Market Advisory Features
Foreign Policy: A New World Order
Towards A More Inclusive World Economy
World Economy: Searching for Good News
Iraqi Debt: The Cold Calculation of War
in Iraq: America's Moment in the Middle East
The War in Iraq: At the Gates of Baghdad
American Diplomacy: Collateral Damage
new world order
Yet, in the longer term, the conclusions which the administration in Washington draws from its experience with Iraq could have far-reaching consequences both for the deployment of American power around the world and for the future of international relations. The United Nations, NATO, the old transatlantic alliance—none of these things is likely to be the same again. Even the shape of the world trading system could be affected by how America chooses to act once the conflict in Iraq is ended.
Conspiracy theorists—and there are more of them than ever these days—are tempted to assume that a small group of “neo-conservative” advisers with influence over President George Bush have a masterplan. They detect hints of this in Donald Rumsfeld’s off-hand reference to “old Europe” during the debate about whether to go to war with Iraq. They assume the American defence secretary was underlining the extent to which the United States was willing to write off longstanding and previously close alliances that had held largely constant since the second world war. Ill-tempered tiffs have always coloured the relationship between America and Europe, France in particular. But Mr Rumsfeld appeared to suggest this time the rift was more fundamental.
For Mr Rumsfeld it might be. But he is only one voice among many competing for Mr Bush’s ear. Even in the most tightly knit American administrations, power and influence are diffuse, never more so than at times of wrenching change, when everyone is keen to ensure their voice is heard. However hard governments try to take a broad strategic view, day-to-day events inevitably dominate. Important policy decisions have to be taken on the hoof and in the light of circumstances which could not have been anticipated.
Military conflicts, even those with a successful outcome, rarely develop as expected; still less does the peace follow predictable lines. Yet it is possible to see how America might seek to exploit its military success in Iraq. The overthrow of Saddam Hussein will, at least, leave some governments looking over their shoulder, wondering if America will now turn its sights on them. The Americans gave a sharp warning to both Syria and Iran when suspicions arose that they were supplying military equipment to Iraq after the war had started. Iran, of course, is already a member of Mr Bush’s “axis of evil”: many Americans, including those in government, have not forgotten the humiliation suffered when protesters stormed the American embassy in Tehran in 1979.
Over the years, America has frequently accused Iran, along with Syria and Libya, of supporting international terrorism. But since September 11th, Mr Bush has seemed determined to back up such accusations with action. The Taliban regime in Afghanistan, judged to be the main protector and supporter of the al-Qaeda terrorists behind the attacks on New York and Washington, was dismantled in short order.
The motive for attacking Iraq was always less clearcut: America’s arguments shifted, sometimes not very subtly. But the ultimate aim was always clear—the removal of Saddam and the introduction of democratic government. For some commentators, that sits oddly with continued American courtship of countries like Saudi Arabia, with its repressive and increasingly nervous regime. But even for someone like Mr Bush, idealism has to be tempered with realpolitik. America relies heavily on Saudi oil production, both to satisfy its own needs and to moderate the oil price.
The prospect of a large rise in oil production from Iraq—which has the world’s second-largest proven reserves—could, eventually, lessen American dependence on the Saudis, especially with no Saddam to keep under control. The successful introduction of democracy in Iraq could also increase pressure on neighbouring countries to move towards more representative government. But even in Iraq alone that is a tall order, and it might take some time to know how successful the experiment in democracy has been. And in any case, democracy in Iraq or in the Middle East region as a whole might not produce governments friendly to America or its interests.
But the readiness of the world’s only superpower to intervene militarily to defend what it regards as its security interests, and to do so pre-emptively, might at least give governments instinctively hostile to America pause for thought. The relatively light military forces with which the coalition successfully prosecuted the war in Iraq have also underlined America’s ability to wage war on more than one front at once—which again should make governments, if not terrorists, more cautious.
The end of the cold war left American power unchallenged in the Middle East. But Mr Bush’s reluctance to engage actively in the peace process between Israel and the Palestinians has fuelled anti-American sentiment in the region. Critics argue that the war in Iraq has given Israel cover to pursue an aggressive, uncompromising policy towards Palestinian dissent. Even Britain’s prime minister, Tony Blair, Mr Bush’s closest foreign ally, is struggling to persuade the president to move forcefully on this issue. America no longer seems so concerned about being liked: it is more preoccupied with ensuring that its opponents are fearful.
