Israel has a comparative advantage in medical care and specifically in treating trauma victims, which comes not only from its advanced human capital, especially in technology and health care, but also from vast experience treating victims of terror and war.  Read the NYTimes article  published yesterday on the subject.  Israel has been treating Haiti’s earthquake victims in its mobile tent hospitals set up in the last week in the impoverished Caribbean nation. 

The Times article discusses the ambivalence Israelis are experiencing, concerned about how they treat Palestinians in Gaza, while offering help to Haitians.  There is a difference.  Rockets have rained down on Israeli towns from Gaza for years, where Hamas was elected to office not long ago and where IDF Staff Sgt. Gilad Shalit, 23 years old, has been held hostage for over 3 1/2 years.  Read the hate for Israel contained in the Hamas Covenant to understand the difference between helping Haitian earthquake victims and maintaining a blockade of the Gaza Strip.  This document has been translated and published at the Yale Law School’s Avalon project, where you can go as well for a fairly full documentary history of the Middle East conflict (1916-2010).

Much news and commentary you hear about the State of Israel has to do with geopolitics and the Arab-Israeli conflict (see my colleague Ben Moscovitch’s blog on this site for a nice selection.)  Settlements, will Abbas run or not, Iran’s plans to wipe Israel off the map, Israel’s thoughts about taking military action against Iran, the Goldstone Report on the war in Gaza, films about the war in Lebanon, and on and on. 

Not that this hyper-news about Israel is not important and interesting.  But, let’s step back and look at Israel from a “rising power” perspective — half highly indebted socialist country/half cutting-edge hi-tech and health sciences capitalist upstart.  Its economy has proven itself resilient to the intifada, to the tech bust of nearly a decade ago, and now to the US-led global meltdown. 

How so?  It’s about policy, stupid.  Sound economic policy, begun in the 1980s with a classic monetary stabilization program that reduced inflation, and deepened only a few years ago, by none other than Benjamin Netanyahu, as finance minister, with his Thatcherite restructuring of the economy (e.g., increasing the labor force participation rate by creating incentives for the religious to work) and his shift to a rules-based fiscal policy.  Israel still has a high government debt burden – above 80% of GDP.  But that is down from above 100% not long ago.  Meanwhile the rest of the world has caught up to Israel’s debt levels (with the U.S. now surging higher). 

On the external front, the country couldn’t look better – $60 billion in foreign exchange reserves, a current account surplus, and ”net external creditor” status, that is, Israel’s claims on foreigners exceed foreigners’ claims on Israel (oh, how the U.S. would love to have that balance sheet!)

So, in spite its modest size, constrained by the country’s small population, the Israeli economy dwarfs those of many of its much poorer and poorly run neighbors.  Have a look at the Fitch press release below referencing a recent report on Israel and its sovereign credit outlook.

Fitch Affirms State of Israel at ‘A’/'A+’; Outlook Stable   
06 Nov 2009 8:22 AM (EST)

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Fitch Ratings-London-06 November 2009: Fitch Ratings has today affirmed the State of Israel’s Long-term Foreign and Local Currency Issuer Default Ratings (IDR) at ‘A’ and ‘A+’ respectively with Stable Outlooks. The Short-term Foreign Currency IDR is affirmed at ‘F1′ and the Country Ceiling at ‘AA-’.

“Israel has fared better than many other small, open economies in the recent global economic and financial downturn, suffering only a mild recession compared to rated peers in Europe and Asia,” says Paul Rawkins, Senior Director in Fitch’s London-based Sovereigns team. “Nonetheless, the downturn has exposed Israel’s key vulnerability to shocks, namely a high public debt ratio that looks set to exceed 80% of GDP in the wake of wider fiscal deficits in 2009-10.”

Fitch says an improved macroeconomic policy framework, coupled with structural reforms since the last recession in 2001-02, laid the foundations for strong growth in 2004-08, in line with the ‘A’ median of 5%, rendering the economy markedly more resilient to shocks. With the exception of Bahrain, China and Poland, Fitch expects Israel to be the only country in the ‘A’ range to escape an outright recession in 2009. This performance is attributed largely to aggressive monetary and exchange rate policies, aided by a relatively trouble-free banking sector and an absence of asset price bubbles. Structurally, Israel’s high-tech manufacturing and services sectors have proved unexpectedly resilient to declining global investment demand, presaging a near record current account surplus in 2009.

Israel’s high public debt ratio remains the key constraint on its sovereign ratings. The adoption of rules-based fiscal policy in the wake of the last recession has served Israel well; limits on the growth of public expenditure and a ceiling on the state (i.e. central government) deficit facilitated a contraction in general government debt to 78% of GDP at end-2008 from a peak of 100% in 2003. Even so, this ratio remains high relative to the peer group median of 37%, although it is not the most extreme (’A-’ rated Greece exceeds 100% of GDP). Moreover, considering the mildness of its recession and an absence of financial sector-related support, the current external shock has taken a heavy toll on the public finances, chiefly on the revenue side. Fitch expects Israel’s general government deficit to widen to 6%-7% of GDP in 2009-10, on a par with rated peers Malaysia and the Czech Republic, which have experienced much steeper recessions, while pushing general government debt up to over 84% of GDP by end-2010.

