreme poverty in 2008 (those earn- them what to do. We saw such surprising success sto- ing less than a $1 a day) was a fifth of what it was in ries as the family grocer in Kenya who became a 1960. In 2008, the income of the average citizen of the supermarket giant, the Nigerian women who got rich making tie-dyed garments, the Chinese schoolteacher William Easterly is professor of economics at New York who became a millionaire exporting socks, and the University. Congolese entrepreneur who started a wildly J a n ua ry | F e b r ua ry 2 0 0 9 77

[ ]The Poor Man’s Burden successful cellphone business in the midst of his coun- the U.S. financial system for his own populist mis- try’s civil war. Perhaps not coincidentally, the share of management of Russia’s even more catastrophic crisis. countries enjoying greater levels of economic and polit- A spreading fire of statism would find plenty of kin- ical freedom steadily and simultaneously shot upward. dling already stacked in the Middle East, the former Soviet Union, Africa, and Asia. And there are many Then came the crash. Western “development” experts who would eagerly Today, global economic calamity risks aborting fan the flames with their woolly, paternalistic thinking. that hopeful Revolution from Below. As India’s Prime Minister Manmohan Singh warned late last fall, “It To Jeffrey Sachs, perhaps the foremost of these would be a great pity if this growing support for open experts, the crash is an opportunity to gain support for policies in the developing world is weakened” because the hopelessly utopian Millennium Development Goals of the crash. Singh understands that the risk of a back- of reducing poverty, achieving gender equality, and lash against individual freedom is far more dangerous improving the general state of the planet through a cen- than the direct damage to poor countries caused by a trally planned, government-led Big Push. “The US global recession, falling commodity prices, or shrink- could find $700 billion for a bailout of its corrupt and ing capital flows. We’re already seeing this dangerous errant banks but couldn’t find a small fraction of that trend in Latin America. In Bolivia, President Evo for the world’s poor and dying,” he wrote in Septem- Morales has openly crowed about the failure of Fuld’s ber. “The laggards in the struggle for the [goals] are not Lehman Brothers and other Wall Street giants: The cap- the poor countries … the laggards are the rich world.” italist “models in place are not a good solution for To Sachs and his acolytes, poor people can’t prosper humanity . . . because [they are] based on injustice and without Western-country plans—and the crash only inequality.” Socialism, he said, will be the solution— serves to turn Western governments inward. Therefore, in Bolivia, the state “regulates the national economy, progress on poverty is bound to suffer. To governments and not the free market.” The leaders of Argentina, of poor countries that have failed to give their people Bolivia, Brazil, Ecuador, Nicaragua, Honduras, the freedom needed to prosper, the neglect of Western Paraguay, Venezuela, and even tiny Dominica to vary- governments is an easy excuse. So the gospel of Sachs ing degrees align with these anticapitalist pretensions, and his disciples, though terribly condescending and all seemingly vindicated by the Crash of 2008. And it’s wrongheaded, could attract many converts in the not confined to Latin America: Vladimir Putin blamed coming months. 78 F o r e i g n P o l i c y

A DEPRESSING HISTORY that individual freedoms for the poor should not be At least we’ve been here before—and we have a the foundation for wealth creation, as they had been chance to avoid the philosophical traps we fell during the Industrial Revolution, when the state had into after the last calamity that did so much harm played a secondary, supportive role. And because to our economic system. But so far, there have governments seemed to successfully take on a larger been strikingly similar reactions to the crashes role during the Depression, development economists of 1929 and 2008. In both cases, when stocks reg- assumed that granting extensive powers to the state istered some of their largest percentage declines on was the surest path to progress. A 1947 U.N. report record, highly leveraged firms and individuals on development gave equivalent approval to state who had placed large bets using complex finan- action in democratic capitalist countries like Chile, cial securities that few understood lost everything. enslaved Soviet satellites like Poland, African colonies The failure of gigantic financial firms spread panic. of the British and French, and apartheid South Africa, Complaints about the greedy and reckless rich ignoring the vast differences in individual liberty escalated; a shift toward protectionism and gov- between these places. ernment interventionism appeared inevitable even Second, these thinkers lost faith in bottom-up eco- where free markets once reigned supreme. Author- nomic development that was “spontaneous, as in the itarian populists abroad mocked the U.S. system. classical capitalist pattern” (as a later history put it), The catastrophe seemed to threaten democratic preferring instead development “consciously achieved capitalism everywhere. through state planning.” After all, the Five-Year The difference is today we know that after a long Plans of the 1930s Soviet Union had avoided the and scary Great Depression, democratic capitalism Depression, at an appalling but then ignored cost in did survive. And the U.S. economy returned to exact- ly the same long-run trend path it was on before the So far, there have been strikingly similar reactions Depression. We also know that, for to the crashes of 1929 and 2008. another important part of the world, democratic cap- italism did not hold up so well. In many ways, that failure stemmed from a mis- lives and human rights. This thinking was so uni- guided overreaction on the part of a new, influential versal that Gunnar Myrdal (who would later win a field of economics that was highly skeptical of cap- Nobel Prize in economics) claimed in 1956: “Special italism, was deeply traumatized by economic calamity, advisors to underdeveloped countries who have taken and considered much of the world “underdevel- the time and trouble to acquaint themselves with the oped.” Born in the aftermath of the Depression, problem . . . all recommend central planning as the “development economics” grew on a foundation of first condition of progress.” bizarre misconceptions and dangerous assumptions. Third, these economists grew to believe that the This approach to poor-country development, most important factor in reducing poverty was promulgated by the economists who took up its the amount of money invested in the tools to do cause in the 1950s, had four unfortunate lasting so. After all, if there were simply too many peo- consequences, the effects of which we’re still reck- ple, they reasoned, the binding constraint on oning with today in the midst of the latest big crash. growth must be the lack of physical equipment. As First, seeing Depression-style unemployment in a result, this line of economic philosophy would every part of the world led these economists to assume forever stress the volume of investment over the that poor countries simply had too many people who efficiency of using those resources; would be stub- were literally producing nothing. A U.N. report in bornly indifferent as to whether it was the state or 1951, produced by a group of economists, including individuals who made the investments; would future Nobel laureate Arthur Lewis, estimated that always stress the total amount of aid required to fully half of the farming population of Egypt produced finance investment as the crucial ingredient in nothing. The insulting assumption that poor people escaping poverty; and would ignore the role of a had “zero” productivity led these economists to think dynamic financial system in allocating investment J a n ua ry | F e b r ua ry 2 0 0 9 79