To reinforce his progress in achieving that goal, it is likely that sooner or later Mr Bush will have to deal with the problem of North Korea—a state that has admitted to having a nuclear-weapons programme. Military intervention there is far more complicated because of North Korea’s proximity to its southern namesake, as well as Japan and China. A pre-emptive strike would have to be swift, unexpected and successful to avoid a dangerous conflagration—a tall order, especially given Chinese sensitivity to America’s military presence in the region. That is why America continues to insist that a diplomatic solution to the crisis can be reached. In the post-Saddam world, though, it would not be wise to rule anything out.
Something good has happened...
The critics will doubtless find new reasons to cavil soon enough. The war was swift, but how could Iraq versus the superpower have ended any other way? What about the looting, the disorder, the score-settling, the perils ahead? How, exactly, does the Anglo-American coalition plan to plant a liberal democracy in such barren soil? Was the war legal? Was it worth the damage it has inflicted on the Security Council, on Arab pride, on relations between America and Europe and between Islam and the West? Is there not a danger that, having rediscovered the swiftness of its terrible sword, America will turn too readily to the use of force in other conflicts? And so forth. In truth, many of these are excellent questions. But first the critics of this war have a duty to acknowledge that something good has happened, and that this good has to be weighed in the scale against their misgivings. Quite simply, the people of Iraq are being delivered from a terror that has endured for more than a quarter of a century. The torture chambers are being emptied. Yes, thousands of Iraqis have died in this invasion; but well over 100,000 had been murdered over the decades by the regime itself, and perhaps half a million died in the dictator's pointless wars. Now, at least, Iraq can hope for a better future.
Will that hope be translated into reality? It is hard to imagine any post-war dispensation that could leave Iraqis less free or more miserable than they were under Mr Hussein. In the long run, its oil should enrich Iraq. But Mr Bush has chosen a horribly complicated country in which to learn the business of nation-building he was once so anxious to avoid. The scale of the atrocities practised by the regime makes it inevitable that there will be a period of bloody revenge-taking. Sectarian conflicts run deep. Iraqi Arabs might once again fall out with Iraqi Kurds. The Kurds themselves are divided between two rivalrous parties that have fought before and might do so again. The Shias might turn on the Sunnis or the religious on the secular. Armed remnants of the regime could make common cause with the Islamists they once suppressed against the infidel invaders. Or all of these things could happen at once.
To Iraqis, moreover, America is an improbable liberator. Those old enough to remember it despise the Americans for abandoning the uprising Mr Bush's father incited in 1991. The younger ones have been schooled to despise America for (they believe) imposing sanctions on Iraq and Zionism on Palestine. To such people—and to the masses beyond who witnessed this week's startling scenes on television—the notion that America might be a force for good in the lives of Arabs must be thoroughly discombobulating. At the beginning of the week, much of the Arab world felt shame and rage as the Americans routed the Iraqis. By its end, the Arabs could see that many Iraqis preferred liberation by the Americans to repression by one of their own. Like the toppling of the twin towers, the jubilant toppling of Mr Hussein's statue in downtown Baghdad was the sort of event that has the power to shape the beliefs and behaviour of millions.
This is both a great opportunity and, surely, America's moment in the Middle East. Mr Bush did not launch this war on behalf of the people of Iraq. He went to war because, after September 11th, the prospect that a man such as Saddam Hussein would keep his outlawed chemical and biological weapons, or obtain nuclear ones, seemed too big a danger for America to live with. Nonetheless, Mr Bush has now staked his political future on the adventure ending right, with the creation of a stable Arab democracy. Though he had allies, especially the faithful Tony Blair, it will be remembered as his war, the one he insisted on fighting even when America tried and failed to get the clear mandate it sought from the Security Council. He has a bigger interest than any other world leader in winning the peace as well as the war.
Needless to say, those who predicted with such confidence that America would make a hash of the war are now predicting confidently that it will mess up the peace. And so it may—for any or all of the reasons above. Still, failure is not pre-ordained. In the unsuave way of his that has caused him to be chronically under-estimated in Europe, Mr Bush said at this week's Belfast meeting with Mr Blair that he considered Iraqis “plenty capable” of running their own country. At Mr Blair's urging, he has also promised to energise the search for peace between Israel and the Palestinians. Given how much depends on getting his moment in the Middle East right—from his own re-election to America's standing in the Islamic world—he has every reason to mean what he says.