While Israel’s experience with fiscal rules has been mixed, the current framework has entrenched fiscal discipline and together with signs of a strong economic recovery, suggests Israel’s powerful public debt dynamics could reassert themselves by 2011, forestalling any further deterioration in the public debt/GDP ratio. The government envisages a sharp narrowing in the state deficit to 3% of GDP in 2011 (from 6% in 2009), but still hopes to adhere to tax cuts over the medium term. Fitch expects some revision to the fiscal rules, with greater prominence being given to the Maastricht public debt/GDP ratio of 60% of GDP. From a rating standpoint, a positive rating action would require a decline in the debt/GDP ratio to a level nearer to the ‘A’ median. Conversely, a prolonged rise in the debt/GDP ratio and/or sustained fiscal easing would prompt a negative rating action.

Externally, the Government of Israel became a net external creditor for the first time in 2008, although it still falls short of ‘A’ norms on this measure. Burgeoning international reserves - these have more than doubled to USD60bn since end-2007 - have been the key factor behind this status change for the sovereign, facilitated by a strong current account surplus and buoyant net capital inflows. The economy as a whole also passed a new milestone in 2008, registering a surplus of external financial assets over liabilities for the first time. Israel expects its standing on the international stage to be further enhanced by OECD membership in the near future.

Contact: Paul Rawkins, London, Tel: +44 (0) 20 7417 4239; Richard Fox, +44 (0) 20 7417 4357

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email:  peter.fitzpatrick at fitchratings.com.

Additional information is available on www.fitchratings.com.

Great op-ed by Aluf Benn, diplomatic editor/correspondent for Haaretz, in today’s NYTimes.  He asks, Where has Obama been on Israel?  Why hasn’t he spoken to Israelis directly, the way he has addressed everyone else from Ghanaians to Egyptians, Europeans to Latin Americans?  For sure, he is really busy, probably busier than any other president since FDR.  As he himself has emphasized, there is the bank bailout, the trillion dollar fiscal stimulus, two wars (one to wind down, one to wind up), a failing state (Pakistan), and health care reform (is that really necessary right now?), not to mention the controversy over the arrest of a Harvard professor who is a friend of his.  Yet he has said he is the one who can untie the Gordian Knot of the Arab-Israeli conflict by the power of his personality and the credibility he has in the Muslim world.  Well, Aluf Benn argues that he is losing credibility with Israelis, a key player in the conflict.  Moreover, he points out something important and elusive to most world leaders.  The difference between playing to American Jews and playing to Israelis.  You don’t have to go on and on about the Holocaust and link it to the Arab-Israeli conflict to placate Israelis.  Just visit Yad Vashem and then deal with the here and now.  American Jews are more interested in politicians reiterating their angst about the Holocaust than are Israelis.  Israelis prefer to hear about a plan to deal with Iran’s emerging nuclear weapons capability, about Hamas rockets in the south and Hezbollah rockets in the north, and about Israel being recognized as a Jewish state by the Muslim world.  Have a read…

 

Well, actually, Israel has several points of view.  The one expressed by Netanyahu is just one of them.  Nevertheless, in the “dialogue of civilizations” launched by expert bridge-builder Barack Obama in Cairo earlier this month, when he raised the Arab-Israeli conflict as an obstacle to dialogue, one voice was not heard.  Israel’s.  It’s like negotiating an end to the global financial crisis without inviting China.

Benjamin Netanyahu is no Barack Obama.  He is no Shimon Peres.  He lacks their diplomatic skill.  I have had extensive meetings with him on a number of occasions, and found him to be a man enthused with his own self-importance.  Just like Barack Obama and Shimon Peres, but a lot less charming.  What a discovery?  Political leaders are vain.  Yet Netanyahu proved an effective leader as Israel’s finance minister, freeing up the economy to realize its potential.  Can he be an effective and visionary prime minister his second time around?  This speech falls short of the mark.

What Netanyahu did in his speech yesterday (see text) was to say, Wait a minute!  Listen to our point of view! 

Obama made efforts to recognize the Arab narrative in his speech in Cairo.  He recognized the Jewish narrative in part by discussing the Holocaust.  Netanyahu gave voice to another part of the Jewish narrative – the claim to the land in Israel.

But the Arab reaction has been sour.  Mubarak is angry, saying that the requirement that Palestinians acknowledge Israel as a Jewish state, a cornerstone of Netanyahu’s speech, “scuttles the chances for peace,” and that no one in Cairo will answer the phone when Netanyahu calls.

It’s not a very radical idea.  Given the Arab insistence on the “right of return” of Palestinian refugees to Israel, an act that would destroy Israel as a Jewish state, it’s not asking a lot.  The Arab Peace Initiative of 2002, which Obama and some Israeli leaders have applauded, called for a just solution to the refugee problem, according to U.N. General Assembly Resolution 194, which many insist calls for a right of return (”Resolves that the refugees wishing to return to their homes and live at peace with their neighbours should be permitted to do so at the earliest practicable date…”)

Arguably, Obama’s conciliatory speech in Cairo opened the door for this sharp Arab reaction to Netanyahu’s speech.  Bush pushed the Arabs to accept Israel’s narrative; Obama is pushing Israel to accept the Arab narrative.  Obama may have inadvertently created huge expectations on the Arab street for Israeli concessions.

