Friday, March 25, 2011

The Speech Obama Hasn't Given

What are we doing in Libya? Americans deserve an explanation.

It all seems rather mad, doesn't it? The decision to become involved militarily in the Libyan civil war couldn't take place within a less hospitable context. The U.S. is reeling from spending and deficits, we're already in two wars, our military has been stretched to the limit, we're restive at home, and no one, really, sees President Obama as the kind of leader you'd follow over the top. "This way, men!" "No, I think I'll stay in my trench." People didn't hire him to start battles but to end them. They didn't expect him to open new fronts. Did he not know this?

He has no happy experience as a rallier of public opinion and a leader of great endeavors; the central initiative of his presidency, the one that gave shape to his leadership, health care, is still unpopular and the cause of continued agitation. When he devoted his entire first year to it, he seemed off point and out of touch. This was followed by the BP oil spill, which made him look snakebit. Now he seems incompetent and out of his depth in foreign and military affairs. He is more observed than followed, or perhaps I should say you follow him with your eyes and not your heart. So it's funny he'd feel free to launch and lead a war, which is what this confused and uncertain military action may become.

What was he thinking? What is he thinking?

Barbara Kelley

Which gets me to Mr. Obama's speech, the one he hasn't given. I cannot for the life of me see how an American president can launch a serious military action without a full and formal national address in which he explains to the American people why he is doing what he is doing, why it is right, and why it is very much in the national interest. He referred to his aims in parts of speeches and appearances when he was in South America, but now he's home. More is needed, more is warranted, and more is deserved. He has to sit at that big desk and explain his thinking, put forward the facts as he sees them, and try to garner public support. He has to make a case for his own actions. It's what presidents do! And this is particularly important now, because there are reasons to fear the current involvement will either escalate and produce a lengthy conflict or collapse and produce humiliation.

Without a formal and extended statement, the air of weirdness, uncertainty and confusion that surrounds this endeavor will only deepen.

The questions that must be answered actually start with the essentials. What, exactly, are we doing? Why are we doing it? At what point, or after what arguments, did the president decide U.S. military involvement was warranted? Is our objective practical and doable? What is America's overriding strategic interest? In what way are the actions taken, and to be taken, seeing to those interests?

Matthew Kaminski of the editorial board explains America's role in the Libyan campaign.

From those questions flow many others. We know who we're against—Moammar Gadhafi, a bad man who's done very wicked things. But do we know who we're for? That is, what does the U.S. government know or think it knows about the composition and motives of the rebel forces we're attempting to assist? For 42 years, Gadhafi controlled his nation's tribes, sects and groups through brute force, bribes and blandishments. What will happen when they are no longer kept down? What will happen when they are no longer oppressed? What will they become, and what role will they play in the coming drama? Will their rebellion against Gadhafi degenerate into a dozen separate battles over oil, power and local dominance?

What happens if Gadhafi hangs on? The president has said he wants U.S. involvement to be brief. But what if Gadhafi is fighting on three months from now?

On the other hand, what happens if Gadhafi falls, if he's deposed in a palace coup or military coup, or is killed, or flees? What exactly do we imagine will take his place?

Supporters of U.S. intervention have argued that if we mean to protect Libya's civilians, as we have declared, then we must force regime change. But in order to remove Gadhafi, they add, we will need to do many other things. We will need to provide close-in air power. We will probably have to put in special forces teams to work with the rebels, who are largely untrained and ragtag. The Libyan army has tanks and brigades and heavy weapons. The U.S. and the allies will have to provide the rebels training and give them support. They will need antitank missiles and help in coordinating air strikes.

Once Gadhafi is gone, will there be a need for an international peacekeeping force to stabilize the country, to provide a peaceful transition, and to help the post-Gadhafi government restore its infrastructure? Will there be a partition? Will Libyan territory be altered?

None of this sounds like limited and discrete action.

In fact, this may turn out to be true: If Gadhafi survives, the crisis will go on and on. If Gadhafi falls, the crisis will go on and on.

Everyone who supports the Libyan endeavor says they don't want an occupation. One said the other day, "We're not looking for a protracted occupation."


Mr. Obama has apparently set great store in the fact that he was not acting alone, that Britain, France and Italy were eager to move. That's good—better to work with friends and act in concert. But it doesn't guarantee anything. A multilateral mistake is still a mistake. So far the allied effort has not been marked by good coordination and communication. If the conflict in Libya drags on, won't there tend to be more fissures, more tension, less commitment and more confusion as to objectives and command structures? Could the unanticipated results of the Libya action include new strains, even a new estrangement, among the allies?

How might Gadhafi hit out, in revenge, in his presumed last days, against America and the West?

And what, finally, about Congress? Putting aside the past half-century's argument about declarations of war, doesn't Congress, as representative of the people, have the obvious authority and responsibility to support the Libyan endeavor, or not, and to authorize funds, or not?

These are all big questions, and there are many other obvious ones. If the Libya endeavor is motivated solely by humanitarian concerns, then why haven't we acted on those concerns recently in other suffering nations? It's a rough old world out there, and there's a lot of suffering. What is our thinking going forward? What are the new rules of the road, if there are new rules? Were we, in Libya, making a preemptive strike against extraordinary suffering—suffering beyond what is inevitable in a civil war?

America has been through a difficult 10 years, and the burden of proof on the need for U.S. action would be with those who supported intervention. Chief among them, of course, is the president, who made the decision as commander in chief. He needs to sit down and tell the American people how this thing can possibly turn out well. He needs to tell them why it isn't mad.

Troops Open Fire on Syrian Protesters

Troops Open Fire on Syrian Protesters

[0325syria03] Associated Press

Thousands of Syrians took to the streets Friday demanding reforms and mourning dozens of protesters who were killed during a violent crackdown.

Protests calling for freedom and reform erupted across Syrian cities a day after the government announced a list of concessions prompting violent clashes with security forces, witnesses and Arab media reported.

An activist in Damascus in touch with eyewitnesses in the village of Sanamein, near Daraa, said troops there opened fire on demonstrators trying to march to Daraa. He said there had been witness reports of fatalities, some claiming as many as 20 slain, but those could not be independently confirmed, the Associated Press reported.

The new round of protests comes a day after President Bashar Assad's government announced a list of concessions aimed at appeasing the unrest. The government announced on Thursday that it would increase wages for public workers, reconsider the emergency law in place for nearly five decades and allow more freedom for news media.

Amateur video shows thousands marching in funerals for those killed by Syrian security forces.Video Courtesy of Reuters.

Syrian Forces Fire on Protesters


Amateur video footage purportedly shows Syrian forces opening fire on youths protesting against the government of President Bashar al-Assad. Video courtesy of Reuters and photo courtesy of AP.

However, the promises of gradual reform appear to have done little to deter the opposition.

As protests spread across other cities, there is a rising sense in the country that the government's offers of reform had not done enough to appease the population.

"Today ushers in a new era," said one Syrian man speaking on condition of anonymity. "I think the size of the protests will grow and spread further." He said that many Syrians were beginning to view President Assad in a different light.

The president has found favor with many young Syrians who see his foreign policy as well as his aims as trending towards his own: opening up the country and moving forward with reforms.

But the killings in Daraa, the ramping up of arrests and the slew of government propaganda blaming unrest on outsiders, reiterated by spokesperson Buthaina Shaaban on Thursday night, have altered opinions, he said. A Daraa resident told the AP that more than 50,000 people were shouting slogans decrying presidential adviser Mrs. Shaaban Friday.

