issue1529e

Battle In The Shadows Jon Alterman

Manipulating Religion Dr. Mohammed Sayed Tantawi Sheikh Al-Azhar

Time is up

Manuel Almeida

Paved with Good Issue 1529, 24 October 2009

Intentions?

Editorial Cover

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Dear Readers,

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ADEL Al TORAIFI

Managing Director TARIK ALGAIN

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elcome to THE MAJALLA Digital. This week our issue is bringing you an analysis of the reforms that have been put in to place in the global economy since the onset of the recession. Vincent Bevins, London-based political economist and journalist, discusses in our featured article what governments could have done but haven’t, and why. In the Geopolitics section, Dr Jon Alterman, Director and Senior Fellow of the Middle East Program at the Center for Strategic and International Studies, covers the conflict in Iraq in his article “Battle In the Shadows.” Dr Alterman highlights how the media has shied away from what is currently going on in Iraq despite the fact the conflicts is still present, and still a problem.

As a complement to our feature on reform after the financial crisis, we have invited Abd Ahamid Al-Amry, a member of the Saudi Economic Group, and Saudi Economist Dr. Abdullah Al-Kuwaiz, to participate in a debate on how the GCC countries responded to the crisis. Our contributors provide insightful analysis on the monetary policies that have been implemented and their impact on the economy.

Do not miss The Majalla’s interview with Dr. Mohammed Sayed Tantawi, Sheik of the Al-Azhar (university and mosque). In this interview, Dr Mohamed addresses what he describes as Iran’s use of Shiite Islam to achieve narrow political interests.

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Recession Why many politicians think its best to buy out of it

Issue 1529

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Contents 08 Geopolitics Battle In The Shadows

11 In Brief Around The World Quotes Of The Week Magazine Round Up Letters

18 Features Paved with Good Intentions?

25 Debate How did GCC countries respond to the Crisis?

29 Ideas Who Said Capitalism Was Dead?

THE MAJALLA EDITORIAL TEAM London Bureau Chief Manuel Almeida Cairo Bureau Chief Ahmed Ayoub Editors Stephen Glain Paula Mejia Dina Wahba Editorial Secretary Jan Singfield Webmaster Mohamed Saleh Translation Sherif Okasha

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32 People Interview

Manipulating Religion Dr. Mohammed Sayed Tantawi Sheikh Al-Azhar Profile

The High Priest of the New Normal Mohamed El-Erian

Issue 1529, 24 October 2009

Submissions To submit articles or opinion, please email: editorial@majalla.com Note: all articles should not exceed 800 words

39 Economics Gulf Economics

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Black Knights or White Knights?

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47 Reviews Books

The Dilemma of Sunna and Reform Reports

Where to Start?

Readings

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Geopolitics

Battle In The Shadows No news is not necessarily good news for Iraq

After six years of conflict, Iraq still struggles to find its way. In the meanwhile, the general public has grown tired of the situation, and the media has drifted away from what goes on there. The only news that filters out concerns the bombings and some government announcements. However, the battle for Iraq goes on, it just goes on in the shadows.

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t is hard to win a war no one remembers you are fighting. With more than 100,000 U.S. troops in Iraq, the United States is clearly fighting a war, or at the very least supporting a government that is fighting its own war.

But if you read American newspapers or watch American television, the war has disappeared. The only news that filters out is a mass casualty bombing, or an announcement from the prime minister.

The fault does not only lie with the U.S. media. Foreign reporters have come to agree with their Western counterparts that the struggle for control over Iraq is too hard to understand, too complicated to explain, and too expensive and too dangerous to cover. It is remarkably rare for any foreign news organization to cover the lives of ordinary Iraqis or the power struggles underway throughout the country.

It was not always so. In 2003, with the U.S.-led invasion of Iraq, journalists crowded in any way they could. In 20032004-, many news outlets had a team of reporters in Iraq, with some tied to the official news emanating from the “Green Zone” in Baghdad, others embedded with U.S. troops, and still others roaming throughout the countryside.

The airwaves and newspapers were full of information, desperately trying to explain a complicated situation to a concerned public. While some reporters got things wrong and others never escaped the bubble of military supervision, there was never a question that this was an important story, even if covering it cost news organizations millions.

Today, the public has tired of Iraq, or more accurately, given up hope that the problems of the country will ever be solved. Six and a half years 24 October, 2009

a profound effect on the future of the country, regional security, and U.S. interests. While the stakes for Iraq have grown larger, the quantity of quality information that the outside world enjoys is much smaller.

Dr. Jon Alterman of violence have taken a toll on the patience and attention of a world that seeks to move on. It was probably the bombing of the Golden Mosque in Samarra that was the final straw for many. Iraq’s descent into sectarian strife fueled a belief in much of the world that Iraq’s problems were not those of a contemporary society recovering from a decades-long dictatorship, but rather the ancient rivalries of a violent society that never quite managed to be modern.

At the same time, the finances of the news business have shifted radically, as advertising has plummeted and fee-based distribution channels lose subscribers in droves. Maintaining a serious presence in Baghdad means not only covering reporters’ salaries, but significant additional expenses in security guards, armored cars and all manner of fixers, translators and stringers who knew their way around the country. It is a multi-million dollar expense on behalf of a public that is increasingly satisfied with the occasional headline from Yahoo news.

Not only has organizing a multiday reporting trip to Basra or Mosul become an expense few could afford; being in Iraq at all has become an unaffordable luxury for cash-strapped news organizations.

The problem with this turn of events is that the United States still maintains a massive troop presence in the country, and decisions being made now have

The constant drumbeat of reporting on bombings and political dysfunction feeds itself. Outsiders become more convinced that there is nothing to Iraq but bombings and political dysfunction, and news organizations cut back their coverage even further.

The reporting also has the effect of persuading many that the security situation remains extraordinarily dangerous, thereby raising the cost of coverage and undermining public support for continued security assistance to the Iraqis. Without public support, the troop presence decreases, and news organizations are even more reluctant to give time, space and energy to covering the story. It all becomes a cycle, the logical conclusion of which is the end of news coverage out of Iraq.

One might argue that six and a half years into efforts to mold Iraq’s future, the Iraqis have earned the right to be left alone. One could see the world’s disinterest, abetted by the withdrawal of news organizations, as a good thing.

Yet, the fact is that the Iraqis are not being left alone. Foreign governments – and not only the U.S. government – continue to try to influence Iraqi politics to serve their interests and those of their clients.

Weapons continue to flow in, but so does cash, training, and supplies. The battle for Iraq goes on, it just goes on in the shadows.

Director and Senior Fellow of the Middle East Program at Centre for Strategic and International Studies, Washington D.C.

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24 October, 2009

In Brief Around The World

Quotes Of The Week

Magazine Round Up

Letters

Š Getty Images

Al-Baradei in a difficult mission The head of the UN,s nuclear watchdog, Mohamed Al-Baradei, has said talks between Iran and world powers on a uranium enrichment deal are making slower-than-expected progress, but they are still moving forward. The slow progress came after Iran,s announcement of its desire to exclude Paris from the negotionations due to its past failure to meet fuel obligations to Iran.

Issue 1529

In the current talks between Iran, the five members of the UN Security Council, and the IAEA, a scheme has been proposed which hinges on an initial arrangement that Western negotiators announced after talks in Geneva earlier this month. Under it, Russia and France would treat most of Iran,s low-enriched uranium and turn it into fuel rods for a research reactor in Tehran.

Diplomats say a compromise is being considered under which Iran would sign a contract with Russia, which would then sub-contract work to France. The deal would see Iran get the fuel it needs, a tacit acknowledgement of its right to enrich uranium, and no new sanctions. The West would meanwhile get a guarantee that Iran,s existing stockpile will not be diverted to make nuclear bombs.

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In Brief - Around The World

Around The World

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1 Iran 31 people died in a suicide bombing in the Pishin region of SistanBaluchistan, and more than 25 were injured. During the attack, , several top commanders in Iran s elite Revolutionary Guards have been killed. Shia and Sunni tribal leaders were also killed. A Sunni resistance group, Jundullah, claimed responsibility for the attacks.

3 Israel Israeli Prime Minister vowed long fight against Goldstone report that condemned both Israeli and Hamas actions in the Gaza Strip War. He promised a lengthy diplomatic battle to refute UN charges that Israel committed war crimes during that war. Netanyahu said that the report could undermine US-sponsored Middle East peace moves and that he would object to Israelis standing trial for war crimes.

2 Egypt

4 Lebanon

Palestinian President Mahmoud Abbas arrived in Egypt for talks with President Hosni Mubarak after a reconciliation meeting with Hamas movement was put on the backburner. Abbas told reporters in Cairo that Fatah completely supported the Egyptian proposal, but that Hamas raised several obstacles to achieving reconciliation.