There is a deal to be had in the Arab-Israeli conflict.  But both sides have to make concessions.  The deal is:  the dismantling of most West Bank settlements in exchange for Jerusalem.  Israel gets sovereignty over Jerusalem – because no cities, including Berlin, remain divided over the long term – with substantive measures to ensure that Muslim/Palestinian interests in Jerusalem, especially around the holy sites, are overseen by Muslims and Palestinians, much as the Ottomans allowed the French and Russians to oversee their holy sites in centuries past.  In exchange, Israel dismantles most West Bank settlements, forcing tens of thousands, perhaps over a hundred thousand Jewish people to relocate inside Israel behind agreed borders.  As George Bush agreed to, some Israeli settlement blocks, major cities in place for over forty years, generally in and around Jerusalem and very close to the Green Line, perhaps representing some eighty thousand people, will remain as part of Israel.  The Palestinians get a viable, contiguous state in the West Bank with transportation links to Gaza.

That is a deal in which both sides make concessions.  The Arab Peace Initiative demands one-sided concessions from Israel in exchange for the Arabs agreeing not to make war.  It’s like Vito Corleone making you an offer you can’t refuse.

The only problem with the Jerusalem-for-Settlements idea is that Palestinians, Arabs and Muslims will never go for it.  It’s become too emotional a part of their narrative.  Jerusalem is the third holiest city of Islam.

Putting aside such discussions of what is fair, the key question in all of this is, Whose side is time on?  Given demographic realities, it seems that time is on the Arab/Muslim side.  Peres and others on Israel’s left acknowledge this, which has underpinned their efforts to move quickly to a negotiated settlement.  The right in Israel emphasizes their neighbors’ weaknesses – economic and political — and argue that time is on Israel’s side, a potentially risky misconception. 

Netanyahu, spokesman of the right, basically said in his speech, Here is our position; now come to us.  He has adopted the Arab strategy:  stake out a hard line and let others begin concessions.  Netanyahu has stood up to Barack Obama, maybe not the last foreign leader to do so.  Read Jeffrey Goldberg for insight into how Mr. Netanyahu thinks.

Politics in Israel is dysfunctional, leaving that nation bereft of visionary leadership.  It takes so much effort to make and hold coalitions together there, that politicians have little time for policy making.  Political reform is needed, included raising the minimum for parties to be seated in parliament.  The religious parties must be folded into larger groupings.  If things remain as they are, Israeli leaders will miss opportunities, and for tiny Israel with so few friends in the world, this could be an existential threat.

Photo:  Benjamin Netanyahu, Israel’s Prime Minister.   Source:  www.yglesias.thinkprogress.org

2,000. The United States spends nearly $2,000 a person on defense and accounts for over 40 percent of global military expenditure. Yesterday, the Stockholm International Peace Research Institute released its annual yearbook on arms and international security. Worldwide defense spending reached $1.46 trillion in 2008, up four percent from 2007 and 45 percent since 1999. Even though the US accounted for the bulk of the increase, it’s not alone.

“The Yearbook shows that the USA accounted for the majority (58%) of the global increase between 1999 and 2008, with its military spending growing by $219 billion in constant 2005 prices over the period. Even so, it was far from the only country to pursue such a course. China and Russia, with absolute increases of $42 billion and $24 billion respectively, both nearly tripled their military expenditure over the decade. Other regional powers – particularly India, Saudi Arabia, Iran, Israel, Brazil, South Korea, Algeria and the UK – also made substantial contributions to the total increase.

“‘The idea of the “war on terror” has encouraged many countries to see their problems through a highly militarized lens, using this to justify high military spending,’ comments Dr Sam Perlo-Freeman, Head of the Military Expenditure Project at SIPRI. ‘Meanwhile, the wars in Iraq and Afghanistan have cost $903 billion in additional military spending by the USA alone.’”

Image from the Economist.

  

President Obama’s speech to the Muslim world today, titled “A New Beginning,” was at its best when it explained the grievances of both sides of the Muslim/non-Muslim divide, but much less effective when it dealt with substantive issues, such as Iran’s acquisition of a nuclear weapon. 

Like he did so powerfully for Americans in his famous speech on race of March 2008, President Obama in this speech exhorted the citizens of Planet Earth to bridge our differences, understand each other better, and solve our common problems peacefully.  I applaud his effort at launching a new beginning between what he calls Muslim-majority nations and the rest of the world, especially the United States, in order to build a peaceful “alliance of civilizations.” Barack Obama, in his now-famous speech on race (“A More Perfect Union”), drew tens of millions of Americans to his movement, even though arguably he failed to adequately explain his association with his pastor, whose comments had offended Americans and precipitated the speech.  Nevertheless, this kind of speech, which the president is so good at, can work well.  It helped get him elected; and, he believes the power of his personality can solve Huntington’s clash of civilizations.

In spite of the hubris underlying Movement Obama’s appeal to our better angels (his predecessors were incapable of the moral transformation this singular man and his team believe they can accomplish), we all hope it works.  It is foolish to cynically dismiss such important, yet elusive, building blocks of civilization as legitimacy that can win over hearts and minds to good causes.  Charismatic moral leadership can help us pitiful humans stop the slaughter and evolve.   Yet it is likewise naive, though emotionally satisfying, to discount the risks of disillusionment that underlie a phenomenon such as Barack Obama.