A human rights activist, quoting witnesses, told the AP thousands of people gathered in the town of Douma outside the capital, Damascus, pledging support for the people of Daraa.

Across Syria security forces battled the crowds with batons and sticks attempting to disperse antigovernment gatherings that formed around mosques after the Friday prayer sermons, according to media reports. They also arrested dozens of protestors, according to reports.

In Damascus, activists said it was much harder to act. Intelligence agents have been cracking down in recent days, arresting and detaining scores of people and demanding they hand over passwords to email and Facebook accounts.

Muzaffar Salman/Associated Press

In Damascus, activists said a crackdown by intelligence agents made rallies difficult. But these Assad opponents rallied near the city's central Marjeh Square after Friday prayers.

To counter any coverage of anti-government demonstrations, throughout the day huge rallies of pro-Assad supporters drove around the capital city waving flags and photographs of the president. A large rally is planned in the city this evening.

Syria's unrest was sparked by the arrest of a group of teenagers in the southern city of Daraa who painted anti government graffiti on walls. Their arrest prompted massive outrage, followed by heavy crackdowns by the government that human rights organizations estimate has killed at least 45 people.

Thousands of people marched in Daraa on Friday asking for justice for the victims and clashing with the police, Arab media reported. The government asked journalists to leave Daraa on Friday contradicting its earlier promise of greater press freedom.

The Facebook page for organizing Friday's rally "Syria Revolution 2011," posted that more than 200,000 protestors in Deraa and Houran had one demand: "Free Syria" and "No to the presence of corrupt murderers in the government."

Unlike their counterparts in the Arab world, like Egypt and Libya, the demonstrators in Syria have so far stayed away from calling for regime change and kept their demands to calls for reform.

Arab countries in the region followed Syria's unprecedented uprising with apprehension. Mr. Assad, who has defined his foreign policies by being anti-Israel and close to Iran and Hezbollah, was once seen as invincible. That image is quickly shattering as Syrians shed their fear and take to the streets.

In Qatar, an influential Sunni cleric, Sheikh Yusuf al-Qardawi, mentioned the unrest in Syria in his sermon, which was broadcast on Al Jazeera and quickly posted on Youtube.

"Today the train of revolution has arrived at a station that it was destined to reach, the Syrian station. It isn't possible for Syria to detach itself from the history of the Arab nation," he said.

—Nada Raad contributed to this article.

Good Newt v Bad Newt

Newt Gingrich

Good Newt v Bad Newt


EVEN fans of Newt Gingrich have always admitted that there are two sides to the man, one much less appealing than the other. On the one hand, he is well read, curious, passionate, full of energy and ideas—a genuine political thinker in an era of focus-group candidates. On the other hand, he can be impulsive, mercurial and bullying. Running a successful campaign for the Republican nomination, let alone the presidency itself, was always going to hinge on Good Newt keeping Bad Newt under wraps.

So far, however, it seems to be Bad Newt who’s hogging the limelight. Mr Gingrich signaled his heightened political ambitions last year with a series of intemperate statements: likening those who want to build a mosque near Ground Zero to Nazis, describing Barack Obama’s worldview as Kenyan and anti-colonial and so on. He recently snapped at someone who had the temerity to ask him about his louche personal life at a public event. A few weeks ago his advisers let it be known that he was about to announce the first step towards a formal candidacy and then took it all back, making his expected bid for the presidency look disorganised and faltering before it even began.

Now Mr Gingrich has added to this string of embarrassments with an acrobatic flip-flop on America’s involvement in Libya. Barely three weeks ago he told Fox News that Mr Obama should suppress the Libyan air force and establish a no-fly zone over the country right away. Yesterday he announced that a military intervention was a terrible idea to which he would never have resorted as president. Then he issued a convoluted explanation claiming these two stances were consistent, before criticising the president for his confusion and lack of resolve.

At first, the received wisdom in Washington was that Mr Gingrich was simply trying to attract a little attention with his flashy, populist remarks. They would help to bring him back into the headlines after years on the sidelines, and perhaps win round a few of the Sarah Palin mob. If so, it was a risky tactic, in that it must have reminded more moderate souls of all their misgivings about Mr Gingrich.

Anyway, it is hard to imagine that the most recent sightings of Bad Newt—hectoring a private citizen, fluffing the formal launch of his campaign and publicly heaping bluster on inconsistency—were all part of some grand media strategy. The more plausible explanation is simply that Mr Gingrich will not, if he does finally get around to declaring himself a candidate, make a very good one. He does not seem folksy and genuine enough to pass the “Who would you like to have a beer with?” test, nor level-headed, grave and statesman-like enough to pass the “Who would you want with their finger on the nuclear trigger?” test. Even if Bad Newt releases Good Newt from whatever basement he’s locked him in, gives him a shave and a haircut and sends him on the talk-show circuit, it will only make Candidate Gingrich look even more inconsistent and unpredictable. Perhaps a little quiet time in the backwaters of Iowa would be best.

Another year of living dangerously

The global economy

Another year of living dangerously

Turmoil in the Middle East and disaster in Japan arouse economic angst. Central banks must not make it worse

THIS was supposed to be a stress-free year for the global economy. By January the financial crisis had faded and Europe’s sovereign-debt crisis seemed less acute. America’s economy was resurgent. Investors piled into equities and sold some of the government bonds they’d bought for troubled times. If there was a worry, it was that emerging economies would grow too quickly, inflating commodity prices.

The year without crisis is not to be. First, Arabian upheaval put oil markets on edge. Then earthquake, tsunami and a nuclear accident clobbered the world’s third-largest economy. How much of a setback to growth do these twin crises represent? And how should economic policymakers react to them?

Japan’s share of world output has been shrinking for decades, but at 9% it remains large enough for the hit to the country’s growth to subtract noticeably from global output. Then there are the ripple effects on the rest of the world. Japan is a large—in some cases the sole—supplier of intermediate goods to the world’s electronics and automotive industries, from the hardened glass on Apple’s iPad to gearboxes in Volkswagens. Many makers of such parts have had to slow or halt shipments because of damaged roads, power cuts or the loss of components from their own suppliers. The effects have spread well beyond Japan, causing shutdowns from South Korea to Spain. Still, the history of such disasters is that much of that lost production is eventually recovered and reconstruction delivers a fillip to subsequent growth.

Pinpointing the impact of Arab political turmoil is complicated by the fact that oil prices were already rising thanks to a brighter global economic outlook. Nonetheless, a good portion of this year’s 25% increase seems due to worries over supplies. A rule of thumb holds that a 10% increase in the price of oil trims 0.2 percentage points from global growth. At the start of the year, the world looked likely to grow by 4-4.5%. A crude estimate is that the two crises will subtract between a quarter and half a percentage point from that.

That may not capture the full effect. Crises by their nature generate clouds of uncertainty (see article). Businesses postpone capital spending and hiring until the clouds clear. Investors seek the safety of bonds and lose their taste for equities.

Economic policymakers can’t make peace between Arab rulers and their people or stabilise Japan’s nuclear reactors, but they can minimise the collateral damage. The greatest burden is on the Bank of Japan. Its efforts to cure deflation over the past 15 years have too often been timid. That could not be said of its rapid response to the tsunami. It poured cash into the banking system in a pre-emptive strike against panic hoarding. And it expanded its purchases of government and corporate debt and equities. Still more “quantitative easing” can keep bond yields from rising as the government borrows for reconstruction, and help the fight against deflation.