During a state visit to Spain Lebanon,s President Michel Suleiman accused Israel of spying on his country in violation of a United Nations resolution intended to promote peace in the region. He added that spying equipment planted

by Israel have been detected during the last week, which is a clear violation of UN resolution 1701.

24 October, 2009

5 Somalia Hardline al-Shabaab rebels have destroyed a mosque and the grave of a revered Sufi Muslim sheikh in central Somalia after shooting in the air to drive away local protesters.

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8 Taiwan

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9 Washington

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6 Pakistan Pakistani helicopters attacked Taliban bases near the Afghan border as the army urged NATO forces to seal the frontier to stem cross-border movement of militants. Earlier, six people were killed in two suicide bomb attacks at the International Islamic University in the capital, Islamabad, prompting authorities to order the closure of educational institutions across the country.

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, Taiwan s defence ministry has said China›s military strength is far more than it needs for selfdefence and it is a threat to the Asia-Pacific region. It warned unless 1,500 missiles aimed at Taiwan were removed, both nations would find it hard to trust each other. China, which regards Taiwan as part of its territory, has not yet responded to the Taiwanese defence report.

7 China Foreign ministry spokesman Ma Zhaoxu said China would make ‹‹all-out efforts to rescue the hijacked ship seized east of the Somali coast.›› Pirates threatened to execute all the , ship s crew should a rescue attempt be made by the Chinese government. So far there are reports that the ship is being tracked and the crew is in good conditions.

US Senate has voted to continue to allow Guantanamo inmates to be tried on US soil, removing a hurdle as the Obama administration seeks to close the camp. Mr Obama has set a 22 January 2010 deadline for closing the Guantanamo Bay detention centre in Cuba, where more than 220 inmates are still held.

10 Australia An Australian court found five men guilty of conspiring to commit a terror attack, by stockpiling weapons and chemicals to make bombs, , in retaliation at Australia s involvement in the wars in Iraq and Afghanistan. During a 10-month trial, the prosecutor told the New South Wales state Supreme Court that the five Islamic jihadists obtained «step-by-step instructions on how to make bombs capable of causing large-scale death and destruction.»

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In Brief - Quotes Of The Week

Magazine Round Up

Quotes Of The Week

«The reform will continue as long , as the people s demands , haven t been met» Mir Hossein Musawi - The leader of opposition in Iran emphasizing that the reform process will continue in the Islamic Republic.

«There are some parties who want to poison our relation with Egypt that the movement is very keen on, communication with Cairo is continuous and we are coming to Egypt, and it is not true that Cairo has pressured us in any way».

Dr. Mahmoud El Zahar, senior Hamas official. , «I m doing what I do with a sense , of sacrifice. I don t really like it.

Not at all.»

Italian Prime Minister Silvio Berlusconi thoughts about governing Italy

«We have made it clear to the Afghan government, we made it clear to the Security Council that there was fraud we wanted to rectify.»

UN Secretary General Ban Kimoona commenting on political stalemate in Afghanistan 24 October, 2009

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Magazine Round Up 1 Newsweek

Everything you know about China is wrong In this issue of the Newsweek, Rana Foroohar deconstructs six myths about China regarding its economic prowess. In this article Foroohar demonstrates that most facts that we take for granted regarding China may be far from reality. Is the Communist party really a monolith? Does China put money before the environment?

This article goes a long way in showing that what you may think you know about China may very well be wrong.

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3 The New Yorker

War and Politics

2 Reason

Inflation Returns!

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Reason magazine introduces inflation as a phenomenon on the rise, even though, according to the writers, its effects have not yet kicked in. The article tackles the issue by analyzing the American fiscal and monetary systems. The writers note that the overflowing financial liquidity is expected to lead to a price spike when the recessionary pressures break down. However, they also note that measures to counter inflation have been put in to place. But will these be effective?

Steve Coll tackles the deteriorating situation of stability in Afghanistan, where fraud during the Presidential elections blatantly took place.

According to Coll, the worsening of circumstances has been the result of a steady buildup since Karazai›d landslide victory in 2004›s presidential elections. The escalation of corruption levels and the Afghanis› weariness of conflict contributed to what Karzai has perceived as electoral betrayal. The policy of neutrality that was recently initiated by the American administration has also aided Karzai›s non-encroachment approach. To Coll, the Obama administration should be more «ambitious» when dealing with Afghanistan.

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4 4 Foreign Policy The Hermit Kingdom

In his weekly «Reality Check» column, Christian Caryl starts off with a portrayal of both the external and internal policies of the North Korean leader, concluding that despite his eccentricity, Kim Jong Il is no mad man. Caryl further digresses into issues pertaining to the succession of Kim Jong Il by his third son and the relationship between North and South Kore. Caryl believes that the implications of the political context weaved by North Korea’s nuclear weapons program is likely to keep the international community on its toes.

Cover Of The Week

Cover of the Week Time

Back to the Land: The New Green Revolution

The importance of the agriculture is highlighted in Time’s article on what has been dubbed the New Green Revolution. Fears of food shortages, a rethinking of antipoverty strategies and the recession are causing a dramatic shift in world economic policy in favor of greater support for agriculture. Farmers are being supported with more aid and investment by governments and development agencies than they have in decades as a result of a renewed global quest for food security and rural development.

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In Brief - Letters

Letters

The aging party

A marvelous historical account of the «Muslim Brotherhood». It describes its history from a domestic and international point of view. It highlights the problems of the group and the speculations regarding the Brotherhoods coming Supreme guide. It discuses the prospect of opening channels of communication between the United States and the Muslim Brotherhood. America will certainly regret its refusal to deal with moderate Middle East leaders, begning with Gamal Abdel Nasser, and ending the former Iranian President Mohammad Khatami.

Tony Phill - London

Egypt and the scourge of political stalemate

Great analysis of the governance crisis in Egypt. Such crisis has made the Egyptian political life rigid and filled us, the citizens of Egypt, with despair and frustration. The political, economic and social conditions will not be reformed our country unless there is a real trading of power.

Mohamed Al-Said - Egypt 24 October, 2009

Calls for reform and accusations of political inheritance

Having read this article, which displayed the opposing views on the political role played by Gamal Mubarak in the Egyptian political life, I fully agree with the author of the article that the person who deserves to be the president of Egypt, is the one who will be capable of fulfilling the dreams of the ordinary Egyptian citizen, whether it Gamal Mubarak or anyone else.

Samir Samy - Egypt

An Opportunity For Reform

A deep economic analysis of the structural problems that stand in the way of the recovery of the Gulf financial centers from the negative impacts of the global economic crisis. We, as members of the Gulf Cooperation Council, should take the advice of the author of the article and take advantage of the global financial crisis to create a culture of «continuous» reform.

Ahmed Al-Mutairi - Kuwait 16

In Brief - Magazine Round Up

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Features

24 October, 2009

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Paved with Good Intentions?

By Vincent Bevins Issue 1529

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Features

Paved with Good Intentions?

The Political Road to Economic Reform How much has changed since the onset of the Global Financial Crisis? It appears as though the answer is not much. The lack of reform of the financial system is due to a lack of political will to change. Now that signs of recovery are present, the political capital that may have allowed reform to occur is also waning. Prospects for real reform appear bleak.

LONDON - SEPTEMBER 5: (L-R) US Federal Reserve Bank Chairman Ben Bernanke, French finance minister Christine Lagarde, and US Treasury Secretary Tim Geithner walk following a group picture at the G20 finance Minister›s summit, at the Treasury in Westminster on September 5, 2009 in London, England. Š Getty Images

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wo CEOS stand in an office examining a chart showing plunging world GDP. One turns to the other, and says, “We can only hope that it turns around before there’s time to learn any lessons”.

global governance, and the international regulations which kept the immediate post-war period relatively stable have been gradually removed since the early 1980s, in line with the same beliefs that drove deregulation at the national level.

It seems this wish, expressed in an April cartoon, might now be coming true. It has been over a year since a financial maelstrom growing between Wall Street and London suddenly sucked the world economy down with it, submerging production and drowning off the planet’s less fortunate elements. Despite much discussion of the necessity of reform, it is unclear how much politicians have actually changed, and one begins to wonder if the political momentum for reform has been lost now that small signs of recovery are appearing.

What meaningful progress has been made in discussions of tackling these problems at these different levels? There has been some unconvincing discussion of reforming banker pay schemes, and there has been extensive talk of rearranging regulatory duties. Rearranging regulatory duties, however, is not the same as actually regulating. It was always someone’s job to oversee the system. It is not who does it, but if it is actually done, that matters.

Deep Problems, Shallow Attention Averting another similar financial disaster, of course, requires some agreement on what caused this one. This has been slow coming, but broadly speaking there are three levels where problems of instability contributed to the meltdown.