First, though, he must deal with a complication. Having failed to stop the Americans and British from launching this war, France, Russia and Germany, which led the anti-war diplomacy, are now intent on denying the victors a special say, let alone a free hand, in putting Iraq back together. At their Belfast summit, Mr Bush and Mr Blair promised that the UN would have “ a vital role” in post-war Iraq. For Jacques Chirac, however, this does not seem to be enough. France's president insists that the UN, and it alone, must rebuild the country and give it a new government. He will seek support for this at a weekend summit in St Petersburg with Russia's President Vladimir Putin and Germany's Gerhard Schröder.
As it happens, there is a lot to be said for giving the UN a prominent job in Iraq. It has useful experience and dedicated professionals. By giving a substantial role to the world body, the Americans can help to persuade the sceptical that they are acting in a wider interest than just their own. A new Iraqi government that receives a blessing from the UN, and comes into being by means of a procedure the UN endorses, is far less likely to be seen by Iraq's people as the creature of the United States. In short, Mr Bush himself has much to gain by using the UN to lower America's profile in Iraq once the war is over. And it would be good to mend some of the damage the pre-war rift did to relations within the Security Council.
But not at any price. The danger posed by Mr Chirac and his salon des refusés is that they still give the impression of caring more about hobbling America's power in the world than about helping America to achieve its ambitious aims of peace and democracy for Iraq. If their price for bringing the UN into the picture is that America must lose all its freedom of manoeuvre in Iraq, where it is Mr Bush who is bound to be blamed anyway for whatever happens, he should refuse to pay. It would be folly to allow the post-war transition to follow the enervating pattern of the pre-war diplomacy. There is simply too much at stake to go through all that again.
Towards a more inclusive world economy
Mr Wolfensohn did not seek to downplay the importance of rebuilding Iraq, or of the need for humanitarian assistance. But as finance ministers gathered in Washington for the spring meetings of the International Monetary Fund (IMF) and the World Bank, he was concerned not to lose sight of the longer-term challenges facing the world economy. The World Bank has already admitted that many of the world’s poorest countries do not now look like being able to meet the Millennium Development goals set by the United Nations in September 2000. These goals include universal primary education by 2015 and a dramatic reduction of the number of people living in poverty.
Mr Wolfensohn and his counterpart at the IMF, Horst Köhler, are also both alarmed by the current deadlock in the Doha round of world trade negotiations, being conducted under the auspices of the World Trade Organisation. Mr Wolfensohn has described the the gulf between many of the participants, especially on the issue of subsidies for farmers, as a “dialogue of the deaf”. And the IMF, in its latest economic outlook, published on April 9th, noted that the rich world spent $300 billion on agricultural support in 2001—six times the amount they spent on development aid.
Agricultural protection in the rich countries hurts poor countries in two ways. Subsidies undercut the cost of production in poor countries, making it harder for them to compete and damaging their efforts to establish viable agricultural sectors and move towards self-sufficiency. But protection also excludes poor-country farmers from access to the markets of the industrial world. Making progress on farm support is crucial to the success of the Doha round. When the round was launched in November 2001, the promise of concessions in this area was one of the issues which persuaded the developing countries to agree to participate in further negotiations. So far, though, the promises remain unfulfilled. The European Union and Japan are getting most of the blame for the lack of progress.
The launch of the Doha round took place just weeks after the terrorist attacks of September 11th 2001, while the war in Afghanistan was being waged. These dramatic events brought home to the rich world how important it was to ensure that even the poorest countries were encouraged to participate in the world economy. Trade and prosperity are the surest ways of preventing the problem of “failed states” which has helped foster international terrorism. Poverty might not be a direct cause of terrorism—plenty of very poor countries have no record of harbouring terrorists—but it certainly provides the environment in which dissent and resentment thrive.
Eighteen months on from September 11th, it is easy for the cynics to argue that the promises at Doha were not well-intentioned. Besides the deadlock on farm trade, plans to improve access to cheap drugs for poor countries are stalled, this time because America is refusing to sign up to an agreement negotiated last December. And developing countries are unhappy with the failure of their efforts to revise elements of the previous Uruguay round trade deal—another undertaking they were given at Doha.
There is now a real prospect that Doha could fail if progress is not made by the time ministers meet to take stock in Cancun, Mexico, in September. The list of issues for them to address is already piling up, which risks making the meeting unwieldy and ineffective. The collapse of trade talks would seriously damage relations between the rich countries and their poorer neighbours. There is always the risk that at least some countries would start to implement protectionist policies—blocking imports and raising tariffs, for instance. This would curb world trade growth and, in turn, harm the already-fragile economic recovery.