What should the rest of the world do? In a show of sympathy the G7 joined the Bank of Japan in selling the yen after it spiked dramatically. Such actions should be limited, however. Japan is too dependent on exports and its priority should be stimulating domestic demand and ending deflation, not cheapening the yen. A better way for outsiders to help is to ensure that concerns over radiation in Japanese products do not become an excuse for protectionism.

Avoidable aftershocks

Other central banks face a more complicated task. Even as higher oil prices and hobbled Japanese production reduce growth they add to mounting inflation risks (Britain is now fretting over inflation of 4.4%). But most rich-world economies have ample economic slack, and in several countries fiscal tightening will tug at recovery. Britain’s coalition government has reaffirmed its commitment to austerity with this week’s budget (see article), and America has begun to cut spending. Both the Bank of England and the Federal Reserve should resist the temptation to tighten soon.

The European Central Bank seems intent on raising interest rates next month. That would be a mistake. In the euro zone underlying inflation and wage growth are both subdued and inflation expectations are under control. By raising rates the ECB would strengthen the euro and frustrate the efforts of countries like Greece, Ireland and—the next in line for bailing out—Portugal to grow their way out of their debts.

There is only so much economic policymakers can do about crises that spring from war or nature. In this case, the priority should be not making matters worse.

The reluctant warrior

The reluctant warrior

Barack Obama’s risk-averse handling of the war in Libya holds political risks of its own

“WE APOLOGISE for the unplanned hiatus in bombing of the Middle East. Normal service has now been resumed.” Thus one wry Facebook posting after Barack Obama launched Operation Odyssey Dawn and America unleashed its cruise missiles. To people all over the world, it has come as a shock that this of all presidents, the man who always opposed George W. Bush’s “dumb” invasion of Saddam Hussein’s Iraq in 2003, should have plunged the United States into a war of his own against Colonel Muammar Qaddafi of Libya.

In America too the decision came out of the blue. Distracted by the tsunami and nuclear catastrophe in Japan, the media had lost sight for a while of the negotiations taking place behind closed doors in the UN Security Council. By the time Resolution 1973 authorised “all necessary measures” to protect civilians, and military operations swiftly followed, there had been none of the public weighing of pros and cons that preceded the Iraq war. Nor did Congress get a chance to have its say. The lack of debate was inevitable, given that the operation was, as Robert Gates, the defence secretary, later admitted, put together “on the fly” to block Colonel Qaddafi’s imminent conquest of Benghazi. But now, rather like the squabbling international coalition itself, Mr Obama’s many critics are scrambling to make up for lost time.

Some of the most scathing criticism has come not from Republicans but from anguished liberals. Like the neoconservatives who were so bullish about Iraq, and have now got their voices back, a few on the left are still haunted by the world’s failure to prevent atrocities in benighted places such as Rwanda and Bosnia and are still willing to entertain military intervention on humanitarian grounds in some circumstances. But a good many have come to see the Iraq war as an unmitigated calamity and concluded that no good can ever come from American intervention in a Muslim country. One influential blogger, Andrew Sullivan, seems scarcely able to believe that what he calls a “neocon-bleeding heart alliance” has forgotten the Iraqi lesson so soon.

The response of mainstream Republican politicians has been more cautious. This may be due less to the fraying convention that it is unseemly to criticise the commander-in-chief and more to the fact that even a war-weary America tends to rally behind wars in their early stages. An Economist/YouGov poll taken after Resolution 1973 was passed and as bombing began found 67% of Americans in favour of imposing a no-fly zone, up 21 points from the previous week. Support for direct military intervention had more than doubled, to 32%. So the dominant Republican line is not that the war is misconceived—it is hard for Republicans to object to the general idea of walloping the loathsome Colonel Qaddafi—but that Mr Obama’s handling of it has been incompetent.

Exhibit A in this indictment is that Mr Obama dithered. Rick Santorum, one of the Republicans’ presidential wannabes, said that by taking so long the president may have “missed our window of opportunity”. Senator John McCain, the Republicans’ 2008 candidate, and Sarah Palin, his running-mate, voiced similar misgivings: better to have helped the rebels clinch their victory when they appeared to be on a roll than come to their defence when they were at their last gasp on the edge of defeat. For exhibit B the Republicans turn to what they see as Mr Obama’s muddled definition of the war’s aim and his abdication of America’s vocation to lead. “I don’t know what finally got the president to act, but I’m very worried that we’re taking the back seat rather than a leadership role,” Senator Lindsey Graham told Fox News.

As to whether these points have merit, the answer, like Mr Obama himself, is complicated. This president has never been the peacenik America’s doves craved; his scorn for the “dumb” war in Iraq was always balanced by support for the “necessary” one in Afghanistan. When he collected his Nobel peace prize from Oslo in December 2009 he made a point of saying that he accepted the case for using force on humanitarian grounds, as Bill Clinton did in the Balkans in the 1990s. But justifying a war on such grounds depends on some large atrocity looking imminent—as it did by the time Colonel Qaddafi reached the gates of Benghazi and not, arguably, very much earlier.

For much the same reason Mr Obama says that although his ultimate aim is to topple Colonel Qaddafi, this must be done by non-violent means, such as diplomacy and sanctions, while the military force the United Nations authorised is used only to protect Libya’s civilians. Such distinctions do matter, especially to the Cartesian Mr Obama. But this conclusion, even if reached by way of an impeccable philosophy, is in danger of leaving the average Joe, not to mention the average General Carter Ham, Odyssey Dawn’s American commander, scratching his head in puzzlement. Are the coalition’s jets supposed to clobber Libya’s forces wherever they are or only when they are advancing? If they are attacking rebels, rather than civilians, can they be hit? Is an armed rebel also a threat to civilians, or are loyalists the only target?


Many Americans are no less queasy about Mr Obama’s desire for someone else—France’s president, Britain’s prime minister, NATO, the league of Arab dictators, whoever—to take charge, even though everyone knows the whole enterprise leans in the end on American power. His instinct is admirable: to dilute what in Oslo he called the world’s “reflexive suspicion” of the superpower. He also, presumably, would prefer to face re-election in 2012 without bearing sole responsibility for another war in the Arab world. But letting a committee run a war is a risk too. A safer, if less principled, path to re-election would be for him to topple the colonel quickly, with less scruple for the sensitivity of allies and the letter of the law. Assuming that is possible, of course.

U.S. Stocks Gain on Earnings

U.S. Stocks Gain on Earnings; Portugal Bonds Fall, Aussie Rises

U.S. Stocks Gain on Earnings

A trader with Getco Securities LLC, works on the floor of the New York Stock Exchange. Photographer: Jin Lee/Bloomberg

March 25 (Bloomberg) -- Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor’s, discusses the outlook for the sovereign debt ratings of Greece and Portugal once full details of the European Stability Mechanism, the euro area's permanent rescue fund, are disclosed. Kraemer speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

March 25 (Bloomberg) -- Christopher Verrone, lead technical analyst at Strategas Research Partners, talks about outlook for the Standard & Poor's 500 Index and the copper market. Verrone spoke yesterday with Adam Johnson at the Strategas Global Macro Conference in New York. They spoke on Bloomberg Television's "Fast Forward." (Source: Bloomberg)

U.S. stocks gained, extending a weekly rally, as forecasts at Oracle Corp. and Accenture Plc beat estimates and economic growth was revised higher. Portugal bonds fell after S&P downgraded the debt, while Australia’s currency touched a record versus the dollar as commodities rose.