At the individual level, bankers, spurred on by large pay packages that encouraged short-term profit maximisation, took excessively risky positions and dispersed that risk system-wide through complex and opaque financial instruments. This was made easier and more dangerous by the fact that American consumers, who have tended to see their real wages fall over the past 30 years, had been convinced they could live the good life by taking on more and more debt, often against rising asset prices that turned out to be bubbles, easily burst.

At the national level, regulators failed to do their job. Keynes and Minsky showed us long ago that financiers will always hang themselves if given enough rope.

Those in charge of overseeing financial markets let risk become increasingly large and opaque, allowed banks to become too big to fail and chose to ignore a massive housing bubble. This behaviour was bolstered by the belief, held by those at the top, that markets “worked” and would sort themselves out in the end.

At the global level, huge trade imbalances and massive flows of speculative capital moving at light-speed have led to an increasingly unstable world economy for years, and have contributed to the problems at the individual and national level. A globalised economy and global finances have not been matched by any real Issue 1529

Progress has been made on the requirement that banks hold higher amounts of capital to balance the money they have invested.

But this is not much comfort even to such a mainstream commentator as Martin Wolf, author of Why Globalisation Works.

In the Financial Times, he writes, “higher capital requirements would again trigger an explosive expansion of an unregulated shadow banking system. In short, higher capital requirements will only work if they come with a huge increase in regulatory will and effectiveness. I am not holding my breath.” And as for the critical issues at the global level, there has been basically no progress whatsoever.

A Question of True Intentions In a discussion for this article at the Financial Times offices in London, one journalist joked, “The steps needed to avert another global crisis? Good luck”.

But in a sense, everyone knows what would avert another financial crisis. If stability was the main goal, politicians could easily take a set of aggressive steps to reform the system.

Governments could create a stringent regulatory structure at the national level in all the major economies, which would need to approve all new financial products.

One possible option is that they could break up banks that are too big to fail. They could also use anti trust law to prohibit banks from becoming too large in the future. Authorities could strictly separate different kinds of banking activities, and therefore erect walls between different types of risk, cutting short the risk of toxic contagion.

At the global level, governments could cooperate on reducing global trade imbalances, create multilateral institutions

to oversee global risk, and re-legitimise the use of capital controls to offset the effects of fast-moving, speculative “hot money” which has brought down so many developing countries in the past 30 years.

All economies, capitalist or not, need credit institutions to allocate resources and smooth exchanges and debt payments.

“They are a vital public service, like a health service,” pointed out economist Peter Gowan before passing on earlier this year. At their best, financial markets efficiently allocate capital within the economy. At their worst, they suck money and talent out of the real economy and into risky activities that ultimately require bailouts when they fail.

Democratic societies could decide the functions currently performed by financial markets are too important and risky to be entrusted to profit-maximising private actors, and should serve a public good rather than increasingly driving the economy and the state. This is another radical idea that has found its way into the mainstream as a result of the shock of 2008. Willem Buiter, professor at the London School of Economics and former member of the Bank of England’s Monetary Policy Committee, wrote on his blog for the Financial Times “There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer… No doubt the socialisation of most financial intermediation would be costly as regards dynamism and innovation, but if the risk of instability is too great and the cost of instability too high, then that may be a cost worth paying…From financialisation of the economy to the socialisation of finance. A small step for the lawyers, a huge step for mankind.”

The fact that these aggressive approaches to averting another crisis would work does not change that they are extremely unlikely in the near future. They would quickly come up against large and powerful domestic political interest groups in the most important economies.

And this is made even more difficult by the widespread belief that slowing down free-wheeling financial capitalism would slow down economic growth itself.

It is unclear that this is true. The world economy grew faster in the period from 1945 to 1980 than it has since. In that 21

Features period, countries reserved the right to employ capital controls on cross-border transactions, exchange rates were largely fixed and negotiated rather than subject to real-time market movements, and finance was much less central to the economy. Financial crises have become an extremely common occurrence since 1980, usually in the poorer countries.

Granted, it would be difficult to return to such a managed international capitalism and the growth rate then may have been attributable to a rebound after WWII. But even today, countries with more managed and defensive financial systems, from Brazil, China, to Saudi Arabia, have been better able to weather the current economic storm than more open counterparts such as Mexico, Japan, or Dubai.

But as developing countries know well, no amount of prudence can protect them from the vicissitudes of the international marketplace. No oil-exporting country, for example, can be reasonably expected to comfortably manage a swing in the price of oil up to $150/barrel and down to $30. It’s clear a large part of that swing was fueled by financial speculation.

Some have argued credibly that the brief explosion in the price of oil was the result of an asset bubble blown by AngloAmerican financial actors fleeing to oil from US housing markets before that bubble itself burst.

National Political Realities So, then, it is not that one needs luck to come up with a way to avoid crises. It’s that no one knows exactly which approach can provide meaningful stability while realistically dealing with opposed interest groups and the slowdown in growth.

Since WWII, there have been two major transformations in the nature of capitalism, and they have both come after a crisis.

1945 saw world capitalism reconstructed after the chaos of the war along more cooperative and regulated lines. John Maynard Keynes was instrumental here, convinced, like most others at the time, that unrestrained international finance had helped cause the Great Depression.

From 1980, Reagan and Thatcher’s push for global deregulation, the elevation of international finance and a return to more liberal, unrestrained capitalism came after a decade of economic crisis in the rich countries in the 70s, when Keynesian policies seemed to be hitting a wall. Crises often provide fertile ground for a restructuring of society. “Never let a serious crisis go to waste,” as White 24 October, 2009

House chief of staff Rahm Immanuel.

The crisis of 2008 - 2009 could provide the necessary shock to reform the world’s financial system along more stable lines.

But there is a big difference between 2009 and past transformations. In 1945 and 1980, there were no massively powerful groups with interests invested in the status quo. In 1945 there was no status quo whatsoever; the world economy was in ruins. In 1980, the only major powerful opponents to the neoliberal reforms were unions, influential to some extent in the US and Europe and less so in the developing world. But even this relatively weak coalition of forces proved a very tough nut to crack.

All economies, capitalist or not, need credit institutions to allocate resources and smooth exchanges and debt payments. “They are a vital public service, like a health service,” pointed out economist Peter Gowan Governments, especially in the developed world, had to stage bitter and protracted fights with labour movements.

The financial sector in the US and Europe now is much more powerful than unions were then. It is extremely unlikely Obama or anyone else is about to enter a long war with finance. Clawing back massive bonus packages for bankers is good insofar as it makes them less likely to privilege short-term risk, but in a sense it misses the point. Banks are only able to pay these huge bonuses because they are making huge profits, likewise because their activities have taken up such a large part of economic activity. In 2006, 40% of American corporate profits accrued to the financial sector of the British and US economies—quite a bit for a sector whose only job is to allocate credit. A real restructuring of the economy along more stable lines would reduce the size of the often “socially useless” sector, as Lord Turner, head of the British Financial

Services Authority recently suggested— something the powerful lobbies of the finance industry simply won’t put up with.

What makes this even more difficult is that huge sections of the middle and lower classes in the rich countries have been financialised themselves. As their real wages fell during reforms of the 80s and 90s, they began living more and more on borrowed money. US household debt as percentage of GDP doubled from 50% to 100% from 1980 to 2007. In the financial sector, this jumped fivefold from 21% to 116%. Hard-working middle and lowerclass households with large debt burdens and who have seen their pension schemes moved to the stock market found out how much they were tied to finance when they saw around 30% of their life savings disappear in October last year.

Finger Pointing Politics At the crucial international level, these problems are compounded by a lack of credible global institutions to tackle global risk. Globalised finance has not been matched with global governance, and returning to a world of more stable and nationally managed finance is taboo, not least because doing so would hurt the same powerful interests listed above. The US still controls the two institutions with real power, the IMF and the World Banks.

And getting weak multipolar bodies like the G20 to negotiate on such huge and prickly problems is like, as the phrase goes, “playing chess with 20 sides.”

Though the important issues of a new “international financial architecture” (rules, regulations, global cooperation, etc) remains undiscussed, global trade imbalances finally received some attention at the last G20 conference in Pittsburg, The logic behind the role of these imbalances on the crisis is fairly simple. Because of the role of the dollar as international currency, the US has been able to borrow cheaply internationally to fund its massive trade and fiscal deficits.

In 2006, the US consumed more than it produced by an amount larger than the entire economy of India.

China, one of the largest surplus countries, re-invests a large portion of this money into the US to keep the dollar high enough to continue buying its exports.