Lack of progress on trade, though, is symptomatic of what developing countries see as a general reluctance on the part of rich countries to put their money where their mouth is. Many in the developing world are sceptical of initiatives like debt relief for the most heavily indebted poor countries, known as HIPCs. There are complaints that not all the countries that could benefit are able to, and that the debt relief provided is insufficient to help the recipients rebalance their finances. And even the IMF’s own Executive Board recently noted that creditor countries had been much quicker to promise help than to deliver it.
Work is under way to give poor countries more of a voice in the international organisations on whose help they most depend. At their spring meetings, both the IMF and the World Bank are looking at ways to help developing countries participate more effectively and acquire more influence. An inclusive world economy is key to helping poor countries become more prosperous.
But so too is good governance—an issue now in the headlines in the context of Iraq. The coalition military forces are now seeking to establish law and order in Baghdad and elsewhere. But their experience has already shown how difficult and how important the basic rules of society are. In its economic outlook, the IMF points out that variations in the quality of domestic institutions—by which it means the rule of law, the ability to guarantee property rights, freedom from corruption, and so on—explains a large part of the wide variations in economic performance in a continent like Africa.
Ultimately, interaction with the rest of the world, at both the political and economic level, is the best way to give poor countries a sense of belonging and provide the incentive for good government and, in turn, economic growth. Responsibility for achieving that, though, is a two-way process—and in many respects the rich world has yet to play its part.
Dominating the assessment is the outlook for America. The IMF is now expecting slower growth in the world’s biggest economy than it was six months ago, and, significantly, than last year. The Fund nevertheless expects America to lead the global upturn, and argues that the world is now too reliant on American growth. A greater sense of urgency is needed to reduce dependence on America, says the Fund in its list of policy prescriptions.
Easier said than done, of course. If the outlook for America is subdued, it is dismal in most parts of Europe and Japan. The IMF is clearly very worried by the poor economic performance of the euro area—its latest forecast for growth this year is less than half that produced in September. Germany is of particular concern: as the Fund points out, 2003 will be the third consecutive year that Europe’s largest economy has grown at a rate of less than 1%. There is not much sign of any improvement, either. Although—unlike some economists—the IMF forecasters do not believe there is much risk of global deflation, they do think that of all the industrial countries, Germany remains most vulnerable to falling prices after Japan.
Japan, of course, is now almost a global economic pariah. Deflation there is well-entrenched and the authorities have so far failed to make any headway in stabilising prices, let alone restoring some measure of inflation. The IMF predicts that prices in Japan will continue to fall at least through to the end of next year (the extent of the IMF’s projections). The Fund—like almost every other commentator on Japan—wants to see the Bank of Japan make an explicit public commitment to ending deflation. It also wants to see firm action to tackle structural problems in the banking and corporate sectors.
One reason why the IMF is concerned that the world remains too dependent on America for its economic momentum is that there is relatively little room for manoeuvre when policymakers need to respond to outside shocks, especially in Europe and Japan. The Fund clearly wants lower interest rates in the euro area in any event. At a news conference on April 9th, the Fund's chief economist, Kenneth Rogoff, also said that the ECB should consider replacing the current 2% inflation ceiling with a central inflation target of perhaps 2.5%, so as to make it easier to relax monetary policy.
But the fiscal position in both Europe and Japan makes it hard for policymakers to provide much additional stimulus. The IMF does not explicitly criticise the euro-area’s notorious stability and growth pact; indeed, it sees merit in European governments sorting out their fiscal mess by aiming for balanced budgets over the medium term. But it wants the so-called automatic stabilisers—higher spending and lower tax revenues—to take full effect during the current slowdown. So governments should let the short-term budget deficit go above the 3% limit if need be—not a suggestion that will win the IMF many friends at the European Central Bank.
Heavy reliance on borrowing in the past has pushed public debt up sharply in many economies, just as the prospect of ageing populations means that pensions, health-care and benefit programmes need to be reformed, to prevent them surging out of control. Yet there is little sign of either Japan or the euro area acknowledging the dangers if such change is postponed.
America may be the economy on which everyone relies but its policy shortcomings do not escape comment from the IMF. The Fund is particularly concerned about the Bush administration’s planned fiscal stimulus. The large tax cuts envisaged could, says the IMF, be pro-cyclical—in other words, they could give the economy a boost just as it is anyway starting to pick up speed. The risk there is that inflationary pressures could build up. But what really troubles the IMF—and it is not alone in this—is the size of the budget deficits that would result from big tax cuts. The underlying change in the balance between tax revenues and government spending, which would remain even after the economy had recovered, is bigger than in any downturn in the past 40 years, according to the IMF.