The S&P 500 climbed 0.5 percent to 1,316.05 at 3:06 p.m. in New York. The MSCI World Index of stocks in 24 developed markets rose for a seventh day, its longest streak in nine months. Portugal’s 10-year bond yield jumped to a euro-era record. Australia’s dollar strengthened as much as 0.8 percent to $1.0294. The Swiss franc fell versus all 16 most-traded peers and the euro weakened against 12. Ten-year Treasury yields climbed 4 basis points to 3.45 percent.

The S&P 500 has rebounded almost 5 percent from its 2011 low last week as concern eased that the global economy would be hurt by Japan’s worst earthquake on record and uprisings in the Middle East and northern Africa. The benchmark measure of U.S. stock options headed for its biggest seven-day drop 2008 as demand for protection against further declines subsided.

“Despite the global macro uncertainties, company fundamentals are leading investors to bid the market higher,” said Eric Teal, chief investment officer at First Citizens Bancshares Inc. in Raleigh, North Carolina, which manages $5.2 billion. Oracle’s forecast “is a good signal for the technology sector, and so we think there will be ongoing strength in earnings for those companies.”

S&P 500, VIX

The S&P 500 advanced for the third day and extended its weekly gain to almost 3 percent. The Chicago Board Options Exchange Volatility Index, also known as the VIX, has tumbled 39 percent since March 16.

Stock also gained today after the Commerce Department said the economy grew 3.1 percent in the fourth quarter. The revised increase in gross domestic product compares with a 2.8 percent estimate issued last month, the figures showed.

Stocks maintained gains after the Thomson Reuters/ University of Michigan final index of consumer sentiment decreased to 67.5 from 77.5 in February. The preliminary estimate issued earlier this month was 68.2. The median forecast of 67 economists surveyed by Bloomberg News projected a reading of 68.

The MSCI Asia Pacific Index advanced 0.8 percent and the MSCI Emerging Markets Index climbed 0.8 percent. The Stoxx Europe 600 Index rose 0.1 percent and is up 3.1 percent since March 18, extending its biggest weekly rally in six months.

Oracle Rallies

Oracle, the world’s biggest supplier of database software, rallied 2.1 percent after saying earnings will increase amid a boom in demand, while Accenture, the second-largest technology- consulting company, jumped 4.3 percent after predicting better- than-estimated sales. SAP AG, the world’s largest maker of business-management software, advanced 1.9 percent. Infosys Technologies Ltd., India’s second-largest software-services provider, climbed 5.3 percent, the most since July 2009.

Ten-year Portuguese bond yields surged as much as 14 basis points to 7.80 percent after S&P joined Fitch Ratings in cutting the nation’s creditworthiness as European Union leaders met to discuss ways to resolve the region’s debt crisis.

The nation’s two-year yields rose 37 basis points to 7.07 percent and jumped 73 basis points in the week, while the extra yield investors demand to hold the 10-year securities instead of benchmark German bunds rose 9 basis points today to 451 basis points.

Default Swaps

The cost to protect U.S. corporate bonds from default was little changed as economic growth outweighed the downgrade of Portugal’s debt. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose less than half a basis point to a mid-price of 95 basis points, according to index administrator Markit Group Ltd.

Default swaps on Tokyo Electric Power Co. increased 82 basis points to 352 after Japan’s nuclear regulator said one reactor core at the quake-damaged Fukushima Dai-Ichi power plant may be cracked and leaking radiation.

Australia’s dollar rallied against 14 of 16 major peers, gaining more than 1.3 percent versus the Norwegian, Swedish and Swiss currencies. Natural gas, cattle, hogs and sugar climbed at least 1.5 percent to lead gains in commodities in the Thomson Reuters/Jefferies CRB index. New Zealand’s dollar climbed 0.6 percent versus the U.S. currency after central bank Governor Alan Bollard said the nation’s economy will get a boost from earthquake reconstruction next year.

The franc depreciated 0.4 percent against the euro, and 1.2 percent versus the dollar. The Swiss central bank said that while borrowing costs can’t remain near zero over the coming years, the inflation outlook hasn’t changed “significantly” since the previous quarterly assessment in December.

Crude oil for May delivery fluctuated, recently slipping 0.1 percent to $105.45 a barrel in New York.

Classified Briefing on Libya Action

U.S. Congress to Schedule Hearings, Classified Briefing on Libya Action

Both houses of Congress plan public hearings on the military intervention in Libya by the U.S. and allies, and top Obama administration officials will brief lawmakers next week.

Secretary of State Hillary Clinton, Defense Secretary Robert Gates and other officials will meet with House members in closed session on March 30, according to a notice sent to members.

The classified briefing on the situation in Libya and an appearance by Deputy Secretary of State James Steinberg at a House Foreign Affairs Committee hearing the following day are part of the administration’s efforts to respond to lawmakers’ complaints that they weren’t adequately consulted before the March 19 start of the allied air assault on Libya’s anti- aircraft defenses. The military action was authorized by the United Nations to curb Colonel Muammar Qaddafi’s capability to target civilians supporting the revolt against his regime.

“We think that it is important to consult with members of Congress” and “we think the questions that have been asked have been legitimate,” White House press secretary Jay Carney told reporters in Washington yesterday. The administration “will continue to consult” with lawmakers, he said.

The briefing with administration officials was requested by House Speaker John Boehner, who also wrote to President Barack Obama earlier this week seeking an explanation of the purposes and strategic rationale for the military operation.

Several Hearings

Carney listed 10 congressional hearings since Feb. 28 where administration officials had discussed the options for action in Libya. He also cited a March 18 briefing that Obama conducted for Democratic and Republican congressional leaders and key members of the Senate and House committees dealing with defense, foreign affairs and intelligence.

That session took place a day after most lawmakers left Washington for a weeklong recess. Some participants met with Obama in the Situation Room at the White House and others joined in by telephone, lawmakers said.

Carney said Obama couldn’t wait to act until Congress returned from its recess because “leadership requires him to take action when action will save lives, and delaying action will cost lives.” When the military action began, troops loyal to Qaddafi were massed on the outskirts of the rebel stronghold of Benghazi, Libya’s second-largest city.

“Had we waited for Congress to get back,” Carney said, Qaddafi’s forces “would control Benghazi, and there would have been a great deal of people killed in the process.”

In addition to Clinton and Gates, House members will also hear from Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, and James Clapper, the director of national intelligence, at the March 30 briefing, according to the notice sent to members.

Libya’s Importance

At the House Foreign Affairs hearing the next day, Steinberg will be questioned about Libya’s importance to U.S. security, according to a notice on the committee’s website.

A spokesman for the Senate Foreign Relations Committee said in a statement that a hearing on Libya would be held in the “near future.”

The panel’s chairman, Massachusetts Democrat John Kerry, “has been traveling in the region” during this week’s recess “to get information firsthand from our allies,” Frederick Jones said in the statement.

“Senator Kerry understands the importance and complexity of our role in protecting the people of Libya and the committee will hold public hearings in the near future,” Jones said.

Senator Richard Lugar of Indiana, the top Republican on the Foreign Relations panel, sent a letter to Kerry on March 23 requesting hearings on Libya.

“The administration has not adequately defined the U.S. strategic interest in Libya or adequately articulated how the conflict ends,” he wrote.

Jones said that the Libyan situation “was explored in depth” during a March 17 committee hearing when Under Secretary of State William Burns testified about citizen uprisings in the Middle East and North Africa.