This massive inflow of money looking for places to invest contributes to asset bubbles and overwhelms weak regulatory structures in the US. The US has told China and other exporter 22

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countries they need to consume more to reduce these imbalances. But this neglects the other side of the coin—that the US would have to consume less and deal with a drop in the value of the dollar. To consider the political toxicity of such a proposal, think of a US president running on the slogan “Let’s consume less”.

Blaming China and other export countries for these imbalances is a bit disingenuous.

It implies that the US actually wants to export more and China wants to avoid consuming, instead of the other way around.

Considering that US deficits have been a structural feature of the world economy since before China integrated into it, it’s a bit cynical to accuse China of perpetuating a system, when in actuality it had to find a way to adjust to it.

Future Horizons

On the other hand, blaming the US for the weaknesses of the current international economic order is a bit pointless, because due to its level of involvement the country is equally responsible for what have also been its many successes for fifty years. As always, things could have been better, but they could Issue 1529

have been worse. What is more important is how the current situation can lead to an improvement given the current conflicting forces.

The question of the dollar has been made more critical as the US deficit balloons as a result of the US fiscal stimulus package.

Acting quickly to inject money into the economy was important and likely saved the world from serious depression. But it indeed propped up the existing problematic system. The US spending trillions of dollars of money it doesn’t have surely does little to help global deleveraging.

Unfortunately, no action is likely to be taken on imbalances in the short term, nor on reducing the instability of global finance.

And the regulatory reshuffling that will take place in the rich countries, it seems, will be far from ideal, if even minimally sufficient.

But there is a growing awareness, in the rich countries and worldwide, that the ideology which supports the structure that led to this crisis is sorely lacking. At the last G20 conference, China stepped forward for the first time, with Russia, to criticize the role of

the dollar as international reserve currency.

China has quietly begun diversifying investments away from dollars to assets in Africa and Latin America. Developing countries with socially regulated financial systems have been praised for prudence, when just yesterday they were scorned for backwardness and stupidity.

These changes may yet make 2009 a year that marks the beginning of a slow transformative process. Those with real power, including to block necessary reforms, may find the legitimacy they previously relied upon is being undercut by the patent failure of some of their approaches.

This will become especially relevant if we run into another market failure, something that remains all too possible if the reforms currently planned currently don’t get much tougher. If they don’t, we may find that another crisis comes around to teach us some real lessons.

Vincent Bevins - London based journalist and political economist. A frequent contributor for New Statesman magazine and most recently for the Financial Times.

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Debate How did GCC countries respond to the Crisis?

The financial crisis affected some countries more than others. Being well-resourced with oil and financial assets, the crisis did not cripple the Gulf economies as much as it did other countries. However, the crisis signalled that no one could escape an international recession of this magnitude. The Emirate of Abu-Dhabi, which initially looked economically secure, was one of the most hard-hit economies in the Gulf. Several companies and businesses declared heavy losses as well in many Gulf countries. Saudi Arabia and Qatar injected money into the markets, saving some of their businesses from collapse. But for the future, could money alone save the Gulf economies from potential recessions?

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Debate

How did GCC countries respond to the crisis?

The global financial crisis - A faint signal in the noise Thanks to their huge financial returns, the GCC countries have managed to overcome the global financial crisis to some extent. But more structural financial solutions must be found to overcome bigger problems in the future.

Abd-AlHamid Al Amry

T

he capital losses of the markets of the GCC countries at the beginning of the global economic crisis are estimated to be approximately $ 480 billion, or up to 50 per cent of their total. These losses also represent about 45 percent of the GDP of the GCC states.

The decline occurred within a short period of no more than five months, and according to estimates by the IMF, the Gulf economies are expected to shrink during 2009 by about $ 220 billion. The impact of losses on global markets for the same period has been devastating with losses exceeding $ 20 trillion.

These trends have made the future of world economies seem bleak.

Faced with this dramatic scene, the leaders of major economies and international bodies have taken an urgent initiative to salvage whatever is left to save.

The most reliable means to do so has been to adopt unprecedented policies of fiscal stimulus.

The second measure has been to reduce the costs of finance by reforming the system that allowed the crisis to occur.

From 2007-2008 the attention of central banks focused on confronting inflation, which surprised emerging economies after the collapse of their financial markets in early 2006. Despite the realization that this dilemma was out of control, central banks believed they could succeed in decreasing it. Their approach was to raise the cost of financing, and impose restrictions on commercial banks by raising the 24 October, 2009

regular reserve rates on deposits.

However, since the currencies of these countries were tied to the dollar, it was inevitable that these policies would fail. As a result inflation rates continued to rise, and the fragile and inefficient financial markets of the GCC countries continued to decline sharply.

The impact of losses on global markets for the same period has been devastating with losses exceeding $ 20 trillion Gulf economies have suffered as a result of the crisis. In the UAE the most important challenge was the high volume of private sector debts. The private sector conditions began to worsen, as result of its inability to pay back its debts. The impact of the crisis increased in the UAE with the withdrawal of foreign funds from its stock exchange market, causing it to lose $127 billion. In Saudi Arabia, the market fell by around 52 percent, losing $ 234 billion. Conditions were further complicated as banks refrained from providing finance, despite the absence of any liquidity problems, and despite successive reductions in reverse lending rates carried out by SAMA to stimulate bank lending. But that did not convince the guards of

the bank vaults.

Despite the severity of the crisis and the failure of monetary polices, the Gulf economies were able to meet most of their domestic liquidity needs. Some Gulf States, with the exception of Saudi Arabia and Qatar, have gone even further by issuing sovereign bonds to finance those needs. Overall, these countries will be able to weather the impact of the crisis. In particular, Saudi Arabia and Qatar will be the first to overcome the impact of the crises, due to their significant reserves and their promising investment opportunities.

What planners and economic policy makers in the Gulf must realize is that the global economy is still going through one of the largest processes of transformation in history.

Perhaps the most prominent features of this transformation process is the greater impact the emerging economies are expected to have on the global economy, at the expense of old economies like the United States and the euro group. This in turn requires a radical change of policies and programs that will take into account such profound global changes. The most important thing that we should comprehend from the crisis is that the global economy which prevailed before 2008 has fallen apart. We must realize that the world today is on the verge of an entirely new economic and financial era.

A member of the Saudi Economic Group.

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Debate

How did GCC countries respond to the crisis?

Turning a crisis into a solution

More coordination between the economic entities of the GCC countries will help them avoid future economic crises.

T

Dr. Abdullah bin Ibrahim

he global crisis began as a banking crisis before it dominated all the aspects of economic life.There are several angles for understanding the way the GCC countries dealt with the crisis. The most important of these angles are as follows: The GCC countries as oil producers, as debtor countries and as importing states. Having evaluated the measures that were put in to place in each of these categories, it is evident that to counter the negative effects of the financial crisis the GCC was most successful when individual states were able to coordinate measures with other countries in the region.

GCC Countries Countries:

The GCC Countries as Oil Producers:

GCC Countries as Importing States:

Focusing on energy markets, we can see that the demand for oil has plummeted, the price of oil has dropped accordingly, and the dollar exchange rate has decreased. This has led to the reduction of the purchasing power of oil revenues. The major oil companies and international banks have refrained from participating in petroleum investment projects or financing them, making the burden of financing expansions in production, transportation, refining and distribution rely entirely on the producing countries.

Coordination between GCC countries as importing states is done through collective trade agreements. These agreements create better conditions for collective purchases of certain commodities. The import process is usually performed through the private sector and is subject to competition, even within the same country.

As producers of oil, the GCC countries have effectively managed the impacts of the crisis on the oil market within the framework of OPEC. But dealing with the decline of the dollar can only be done through international bodies such as the G20 and the IMF. Issue 1529

as

Debtor

From this perspective the GCC countries are coordinating with each other in the monetary, financial and banking fields to improve their borrowing credibility. However, the GCC states do not coordinate with each other in lending activities. With the exception of major surplus countries, the rest of the GCC countries have suffered greatly from the decline in lending that resulted from the crisis, along with the high costs that resulted from the growing number of defaults.

Comparatively Speaking While these measures are indicative of the sectors that the GCC countries could and do use to cooperate with one another in order to maximize their resilience, in order to gauge the GCCs response to the crisis, it is useful to compare their response to that of other developed regional economies.

For example, when the crisis broke out it was expected that the European response would have been more consistent. However,

coordination among European countries was less than expected.

As for Asian countries, they had taken necessary precautions after the crisis of 1997. Consequently, coordination among these states was more prominent in the monetary field, and has thus far resulted in comparatively higher growth rates. In the GCC a number of monetary measures have been put in place. Yet, coordination has been less than expected when it comes to aiding those public and private businesses that were most hit by the crisis.