Much of the IMF’s forecast was prepared before there were clear signs about how the war in Iraq would progress. Some of the downside risks are likely to be less serious now that the conflict appears to be nearing its end. But, as the IMF points out, the end of the war does not mark an end to uncertainty: nobody yet knows what impact it will have on the Middle East and beyond. What is more, the impact of underlying economic problems remains unclear, muddied as it is by the complications of the Iraqi conflict. Is the world, and especially America, still suffering from the after-effects of the dotcom bubble bursting, or of last year’s corporate scandals? It should be over them by now, but it is too soon to be certain. And what if America’s huge current-account deficit should lead to a painful adjustment in exchange rates, which might in turn have an impact on the pace of recovery?
The IMF’s forecasters are experienced enough to know that there is never a good time to make a judgment about where the world economy is heading. But now is even more difficult than usual. The most that anyone can do is outline the risks—and there are currently plenty of those.
War in Iraq
At the gates of Baghdad
This war is unpopular with Muslims almost everywhere. If Saddam Hussein really could suck the Americans and British into the Vietnam-like “quagmire” his spokesmen have promised, this would undoubtedly poison America's and Britain's relations with both the Arabs and the wider Islamic world. The suicide-bombing at an American checkpoint on March 29th, followed by the shooting by Americans of civilians at another checkpoint, provoked comparisons with the quagmire Israel has sunk into in the occupied Palestinian territories. The stream of fatwas declaring holy war against the invaders, and the trickle of Arab volunteers entering Iraq to fight the Americans, have provoked comparisons with the Soviet invasion of Afghanistan, which radicalised a generation of Islamists, including Osama bin Laden. The defect of these comparisons is that Iraq is nothing like Vietnam, not much like Palestine or Afghanistan, and, on present evidence, no quagmire.
In Vietnam the Americans fought for ten years. The Soviet army spent ten years in Afghanistan. This war entered its third week with the Americans battering through Iraq's Republican Guard divisions to the gates of Baghdad. At this rate, it will be a surprise if the Americans have to fight for ten weeks, let alone ten years. Israel's occupation of the West Bank and Gaza has lasted for 36 years. If America has its way, its occupation of Iraq is more likely to last for fewer than 36 months. And there is no reason why America should not have its way: unlike Israel and the Palestinians, America and Iraq have no territorial quarrel. America's stated aim is to remove the regime and its mass-killing weapons, allow the Iraqis to replace their dictatorship with a representative government, and then depart.
By sticking to this plan and remembering to go home, the Americans should be able to reduce the damage their victory does to wider Arab pride. They and the British are already going to unusual lengths to bring some delicacy, even political correctness, to the battlefield. There is no tactless raising of the Stars and Stripes or the Union Jack over captured Iraqi positions. The civilian casualties, which even the Iraqis put at under 1,000, have so far been negligible by the standards of war.
When the war is over, especially if its ending emboldens Iraqis to say out loud that they abhorred the previous regime, Iraq will make an improbable Afghanistan. The Arabs who flocked to fight in Afghanistan had a superpower (America) on their side and a base (Pakistan) to fight from. They also had an idea: they were fighting for Islam against communist atheists. None of this applies in Iraq. Iran and Syria, already on George Bush's watch list, have good reasons not to pick a fight with America. Iraq's other neighbours—Jordan, Turkey, Saudi Arabia and Kuwait—are already America's friends. Some of these governments will no doubt seek spheres of influence inside the new Iraq. This is a danger. But none will risk making itself the base for an anti-American guerrilla war. However much they disapprove of this war, most Arab governments will stay on side. And those that do not stay on side will stay in line.
The governments may stay in line. But what about the people? Here too the danger of an Arab explosion is greatly exaggerated. There has been much loose talk in recent weeks about the possibility of the Iraqi war reviving the spirit of pan-Arab nationalism. But this idea of uniting the Arabs in a single polity expired a long time ago. In an irony, it was Mr Hussein who administered its death blow, when in 1990 he invoked the broader Arab interest as a reason to invade Kuwait, and so forced many other frightened Arab states to take America's side against him. Today's Arab world possesses no leader with the charisma of a Nasser, who in the 1950s and 1960s seemed capable of reaching across borders to electrify the masses. Mr Hussein might—just—have been capable of achieving a similar status if he had prevailed against America in the Gulf war, or if by some miracle he were to prevail now. But if he is defeated and disappears, his influence will flicker out.