[ ]The Poor Man’s Burden resources to those private uses where they would taken nearly 50 years for the world to recognize the get the highest return. damage that the state-led, expert-directed, antifreedom agenda had done to the world’s poor. Today, the Fourth, the collapse of international trade dur- only remaining holdouts among the top-down ing the Depression made development economists experts are so utopian that they are safely insulated skeptical about trade as an engine of growth. So in from reality. Africa, for example, they pushed for heavy taxes on export crops like cocoa to finance domestic indus- A 5(0)-YEAR PLAN trialization. In Latin America, Raúl Prebisch pushed import-substituting industrialization instead of Today, just when we were getting over the long, export-led growth. This strategy was supposed to toxic legacy of the Depression and its misguided help developing countries in Africa and Latin emphasis on statist plans to fight poverty, this finan- America escape a presumed “poverty trap.” But the cial crash threatens to take us back to the bad old only “trap” it kept them out of was the greatest days. To avoid such a return, we must keep some global trade boom in history following World War principles in mind. ii, which fueled record growth in Asia, Europe, and the United States. First, we must not fall into the trap of protec- tionism—neither unilaterally nor multilaterally, nei- By the 1980s, the state-led plans had clearly ther in rich countries nor poor. Protectionism will failed. The wreckage of unsuccessful state enter- just make the recession spread further and deeper, as prises, bankrupt state banks, and inefficient hot- it did during the Depression. house industries behind protectionist walls—all of which culminated in African and Latin American Second, when changing financial regulations to debt crises that destroyed growth—became too repair the excesses of the past several years, don’t obvious to ignore. These factors, plus East Asia’s rise strangle the financial system altogether. You can’t to power in global markets, finally fueled a coun- have a Revolution from Below without it. This les- terrevolution in development thinking that favored son is especially salient as Washington bails out free markets and individual liberty. By the new mil- Wall Street banks and failing industries and inter- lennium, the long record of failure of the top-down venes in the U.S. financial sector to an unprece- development experts triggered a well-deserved col- dented degree. This bailout might turn out to be the lapse of confidence in top-down planning. It had bitter medicine that saves “finance capitalism” from 80 F o r e i g n P o l i c y

a stronger form of anticapitalism, but in developing policies of the past century. But if we are truly to con- countries, open economies are still an open question. tinue the miraculous exodus from poverty that was under way before this traumatic crash, we ought to Third, keep slashing away at the enormous red keep in mind stories like that of Chung Ju-yung. tape that is left over from previous harebrained attempts at state direction of the economy. Learn The son of North Korean peasant farmers, from the combined dismal track record of state- Chung had to leave school at 14 to support his owned enterprises but also from the unexpected family. He held jobs as a railway construction labor- success stories: Private entrepreneurs are far better er, a dockworker, a bookkeeper, and a deliveryman than the government at picking industries that can be for a rice shop in Seoul. At 22, he took over the rice winners in the global economy. Although fierce oppo- shop, but it failed. He then started A-Do Service sition will be inevitable, to adopt these policies would garage, but that failed, too. In 1946, at age 31, be to turn the bad hand we’ve been dealt into an out- Chung tried once again to start an auto repair serv- right losing one. ice in Seoul. At last, his enterprise succeeded, largely through the contracts he won to repair U.S. Army Fourth, don’t look to economists to create vehicles. As his success continued, Chung diversified “development strategies,” and don’t back up such into construction, and his company kept growing experts with external coercion like imf and World rapidly. In 1968, he started manufacturing cars. Bank conditions on loans. Such efforts will be either a waste of local politicians’ time or positively harm- He named his company Hyundai. It became one ful. Jeffrey Sachs alone can take partial credit for the of the largest companies contributing to South rise of two xenophobic rulers hostile to individual Korea’s rise. His first effort to export cars to the liberty—Evo Morales and Vladimir Putin—after his United States in 1986 brought ridicule because of the expert advice backfired in Bolivia and Russia. If cars’ poor quality. The Asian crisis of 1997-98 led like-minded experts couldn’t get it done in the 50 to a partial breakup of the Hyundai Group, but years after the Great Depression, they can’t do it in the Hyundai Motor Company continues to thrive. the next 50 years. Nothing in the current crash Chung died in 2001, but his dreams for the U.S. changes these common-sense principles. market came true. By 2008, Hyundai cars had received awards in the United States for the highest D R I V I N G T H E R I G H T WAY level of quality from Consumer Reports. In the coming months and years, the world’s econo- However terrifying the latest crash may be, let’s mists, politicians, and average consumers could find never forget that it is the Chungs of the world that it incredibly easy to fall again for the wrongheaded will end poverty—not the Depression-inspired regression into statism. [ ]Want to Know More? William Easterly’s most recent book, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (New York: Oxford University Press, 2006), criticizes Western approaches to global poverty. In “The Ideology of Development” (Foreign Policy July/August 2007), Easterly warns of the dangers of “Developmentalism.” Easterly’s chief economic adversaries, Jeffrey Sachs and Paul Collier, take a more aid-oriented approach. Sachs’s Common Wealth: Economics for a Crowded Planet (New York: Penguin Press, 2008) and Collier’s The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It (New York: Oxford University Press, 2008) offer policy solutions for the world’s most pressing problems. For a look at one of the earliest and most prescient (and now forgotten) economists to advo- cate the potential of free markets as a tool for development, read S. Herbert Frankel’s Some Conceptual Aspects of International Economic Development of Underdeveloped Territories (Princeton: Princeton University, 1952). For a more well-known early critique of development, see P.T. Bauer’s Dissent on Development (Cambridge: Harvard University Press, 1976). J a n ua ry | F e b r ua ry 2 0 0 9 81