The joint efforts of the Gulf officials to face the financial crisis were quick and effective in halting the declining price of oil. At the national level, banks were injected with necessary liquidity as a way to support and encourage lending, interest rates were also lowered, and financial institutions stepped up their activity to compensate for the shortfall in international finance. No doubt large surpluses in a number of GCC countries also contributed to reducing the negative effects of the crisis and prevented the further deterioration of economic activity.

Nonetheless, many shortcomings have emerged in addressing other aspects of the crisis, such as real estate market, the rare buyouts of assets of troubled banks, and the time it took for certain banks to provide loans to save the economy from collapse. There are huge possibilities for greater coordination between the states of the Council on different relevant issues.

A renowned Saudi economist 27

24 October, 2009

Ideas

Who Said

Capitalism Was Dead?

By Paula Mejia Issue 1529

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Ideas

Who Said Capitalism Was Dead?

The re-branding of American capitalism after the Financial Crisis The measures implemented by the American government to counter the impact of the crisis shocked many, as it contradicted the infamous brand of American capitalism they have exported over the years. Is this change a sign that capitalism as we know it is dead?

24 October, 2009

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Ideas

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he death of capitalism has been predicted and even wished for by many throughout history.

Examples abound, from those who theorized its end, to those who attempted to implement an alternative to it. Yet, history has not redeemed the predictions of Marx, nor has it justified the state controlled markets of the former Soviet Union, North Korea, or Cuba, to name a few. The prognosis for capitalism has, time and again, been wrong and the obituaries of capitalism that accompanied the current financial crisis have equally proven premature.

To assess the potential of capitalism’s survival is to take part in an extensive debate that addresses issues ranging from its evaluation to defining what capitalism actually means. Beyond that, it also implies understanding the one factor that many of its undertakers have ignored: its capacity to evolve, to form a better version of itself, at least until the next crisis demands a subsequent alteration of its dynamics.

Capitalism in its ideal state – where the means of production, or capital, are privately owned and all goods and labour are traded in a global free market – has never really existed.

Instead the history of capitalism, in its various versions, has tended to undergo a series of developments that have been accompanied by cycles of protectionism and liberalism. So why do claims that capitalism has come to end sprung up again?

The Global Financial Crisis had a significant impact on the modus operandi of the one economy that has been most closely associated to the ideal form of capitalism. The American economy, despite its past experiments with protectionism, has for the past decades been a staunch defender of capitalism in its most extreme forms. The U.S., as well as the financial institutions based on its soil, like the IMF and the World Bank, was greatly influenced by the neo-liberal school of economic thought. As a result, when they had the task to overcome the recessions of the 70s in developing countries they encouraged, above all things, market liberalization and financial stabilization. Despite the fact that the effectiveness of these measures has since been questioned, the economic dogma of the U.S. and International Financial Institutions has continued to correspond to the ideal of capitalism.

Fast forward to the end of 2007 and the beginning of 2008, and the policies espoused by the American government are unrecognizable in comparison to their past philosophy. Having watched Lehman brothers collapse without their help, the government was unwilling to allow the same to happen to other financial institutions. Through a series of bailouts and the de facto nationalization Issue 1529

of companies, they have arguably managed to stabilize the drop that had shocked so many.

For the U.S. to have undertaken these measures the potential impact the crisis could have had, beyond the one it actually did, must have been beyond imagination.

These practices are entirely against what the republican values of the American government stand for – values which at the onset of the recession were relatively strong. These practices contradict the idea behind small government, yet those practices have been understood as what saved the American economy from collapse.

Do these practices then represent the death of capitalism? Do they contradict the foundation of the American brand of capitalism? Not in the least. On the contrary, these practices embody the evolutionary nature of capitalism that accounts for much of its resilience.

The Global Financial Crisis, has demonstrated that economists cannot predict every crisis, nor do they even agree on how to deal with the same one.

While the bail-outs and increased regulations on the American financial system have been hailed by many as timely, others have insisted that instead of promoting reform they have largely allowed the previous economic system to survive. In comparison to past shifts in “economic orders” the global financial crisis of 2007 has not demonstrated significant alterations in the foundations of the system pre-crisis. These practices are clear evidence that the economic system has remained largely unchanged.

But If the Global Financial Crisis did not manage to kill capitalism, what did it manage to kill? Besides largely undermining much of the growth that has taken place in the last years, the Global Financial Crisis has managed, for the time being, to kill the idea of Economics as a “science.”

The Global Financial Crisis, has demonstrated that economists cannot predict every crisis, nor do they even agree on how to deal with the same one.

The joke that claims that Economics is the only field in which two Nobel Prizes can be awarded for proving two contradictory ideas has never seemed

more insightful.

How does this then impact our understanding of the current state of the economy, especially considering the recent rise in the popularity of one famous British economist, John Maynard Keynes? He is most recognized for opposing the long held belief that the market is inherently capable of regulating its problems over the long term. Instead he argued that one couldn’t afford the luxury of allowing the market to regulate itself because “in the long run we are all dead.”

While this seems to have been the attitude of the American government in response to the crisis, renowned economist Robert Lucas of the University of Chicago noted that “Everyone is a Keynesian in a foxhole. If the American economy stabilizes there will be plenty of born again Keynesians outside those fox holes”.

The first anniversary of the end of Lehman Brothers was this September, and already there were signs of recovery everywhere. If less than a year passed for the crisis to “end” at the cost of implementing a more hands-on approach to the economy, is it not true that these measures in fact saved capitalism again?

Capitalism comes in many forms, and today’s increased government involvement in the economy is another version of this system. This arrangement has its advantages in times of economic instability. It allows governments to balance the honest assessment of the “invisible hand” that caught up with toxic assets over a year ago and exposed them for what they really were. But what does government influence in the economy cost us?

Milton Friedman noted that capitalism and democracy were inherently related to one another. It follows then that the less free capitalism is, the less democratic institutions become. Foreign Affairs contributor Ian Bremmer noted that “deeper state intervention in an economy means that bureaucratic waste, inefficiency and corruption are more likely to hold back growth.” That is, although state capitalism offers opportunities for economic stabilization, the less democratic and transparent the state is, the more likely it becomes that these inefficiencies are transmitted on to the economy they influence.

Although capitalism is far from dead, the capitalism in place that leans towards state capitalism may pose as many problems for states as it does solutions if it is not controlled. If we have learned anything from the past financial crisis is that regulation is important for the benefits of capitalism to prevail. The same is true of state capitalism. States must not overstep their own regulation lest they undo the work of the market.

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People

24 October, 2009

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Manipulating

Religion Dr. Mohammed Sayed Tantawi Sheikh Al-Azhar

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People - Interview

Manipulating Religion Dr. Mohammed Sayed Tantawi Sheikh Al-Azhar , «Iran is using a political Shi ism against Egypt and Saudi Arabia»

Dr. Mohamed Sayed Tantawi, Grand Imam of Al-Azhar (university and mosque), does not see any justification for the differences between Sunni and Shiite Muslims. In his opinion, they are all Muslims. But he confirms that Iran is the one using Shiite Islam to achieve narrow political interests. It seeks to dominate the Islamic world, and to penetrate some of the most regionally influential Arab societies, such as Egypt, Saudi Arabia, Syria and Yemen.

The Majalla - Why has the dispute between Sunnis and Shiites intensified recently?

The origins of the differences between Sunnis and Shiites are not religious, but political. It is a dispute over secondary issues, not basic ones. I think that anyone who believes that there is no god but Allah and that Muhammad is his Messenger is definitely a Muslim. Therefore, we have been supporting, for a long time, through Al-Azhar, many calls for the reconciliation of Islamic schools of thought. Muslims should work on becoming united, and protecting themselves from denominational sectarian fragmentation.

There are no Shiites and no Sunnah. We are all Muslims. Regretfully; the passions and prejudices that some resort to, are the reason behind the fragmentation of the Islamic nation.

Q: What has Al-Azhar done for the unity of the Islamic world, which the Grand Imam dearly believes in?

Al-Azhar is the biggest Sunni reference 24 October, 2009

in the Sunni and Shiite worlds. A fact admitted by the Shiite scholars themselves.

Its efforts in this matter are obvious.

Shiite scholars always visit us in Al-Azhar asking for our cooperation. They have called for Al-Azhar to establish some of its learning institutes in their countries.

The Mufti of the Shiites in Lebanon has asked me during his visit to Al-Azhar to allow Shiite students from Lebanon to study at Al-Azhar. He also demanded Iran to establish a branch of Al-Azhar University on its territory.

Q: Did you welcome such calls and wishes?