Obama Under Pressure to Clear ‘Ambiguity’ From Libya

Obama Under Pressure to Clear ‘Ambiguity’ From Libya, Middle East Strategy

US President Barack Obama

Barack Obama US president. Photographer: Saul Loeb/AFP/Getty Images

Almost a week after U.S. warplanes began dropping bombs on Libya, House Speaker John Boehner fired off a letter to President Barack Obama that posed a basic question: What are we fighting for?

Obama’s responses to unrest throughout the Middle East and his actions in Libya show an approach to projecting U.S. power that contrasts with the certitude of President George W. Bush’s doctrine of unilateral preemption of perceived threats and promotion of democracy.

The emerging Obama doctrine balances humanitarian ideals and pragmatic national interests, places a premium on international backing and accepts limited goals.

The result is not easily explained.

“The Obama administration does not have a simple tale to tell, and the tale it has told it has told poorly,” said James Lindsay, a former national security staff member in President Bill Clinton’s administration. “If you don’t tell your story well, you start off with less support.”

In seeking to limit the commitment of U.S. forces and gain an international cast for military intervention in Libya, Obama has embarked on a complex strategy -- one stirring criticism that he is endangering success with muddled goals.


In his letter to Obama, Boehner challenged the president to explain the “contradiction” between his declaration that Muammar Qaddafi “must go” and repeated administration statements that regime change isn’t the aim of the military campaign. Senator Richard Lugar of Indiana, the senior Republican on the Senate Foreign Relations Committee, said the administration’s “ambiguity” may hurt the military operation and public support.

Lugar’s warning is reflected in a Gallup poll conducted March 21 that found support for the Libya mission is the lowest at the outset of a U.S. military action in the past three decades. Forty-seven percent of Americans approve of the Libya mission, while 37 percent disapprove. By comparison, 51 percent approved of the intervention in Kosovo in 1999 and 76 percent approved at the start of the war in Iraq in 2003.

Despite the criticism, Edward Djerejian, a former U.S. ambassador to Syria and Israel, said the military mission in Libya flows from a “coherent” strategy.

‘Logical Approach’

“The administration’s policy is to avoid a humanitarian disaster and try to level the playing field in Libya to give the rebels more opportunity to confront the Qaddafi regime,” said Djerejian, founding director of the Baker Institute for Public Policy at Rice University in Houston. “That certainly seems like a logical approach to adopt without the U.S. being overstretched.”

White House press secretary Jay Carney told reporters yesterday that while some of the administration’s critics are “perhaps driven by politics,” the questions from lawmakers “are legitimate and need to be answered.”

The president hasn’t made any public statements since his return from Latin America March 23. Carney said Obama “looks forward to communicating with the American public” on Libya.

The danger of public support eroding may be lessened by the narrow scope of the campaign, said Lawrence Korb, a former Defense Department official now at the Center for American Progress, a policy research group in Washington.

“No Americans are dying, and it’s not costing that much money,” Korb said.

The airstrikes backed by the Obama administration headed off a potential massacre in Benghazi, Libya’s second-largest city, that was already stirring comparisons to the 1995 killing of 8,000 Bosnian Muslims in Srebrenica, Djerejian said. Inaction in the face of the threat would have been an international embarrassment for the U.S., particularly after the Arab League endorsed creation of a no-fly zone, he said.

Added Pressure

The military campaign, on top of a sanctions regime targeting financial assets of the Libyan leader and his allies, adds new pressure on Qaddafi’s supporters to abandon him, Djerejian said.

Secretary of State Hillary Clinton alluded to the strategy when she said March 19 in Paris that the bombing campaign would “make a new environment” in which people close to Qaddafi might turn on him.

While that may amount to “a roll of the dice,” Djerejian said, the outcome cannot be assured when the U.S. enters any conflict. “The end games are never guaranteed in any of these scenarios,” he said.

The president has joined his stance that Qaddafi must relinquish power to a United Nations-sanctioned coalition with a mission limited to protecting the civilian population. That leaves open the possibility of a stalemate or a resolution in which Qaddafi retains a role in government, or perhaps even prevails.

Goals in Tension

R. Nicholas Burns, the third-ranking official in the State Department during Bush’s second term, said the tension among the goals in Libya may be exacerbated as the U.S. hands over more control of the military operation to its partners.

While the U.S. has interpreted the UN resolution’s mandate broadly to include tactical air strikes in support of rebel forces, coalition partners might be more reluctant to do so, said Burns, now a professor at Harvard University’s Kennedy School of Government in Cambridge, Massachusetts. The air campaign so far has not stopped Qaddafi’s forces, and a protracted civil war is a likely outcome, he said.

“When times get tough, if there are civilian casualties, God forbid, if there’s a failure in any way in the war effort, there will be second-guessing,” Burns said. “They’ll perhaps pursue an overly restrictive and narrow interpretation of the mandate.”

Arab League Secretary General Amr Moussa already has criticized air strikes in Libya, and Arab nations that promised assistance for the mission have been slow to provide support, Burns said.

“It’s not easy to hold together a political coalition in war,” Burns said.

Uncle Sam Wants Your Money, Not Your Confession

Uncle Sam Wants Your Money, Not Your Confession: Ann Woolner


Ann Woolner

Sitting in a federal prison for the rest of his life, Bernard Madoff neither admits nor denies that he committed civil securities fraud.

Yes, he pleaded guilty to criminal fraud and drew a 150- year sentence for his $20 billion bilking. But the U.S. Securities and Exchange Commission settled its civil fraud case against him without making him acknowledge a solitary lie.

So routinely do people and firms resolve SEC cases “without admitting or denying” wrongdoing, as the agency’s boilerplate phrase goes, that even the guiltiest of fraudsters who confess in criminal court to the most audacious of crimes never come clean with the SEC, which has its own, civil cases to resolve. They don’t have to admit anything for the agency to get off their backs, as long as they agree to disgorging allegedly ill-gotten gains and other penalties.

At least with Madoff and anyone else pleading or found guilty in criminal court, the public can be pretty sure they ripped off someone. But what about those who are never charged with crimes, who are accused only by the SEC in civil actions?

How are we to know whether an accused person or firm really lied to investors? Except for the rare defendant who denies wrongdoing and goes to trial, there’s no way to know.

Only about 20 lawsuits go all the way to trial out of more than 600 filed nationally a year, says SEC spokesman John Nester.

“Our main objective in any case is to obtain appropriate sanctions against wrongdoers,” says Nester.

Avoiding Trial

Not demanding an admission while forbidding a denial is supposed to help accomplish that. Accused violators will give up a lot to avoid a trial where they could be found liable. And they’re not about to confess anything. An admission or verdict against them would be manna from heaven for plaintiffs’ lawyers representing investors or others who say they were cheated.

It’s the same policy the Justice Department and other agencies follow in civil cases. For that matter, how often do you see two private parties resolve a lawsuit where one of them admits misconduct? It’s rare.

You can say the SEC is different because its civil actions are sort of semi-criminal. At least one federal judge has had enough of the SEC practice of letting defendants settle with no confession.

“An agency of the United States is saying, ‘Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it,” U.S. District Judge Jed Rakoff wrote this week.

Implied Mea Culpa

“The disservice to the public inherent in such a practice is palpable,” he wrote in a court order. He approved a settlement despite the boilerplate language it contains.

He signed it, he said, because guilty pleas in parallel criminal cases and the size of the civil penalty consented to by Vitesse Semiconductor Corp. (VTSS) mean the “company has effectively admitted the allegations.” The SEC accused it of cooking its books, back-dating stock options and lying in material public statements.