82 F o r e i g n P o l i c y

J a n ua ry | F e b r ua ry 2 0 0 9 83

[ ]The Think Tank Index 84 F o r e i g n P o l i c y



IN OTHER WORDS [ ]R E V I E W S O F T H E W O R L D ’ S M O S T N O T E W O R T H Y B O O K S India’s Chinese Wall By Jeffrey N. Wasserstrom Smoke and Mirrors: the two countries, takes on the what the Chinese think of her An Experience of China charged question. The best option, homeland. She is, to borrow a By Pallavi Aiyar she contends, is to be a high-caste term coined by another cosmo- 288 pages, New Delhi: Indian man. His political freedom politan writer, Pico Iyer, just the HarperCollins India, 2008 would certainly outweigh the eco- sort of “global soul” we need to nomic opportunities of any Chi- guide us into a China that is trans- To most readers, com- nese citizen, she argues. But if that forming and being transformed by parisons of China and weren’t possible, she’d choose to the world. And her book, which India are nothing new. be a wealthy Chinese woman, was released in September in India Whether it’s the breathless pace of because she wouldn’t be as con- to generally positive reviews, has China’s economy versus India’s strained as her Indian counter- fresh things to say about the usu- slower, more measured growth, or parts by low literacy rates and ally overlooked issues between China’s communist political system limits on female participation in these countries, such as the true rated against India’s complicated the public sphere. If she had to be experience of expats in both democracy, the two countries are poor, she’d go with China. An nations. endlessly dissected in relation to Indian latrine cleaner may get to one another. Yet amid all the vote, she says, but a Chinese one Part memoir and part hand-wringing over which coun- is far less likely to be viewed as reportage, the book covers the try is “beating” the other in their completely subhuman. period from 2002 to 2007 and race to industrialize, one simple describes everything from the question sums up very pointedly If it sounds like Aiyar’s five unique business opportunities that the debate over which one is mak- years in Beijing have left her reluc- a booming China offered entre- ing life better for its citizens. It’s a tant to give a definitive answer to preneurial yoga instructors, to the question few dare to ask in polite this question—one she poses often sars scare, to the high-tech, high- circles: If you were born today, in her book, Smoke and Mirrors: altitude train to Tibet, on which would you rather be Chinese or An Experience of China—she is. Aiyar was an early passenger. After Indian? Like so many other foreigners who studying in Britain and the United gradually discover China, her States, she arrived in Beijing to Delhi-born Pallavi Aiyar, the opinions are constantly evolving. teach English and went on to first Chinese-speaking Indian jour- What makes her unfolding view become the China correspondent nalist based in Beijing and author of a booming and globalizing for The Hindu. of an engaging new book about China special is the mix of expe- riences she brings to bear: She has Every foreign writer’s per- Jeffrey N. Wasserstrom teaches history lived both in Asia and the West, spective on China is shaped by worked in Beijing not just as a the country where he or she grew at the University of California, Irvine, journalist but also as a teacher, up. But Aiyar is refreshingly hon- and knows what her compatriots est about this fact. She knows that is the author of Global Shanghai: 1850- think of the Chinese as well as her Indian background gives her a lens that’s more interesting than 2010 (New York: Routledge, 2008), and blogs at The China Beat. 86 F o r e i g n P o l i c y