The president outlined seven key issues that Muslims and the West must address: the violence of extremists, the Arab-Israeli conflict, nuclear weapons, democracy, religious freedom, women’s rights, and economic development.  He definitely covered the major issues, though some of them, while not unimportant, appear more the product of a Democratic focus group, or more accurately, an effort to please a number of constituencies, than issues really critical to a new beginning of peace and cooperation between the West and the Muslim world.  I’ll let the reader decide which ones should be high on the priority list.

Here is a transcript of the speech, but it is worthwhile to have a look at what he said specifically about nuclear weapons and Iran.  Of note is how short this section was, especially when compared to issue number two, the Arab-Israeli conflict.

“The third source of tension is our shared interest in the rights and responsibilities of nations on nuclear weapons.

This issue has been a source of tension between the United States and the Islamic Republic of Iran. For many years, Iran has defined itself in part by its opposition to my country, and there is indeed a tumultuous history between us. In the middle of the Cold War, the United States played a role in the overthrow of a democratically-elected Iranian government. Since the Islamic Revolution, Iran has played a role in acts of hostage-taking and violence against U.S. troops and civilians. This history is well known. Rather than remain trapped in the past, I have made it clear to Iran’s leaders and people that my country is prepared to move forward. The question, now, is not what Iran is against, but rather what future it wants to build.

It will be hard to overcome decades of mistrust, but we will proceed with courage, rectitude and resolve. There will be many issues to discuss between our two countries, and we are willing to move forward without preconditions on the basis of mutual respect. But it is clear to all concerned that when it comes to nuclear weapons, we have reached a decisive point. This is not simply about America’s interests. It is about preventing a nuclear arms race in the Middle East that could lead this region and the world down a hugely dangerous path.

I understand those who protest that some countries have weapons that others do not. No single nation should pick and choose which nations hold nuclear weapons. That is why I strongly reaffirmed America’s commitment to seek a world in which no nations hold nuclear weapons. And any nation - including Iran - should have the right to access peaceful nuclear power if it complies with its responsibilities under the nuclear Non-Proliferation Treaty. That commitment is at the core of the Treaty, and it must be kept for all who fully abide by it. And I am hopeful that all countries in the region can share in this goal.”

He alludes to the differing perceptions underlying the mistrust between Iran and the West.  He points out  the danger of a nuclear arms race in the region.  And, as he does throughout the speech, he portrays himself as someone who, unlike his predecessors, understands the other side’s point of view.  He understands Muslim frustration over the fact that some countries are allowed to have nuclear weapons, while others are not. 

What is missing in this speech is anything Churchillian.  What is missing is realism…for example, a statement that the U.S. is determined to prevent the acquisition of nuclear weapons by unstable or radical regimes, be they Muslim or not.  The risk of the Obama phenomenon is that his extended hand and emotional understanding will not be backed up by a steely determination to oppose dangerous regimes.  True, he takes a stab at this in his remarks about Al Qaeda and extremism.  However, just as it was nearly impossible for Bush to establish moral authority, it will be challenging for Obama to convey strength and determination, and to inspire respect and, yes, fear among America’s adversaries.  I understand he was addressing Muslims, but still there were no unequivocal statements against the Iranian acquisition of the bomb.  

He acquiesced to the Arab narrative in many ways.  The most salient example was his putting the Arab-Israeli conflict, or as he termed it, “the situation between Israelis, Palestinians and the Arab world,” as one of his seven key issues causing tension in the region.  It sure is, but why not the India-Pakistan conflict over Kashmir?  The Shia-Sunni divide was noted, but not as a key cause of tension.  Genocide in Darfur was not mentioned.  Saudi Wahhabism and other sources of extremism in Muslim education were not mentioned. 

The Arab narrative suggests that everything nasty that happens in that part of the world is linked to, if not caused by, Israeli actions vis-à-vis the Palestinians.  Never mind how the rest of the Arab World has treated the Palestinians, refusing to settle these refugees in neighboring countries, the way India and Pakistan settled Hindu and Muslim refugees after their 1948 conflict.  What’s more, the language about Israeli settlements was harsher in this speech than in the past.  The United States does not accept the legitimacy of settlements, and the settlements must stop.  This is quite different from Bush’s statement that after forty years of conflict, forty years of woeful Palestinian (and in most cases, Arab) leadership, some of Israel’s settlements have become a reality on the ground and the subject of negotiation.  Of course, Obama may turn around and tell the Israelis he was only talking about the “growth” of settlements, not the full dismantling of all settlements.  The Obama administration has asked the Israeli government for clarification of its views on settlements, when “clarify” is exactly what Team Obama needs to do on this issue.   

Nevertheless, all in all, it was a valiant effort on the part of President Obama.  I hope he can engender understanding and cooperation through the power of his personality.  His administration has orchestrated this overture to the Muslim world quite well.  The president argued as much in his speech.  He has stuck it to Israel on settlements.  He is pulling out of Iraq. He has called for all nations in the region, and in the world, to give up nuclear weapons.  He is giving humanitarian aid to Pakistan and Afghanistan.  He is launching educational and economic initiatives in the region.  This is the change he offers from Bush’s bluster.  And, he says, the Arab world must do its part.  I hope it works.  

 

 

A lot is going on in the Rising Powers at the moment, so why not begin the week with a survey of key developments and important news articles? 