But not every SEC case has a parallel criminal case, and it’s not always clear from settlement terms whether the alleged villains did bad things.

Did International Business Machine Corp. employees really bribe Chinese and South Korean officials, as the SEC claims? The computer-services provider agreed this month to pay $10 million to resolve the matter, without admitting or denying anything.

Companies would have us believe that sometimes it’s simply cheaper to settle than fight. And if they don’t have to admit liability, then why not get it over with?

‘Stew of Confusion’

Or maybe Company X really did what the SEC says. Of course it would rather leave that question unresolved than face trial and be found liable, anyway.

“The result is a stew of confusion and hypocrisy,” Rakoff complained. “The defendant is free to proclaim he never remotely admitted the terrible wrongs alleged,” as long as he doesn’t flat out deny them, the New York judge wrote.

Rakoff warned that he is “reserving for the future substantial questions” of whether he could keep signing off on agreements when the accused doesn’t say whether the allegations are true.

At least one SEC commissioner has had similar misgivings.

Luis Aguilar told an audience last month that he wants defendants to “take accountability for their violations and issue mea culpas to the public.”

Press Releases

He wants an end to company press releases that suggest the SEC over-reacted. Otherwise, he said, the commission may reconsider its routine acceptance of settlements in which the accused culprit neither admits nor denies misconduct.

Aguilar’s comments sound more like a threat aimed at those who try to squirm around the no-denial provision of their SEC settlements.

As for Rakoff, who has tangled with the SEC in the past, stay tuned to see whether he can force a redo of SEC practices by rejecting a settlement now and then.

He makes a point. The current policy looks silly in cases like Madoff’s, and inconclusive in the grayer ones.

But in the real world of litigation, it’s hard to see how demanding an admission as part of a settlement would do anything other than drive more accused violators to trial, at taxpayer expense, without producing tougher penalties for the wrongdoer.

Yakuza Salivate Over New Construction Paradise

Yakuza Salivate Over New Construction Paradise: William Pesek


William Pesek

Here’s a number for economists mulling Japan’s post-earthquake trajectory: 17.

That’s Japan’s ranking out of 178 nations in Transparency International’s latest corruption perception index, putting it on a par with Barbados. The odds strongly favor Japan sliding down the list in the next few years. A sudden return to “concrete economics” in a nation that’s tried to shake the phenomenon virtually ensures the return of large-scale graft.

An estimated $309 billion in earthquake and tsunami damage may prompt formation of a reconstruction agency modeled after the Economic Stabilization Board created in the wake of the devastation of World War II.

That board helped power Japan’s postwar boom, one largely built on building. Massive public-works projects that transformed Japan also gave rise to a construction-industrial complex and some notable side effects: surging public debt, a heyday for mobsters and graft. These side effects are about to swell again.

To jolt gross domestic product properly, Japanese officials must not only spend wisely, but impose unprecedented levels of accountability in the process. Money is tight given Japan’s fiscal position. And if Stephen Roach, nonexecutive chairman of Morgan Stanley Asia, is right, any boost from rebuilding may just fade into another “lost decade.”

Graft Boom

The reason is the inefficiency inherent in Japan’s economic system. Spending public funds unwisely limits the multiplier effect, whereby stimulus trickles down and helps households. The nexus between politicians, contractors and yakuza also is where economic reforms go to die. Graft at the highest levels keeps Japan from raising its economic game.

The opportunity to line one’s pocket is a powerful force, and creates a kind of tunnel vision. As Japan plans the needed rebuilding, it must consider the wisdom of lavish spending to recreate communities that were losing relevance before March 11 and are directly in harm’s way for the next tsunami. Huge, costly seawalls proved little help.

These considerations require careful reflection, and they will get short shrift as money begins to flow freely. Japan has long needed to channel money away from construction into more productive pursuits that boost its competitiveness in the age of China. Those efforts, including joining U.S.-led trade talks and empowering entrepreneurs, are now on the backburner.

Yakuza Ban

Government and business leaders worked steadily in recent years to sever deep and shadowy ties between organized crime and corporate Japan. The construction industry has been a particular focus, as evidenced by a complete ban on yakuza involvement in one particularly high-profile project: the 2,080-foot (634-meter) Tokyo Sky Tree tower.

The campaign reflects public discontent with Japan’s estimated 80,000 yakuza, who control a critical mass of the underbelly of Japan Inc. There’s a growing realization that in a sluggish, deflationary economy, gangsters add costs. They also thrive in industries -- including sex, drugs and gambling --that the National Policy Agency would rather do without.

Japan’s ever-entrepreneurial crime syndicates diversified into real estate, technology companies and stock dealing. Still, construction holds a special place in the yakuza heart and that magnitude-9.0 quake will prove very good for business. Expect a building boom like few others in modern Japanese history, with gangsters lining up to get their share.

The Big Nexus

“The nexus of massive construction projects, bureaucrats, politicians, businessmen and yakuza are as revealing about Japan as they are about Italy and Russia,” Jeff Kingston wrote in his 2010 book “Contemporary Japan.” “In Japan, the yakuza cut on construction projects is estimated at 3 percent, a vast sum that keeps them afloat, given that during the 1990s the public-works budget was on par with the U.S. Pentagon’s budget and remains quite high despite huge cutbacks.”

Well, happy days are here again. The billions Japan plans to spend rebuilding is just the beginning. Disaster-damage estimates always start on the conservative side. And given how Japan’s Goodfellas are being squeezed from all angles, expect an all-guns-blazing effort to boost their 3 percent take.

Prime Minister Naoto Kan says he wants construction crews at work in quake-ravaged areas as soon as possible. The desire to get infrastructure projects underway will shorten and simplify the bidding process, probably concentrating projects among politically connected builders.

Concrete Economics

What worries me is the bull market in graft. True, the Liberal Democratic Party is no longer calling the shots. In 54 years of virtually uninterrupted rule that ended in August 2009, the LDP turned concrete economics into an art form.

It was financed by ever-rising public debt, which is now twice the size of the economy. Any growth jolt from public works is temporary. When the project ends, so do the jobs. That’s why Japan perpetually paves roads with no potholes, builds bridges to nowhere and litters shorelines with concrete. Pouring cement wins you votes.

Kan’s Democratic Party of Japan pledged to break Japan’s construction-industrial complex. It’s reviewing dam and other huge public works it deems wasteful. The quake reconstruction process will test that commitment. Transparency International’s perception, too.

Thursday, March 24, 2011

Milton Friedman - Greed

Milton Friedman Debates Naomi Klein

Milton Friedman Puts A Young Michael Moore In His Place

Milton Friedman - Redistribution of Wealth

Responsibility to the Poor

For richer, for poorer

For richer, for poorer

Forget aid—people in the poorest countries like Haiti need new cities with different rules. And developed countries should be the ones that build them

Lacking electricity at home, students work under the dim lights of a parking lot at G’bessi Airport in Conakry, Guinea

On the first day of TEDGlobal, a conference for technology enthusiasts in Oxford in July 2009, a surprise guest was unveiled: Gordon Brown. He began his presentation with a striking photograph of a vulture watching over a starving Sudanese girl. The internet, he said, meant such shocking images circulated quickly around the world, helping to mobilise a new global community of aid donors. Brown’s talk ended with a call to action: developed countries should give more aid to fight poverty.

When disaster strikes—as in the recent Haiti earthquake—the prime minister is right. Even small amounts of aid can save many lives. The moral case for aid is compelling. But we must also remember that aid is just palliative care. It doesn’t treat the underlying problems. As leaders like Rwandan president Paul Kagame have noted, it can even make these problems worse if it saps the innovation, ambition, confidence, and aspiration that ultimately helps poor countries grow.