ILLUSTRATION BY KOREN SHADMI 2008, LEVI CREATIVE MANAGEMENT NYC FOR FP most through which to with its reflections on Chinese- since the 1950s), commentators watch China’s rise. To Indian tensions, the two countries’ ranging from Danish political sci- many Indians, China is differences, and their economic entist Georg Sorensen to American close to home geographi- booms, has arrived a bit too late. business guru Jack Welch to vari- cally, yet mysterious and A year ago, the totemic pairing ous Indian public figures often distant philosophically, of China and India dominated the used the two countries to support often generating mixed Western press. Scores of articles overly simplistic theses about emotions—including dis- fretted over how the joint rise of globalization, democracy, and gust (the “strange” foods), “the Dragon” and “the Elephant” authoritarianism. scorn (the limited free- would challenge the West—or dom), and envy (the sky- salivated over the countries’ mas- Of course, that was before the scrapers, the roads, the sive markets. Alternatively, some global financial crisis, the U.S. Olympics). Aiyar is a bit took a Dragon vs. Elephant presidential election, and the dev- dismissive of some of these approach. Overstating the con- astating terror attacks in Mum- attitudes. When it comes trasts between Chinese and Indian bai. Now, the ways that China to envy of China’s trans- development paths (and over- and India have remade themselves formation into a land with looking the parallels between, for no longer have the same hold on spectacular airports and example, the two countries’ short attention spans they did just highways free of potholes, shared passion for five-year plans a few months ago. Today, the though, her own awe- sound of cascading market crashes struck reaction helps us understand the nature of South Asian anxieties about the surging country to the east. Throughout Smoke and Mirrors, Aiyar alter- nates between describing Chinese people, places, and events, and ruminat- ing on their Indian coun- terparts. She also lets us eavesdrop on other Indians commenting on China and on Chinese airing their views on India. We meet Jayesh, a “buyer from Mumbai” working in the button trade: “What we need is a government like these Chinese. No unions, no nonsense.” And we hear from Nigami, a representa- tive of an Indian bank, who com- plains about all the smoking and drinking involved in Chinese busi- ness transactions, which makes it “difficult for us Indians to adjust here. The Europeans, of course, enjoy themselves here. . . . Many even marry Chinese girls and the food is fine for them.” From a Western perspective, it might seem that Aiyar’s book, J a n ua ry | F e b r ua ry 2 0 0 9 87

[ ]In Other Words seems to be drowning both the THE FP’s new section, The Early Read, fretful and the exuberant China- EARLY will highlight upcoming new books India chatter—but not complete- READ with big ideas. In this inaugural edi- ly, probably not for long, and not tion, we examine a few picks from equally in all places. ON THE the reliable crop of books about the FUTURE future that appears every new year. As for the “not completely,” These take a slightly longer view, consider this: A recent Google with bold forecasts for the next cen- search for “Dragon and Elephant” tury: which brewing conflicts will yielded nearly 5 million hits, com- erupt into wars, which states will pared with just 531,000 for “Eagle dominate, and what it will mean to and Bear,” a once dominant pair. live in a completely digitized world. On the “not for long”: However the financial crisis shakes out, we’ll 7 Deadly Scenarios: A Military Futurist Explores War in the 21st Century surely see these two economies con- By Andrew Krepinevich (January 27, Bantam) tinue to claim a more central place As president of the Center for Strategic and Budgetary Assessments and consultant to the in global markets, and some ana- likes of the CIA and the Homeland Security Council, Krepinevich has studied everything from lysts have begun to speculate that China’s ambitions to Internet warfare to the puzzle of Pakistan. Now, he answers the ques- the crashes might ultimately give tion: What’s the worst that could happen? Whether it’s the detonation of black-market these rising powers opportunities nuclear weapons in major cities or a global pandemic, his scenarios are deeply unsettling. to narrow the gap between them- selves and the United States, Britain, A Brief History of the Future Germany, and Japan. And “not By Jacques Attali (March 11, Arcade) equally in all places”? Keep this in For another harrowing forecast, one of France’s top intellectuals (and an FP contributing edi- mind: The front sections of Amer- tor) argues that history shapes the future with intrinsic, predictable patterns—and then uses ican newspapers might have them to foreshadow the period on deck. So what does Attali see? A massive reshaping of the ignored it, but in late October the global landscape, with democracy ultimately prevailing but at great expense in lives and money. front page of The Hindu featured Russia’s announcement that it plans The Next 100 Years: A Forecast for the 21st Century to move toward having China and By George Friedman (January 27, Doubleday) India displace European countries Friedman, founder of the geopolitical intelligence firm Stratfor, spins his day-job assessments as its main trading partners. into a map for the future. If he’s right, we’ll see a war between the United States and Rus- sia, a new space race, an internal crisis in China, and the rise of Mexico as a major player. In that sense, the timing of Smoke and Mirrors is just fine. The Tyranny of Dead Ideas: Letting Go of the Old Ways of Thinking When the obsession with China to Unleash a New Prosperity and India’s mutual, competitive, By Matt Miller (January 6, Times Books) and thrilling rise comes back into Fortune columnist and Center for American Progress fellow Matt Miller predicts that vogue in the West—and it will— America will only remain competitive by adopting a new approach to the future. The we will benefit from having United States must, Miller argues, adopt a new set of “destined ideas”: Only business Aiyar’s cultural vantage point and can save liberalism, only government can save business, and there’s no longer room nuanced lens. She will certainly to fear great policy ideas from abroad. serve as a better guide to explor- ing those issues that don’t easily fit Carbon Shift: How the Twin Crises of Oil Depletion and Climate Change Will into the already hackneyed “Drag- Define the Future on vs. Elephant” cliché. And when By Thomas Homer-Dixon (April 14, Random House Canada) it comes to answering that all- With the help of six of Canada’s leading experts, Thomas Homer-Dixon argues that the important question of how these dual crises of the future—climate change and peak oil—are really just one address- countries are improving the future able problem with one simple answer: clean, low-carbon energy. for their citizens, who better to help us understand than someone who knows them both with the love of a native and the curiosity of a traveler? 88 F o r e i g n P o l i c y