On China, there was an excellent article by David Leonhardt in the New York Times Magazine, explaining quite clearly the symbiotic linkages between the economies of China and America and the challenging tasks both governments face to correct the imbalances in trade and finance that have underpinned the current global financial crisis.  I applaud Leonhardt’s mentioning Ben Bernanke’s past and present near-blaming of America’s debt-driven trade deficits on China’s savings glut.  I first heard Bernanke make this argument at a Merrill Lynch dinner in 2005 where he was keynote speaker and was angling to be Bush’s nominee for Fed chairman.  According to Bernanke, then Chairman of the Council of Economic Advisers, America’s twin deficits were not the problem; abysmally low American household savings were not the problem.  It was the global savings glut that kept interest rates low in the U.S.  Global capital sought the superior returns of U.S. assets.  It was up to other countries like China to adjust, not the U.S.  The Special of the Day at the Federal Reserve dining room these days is crow.

I disagree with one point made in the Leonhardt article.  He quotes China expert Nicholas Lardy saying that China’s massive current account surpluses were accidental; the Chinese “fell into it.”  As head of Asian Sovereign Ratings at a global rating agency during the Asian financial crisis of the late 1990s, I recall Chinese officials observing the financial dominos falling all over Asia at that time.  They saw governments, from Korea to Thailand, failing to follow a policy of targeting higher foreign exchange reserves.  As a result, I believe the Chinese became determined to run up their surpluses and to bank them, so as never to go hat in hand to the IMF like their neighbors had to do.

Also on China, a Foreign Affairs article called “The G-2 Mirage,” penned by Elizabeth Economy and Adam Segal, argues that prospects for the G-2 cooperatively managing world affairs are not great, given conflicting values and goals, even less so now that Obama is in power.  I heard Economy argue this point in a political salon I attended.  In contrast to Bush, Obama’s team will stress with China reducing greenhouse gases and improving human rights, which could get in the way of coordinating economic policies and solving problems around the world, notwithstanding the best intentions of Tim Geithner.

On an optimistic note regarding China, in a world where relations between (and within) states have been deteriorating (whether it is in Pakistan and Afghanistan, between Russia and NATO, or between Iran and its neighbors), it is encouraging to see China and Taiwan improving relations.  An Economist article discusses the announcement in late April by China Mobile that it would buy a Taiwanese mobile operator.  Taiwanese capitalists have long invested in the Mainland, but Taiwan has restricted Mainland investment in its economy.  With its economy now faltering, Taiwan has liberalized its investment rules vis-a-vis the Mainland.  This is part of a mutual thawing of relations since Taiwanese President Ma Ying-jeou of the KMT party, which advocates closer cross-straits relations, replaced the controversial President Chen Shui-bian, of the pro-independence DPP party, last year. Yet the Taipei Times reports that Sunday tens of thousands of protesters took to the streets of two Taiwanese cities to show anger at President Ma’s pro-Beijing policies.  Organizers had hoped for hundreds of thousands.

In India, contrary to what most pundits had expected, the incumbent Congress Party did very well in national elections and will easily form the next government.  It seems Indians voted for who they believe will run the economy and look after the poor best, not who will take the hardest line on terrorism (the BJP).  Likewise India’s smaller and regional parties had a poor showing overall.  I argued in an earlier post that an election resulting in political fragmentation, characterized by a surge of support for the smaller parties, could lead to higher government deficits and debt.  Let us see if a government dominated by the Congress Party can fulfill its election promises without a deterioration in sovereign creditworthiness.  What is clear is that President Singh is now a giant on the Indian political scene, much like Barack Obama; and, with a likely 260 seats, he needs just 12 more from other parties to govern.

Prime Minister Netanyahu of Israel will meet Monday with President Obama in Washington.  A must-read ahead of this meeting is a NYTimes op-ed by Jeffrey Goldberg, correspondent for The Atlantic, in which he explains what motivates Netanyahu and the consequent challenges Obama will face in dealing with him.  I had extensive meetings with Netanyahu over the years he was finance minister, and there is nothing in Goldberg’s piece that I would disagree with. While it would not be correct to say there has been a deterioration in relations between the U.S. and Israel since the election of Obama in November and Netanyahu in February, the expectation is that they will not see eye-to-eye in the same manner Bush and Olmert did.  However, an AP article quotes Defense Minister Barak suggesting that Netanyahu, who has lowered expectations about his appetite for negotiations with the Palestinians, will reaffirm his country’s commitment to a two-state solution.  This will be a sort of “gift” to Obama, but will there be a quid pro quo?  A commitment to heavier sanctions on Iran on the part of America?  How can Obama promise that?

In the presidential election in Iran, reformist candidates have been knocking Ahmadinejad for denying the Holocaust and ruining relations with the West.  If there is any hope that a reformist can win in Iran with Khamenei lurking behind the scenes, would this presage a détente with the West?  The trouble with this hope is that it may in fact be the case that both reformists and hardliners in Iran are intent on building a nuclear weapon.  Perhaps the only way to stop one, therefore, if that is what in fact the West wants to do, is to sharply curtail the country’s access to petroleum markets worldwide, which is a highly unlikely event.

And in Pakistan, the UN estimates one million people have fled their homes, due to fighting between the government and the Taliban.  Likewise U.S. targeted killings continue, with criticism, including in this country, mounting.  And, a New York Times article on Sunday quoted Admiral Mike Mullen, the chairman of the U.S. Joint Chiefs of Staff, confirming that the government of Pakistan is rapidly expanding its nuclear weapons arsenal.