So, two days later, I opened my own TED talk with a different photo, one of African students doing their homework at night under streetlights. I hoped the image would provoke astonishment rather than guilt or pity—for how could it be that the 100-year-old technology for lighting homes was still not available for the students? I argued that the failure could be traced to weak or wrong rules. The right rules can harness self-interest and use it to reduce poverty. The wrong rules stifle this force or channel it in ways that harm society.

The deeper problem, widely recognised but seldom addressed, is how to free people from bad rules. I floated a provocative idea. Instead of focusing on poor nations and how to change their rules, we should focus on poor people and how they can move somewhere with better rules. One way to do this is with dozens, perhaps hundreds, of new “charter cities,” where developed countries frame the rules and hundreds of millions of poor families could become residents.

How would such a city work? Imagine that a government in a poor country set aside a piece of uninhabited land. It invites a developed country to enter into a new type of partnership, in which the developed country sets up and enforces rules specified in a charter. Citizens from the poorer country, and the rest of the world, would be free to live and work in the city that emerges. It could create economic opportunities and encourage foreign investment, and by using uninhabited land it would ensure everyone living there would have chosen to do so with full knowledge of the rules. Roughly 3bn people, mostly the working poor, will move to cities over the next few decades. To my mind the choice is not whether the world will urbanise, but where and under which rules. Instead of expanding the slums in existing urban centres, new charter cities could provide safe, low-income housing and jobs that the world will need to accommodate this shift. Even more important, these cities could give poor people a chance to choose the rules they want to live and work under.

To understand why rules are the way to harness self-interest, and why such new cities could work where old cities have not, look again at the example of electricity. We know from the developed world that it costs very little to light a home—on average, less than one US penny an hour for a 100-watt bulb. We also know that most poor people in Africa are not starving. They could afford some light. Africans do not lack electricity because they are too poor. Indeed, reliable power is so important for education, productivity and job creation that it would be more accurate to say that many in Africa are poor because they don’t have electricity. So why don’t they?

Why the right rules matter

Consider development the other way round. US customers have cheap electricity mostly because rules channel self-interest in the right way. Some protect investments made by utilities, others stop these companies abusing their monopoly power. With such rules, companies win; efficient providers make a profit. But customers win too; they get access to a vital resource at low cost. It’s the absence of these rules that explains why many Africans don’t have electricity at home. It might seem a simple insight, but it took economists a long time to understand it.

In the 1950s and 1960s, economic models treated ideas as public goods, meaning that once one existed it was assumed to exist everywhere. Some ideas are like this—for example, the formula for oral rehydration therapy, the mixture of sugar, salt, and water, that stops children dying from diarrhoea. No one owns it and you can find it easily online. If all ideas were like this it would be easier for poor countries to grow. But they aren’t: patents and other legal rules stop some ideas spreading, while others are just easy to keep secret.

When I started graduate school in the late 1970s I was convinced economists underestimated the potential for new ideas to raise living standards. The body of work that grew out of my PhD thesis came to be called new growth theory, or post-neoclassical endogenous growth theory in Britain (when it was infamously taken up by new Labour in the mid-1990s). Initially I just wanted to understand how good ideas, like those which make cheap electric light possible, were discovered. But then another topic began to interest me: why didn’t ideas common in some parts of the world spread to others?

Put simply, some countries are better able to establish the type of rules that help good ideas spread, while others are trapped by bad rules that keep ideas out. The rules stopping cheap electricity, for instance, are not hard to identify. The threat of expropriation or political instability stops many western electricity companies moving into Africa. Those that do set up there can exploit their power as monopolists to charge excessive prices. Often they offer bribes to stop rules being enforced, or pay bribes themselves. Good rules would stop all this. So to unleash the potential of the marketplace, poor countries need to find a way to create good rules.

The challenge in setting up good rules lies in solving what economists call “commitment” problems. How can a developing country promise to keep the rules that govern investment fair? Nobel prize-winning economist Thomas Schelling illustrates this problem with the example of a kidnapper who decides he wants to free his victim. But the kidnapper worries that the victim, once released, will go to the authorities. The victim, eager to be free, promises not to—but there is no way for him to guarantee he will keep quiet. As a result, the kidnapper is compelled to kill the victim, even though both would be better off if a binding agreement could be made. Poor countries face similar problems: their leaders cannot make credible commitments to would-be investors.

Rich nations use well-functioning systems of courts, police and jails, developed over centuries, to solve such problems. Two people can make a commitment. If they don’t follow through, the courts will punish them. But many developing countries are still working their way down the same arduous path. Their leaders can fight corruption and establish independent courts and better rules over property rights, but such moves often require unpopular measures to coerce and cajole populations, making internal reforms excruciatingly slow. Subsequent leaders may undo any commitments they make. A faster route would seem to be for a developed country to impose new rules by force, as they did in the colonial period. There is evidence that some former colonies are more successful today because of rules established during their occupations. Yet any economic benefits usually took a long time to show up, and rarely compensated for years of condescension and the violent opposition it provoked. Today, violent civil conflicts have led some countries to again consider military humanitarian intervention, but this can only be justified in extreme circumstances. My point was that there is a middle ground between slow internal reforms and risky attempts at recolonialisation: the charter city.

There are large swathes of uninhabited land on the coast of sub-Saharan Africa that are too dry for agriculture. But a city can develop in even the driest locations, supported if necessary by desalinated and recycled water. And the new zone created need not be ruled directly from the developed partner country—residents of the charter city can administer the rules specified by their partner as long as the developed country retains the final say. This is what happens today in Mauritius, where the British Privy Council is still the court of final appeal in a judicial system staffed by Mauritians. Different cities could start with charters that differ in many ways. The common element would be that all residents would be there by choice—a Gallup survey found that 700m people around the world would be willing to move permanently to another country that offers safety and economic opportunity.

I started thinking about city-scale special zones after writing a paper about Mauritius. At the time of its independence in 1968, economists were pessimistic about this small island nation’s prospects. The population was growing rapidly, new jobs were scarce in its only real export industry (sugar), and high tariffs designed to protect small companies manufacturing for the domestic market meant no companies could profitably use their workers to manufacture goods for export. It was politically impossible to dismantle these barriers to trade, so policymakers did the next best thing: they created a special category of companies, ones said to be in a “special export zone.” The zone didn’t physically exist, in that these companies could locate anywhere on the island, but companies “inside” the zone operated under different rules. They faced no tariffs, or limits on imports or exports. Foreign companies in the zone could enter and exit freely, and keep profits they earned. Domestic companies could enter too. The only quid pro quo was that everyone in the zone had to produce only for export, so as not to compete with domestic firms. The zone was a dramatic success. Foreign businesses entered. Employment grew rapidly. The economy moved from agriculture to manufacturing. Once growth was underway, the government reduced trade barriers, freeing up the rest of the economy.

The history of development is littered with failed examples of similar zones. Mauritius was unusual because it had low levels of crime and the government already provided good utilities and infrastructure. The zone only had to remove one bad form of governance: trade restrictions. Yet many developing countries still can’t offer the basics, another reason why building new cities is an attractive option. Cities are just the right scale to offer basic conditions. So long as they can trade freely, even small cities are big enough to be self-sufficient. Yet because they are dense they require very little land.