The Best in International Economics China’s Rise: Challenges and Opportunities C. Fred Bergsten, Charles Freeman, Nicholas R. Lardy & Derek J. Mitchell “…designed to clarify contemporary China and advise how U.S. ‘engagement’ with China may best move ahead. There’s lots here, but clearly presented, with a great chronology.” Library Journal September 2008 • ISBN hardcover 978-0-88132-417-4 • $26.95 How Ukraine Became A Market Economy and Democracy Anders Åslund In this fast-paced, easy-to-read book, noted expert on postcommunist transforma- tion, Anders Åslund traces Ukraine’s transition into a market economy and de- mocracy and assesses the repercussions of this gradual political rebirth on Ukraine’s governmental and societal architecture. March 2009 • ISBN paper 978-0-88132-427-3 • $26.95 Banking on Basel: The Future of International Financial Regulation Daniel K. Tarullo “[Banking on Basel] is thorough, erudite, and well written. It will become a classic on this important topic of international bank regulation.” Robert Litan, Kauffman Foundation September 2008 • ISBN paper 978-0-88132-423-5 • $26.95 Russia The Balance Sheet Anders Åslund & Andrew Kuchins This collaboration between the Peterson Institute and CSIS provides information on all key aspects of Russia and discusses what its status means for the US and other na- tions. The book develops a cohesive, overarching framework that analyzes economic reforms and integration, domestic politics and society, foreign business partnerships, and energy demands. It suggests constructive policies for Russia and the next US administration. April 2009 • ISBN paper 978-0-88132-424-2 • $24.95 www.petersoninstitute.org

order online and get one year for $19.95. 38

MASTER OF ARTS IN NEW FROM CORNELL International Commerce and Policy HUMANITARIANISM IN QUESTION Politics, Power, Ethics Earn a degree that provides you with the practical skills to operate EDITED BY MICHAEL BARNETT AND effectively in today’s global economy. THOMAS G. WEISS Our unique program explores the intersection of international trade, “This is a superb survey of the rise and politics, economics, commerce, challenges of international humanitar- and technology. ianism assistance. The book chronicles Q Small classes taught by world- the remarkable post-Cold War emer- gence of a global system of humanitar- renowned faculty ian relief—a system complete with Q Conveniently located in the metro doctrines, organizations, and extensive field operations. This book will long Washington, D.C. area be an essential guide to the theory and Q Full-time or part-time study politics of global humanitarianism.” Q Affordable costs To learn more, visit —Foreign Affairs policy.gmu.edu or call 703-993-8099. [  pages / . paper ] A Special Two-Day Conference FORCED TO BE GOOD Why Trade Agreements January 12–13, 2009 • Cato Institute 1000 Massachusetts Ave. N.W., Washington, DC 20001 Boost Human Rights With a new administration in the White House, January 2009 will be the EMILIE M. HAFNER-BURTON starting point for a new approach to U.S. counterterrorism efforts. This new “In this book, Hafner-Burton shows conference, with presentations by over 35 national and global experts, offers convincingly that old-fashioned, extensive analyses of strategic and proven counterterrorism policies that interest-based political bargaining, not a moral impulse to improve the world, will provide the most beneficial results for the United States. led to human rights being included in recent U.S. and European trade agree- THIS CONFERENCE IS MADE POSSIBLE THROUGH THE GENEROSITY ments. ” OF THE ATLANTIC PHILANTHROPIES. — Kimberly Ann Elliott, FOR FURTHER INFORMATION AND REGISTRATION: Center for Global Development Cato.org/counterterrorism [  pages / . cloth ] CORNELL UNIVERSITY PRESS 1-800-666-2211 www.cornellpress.cornell.edu