I said to them, you are welcome to do so, on the condition that Al-Azhar›s curricula are preserved, especially those related to Islamic Shariah. Changes can not be made to them, nor can any thing be omitted from them. Further, teaching in theses institutes must be done by professors from Al-Azhar. All of the Sunni and Shiite doctrines will be taught in these institutions, such as the Twelver and Ibadi Shiite doctrines, and on top of

which are the four main Sunni doctrines of Abu Hanifa, Malik, Ibn Hanbal, and Shafi›i. This is our condition for allowing Al-Azhar learning institutions to be established anywhere in the world. There must be no interference or influence by any particular entity or political current.

The mission of Al-Azhar is to spread the reasonableness and moderation of Islam. It is not concerned with serving political purposes and objectives, as some other states do. Therefore, we would not allow the noble name of Al-Azhar to be manipulated by militants or extremists.

Q: Some people have warned against the Shiite tide, especially in Egypt and Syria, such as Dr. Yusuf al-Qaradawi ...

What do you think of this?

Dr. Qaradawi has the right to express his point of view, but I disagree with him completely, as there is no such thing as a Shiite tide in Egypt. Egypt is a Sunni state, and Al-Azhar will not allow for the deployment of Shiism in the country. But it is possible to say that it is the nature of the Egyptians to hold a certain tendency

34

People - Interview towards Ahl al-Bayt (The family of Muhammad, the prophet of Islam). I want to remind Dr. Qaradawi that the Shiite Fatimids ruled Egypt for about 230 years, and when Saladin forced them to leave the country, there was not one Shiite left in Egypt. But what is really happening is that the Iranian government is using the Shiite doctrine to serve its own political agenda.

It aims to penetrate some Arab societies which have significant political weight and influence, particularly Egypt, Saudi Arabia, and Syria. Recently, it managed to penetrate Yemen. Iran is manipulating the Shiite doctrine and using it against the communities of these countries. But such attempts are certainly destined to fail, because these communities enjoy a certain immunity and are not easily tricked or bought. I repeat: any talk about a Shiite tide or a Shiite presence in Egypt is totally untrue. But if anybody wishes to become a Shiite, he must not try to spread such a call among a community of Sunnis.

He must refrain from causing sedition or implementing malicious schemes.

Q: Why escalate the conflict between Sunnis and Shiites?

I say that anyone who tries to escalate the conflict between Sunnis and Shiites is trying to achieve political goals and to ignore the major issues at stake. Shiite scholars must stop insulting the Sahaba (companions of the prophet Muḥammad), and Aisha (wife of the Prophet Muḥammad). The other irregularities and wrong beliefs found in Shiite books and heritage must be completely removed.

Q: How do you see the positions of Hassan Nasrallah, the leader of Hezbollah?

, Nasrallah s positions toward Egypt are deeply offensive and destructive. They are a call for sedition. He and his likes must refrain from making such a loud noise and giving such rhetoric speeches. It would be better for him to try and solve his own problems instead. Egypt was a great country and will always remain so. It does not pay attention to such small and trivial matters, as President Hosni Mubarak likes to stress... The problem is that such people want to have a role at the expense of countries that have big weights in political history such as Egypt and Saudi Arabia ... But they do not know that this is impossible ... Deeds rater than loud noise is what makes one have a role in life.

Q: Last year, you rejected an invitation to visit Iran, for what reasons did you do so?

Right, I received an invitation from Iranian officials to attend a conference held to honor one of the scholars there.

They asked me to give a speech about the importance of establishing a dialogue between different doctrinal approaches.

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Given the political conditions, and the problematic relationship that has arisen after the arrest of a terrorist cell in Egypt belonging to the Shiite militia Hezbollah, I strongly rejected the invitation. You know, not every invitation should be accepted.

I remember that four years ago I was invited to visit Iran to attend a ceremony held to honor the late Al-Azhar Sheikh Mahmoud Shaltout there. I did not accept the invitation but I sent 10 scholars from Al Azhar Islamic Research Academy members to participate in the ceremony with their researches about Sheikh Shaltout.

«My message to Ahmadinejad: no proximity between our schools of thought will be made until you apologize to the people of Egypt, and the family of late president Sadat» Q: Are the books that promote the Shiite ideology carefully examined?

Research and Authorship Committee of the Islamic Research Academy examines any books they receive from any part of the world. Within the framework of cultural exchange between Egypt and Iran, the Iranian books on Fiqh, Education and rapprochement between different ideologies are examined. In this way, we ensure that these books are carefully examined, not because they are Shiite, in fact we do this with all other books in order to ensure they respect the constants of religion.

Q: When will Sheikh Al-Azhar go to Iran?

This depends on the extent to which Iran is willing to stop their aggressive political plans, show their respect and reverence for symbols of Egypt and the Sunni world.

I can not accept making a visit to Iran under any circumstances while there is still a street in Tehran carrying the name and picture of the murderer who killed the martyr president Anwar Sadat. Why did Iran make the film, «Execution of the Pharaoh»? Although the Iranian Embassy in Egypt apologized to the Egyptians and Al-Azhar, and the Iranian government absolved themselves of blame for this

work, this is not enough. In order for Iran to show its good intentions, further evidence and respect for Egypt with all its symbols should be provided. We will not accept any prejudice against us. , Q: You mean there isn t any kind of rapprochement between different doctrinal approaches?

Since 1946, the Society of Rapprochement between different doctrines aimed to build bridges of understanding between the Sunni and the Shiite. It was established by Sheikh Shaltout and Sheikh Al-Qomi. This , committee is still running, but I don t have any idea about the dates of their meetings., I was asked by the Iranian delegation at a UN conference of interfaith dialogue to make rapprochement with them, but we, in our turn, asked them to tell the Iranian President Mahmoud Ahmadinejad that we will not seek any kind of rapprochement with Tehran before they make their apologies to Egypt and the family of Late President Sadat. They should first withdraw their defamations and misrepresentations of national symbols of Egypt.

Q: What do you think of the current situation in Iraq, specifically between Sunnis and Shiites? , The issue of Iraqis fighting and killing themselves is not Islamic at all. Their fighting against each other is a dark dissention. They should realize that the difference in doctrine can never be an excuse for killing our brethrens in religion.

Q: In your opinion, who stands behind this dissention?

I think that suspect regional and global regimes trying to drive a wedge between the Iraqis stand behind the civil war going on in this country.

Q: I think you made a proposal to face this crisis before, am I right?

Yes, I called on Iraqi brethrens for holding a truce, even for one month to reconsider the size of losses and destruction caused to their country as a consequence of killing and fighting each other.

My advice to Iraqis whether they are Kurds, Sunni or Shia is to promote a dialogue between themselves in order to be able to stand up to their enemy. The best way out of the Iraqi crisis is the unity of its people. They should unite their word and efforts without discriminating between the Sunni and the Shiite. In this way, they will put an end to the invasion and not a single , soldier will then be seen on Iraq s land.

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People - Profile

The High Priest of the New Normal Mohamed El-Erian

The financial crisis has led to a surge in faith amongst those looking for hope in the future of the economy. Spiritual leaders are emerging, but Mohamed El-Erian the Chief Executive and Co Chief Investment Officer at Pacific Investment Management Co., has emerged as the high priest. ElErian promotes sober minded investments, but more importantly, he emphasizes the need to adjust to the new definition of normalcy in the economy.

I

n times of crisis, people seek comfort in religion, be it through established faiths, pagan ritual, or modern mysticism. The deeper the crisis, the greater the need for spiritual salve and for learned healers to administer it.

The global economic meltdown is no different. It has produced a flock of gurus, ranging from small-time shills to the secular equivalent of mega-church evangelicals. They dispense their forecasts and investment advice on the airwaves and in the opinion pages of financial journals and, like professional wrestlers, they have their own distinct personas.

24 October, 2009

There are grim reapers like the economist Nouriel Roubini who predicted the crisis in the first place, and there are scolds such as Simon Johnson, a professor at the MIT Sloan School of Management, who speaks truth to the greedy American banks that helped to create the crisis. Then there are wonks like Martin Wolf of the Financial Times whose arcane columns about macroeconomic trends are required reading for anyone capable of deciphering them.

These are thoughtful commentators of great integrity, and in the temples of finance they rate some stations below

the High Priest, Mohamed ElErian. If Roubini has achieved pop-culture celebrity for his prescience, El-Erian commands the respect of a more exclusive, if far more influential constituency.

As the chief executive and cochief investment officer at Pacific Investment Management Co., or Pimco, the world’s largest bond investor with some $850 billion in assets under management, ElErian with a single utterance can move markets as decisively as any central banker and he works closely with the regulatory overlords in Washington. As a former deputy director at the International Monetary Fund, he has negotiated 36

People - Profile closely with global leaders on everything from currency reform to sovereign debt issues. He is a frequent commentator on CNBC, the financial news network, where he has established himself as a pioneer of the “de-coupling” theory of global growth and as a prophet of the “New Normal” of next-generation finance. “We are looking at a bumpy ride,” he cautioned in a recent interview.