To apply the lessons from Mauritius in countries with pervasive problems, the key is to create zones with new rules that are big enough to be self-contained. Big enough, that is, to hold a city. Then let people decide whether to enter.

When I returned to Mauritius in 2008, I outlined my ideas to Maurice Lam, head of the Mauritian Board of Investment. Maurice splits his time between Mauritius and Singapore. He and I knew that Lee Kuan Yew, former prime minister of Singapore, had experimented in the 1990s with a similar idea, establishing new cities that Singapore could help to run in China and Indonesia. These ran into difficulties because the local governments retained discretionary powers that they used to interfere after Singapore had made large investments in infrastructure. This convinced us that explicit treaties reassigning administrative control over land were needed. Maurice also said that countries in Africa would be open to this kind of arrangement. Some officials, eager to make a credible commitment to foreign investors, had already made informal inquiries about whether Mauritius would be willing to take administrative control over their special export zones.

What could go wrong?

Some economists have objected that a charter agreement between two countries will not necessarily solve the commitment problem that lies at the heart of development failures. The leaders of many countries enter into agreements, sometimes with the best intentions, that subsequent leaders or officials do not honour—as Lee Kuan Yew found to his cost. To guard against such an outcome, partners in a charter city must negotiate a formal treaty, like the one that gave the British rights in Hong Kong (see box, right). Under this arrangement the only way for the host country to renege on its commitment would be to invade. Even governments that resent having signed such agreements in the past almost always respect them. The Cubans hate the agreement that gave the US control of Guantánamo Bay, but learned to live with it.

Another objection comes from those who study urbanisation. They point out that the location of most existing cities is determined by accidents of history or geography, and suggest, correctly, that there are geographical requirements for a city to survive. But they are surely wrong to think that all the good sites for cities are taken. Here distance matters, but it is not an insurmountable obstacle: Mauritius continues to develop despite its remote location. Flat land is cheaper to build on, but many cities have developed on hilly terrain. A river can provide fresh water and access to the sea, but with desalination, so too can any coastal location where a port could be built. Access to the sea is the only real necessity—as long as a charter city can ship goods back and forth on container ships, it can thrive even if its neighbours turn hostile or unstable. And there are thousands of largely uninhabited coastal locations on several continents that could qualify.

Other urban economists fear new cities will repeat the unimpressive history of government-planned ones like Brasília, or Dubai’s recent bust. But these are both extreme examples. The state was too intrusive in Brasília and almost non-existent in Dubai. Hong Kong is the middle ground, a state ruled by laws not men, but one that leaves competition and individual initiative to decide the details.

The experience in Hong Kong offers two further lessons. The first is the importance of giving people a choice about the rules that govern them. Hong Kong was sparsely populated when the British took over. Unlike other colonial systems, almost everyone chose to come and live under the new system. This gave the rules proposed by the British a degree of legitimacy they never had in India, where the rules were imposed on often unwilling subjects. This is why building new cities, rather than taking over existing ones, is so powerful.

The second lesson is the importance of getting the scale right. Most nations are too large to update all their rules and laws at once. The coercion needed to impose a new system on an existing population generates friction, no matter who is in charge. Leaders on mainland China understood this when they attempted to copy the successes of Hong Kong by gradually opening a few places, such as the new city of Shenzhen, near Hong Kong. Yet while nations are too big, towns and villages are too small. A village cannot capture the benefits that arise when millions of people live and work together under good rules. Cities offer the right scale for dramatic change.

The demands of migration

As billions of people urbanise in the coming decades, they can move to hundreds of new cities. The gains new cities can unleash are clear. Picture again the students studying under the streetlights. By themselves, political leaders in poor countries won’t provide cheap, reliable electricity any time soon. They can’t eliminate the political risk that holds back investment or ensure adequate regulatory controls. But working with a partner nation, they can establish a new city where millions of young people could pay pennies to be able to study at home. And as these cities seek out residents, the leaders and citizens in existing countries will face the most effective pressure for good governance—competition.

We know from history that the competitive pressures created by migration can boost economic growth. But strong opposition to immigration in the world’s richest economies prevents many people from moving to better systems of rules. Charter cities bring the good systems of rules to places that would welcome migrants. Indeed, charter cities offer the only viable path for substantial increases in global migration, bringing good rules to places that the world’s poor can easily and legally access, while lessening the contentious political frictions that arise from traditional migration flows.

Intelligently designed new cities can offer environmental benefits too, a point increasingly made by environmentalists like Stewart Brand (see p39.) For example, Indonesia emits greenhouse gases at a rate exceeded only by China and the US. This rate is partly due to logging practices in its rainforest, and efforts to clear land for palm-oil plantations and pulp-producing acacia trees. Brand has cited the experience of Panama to demonstrate the green potential of urbanisation: as people there left slash-and-burn agriculture for work in cities, forest regenerated on the land they left behind. Similar migration to new cities in places like Indonesia could do much to reduce carbon emissions from the developing world.

Investment in charter cities could also make more effective the aid rich countries give. The British experience in Hong Kong shows that enforcing rules costs partners very little, but can have a huge effect. Because Hong Kong helped make reform in the rest of China possible, the British intervention there arguably did more to reduce world poverty than all the official aid programmes of the 20th century, and at a fraction of the cost. And, if many such cities are built, fewer people will be trapped in the failed states that are the root cause of most humanitarian crises and security concerns.

There are many questions to be resolved before the first city is chartered. Is it better to have a group of rich nations, or a multinational body like the EU, play the role the British played in Hong Kong? How would such a city be governed? And how and when might transfer of control back to the host country be arranged? But as we begin to explore these questions, we must not lose sight of the fundamental insights that advocates of the free market underestimate. The win-win agreements that we see in well-functioning markets are possible only when there is a strong, credible government that can establish the rules. In places where these rules are not present, it could take centuries for locals to bootstrap themselves from bad rules to good. By creating new zones through partnerships at the national level, good rules can spread more quickly, and when they do, the benefits can be huge.

The world’s fortunate citizens must be able to provide assistance when disasters like the earthquake in Haiti strike, but we must also be wary of the practical and moral limits of aid. When the roles of benefactor and supplicant are institutionalised, both parties are diminished. In the case of Haiti, if nations in the region created just two charter cities, they could house the entire population of that country. Senegal has offered Haitians the opportunity to return to the home “of their ancestors.” “If they come en masse we are ready to give them a region,” a Senegal government spokesman said. Outside of the extraordinary circumstances of a crisis, the role of partner is better for everyone. And there are millions of people seeking partnerships around the world. Helping people build them successfully is the opportunity of the century

Hong Kong: the first charter city?

Hong Kong was a successful example of a special zone that could serve as a model for charter cities. In the 1950s and 1960s, it was the only place in China where Chinese workers could enter partnerships with foreign workers and companies. Many of the Chinese who moved to Hong Kong started in low-skill jobs, making toys or sewing shirts. But over time their wages grew along with the skills that they gained working with educated managers, and using modern technologies and working practices.

Over time they acquired the values and norms that sustain modern cities. As a result, Hong Kong enjoyed rapid economic growth—in 1960, the average income was around £2,500; by 1997, it was around £20,000.

Even if it had wanted to, the Chinese government acting alone could not have offered this opportunity. The credibility of rules developed over centuries by the British government was essential in attracting the foreign investment, companies and skilled workers that let these low-skill immigrants lift themselves out of poverty. As in Mauritius, authority rested ultimately with the British governor general, but most of the police and civil servants were Chinese. And the benefits demonstrated in Hong Kong became a model for reform-minded leaders in China itself.

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