NET EFFECT [ ]H O W T E C H N O L O G Y S H A P E S T H E W O R L D Neighborhood fast. An Ushahidi user, for example, humanitarians. The African Union has sends details of turmoil by text or posts been intent on creating its own system since the early 1990s. But none of the Watch directly to ushahidi.com. Once a local ideas was Internet-based. As the South ngo verifies the account, the incident Africa-based Institute for Security Stud- ies put it, Web-based approaches “would W hen a rush of violence broke out gets entered into the Ushahidi database last January after Kenya’s and plotted on a map, tagged with a have been patently inappropriate for an organization that only presidential election, many recently achieved a moderate level of external e-mail connectivity.” wondered why it was so unex- With Ushahidi, information is pected. Electoral rigging set off available within minutes, and Okolloh says censorship isn’t a the attacks, but surely tensions problem because governments “are more interested in what’s in news- simmered before. Could Kenya papers than what’s online.” Kenya was the first testing ground, and have seen the outburst coming now Ushahidi is jumping into other conflict countries as well. As and perhaps done something to of November, the group was already receiving an average of prevent it? four reports a day from the Demo- cratic Republic of the Congo. This Prediction, at least, was growing breadth could make Ushahidi something like the Wikipedia of con- possible—and Web-based non- flicts, wrote Harvard researchers Joshua Goldstein and Juliana Rotich in a recent profit Ushahidi (Swahili for paper. “They are tools that allow coop- eration on a massive scale.” Ushahidi “testimony”) did just that. hopes to become a history worth con- tributing to. —Elizabeth Dickinson Funded by grants and individual donations, Ushahidi had already E-alert: Conflict early warning systems are catching on. developed software that allowed any mobile-phone user in Kenya to description of the event and with space report incidents of community tension. for pictures and video. In Kenya, reports “[T]here were a lot of rumors going of violence were texted back to local around way before the violence,” says leaders, who could mediate community Ushahidi’s founder, Ory Okolloh. conflict. International observers could Okolloh’s group operates one of a monitor the reports, too. growing number of conflict early warn- For years, creating an effective ing systems that are springing up online. means of alerting the world to brew- They work because they are simple and ing conflicts has been the dream of Sticker Shock Caught in the Net: TOP: URIEL SINAI/GETTY IMAGES; BOTTOM LEFT: ISTOCKPHOTO.COM; BOTTOM RIGHT: TIM BOYLE/GETTY IMAGES R emember the $100 laptop? Turns out, Bank Customers when you add up the total costs of own- ership, the tab can actually top $2,600. Projects The financial crisis may have caught most of us flat-footed, but such as One Laptop per Child and Intel’s Class- there’s one group that has easily adapted to the new economic order: mate pc have sought to bring low-cost com- cybercriminals. Capitalizing on popular fears with new phishing cam- puters to classrooms in poor countries that can’t paigns, scammers are enjoying something of a bull market, according afford mainstream technology. A recent study by to the FBI. In a particularly clever ruse, criminals sent a fraudulent Vital Wave Consulting, however, shows that e-mail instructing Wachovia customers to hand over their online training and support expenses eventually dwarf banking credentials ahead of a prospective merger with Citigroup. the initial outlay, putting total costs on par One cybercrime expert, who detected a jump in malicious software as with conventional machines. “You have a U.S. stocks first headed south, told cheaper device, but you still need to under- Information Week that economic stand those other costs,” says Vital anxiety could be causing nervous Wave’s Karen Coppock. The ultra- users to make bad decisions: “If cheap devices might not even last as the stock market is crashing, long as ordinary computers, leading to sizable replacement there’s not a lot of confidence.” bills. Classmate pc and One Laptop per Child hope to boost com- Unless you’re a thief, apparently. puter life spans with rugged, kid-friendly designs, but so far, the end product hasn’t quite caught up with the hype. —Jerome Chen 92 Foreign Policy

Expert Sitings Barry Ritholtz is CEO and director of equity research at Fusion IQ, an online quantitative research firm. He blogs at ritholtz.com, a top-ranked financial Web site, and is a frequent television commentator. calculatedrisk.blogspot.com Run by a retired senior executive with deep expertise in housing finance (in a good way), this blog is a great source for the latest news and overlooked insights on the financial crisis and the folks in charge who keep screwing everything up. LEFT: MAP DATA CCBYSA 2008 OPENSTREETMAP.ORG CONTRIBUTORS; A bright shining map: Vietnam, generated by Flickr. stlouisfed.org RIGHT: COURTESY OF BARRY RITHOLTZ Picture (Im)perfect There’s a simple mathematical beauty in a well-constructed chart. The St. Louis Fed’s monthly Monetary Trends newsletter Apicture may be worth a thousand words. But, as it may not be flashy, but it’s clean, clear, and always chock turns out, it takes almost 100 million pictures to full of interesting data. The bank’s research division produces make a map. a prodigious volume of expert analysis, too. The inventive engineers at Flickr—a popular Web site that flowingdata.com allows users to upload and share photos online—have discov- ered a way to harness the data provided by their millions of users For some real numbers porn, surf around on this graphics- to create a constantly changing picture of the world itself. rich site. Whether it’s a computer simulation of worldwide air-traffic patterns or a map showing global “friend” activity When a user uploads a photo onto Flickr, he or she can on Facebook, the guys at Flowing Data are brilliant at making pinpoint, or “geotag,” the location where that photo was complex visualizations look deceptively simple. taken on an interactive map. gps-enabled camera phones, such as Apple’s iPhone, can do this automatically. Flickr economagic.com then uses these coordinates to create a “Where on Earth” id for the photo that includes the neighborhood or town When I want to get the latest unemployment figures, survey where it was taken, right up to the continent, a process trends in the three-month London interbank offered rate, or known as reverse-geocoding. The actual content of the delve into the consumer price index, Economagic offers a photo itself is irrelevant; it’s simply being used for its geo- much clearer starting point than the byzantine Web sites of graphical data. the U.S. government or foreign central banks. With 90 million geotagged photos and counting, the residents, for instance, might have conflicting ideas about company’s development team realized that these locations where Soho ends and Covent Garden begins. could be plotted on a map to create an outline. For now, Catt considers the maps a “cool side project,” Not all locations are equally easy to plot. “Within the but he hopes that by publishing the maps on its site, Flickr can first few weeks [of geotagging] there were probably enough “give people back” the ability to define their surroundings and photos to map San Francisco,” says Flickr’s Dan Catt, the trace how these definitions change over time. “Most of the senior engineer spearheading the project. But, he says, data we have for Where on Earth comes from government “there are still places in the world,” such as the upper sources. That doesn’t always correspond with what people are reaches of North America, “that we don’t have enough pho- seeing on the ground,” he says. Geography, in other words, tos to do.” It takes about 10,000 photos for Flickr to map just became user-generated. —Joshua Keating just one location. Elizabeth Dickinson is an assistant editor, Jerome Chen is Reverse-geocoding is also a lot harder than it sounds. a researcher, and Joshua Keating is an editorial assistant at Attendees at a 2007 technology conference in San Diego Foreign Policy. uploaded their photos only to see them tagged as being taken at the San Diego County jail. Flickr allows users to correct the geographical data that the company’s software provides, but that creates its own set of problems. London J a n ua ry | F e b r ua ry 2 0 0 9 93