In Brazil, hundreds of thousands remain homeless after floods ravaged the northeast, and the government is being criticized for not doing enough, reminiscent of criticism of the Bush administration after Hurricane Katrina.

And Friday, Russia and other nations could not agree on a proposal to extend peacekeeping monitors from the Organization for Security and Cooperation in Europe to stay in Georgia beyond June 30.

The world takes one step forward and two steps back…

One of the under-the-radar news stories these past several weeks has been mysterious indirect negotiations between American and Iranian officials regarding Tehran’s nuclear program. The Iranian nuclear program is worrisome to most western powers not because it would provide Iran with an alternative power source, but because if Tehran were to convert its civilian-level nuclear capabilities and enrich uranium to weapons-grade quality, it could obtain nuclear weapons. This in turn would throw off the entire balance of power in the Middle East, which is currently dominated by only one (unofficial) nuclear power: Israel.

Iran has shown a growing influence in recent years and has proven itself to be a star regional rising power. For evidence, look no farther than its support for Hezbollah and Hamas, its close ties with Syria, its commandeering and confusing relationships with Gulf States, its participation in Caspian politics, its perseverance in creating a gas cartel with Russia and Qatar, its development of the India-Pakistan-Iran Pipeline, and its ambiguous and mysterious dealings with internal Afghan affairs. While neither an Arab nor a Sunni-led nation, Iran has become a beacon of hope for many in the Sunni-Arab street. Iran also can be admired for its relatively developed democracy (in comparison with many of its neighbors), its emphasis on women’s education, and a high literacy rate. Iran is clearly rising, and that is certain cause for worry among those concerned with a regional balance of power.

Of course, the most worried party in the whole intricate web is Israel. In the eyes of many, a nuclear Iran would mean an “existential threat” to Israel. (However, on a side note, a report released today by Israeli military authorities says that Iran currently poses a “a substantial but not existential threat” to Israel due to its emphasis on missile technology. Read more here.) Many Israeli leaders have issued repeated and continued threats against Iran, saying that it would perform preemptive strikes on any Iranian nuclear facility with or without US approval. Israeli fighter jets have been seen as far as Gibraltar (the distance from Israel to Gibraltar is roughly the same distance as Israel to Tehran), and Israeli Foreign Minister Avigdor Lieberman and Prime Minister Binyamin Netanyahu have been particularly clear in expressing their hawkish views.

Given the US’ new and more hardliner stance on Israel as evidenced by Vice-President Joe Biden’s statements at the AIPAC summit in Washington last week calling for no exceptions to a two-state solution including the dismantling of West Bank settlements, some predict a growing clash between Israel and Washington. Lieberman, who has been appointed as leader for strategic dialogue with this US and is well known for his stance on Israeli nationalism, stated last week: “For us it is important to underline that the greatest problem at the moment in the Middle East is Iran; an Iran that is becoming nuclear and is becoming, or has already become, a destabilizing factor for the entire world”. Read more here. Netanyahu, coming to Washington this week to sit down with US President Barack Obama, also visited Egypt, reportedly, among other issues, in an attempt to win Cairo’s support against Iran and its nuclear ambitions.

Indeed, it is the nuclear issue, much more than the elusive topic of Palestinian statehood, that has appeared to be most controversial between Israel, the US and Iran. And the issue took a new turn last week when US Assistant Secretary of State and nuclear negotiator Rose Gottemoeller stated at the UN that all nations must abide by the Non-Proliferation Treaty (NPT), including Israel, India, Pakistan and North Korea, which have not signed the agreement. The NPT is one of the few international documents that seek to curtail the limits of nuclear technology and prevent the spread of nuclear arms. For various reasons, largely due to diplomatic immunity provided by the US and its allies, Israel, India and Pakistan have become nuclear weapons states without signing the NPT. As the UN meets to revamp the NPT, it only makes sense that some nations should call for complete international adherence to the treaty. However, it was unexpected that the US would lead the call, especially against its staunch ally Israel.

So what’s going on? Some analysts and pundits suggest that the posturing and hardened stance by the US against Israel is part of a strategic plan by the Obama Administration to placate Iran to a certain degree so that it can enter into talks regarding Tehran’s nuclear program. Given the Obama Administration’s attempts to create venues to meet with Iranian diplomats (such as at the Shanghai Cooperation Organization summit in Moscow, a UN meeting on Afghanistan at The Hague, or a G8 summit on Afghanistan/Pakistan), this argument holds water. What is curious, however, is that it is largely Israeli media sources that are covering developments as they relate to US-Iran interactions. For example, on Sunday, it was revealed the US reportedly sent a letter to Iranian negotiator Said Jalili that set an October deadline for a first round of Iranian nuclear talks. The story was broken by the Israeli paper Ha’aretz, which relied on “a political source in Jerusalem” for its information. Iran quickly denied the allegation that it had received any letter giving a deadline, and the story then dissipated in the media, barely mentioned in the North American press.