“The next several years will test the two public goods the US offers the world – the reserve currency and the depth and predictability of US financial markets.”

Until things smooth out, ElErian promotes sober-minded investments like mortgage bonds, Pimco’s lucrative stock in trade. Four years ago, company managing director Bill Gross began warning about a looming subprime mortgage crisis and he structured his portfolios accordingly. As a result, Pimco’s Total Returns Fund for individual investors was one of the few bond funds to actually post a profit in 2008. Debt and commodities will remain the investment vehicle of choice so long as the outlook of the global economy is uncertain, and that makes men like Gross and El-Erian the fountainheads of recovery. When the international financial system seized up a year ago with the collapse of Lehman Brothers, the US Treasury Department unveiled a plan for a public-private bailout that was modeled largely on a blueprint drawn up by El-Erian that spring.

It is known as the Troubled Asset Relief Plan, and Treasury Secretary Timothy Geithner continues to consult closely with senior Pimco executives.

Pimco founder Gross is known for his myriad eccentricities.

If Roubani is Wall Street’s Dr. Doom, Gross is its court jester for the barbed commentary of Issue 1529

his investor newsletter, ambitious stamp collection and penchant for wearing his necktie un-notched over his shoulders like a prayer shawl. In contrast, El-Erian is subdued and soft-spoken, whether he is conversing in English or his fluent Arabic or French. The son of an Egyptian diplomat, El-Erian is a well-known internationalist and a fixed coordinate on the World Economic Forum circuit. He is also something of a Calvinist, emphatic as he is about the need for investors to adjust to the new, harsher reality of the post-crash global economy. In When Markets Collide, published last year, he argued that the heady confluence of high growth and low inflation of 20032007- was an aberration that is unlikely to return. Instead, investors must prepare for a sluggish US economy – 2 percent annual growth or less, he projects – and a sustained unemployment rate of 6 percent or so for at least the next several years. Financial markets will become less casinos than automats in which investors purchase familiar instruments that offer predictable yields and embrace investment strategies that reflect the shifting balance from the market’s “invisible hand” to the “fist” of heavy government regulation.

El-Erian with a single utterance can move markets as decisively as any central banker and he works closely with the regulatory overlords in Washington.

“The US financial sector is being de-risked and turned into a utility,” El-Erian says. “We are now looking at a different destination

for the global economy.” In the May/June edition of Foreign Policy magazine, El-Erian wrote that investors in the future “will be driven by a ‘never again’ mind-set, recognizing that in a democracy, a system that privatizes losses cannot (and should not) be tolerated.” Much of Wall Street’s over-geared investors, starting with hedge funds, will disappear.

As growth slows, we will have less of everything. According to El-Erian, “less is the new more,” Washington’s huge debt burden, worrisome even before the advent of massive spending plans and bailout packages, threatens to subvert the US as the world’s primary growth center, says ElErian. There is a bright spot, however. As developing countries like China, Saudi Arabia, South Korea and India evolve from manufacturing-led economies to consuming ones, the global imbalances between creditor and debtor nations may even out. What’s more, the fusion of economic blocs in the developing world will create alternative sources of growth that will fuel demand even as the developed world sputters. It is a trend ElErian identified long before it became known as “de-coupling,” a theory vindicated by the reality of China’s robust growth and its economic convergence with the economies of the Middle East and Africa.

The future as composed by ElErian is forbidding, at least in the short term, but it is not without the prospect of redemption. At the very least, his conviction that the financial world a generation from now will be very different than it is today implies that the lessons of this cruelest of recent recessions will have been learned. And that makes him the most hopeful oracle of all.

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24 October, 2009

Economics Gulf Economics

International Investor

Markets

On the right

Track Issue 1529

39

Economics - Gulf Economics

On the right track

Why is Dubai Metro an indicator of a sound policy?

By Dr. Wadah AL-Taha Dubai underground Metro is evidence that Dubai is moving steadily towards comprehensive modernity, but there are a lot of procedures and laws that limit the optimum utilization of the metro project.

Passengers wait for the first metro ride at a station in Dubai following the official opening of the Gulf emirate›s metro network on September 9, 2009. Dubai opened a metro network in a bid to cut dependency on cars and ease congestion, becoming the first city in the oil-rich Gulf to introduce rail as a commuting option.

(c)getty images

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he number of passengers of the Dubai Underground Metro has exceeded one million, after only three weeks have passed since its opening.

I think that this shows a number of things, such as the Dubai government›s insistence on building a distinguished infrastructure that continues to outpace the infrastructure of the cities of the Gulf region in particular and the Arab region in general. The evolution of infrastructure in any economy, especially in emerging economies, is an important element in attracting investments.

Despite the fact that one line was opened out of two subway lines, and that only ten stations were inaugurated out of 29 stations that were supposed to be opened along that route (19 stations are still under constriction), there are still doubts about the success of the experiment, based on the individual tendency that prefers the using of cars as a means of transport. But this tendency has completely evaporated since the first week of the opening of the Dubai Metro.

The second thing indicated by such a large number of passengers, is that the subway would reduce the costs of tourist influxes 24 October, 2009

to Dubai. Instead of using taxis, the metro will be a very appropriate alternative that is easy to use. The cost of using the metro for a whole day to go around Dubai is 14 dirhams ($ 3.80), regardless of the frequency of journeys. The average current waiting period ranges from 58- minutes, which the passenger spends at an air-conditioned and very comfortable station. Short trips do not cost more than half a dollar.

The third and most important indicator is the strong insistence of Sheikh Mohammed bin Rashid Al Maktoum, Prime Minister of UAE and Ruler of Dubai, to reduce the impact of the economic crisis on the emirate.

, Dubai s economy is not entirely dependent on oil. Tourism, construction, and exports are important sources of national income.

Each of these sectors has been affected in a different way by the global economic crisis. I believe that the reason behind such a variegated impact is due to two key factors.

The first is the nature of the economic sector and the how strongly it was tied to the economic crisis. The second is how the economic sector leadership, which is

mainly represented in the managements of large companies, comprehends the crisis.

The market shares of such big companies represent a large percentage that affects the performance of the economic sector.

Of course, the degree of control over these factors will inevitably be different. The first factor is almost out of control. And, if such an assumption is correct, it will certainly mean that the capacity of an economic sector for recovery and consolidation, and the chances of reducing the crisis impact on it, will be largely tied to how the managements of the big companies operating in that sector absorb and comprehend the size, depth, and dimensions of the crisis, and the different scenarios of its interactions with what is happening at the global, regional and local levels.

As it is known, the crisis has had a double impact on the UAE in general and Dubai in particular. The first impact is related to a rapid and massive reduction of liquidity accompanied by a reality on the ground, which is essentially embodied in the form of a huge increase in lending rates. The second impact is related to the real estate sector.

40

Economics - Gulf Economics In addition, the rise in lending rates is a reality that was not imposed by the global crisis. The crisis only helped in exposing it.

Despite the passage of more than a year on the beginning of this rise in lending rates the UAE (according to the figures of the UAE Central Bank, the ratio of loans to deposits at the end of August has reached 105%), this ratio is still high, notwithstanding its notable improvement over the year. But as some banks have reverted to offering limited lending as a means of improving their income from interest, the ratio continued to be above the level of 100%. Despite the slow growth percentage of deposits, they managed to contribute in lowering the ratio. This is an important indicator of gradual recovery, after some banks persisted in lending, which increased the banks› loans to deposits ratio of last year to more than 140%.

It is clear that this relative improvement is an important stabilizing factor. It is directly related to the supply of cash in the market.

This relative stability had an obvious impact on the performance of the UAE financial markets (the Dubai and Abu Dhabi markets).

At the end of the third quarter of this year, Dubai market came first among the Gulf Capital Markets. Since the beginning of the year, Dubai›s financial index increased by 37%. It was followed by the Stock Exchange markets of Saudi Arabia and Abu Dhabi. But, despite the improvement in the morale of the investors, the obvious imitation of the U.S. markets, and the improved oil prices, there were other important factors that caused the high rise of the financial index in the UAE financial markets. It is noted that the daily trading value rate in the Dubai Financial Market has risen dramatically, especially during the month of September. This rise occurred despite the fact that the month of Ramadan happened to come at the period, a month where usually trading in financial markets tends to fall.

In contrast to this improvement in the financial markets, finance activities continue to be clearly affected. The problem of the two companies of «Amlik» and «Tamuel», which are registered in the Dubai Financial Market, is still unresolved due to the liquidity crisis, which both the two companies suffer from. These two companies are two of the leading companies in the finance business, especially real estate financing. It has been almost and the two , over a year now, , companies problem hasn t been resolved yet.