Answers to the FP Quiz increased from 0.5 metric tons in 2000 to 15 metric tons in 2006. And these numbers surely underestimate the extent of trafficking due to unreported data (From page 30) and weak law enforcement. 1) C, Nigeria. Hollywood may produce all the blockbusters, and India’s Bollywood 5) B, 24. Almost all countries without regular military forces, such as has the market cornered when it comes to song and dance, but Nigeria’s Liechtenstein, Iceland, and Samoa, are landlocked or island countries with small Nollywood rakes in cash by churning out low-budget, direct-to-video flicks. populations. But also on the list are Costa Rica, whose constitution prohibited Movies are filmed in less than two weeks for about $10,000 to $25,000, edited in the armed forces in 1949 in the wake of its civil war; Haiti, whose then presi- a day or two, and sold dirt cheap by street hawkers. With 2,400 films produced dent, Jean-Bertrand Aristide, demobilized the army in 1995; and Panama, which every year, the movies pull in nearly $290 million in revenue across Africa. abolished the military in 1990. 2) B, 7. The greenback may be weak, but it is still the official currency in 6) C, 61. Using NASA satellite data and estimates of the number of trees East Timor, Ecuador, El Salvador, the Marshall Islands, Micronesia, Palau, typically found in different environments, an ecologist at Evergreen State and Panama. Guatemala permits use of the dollar and other currencies, College in Washington state has calculated that in 2005, there were approxi- but businesses aren’t required to accept them. Meanwhile, the U.S. dollar mately 400 billion trees on Earth. Divided by a world population of 6.5 billion is the de facto currency in many other countries, such as Cambodia, Cuba, people at the time, that’s 61 trees per person. and Liberia. 7) B, 12. Women served as the heads of just 12 of the world’s top 500 cor- 3) C, 42 percent. As wild fish stocks are overexploited worldwide, the porations last year. The group includes Angela Braly of health insurer percentage of farmed seafood is predicted to rise to more than half of the WellPoint, Patricia Woertz of Archer Daniels Midland, and Indra Nooyi of world’s total in the next decade, according to the Worldwatch Institute. PepsiCo. And though having women in the corner office of just 2 percent of Presently, the most farmed seafoods are those that are low on the food chain, the world’s top businesses is hardly news to celebrate, signs point to an such as carp, tilapia, and shellfish. China produced a whopping 70 percent of increasing number of cracks in the glass ceiling. In 2005, just six of the top the world’s farmed seafood in 2004, the most recent year for which figures 500 companies were led by women. are available. The world’s top 10 countries for aquaculture are all in Asia, except No. 10, Chile. 8) B, Yomiuri Shimbun. With a circulation of 10 million, Japan’s Yomiuri Shimbun is the world’s most-read newspaper, according to the World 4) C, 30 times. West and Central African countries such as Ghana and Guinea- Association of Newspapers. Germany’s Bild ranks as the No. 4 paper with 3.5 Bissau have become increasingly popular transit points for cocaine trafficked million in circulation, and China’s People’s Daily comes in at No. 9 with 2.8 mil- from South America to European countries such as Portugal and Spain. lion. Of the world’s top 10 newspapers, five are from Japan, perhaps because According to the 2008 U.N. World Drug Report, seizures of cocaine in Africa Japanese newspapers typically put just 20 percent of their content online. 94 F o r e i g n P o l i c y