If secular nationalism has failed the Arabs, will they turn to violent Islamism instead? It is unlikely. Over the past 20 years, Arabs have watched the Islamic revolution in Iran, which once hoped to export revolution to the Arabs as well, fail in war against Iraq and then fail in economics too. In countries where radical Islam turned violent, such as Egypt and Algeria in the 1990s, it has succeeded mainly in scaring the middle classes and secular intellectuals, who might otherwise have pushed for political reform, into accepting ruthless state repression. A few pious and violent hearts, offended by the spectacle of infidel intrusion, will no doubt respond to the Iraqi war by taking up arms alongside al-Qaeda. But though some Arabs admired the attack on the twin towers, most know that religious war against the West is no answer to their difficulties. The chances of Iraq igniting such a war is slim.
All this is reassuring. But it is reassuring only up to a point. It means that the Arabs have no dangerous answer to their problems, but it does not mean that they have no dangerous problems. On the contrary: to the problems of authoritarian governments, rising populations and failing economies, a successful American war in Iraq is liable to add a new dose of bitter humiliation. The glee with which so many Arabs have woven a myth of David-beats-Goliath resistance around Iraq's early performance in this war points to the danger of dreadful let-down when the reality of the regime's reverses sinks in. Even a short war in which the coalition bends over backwards to show that it is fighting the Iraqi regime and not the Iraqi nation will leave a bruise on Arab sensibilities. In 1967, six days of war was time enough for Israel to humiliate a generation of Arabs. Lately, a new generation has fumed helplessly as Israel knocks the stuffing out of the Palestinian intifada. Now Arabs are having to fume helplessly while Israel's superpower patron knocks the stuffing out of the one Arab state that had set its heart on becoming a superpower itself. To judge by the rage in Cairo, Damascus and other capitals, it is more than many Arabs can bear.
Humiliation is a dangerous thing. What is worse is that there is not much the western powers can do to soothe the wounds. In Iraq, America and Britain believe correctly that they are acting in their own vital interest and that of the wider world by separating Mr Hussein from his mass-killing weapons. They can try harder to bring peace to Palestine—indeed, to create a Palestine—but this will be possible only if the Palestinians and other Arabs stop hoping that they can reverse what many still see as the humiliation of Israel's creation. They can try to create the conditions in which a post-Saddam Iraq can become an exemplary democracy. But what if Iraq cannot rise to the occasion? Ultimately, it is for the Arabs themselves to opt for the modernity and democracy that have eluded them. All this war can do is to make that possible. It cannot guarantee that it will happen.
The diplomatic costs of war in Iraq, at least in the view of the rest of the world, have been large. Relations with France and Germany, once two of America's closest allies, are barely cordial. For 50 years, Turkey too was one of America's most reliable partners. Now, Turkish peasants have taken to stoning American military vehicles, and America is moving its aircraft from Turkish bases to Kuwait.
Still more collateral damage has been done to America's relationship with Russia, which had been steadily growing warmer during Vladimir Putin's presidency. Mr Bush paid scant heed to Russian objections to an attack on Iraq. This has emboldened hardliners who have long argued that their country was not getting enough from improved ties with America (see article). Russia's parliament has refused to ratify a treaty cutting American and Russian nuclear arms by two-thirds.
Mr Blair is not alone in worrying about the implications of all this for international order and security. Others also seem to want to cool tempers. Gerhard Schröder, the German chancellor, last week said he thought “a sensible working relationship” with Mr Bush was still possible. He left open the chance that Germany might contribute financially to Iraqi reconstruction. Officials have hinted that Germany might also be willing to back a United Nations resolution endorsing an American-led transitional government in Iraq, so long as authority was handed over to the UN as soon as possible.
Even Jacques Chirac, the French president, has been downplaying his differences with Mr Bush. During the prolonged wrangling this spring within the UN Security Council, Mr Chirac became the Bush administration's nemesis. Now the French leader says that he, too, wants to avoid an adversarial relationship with the world's only superpower.
But is the Bush administration ready, or willing, to respond to these overtures? The answer to that question is still far from clear. On the positive side, it sent Colin Powell, the secretary of state, to Turkey this week, and he stopped off in Brussels on the way back for talks with NATO and European foreign ministers.