Other articles related to Iran have had their first appearance in the English language in the Israeli press as well. On Tuesday, a story coming from Saudi Arabia’s Arabic language paper Al-Watan was translated first into English by Israel’s Ynetnews. The story explains that Iran deployed several mobile surface-to-air and anti-ship missile batteries to locations on the Persian Gulf in anticipation of a joint Israeli-US aerial attack on its nuclear facilities. Al-Watan’s source is a “high-ranking Iranian official”.

There are several potential explanations for these stories about Iran’s nuclear program being broken first by Israeli media. Some of the most credible hypotheses are these:

1.) Journalistic rigor. Israeli reporters are inherently interested in Iran, and Israeli readers want to read about any potential threat to their state. Israeli reporters would be naturally more concerned with Iran’s rising star than, say, journalists from Asia or North America.

2.) Governmental meddling. One cannot help but construct a theory surrounding these reports coming from the Israeli media. Might certain politicians in Jerusalem be seeking to drive their own agendas by leaking top-secret stories to certain Israeli reporters? Given the number of anonymous government sources cited, this could be a possibility.

3.) A grand bargain. Iran is a rising regional power, like it or not. The Obama administration is doing its best to adapt to this inevitable reality that could very well include an Iran with nuclear weapons. These media leaks through Israeli sources could point to backchannel negotiations between Washington and Tehran that constitute part of the fabled “grand bargain” which could lead Iran, the US, and many other powers to a new and supposedly equitable playing field.

No matter what the case or reason for the locus of Iranian nuclear stories in the Israeli press, the issue will continue to develop as officials from Washington and Tehran perform their diplomatic dance. The key question that remains is how the Israeli media — and the Israeli government — will react to these ongoing developments.

 It is legitimate in foreign affairs to employ both the carrot and the stick.  Both policies can secure a nation’s interests; the trick (and difficulty) is to employ the strategy a given situation warrants.  In spite of partisan name-calling, whereby stick-wielders are called warmongers and carrot-salesmen weak, all Great Powers, all statesmen (and women), must be prepared to use both.  In the United States, at least since Teddy Roosevelt and Woodrow Wilson, these two camps have savaged each other in the political arena.

The emotional name-calling is unfortunate.  It distorts policy.  President Obama has suggested he will utilize American goodwill around the world far more effectively than did his predecessor.  Maybe he will.  But, George W. Bush had a point – that America could utilize its overwhelming military superiority to further its interests.  Notwithstanding the critique of Bush’s point by the Democrats, it wasn’t Bush or Cheney who said to Colin Powell, “What’s the point of you saving this superb military for, Colin, if we can’t use it?”  It was Madam Secretary, Madeleine Albright, during America’s unipolar moment. 

Further, President Obama, as candidate Obama, vilified Bush for his big stick policies.  He decried neo-con tactics in the war on terror, but has now adopted many of them.  In a blog last month, I noted that Daniel Byman of Georgetown University in a March 18^th Foreign Affairs piece, referring to a U.S. Predator strike against militants in Pakistan in early March, wrote, “The strike, the fifth drone attack in Pakistan since late January, demonstrates that the Obama administration is not jettisoning the policies of the Bush administration regarding targeted killings; in fact, it appears to be ramping them up.”  Even those that advocate goodwill on the campaign trail will wield the stick in the Oval Office.

Likewise, in another era, another Obama-esque candidate, Ronald Reagan, vilified a sitting president for weakness, vis-à-vis the Soviet Union.  Exaggerations of Soviet strength were put forth, with Reagan offering us “morning in America,” which was, we the American electorate decided in 1980, change we could believe in.

With regard to Iran, it seems unclear to me today which will work, the carrot or the stick (if either).  Can the threat (or use) of military force or diplomatic engagement stop or slow Iran from acquiring a nuclear weapon, or can either succeed in changing the nature of the Iranian regime?  Both options have merit.  While Bush wasn’t able to further this objective, the jury is still out on whether Obama, with a mix of engagement and crafty horse-trading with powers such as Russia, will be more effective.  It is not worthwhile, however, for partisans to call each other names. 

And, just as during the Cold War when Soviet capabilities were exaggerated, politics can prevent an accurate assessment of Great Power strengths today.  Secretary of State Clinton’s awkward remark that the engagement of China and Iran in Latin America is “disturbing,” represents just such an exaggeration of the threat of these Rising Powers, not to mention how condescending this must sound to Latin ears (Monroe Doctrine redux) and how belligerent to Chinese and Iranian ears.  Let us not exaggerate the threat of these two nations, especially in regions where it may be difficult for them to project power.  Such exaggeration is just as much folly as was the neo-con overestimation of American power.

On the other hand, the Middle East is somewhere the Iranian threat is real.  If you want to raise emotions over the carrot vs. stick debate, initiate a discussion of Israeli foreign policy.  It appears that the Netanyahu government, fronted in foreign affairs by tough guy Avigdor Lieberman, is reassessing its foreign policy approach (see article in this Sunday’s NYTimes).  The Israelis will raise with their American and European partners the notion that the carrot of Palestinian statehood and land-for-peace has not worked at resolving the Israeli-Palestinian conflict over the last thirty years, since Israel gave back the Sinai to Egypt.  Netanyahu and company instead believe that Iran is currently fomenting trouble in the region, including by emboldening (and arming) Hezbollah, Hamas and Syria to reject accommodation with Israel.  Ahmadinejad cancelled his worrying trip to Latin America this week in order to go where?  Syria.  Iran is a regional power, a dangerous one, but very unlikely to project power extra-regionally to places like Latin America, though don’t rule out mischief there.