[ ]Missing Links Continued from page 96 This crisis of confidence comes as credible economists are urgently needed to deal with Continuing to assume, for example, that cor- other nefarious consequences of the crash. Con- porations always behave as profit maximizers sider the alarming concentration of the finan- and dismissing the importance of the self-interested cial industry. As banks and other companies go behavior of their unaccountable managers will out of business or are absorbed by their rivals, become much harder after this crash. Prolonged only a handful of giant corporations remain good times encourage bad habits and compla- with a disturbing concentration of assets and cency not only among corporations and con- overall market share. Bank of America is now sumers but also among economists. The crash the bank for about half of all American fami- will stimulate creativity and the new thinking lies. Globally, Citigroup and ubs have been that comes from recognition of failure; the years deeply damaged, allowing JPMorgan Chase to ahead are bound to replenish the intellectual cap- become a largely unchallenged behemoth. Typ- ital on which economists base their influence. ically, such markets with a few large players are vulnerable to collusion and other anticompet- Certainly, the intellectual failures and the pol- icy mistakes that led to the Great Depression pro- Deregulation does not always lead to reckless behavior, and financial derivatives are not always a scam. duced a surge of innovative economic thinking. itive practices; in such a world, it’s the cus- Thanks to the insights of John Maynard Keynes tomers who suffer. and others, governments now know that battling a crisis with tight money, spending cuts, and trade Competition is also being inhibited by financial barriers fuels the economic fires instead of dousing protectionism. While economists worry that the cri- them. So, they’ve put in place humongous bailouts sis will spur countries into raising barriers to inter- and even larger fiscal stimulus packages that we are national trade in goods, significant restrictions on all hoping will work. If they do, economists will international financial integration have already earn back some of their tarnished reputation. been quietly created in recent months. Trade pro- tectionism is a risk; financial protectionism is Regaining intellectual respectability will be already here. The measures governments are tak- sorely needed to reverse some of the bad policy ing to salvage banks and buttress their financial sec- ideas that are gaining currency in the present cri- tors have the side effect of making it very hard for sis. Deriding deregulation, for example, is com- newcomers to compete with existing players. monplace in the new blame game; so is bashing Unfortunately, lessened competition is one of the the rise of risk-spreading financial instruments. But costs we will all be paying for years to come. economists know that deregulation does not always lead to reckless behavior and that financial Worrying about this collateral damage while derivatives are not always a scam. No matter. In the fire is still burning might seem a diversion. But many influential circles, saying that credit-default it is worth remembering that our current mess swaps can be beneficial or that deregulation can was caused in large part by the “solutions” used lift people out of poverty is now sacrilegious. It to minimize the end of the dot-com bubble, the will take years for the pendulum to swing back Asian financial crisis, and other crashes. These to a desirable middle ground between the exces- economic maladies were “cured” using medicines sive and damaging deregulation of the past that weakened the patient and brought us the cur- decade and the equally damaging regulatory rent catastrophe. We did not have a Keynes to alert exaggerations that we are bound to see in us to the toxicity of the cure. Let’s hope that we response to the justified indignation over the will soon get one—or many—of his successors, not catastrophe. Economists can help in this rebal- only to bail out their profession but, more impor- ancing, but their current disrepute undermines tantly, to save us from a new crisis created by the their ability to persuade an angry public that solutions to this one. they know what they are talking about. Moisés Naím is editor in chief of Foreign Policy. J a n ua ry | F e b r ua ry 2 0 0 9 95

[ ]M I S S I N G L I N K S An Intellectual Bailout We must add another field to the list of those in need of rescuing— economics itself. By Moisés Naím The financial crisis has killed the claim that eco- nomics deserves to be treated as a science. The measure of a science is its capacity to explain, predict, and prescribe. And most economists not only failed to anticipate the nature and evolution of the catastrophe, but their conflicting recommen- almost as soon as it was made. The fault lies less dations on how to stabilize the situation with Bernanke for trying to calm the markets exposed the unreliability of their knowledge. As than with the accumulated body of economic much as Wall Street and Main Street, the eco- knowledge that failed miserably to equip him nomics profession needs a bailout of its own. and other policymakers with more reliable tools to anticipate and navigate the crisis. Policy gyrations and faulty calls have revealed that economics itself is in crisis: The So, along with banks and brokerages, mort- experts simply have no idea what to do. No less gage holders and emerging markets, it’s time to an expert than U.S. Federal Reserve Chairman add another rescue effort to the list—for eco- Ben Bernanke repeatedly declared the worst was nomics itself. This intellectual bailout will force over, only to admit with chagrin much later that economists to revise the models and methods “I and others were mistaken early on in saying unquestioned during the boom years. It will that the subprime crisis would be contained.” As force them to produce new tools suited to a recently as mid-November, Bernanke told the new era and reinvigorate their thinking by bor- U.S. Congress that he thought the measures that rowing more intensively from other disciplines, had been taken “appeared to stabilize the situ- such as psychology and political science. ation,” a pronouncement that proved wrong Continued on page 95 FOREIGN POLICY (ISSN 0015-7228), January/February 2009, issue number 170. Published bimonthly in January, March, May, July, September, and November by Washingtonpost.Newsweek Interactive, LLC, a subsidiary of The Washington Post Company, at 1779 Massachusetts Ave., NW, Washington, DC 20036-2109. Subscriptions: U.S., $24.95 per year; Canada, $36.95; other countries, $42.95. Periodicals postage paid in Washington, D.C., and at additional mailing offices. Postmaster: Send U.S. address changes to FOREIGN POLICY, P.O. Box 474, Mt. Morris, IL 61054-8499. Return undeliverable Canadian addresses to: P.O. Box 503, RPO West Beaver Creek, Richmond Hill, ON L4B 4R6. Printed in the USA. 96 F o r e i g n P o l i c y

HHXspFJfÖSOfHoF At the core of every U.S. nuclear reactor is low www.usec.com enriched uranium fuel. As America’s only producer of low enriched uranium, USEC plays a critical role in generating this clean, reliable source of electricity. Today, USEC is deploying an advanced, energy-efficient technology that will reduce the amount of electricity needed to enrich uranium by 95 percent, making nuclear power an even greener solution to our energy challenges. Best of all, our American Centrifuge machine’s components will be manufactured by U.S. companies, providing thousands of quality jobs in Ohio, the location of the American Centrifuge Plant, and more than a dozen other sites across the country.