Mr Powell's trip mattered, if only because (like most administration members) he travels so rarely. Admittedly, the trip was partly to deal with the urgent problems of war, not the long-term health of the two countries' alliance. Mr Powell won agreement from the Turks to ship food, fuel and humanitarian aid across their border into northern Iraq, and he seems to have succeeded in restraining the Turks from invading Iraq themselves. By just travelling all the way to Turkey, Mr Powell pleased his hosts. And his visit came right after an administration request to Congress for $1 billion in fresh grants and loans to Turkey.
Repairing ties with Turkey should be relatively straightforward, because there is an obvious bargain to be made: a resumption of American support for Turkey over EU membership and over backing from the International Monetary Fund in exchange for Turkish co-operation during the war, especially in the sensitive task of dealing with the Kurds. It is not yet clear whether this bargain will stick. But here, at least, is a chance for America to piece together some of the crockery.
Two other issues present a much bigger challenge: the so-called “road map” for a resolution to the Israeli-Palestinian conflict and the question of who will run a post-Saddam Iraq. At his summit with Mr Blair, Mr Bush promised to publish the road map—a series of steps which America wants the Palestinians and Israelis to take to restart the peace process. This could, in theory, improve America's relationship with both the Arab states and Europe.
The trouble is that the map has already run into criticism from both parties who, though they have accepted it in general, want to make a dozen amendments. It seems unlikely that publication itself will change much. It is also unclear how much negotiations on the basis of the road map would improve American ties with the Arab world: the general Arab attitude is that the road map is a surrender imposed on a crippled Palestinian Authority. Moreover, any progress would require America to put real pressure on Israel. No one in the Bush administration has so far shown much stomach for this.
An equally big stumbling block to patching up relations with others will be the fraught question of who will run a post-Saddam Iraq. On March 28th, the Security Council voted to restart the UN's oil-for-food programme under Kofi Annan's authority. The programme had fed more than half of Iraq's population. To win agreement, the Americans dropped their insistence that the UN co-ordinate its relief efforts with the American military command in Iraq. Before that, at the Azores summit on the eve of war, Mr Bush said he wanted the UN to endorse the post-war interim government in Baghdad. That suggested he was willing to give others a role.
But what sort of role? Mr Blair wants the UN to be “centrally involved” in post-war Iraq. That does not seem to be what the administration intends. “We didn't take on this huge burden,” Mr Powell told Congress last week, “not to be able to have significant, dominating control.”
In short, the question of international involvement in the post-war settlement is open, at best. There are few signs that the Bush administration really wants others to participate in reconstruction and even fewer signs that others have accepted what the administration wants, an American-controlled interim authority.
Perhaps this impasse is temporary. The White House itself is entangled in a basic rule of politics—the immediate drives out the urgent. It is also worth pointing out that there was a stage in the Afghan conflict when no one knew who would run the interim government or where reconstruction money would come from. Suddenly Hamid Karzai appeared, and the Tokyo conference promised billions. As one senior official puts it: “We're not yet in a post-conflict situation. The most important thing is to win the war.”
That said, there are more daunting obstacles. The administration is divided, as usual. The State Department wants to mend the crockery. Diplomats apply the term “post-war reconstruction” to America's broken alliances, not just Iraq. But two groups within the administration oppose them. One group says it is too early for diplomacy. The outcome of the Iraq war will fix automatically most of the difficulties, it claims. Engaging in diplomatic processes for their own sake is foolish. The other group, more brutally, wants revenge. Mr Bush's White House believes fervently in loyalty—and Messrs Chirac and Schröder are regarded as disloyal.
Worryingly, neither of these two groups accepts what is so evident abroad: that war in Iraq has caused significant damage to American interests. They see the conflict through the prism of the Anti-Ballistic Missile treaty and the Kosovo and Afghan wars. In each case, they argue, America took a decision, others complained bitterly, but then later endorsed the outcome. Two weeks of combat, after a failure to win a second UN resolution, have not been enough to change their minds. Until that happens, Mr Bush seems unlikely to follow Mr Blair in investing real political capital in the transatlantic alliance. Those hoping for a big American diplomatic effort may be waiting in vain.
The cold calculation of war
DESPITE the murder of Zoran Djindjic, prime minister of Serbia, on March 12th, the secondary-market price of defaulted Yugoslavian government debt has remained buoyant, at 50 cents on the dollar. Speculative buyers of the debt, mostly loans already restructured in 1998, are gambling that the Serbian government will ultimately pay them more—pending, among other complications, the resolution of a dispute between the creditors' agent bank, J.P. Morgan Chase, and the National Bank of Yugoslavia. Their appetite has increased considerably since 1999, when the debt fetched only five cents on the dollar (see chart 1).