Likewise, the Netanyahu government will argue that Palestinian economic, civic and political institutions must be upgraded before real peace can be negotiated.  This view will seem “war-mongering” to some.  While this blogger is not advocating such a change of direction in Israeli policy – the jury is still out — I believe that considering a new approach, wielding the stick where carrot sales have failed, is worth discussing.  Let the name-calling begin…    

Democracies with weak and/or fragmented party systems seem to produce sub-optimal public policies, including heavy government debt burdens.  From Israel to India, Italy to Japan, Brazil to Belgium, governing coalitions held together by paying off key constituencies have yielded chronic deficits and high debt.  By contrast, countries with a small number of strong political parties – usually ideologically-based — that can form stable governments have tended to mind the public purse better (e.g. the U.S., U.K., Germany, and Mexico are examples). 

Some countries with fragmented multi-party systems have been moving in the direction of two or three ideological groupings in recent years, which could be a positive development.  This has been the case in India, Italy and Japan, with some promising signs in Brazil.  This year the financial crisis will continue to unfold, and elections are taking place in such Rising Powers as India and Indonesia.  The conclusion that weak coalition governments produce fiscal irresponsibility will no doubt be tested. 

Recent debt/GDP ratios of selected countries:

India                77%

Brazil               65%

Indonesia        32%

Mexico            31%

Japan              180%

Israel               76%

Italy                103%

Belgium           88%

U.S.                  62%

U.K.                  50%

Germany         64%

 

Note: Debt/GDP ratios are not strictly comparable, as wealthier countries have a higher “debt tolerance.”

 

Weimar Germany was the poster child of a weak democratic system.  Electoral and legislative rules hindered the formation of stable governments, and therefore the public had little faith in democratic government.  To avoid the errors of the past, the architects of Germany’s postwar constitution, the 1949 Basic Law, erected a system that balanced fairness with effectiveness.  It was a mixed proportional representation/first-past-the-post system that excluded parties garnering less than 5% of the popular vote from the legislature and produced two large, ideologically-opposed parties of the right and the left.  Stable governing coalitions alternated in power. 

Konrad Adenauer, one of postwar Germany’s architects, and his Christian Democratic Union were able to govern West Germany democratically and effectively from 1949 till 1963, two years longer than his totalitarian predecessor.  His center-right CDU/CSU and the center-left SPD have largely governed Germany ever since.  Currently, these two strong parties cooperate (to some extent) in a grand coalition, but will head back to the polls this fall to see if they can oust their opponents from power.  Germany’s constitution has worked so well that democratic reformers the world over consider adopting portions of it.

The logic of the two-party, or nearly two-party, system is that if one party mucks up the economy while in power, the voters will “throw the rascals out.” Hence, the incentive to mind the public purse.  On the other hand, if a party’s survival in power is based less on success at the polls and more on maintaining complex coalitions, then the dominant coalition partner will be more interested in using the public purse to buy off smaller parties than in maintaining fiscal prudence. 

This is exactly how the State of Israel functions.  In its February 2009 election, the largest party, Kadima, only garnered 22.5% of the vote.  With twelve parties in the Israeli legislature, the six smallest obtained only 2.5%-3.4% of the popular vote apiece.  The German constitution (and by the way, newly reformed Italian electoral rules) wouldn’t even seat these parties.  It can be argued that Israel’s system is fairer, giving voice to the country’s diversity, but it is not very effective.  Only during Ariel Sharon’s popular rule beginning in 2001, when his party reached close to 30% of the popular vote (quite high in Israel), was his strong finance minister, Benjamin Netanyahu, able to implement reforms to public finances that reduced the deficit and got the debt/GDP ratio on a downward trajectory.

Italy functioned in much the same way until the reforms of the mid-1990s.  Belgium, Brazil and India have functioned this way as well, with public debt levels rising as a result.  Although Japanese politics has long been dominated by one party, the center-right LDP has for all intents and purposes engaged in coalition politics and a consequent public spending spree. The LDP is a collection of personality-based factions, interest groups, local constituencies, and patron-client relationships.  As a result, by opening up the public spigot, the LDP holds together these factions, keeping itself in power. 

Interestingly, the U.S. is embarking on a very large increase in its public debt, and this will occur in a two-party system with one party now overwhelmingly dominating two branches of government.  This must be seen as an aberration, however, an exception to the rule, given the size of the fiscal stimulus required to prevent a collapse of the financial system and to support sagging demand.  This unprecedented increase in public outlays is not being implemented in order to keep a coalition together.  Nevertheless, should the Democrats not act quickly, once the economy rebounds, to re-establish fiscal rectitude, an adjustment that will be very painful, then the government’s credibility will suffer, foreign investment will slow, the dollar will fall, interest rates will rise, and American voters will “throw the rascals out.”

As for India’s election, as spelled out by my colleague, David Kampf, the world’s largest democracy is in the midst of a month-long national election that will be tallied on May 16.  Some commentators believe that the two large parties, the center-left Congress Party and the center-right BJP Party, will lose ground to smaller and regional parties.  This will put pressure on the coalition leaders to spend their way into power.  Rulers of Rising Powers be forewarned: history shows that a sustained mismanagement of public finances often precedes the decline of nations.