Will speculators one day show the same relish for Iraq's loans? Already, traders say, the secondary-market price of two big Iraqi loans has doubled, to around 19 cents on the dollar. Some believe that Iraq is a safer long-term bet than Serbia, because it has oil and is not (yet) hostage to a business mafia. This week a Serbian bankruptcy court sold a steel mill for $23m, ignoring the $1.7 billion the mill had borrowed from some now furious western governments and companies.
All depends on how long the war in Iraq lasts—and on how a future government deals with its legacy of debt. There is $116 billion of official and commercial debt, plus some $200 billion of reparation claims following Iraq's invasion of Kuwait in 1990 and the first Gulf war. Even for a country that might earn $25 billion a year from oil, it is an impossible burden.
The market view is that Iraq will negotiate the write-off of between 70% and 90% of the $116 billion. Traders also guess that the United Nations Compensation Commission (UNCC), which is handling unpaid reparation claims, will cut these to perhaps $40 billion. So Iraq's existing obligations could be reduced to between, say, $50 billion and $75 billion.
Who gets repaid, and how much, depends on which creditors a new Iraqi government would need most to help rebuild its economy. The creditors fall into three groups: the IMF and World Bank; governments that provided trade credits and bilateral loans; and private banks and companies (see chart 2). Iraq owes only $1.1 billion to the first group. Assuming they can be kept happy, the chances of other creditors depend on whether America sets up an officially funded reconstruction programme like the Marshall Plan for western Europe after the second world war, or whether Iraq has to rely mainly on private funding. If the first, it will have to repay its official creditors, known as the Paris Club. If the second, it might follow Nigeria's example, repaying private creditors and ignoring official debt.
Above all, bankers argue, to return to the international capital markets, Iraq will have to show that it is at least willing to pay something towards its properly documented obligations. That would not include bills for sanctions-busting arms shipments, for example. But it would include bank loans, especially two big ones totalling $1 billion, syndicated in the 1980s, which have become a benchmark for Iraq's future creditworthiness. Although the price is only 19 cents on the dollar, a final repayment, including back interest, of up to 75 cents on the dollar is conceivable.
So far, there are few buyers—perhaps one or two a week—although the number of inquiries has soared lately, says Peter Bartlett of Exotix, an emerging-market-debt trading house. American entities are forbidden to trade. The buyers are mostly banks or a handful of funds that specialise in the debt of “pariah” states. Other Iraqi loans are traded too, such as letters of credit and other paper from the central bank, and two other banks, Rafidain Bank and Rashid Bank.
Trading, or even holding, Iraqi paper is loaded with traps. Its validity can expire every few years, according to the statute of limitations in various jurisdictions. Renewing it requires some acknowledgment from the borrower, and that was difficult even before the war. Assigning the debt from buyer to seller requires the borrower's assent, and the Iraqi banks have been unco-operative since 1988. The trick is to apply during public holidays, or when communications are down (as they are now), because the borrower's failure to respond within ten working days can be taken as agreement.
An alternative is to buy a sub-participation in a loan, but then the buyer takes on the credit risk of the intermediary as well. “All right if it's Deutsche Bank,” says one investor, “but not so good if it's a bank in Japan or the Middle East.” Prices are adjusted accordingly. There are long chains of sub-participations, compounding the risk of an already risky investment.
The complexity of Iraqi debt may not match that of Serbia, which is fraught with debt swaps between former Yugoslav republics and commercial debts that were turned into bilateral official lending. Still, it is complicated enough. The UNCC is working through reparation claims, but many of the biggest may take years to resolve. Omni Whittington, a Dutch firm that specialises in debt recovery from pariah states, is sceptical that prospects in Iraq will improve, even after the regime has been changed.
However, some commercial creditors have been able to unfreeze Iraqi assets abroad, except in America, and receive payment, as long as they demonstrate that the proceeds will not return to Iraq. Iraq's economy is centralised and reasonably simple. If the oilfields survive without heavy damage, there will be access to export earnings. The economy is almost bound to grow, albeit from a low base. That should encourage the purchase of speculative assets while they are still cheap. Vietnam may offer a better parallel than Serbia. In 1989, one pariah fund bought Vietnamese debt at four cents on the dollar. In 1995, it sold at 80 cents. That is not a bad return for a recovery that some thought inevitable.