The real problem is that the solution lies in understanding the depth and dimensions of the dilemma. This kind of understanding cannot be imported, neither can the solution.

There is nothing wrong in trying to learn from the experiences and problems of others. But this crisis is completely different from its predecessors. Addressing this kind of situation always starts with the close and continuous monitoring of it. The relative , abatement of the problem s impact does not mean at all that the problem has been solved.

Based on this, the level of caution should not be based on the reports or statements that refer to this abatement. Some basic indicators in the major economies are still being a Issue 1529

reason for concern. Unemployment rates continue to rise, spending levels continue to be limited, and the dollar continues to slide along with the Gulf currencies tied to it. All of these factors and other factors should make us more vigilant, not less worried.

The improvement in the global economy was not a result of substantial and structural changes made to the financial system. It was a result of the financial rescue funds injected by governments. Many people didn›t like this solution at the time, despite being the only practical and rapid procedure that could be taken.

Understanding the global economy in this way and diagnosing the extent of its impact on the local economy, in addition to diagnosing the regional and local impacts on some local economic sectors, constitutes an intellectual, cognitive and practical shield that reduces the effects of global economic crisis on emerging economies, including the economy of Dubai.

the subway would reduce the costs of tourist influxes to Dubai. Instead of using taxis, the metro will be a very appropriate alternative that is easy to use. The cost of using the metro for a whole day to go around Dubai is 14 dirhams , Dubai s realization of the matter was clearly varied. Despite the differences in volume between the tourism and construction sectors, it is obvious that the recognition of the crisis, the realistic approach adopted in dealing with it, and the persistent monitoring of the tourism sector in cooperation with all concerned entities, has led to very positive results during the first half of 2009. Those efforts have been able to maintain high operating rates. Also, they granted a package of incentives and facilities that resulted in Dubai becoming one of the top international destinations in the world. I think that if hotel and tourism administrations succeeded in adopting a value pricing strategy, it will eventually put them in a more powerful position for the remainder of this year.

In contrast, the top players in the construction sector, particularly governmental and semi- governmental real estate development companies have not been able, in my opinion, to sufficiently understand and comprehend the volume of the crisis and its impact on the real estate sector in Dubai. This can evidently be seen

in the light of the lack of a real and concrete action on the part of these companies to reduce the impact of the crisis on this sector.

This recognition is supposed to be based on two axes. The first axis is a professional one. It focuses on restructuring and creating a package of solutions and initiatives within the framework of the strategy of retaining customers (investors). The second axis focuses on the legal protection of investor rights which falls under the same strategy.

The government should give unlimited support to any initiative that would alleviate the impacts of the financial crisis.

It is important to note that the debt of the Government of Dubai is divided into two categories. The first category of debts is related to the development of infrastructure and public facilities and services. This category is not a matter of concern.

Firstly, it mainly helps in creating a real competitive added value. And, secondly, fulfilling the obligations and commitments of the Government of Dubai earns it high credibility at the international level, in case it needs cash to meet those obligations.

The second category of debts is that resulting from the performance of partly or wholly governmental companies. Some of those companies are in dire need of government support, while others have still got the ability to continue operating on their own. In my opinion, most companies that need government support need radical restructuring, including the prospect of potential mergers or acquisitions. This is what happened or is happening to some of them …

As for the job market in the UAE in general and Dubai in particular; it is certainly more coherent than it was in the first half of the year. Most of the bleeding in the job market has been caused by the real estate and construction sector and the other sectors related to it, such as the construction contracting and engineering consultancy sectors, in addition to the financing sector and part of the financial sector, which includes banks and some investment companies. It is important in this regard to deal with the Gulf labor market as one big market, for two reasons. The first is the great similarity in the social, cultural and historical traits between Gulf countries. Thus, the movement of labor within the Gulf market greatly reduces the period necessary for coping with the surrounding environment. This generates psychological stability. It also has a significant impact on labor relations and productivity. The second reason is related to job requirements. We will find that this issue is reflected on the conditions of employment required by job advertisements, particularly in the engineering and project management fields.

Finally, it is important to note the role of regulation and institutional governance in the implementation of structural and appropriate mechanisms to respond to crises.

Senior economics and financial analyst - Dubai

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Economics - International Investor

Black Knights or White Knights?

The Role of Sovereign Wealth Funds in the Global Economy The debate on the global economy has prompted a revaluation of Sovereign Wealth Funds. Many see them as saviours, having prevented many banks from undergoing collapse, while others doubt their motives and paint them in a negative light. Is their impact then benign, malign or simply overrated?

I

n a time where the dos and don’ts of financial markets are more widely discussed than football results, one issue has been curiously absent: Sovereign Wealth Funds (SWF). Once seen as the next big thing in the global economy, these seem to have disappeared from the public radar. Government owned funds currently manage assets of about $3 trillion, up from $500 billion in 1990.

To put this number in perspective, Hedge Funds and Private Equity Funds have assets in the order of $1.9 trillion and $0.8 trillion respectively.

While not huge, compared to a $165 trillion total value of globally traded securities, SWF are clearly significant enough to have an impact on the global economy. However, whether the nature of this impact is benign, malign or simply overrated, has been subject to much speculation.

When the world’s largest investment banks were at risk to drown in a flood of toxic assets last year, SWF were greeted like “white knights” coming to their rescue. Sovereign investors from East Asia and the Gulf supplied struggling financial institutions with much appreciated capital. The governments of Singapore, Kuwait and South Korea provided the lion’s share of a $21 billion lifeline to Citigroup and Merrill Lynch, both of which had lost fortunes when the subprime bubble burst. UBS, the world’s largest wealth manager at the time, received a total of $11 billion from Singapore and an unknown investor, most likely the Government of Oman.

Banks were glad to receive money from SWF, which did not demand a change in conduct, tabs on manager bonuses or tougher regulations, quid pro quos their own sovereigns would have demanded. Western governments on the other hand were content with not having to deal with the political and economic consequences of bailing out irresponsible bankers.

The general satisfaction with foreign governments’ involvement in rescuing 24 October, 2009

investors similar to classic institutional investors. As their support for failing banks shows, these are an additional source of stable capital, giving them a positive role in the global economy.

But recent economic developments, make a revaluation of this role necessary.

Joel Schoppig failing banks marked a sharp contrast in the debate surrounding SWF, whose opaque nature and inscrutable motives made many perceive them as a menace rather than “white knights”. The possibility of politically motivated investment spurred a lively debate in many western countries about the extent to which SWF should have unrestricted access to vital industries. In 2006 DP World, a company owned by the government of Dubai, tried to acquire the United States’ fourth largest port operator.

Congress, based on vague concerns about the implications this transfer might have on port security, interfered.

Reservations towards granting foreign governments full access to companies of strategic importance are nothing if not legitimate, but a general fear of SWF does not seem appropriate.

SWF were established for two reasons: To diversify sector risks, making commodity exporters more independent of volatile global commodity markets; and to diversify across time, making sure there is money left once the last drop of oil has been sold. Because of this longterm perspective, SWF are quite stable investors, unlikely withdraw vast amounts of money for short-term speculation. News about SWF taking share in a company normally has a positive effect on stock prices. The stability and the higher risk tolerance, which are generally associated with a longer perspective, make sovereign

SWF are capital recyclers. As a symptom of the global balance of payments imbalances, SWF reinvest the superfluous savings of oil producers and other surplus countries into western deficit countries. Consequently, changes in the global economic system alter their significance. Two years ago, most analysts assumed that capital held by sovereign investors would exceed $10 trillion by 2012, or triple their currently estimated value.

While government owned funds everywhere were affected by the crisis, those in the GCC have had a particularly difficult time. High profile investments in western banks have been a disaster. In a recent paper, the Council of Foreign Relations estimates that SWF in the gulf lost about 27% of their asset value. A curb in global demand, causing oil prices to tumble, diminishes the surpluses of the gulf economies. These trends are likely to make SWF more cautious.

The Abu Dhabi Investment authority has lowered its asset allocation to equity to the lower end of its target, indicating a lower appetite for risk.

In light of the crisis, SWF appear not to be a mighty dark knight, seeking to overtake and exploit western industries. Although, the losses sovereign investors have suffered and the diminishing oil revenue make the role of a reliable saviour unlikely too.

Like a Fata Morgana, SWF seemed exciting and frightening but neither friend nor foe. SWF are likely to be just another player in the global economy.

Joel Schoppig London based research journalist who focuses on investments 42

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24 October, 2009

Economics - Markets Since 2000, China has become a major economic player in Africa with its foreign direct investment (FDI) driven by the search for oil and minerals China’s FDI stock (investment 2000-06, *2000-05) Algeria China has also signed $525m oil field, $350m oil refineries deal

Libya 2009: Libya blocked China’s $462m bid to take over Canadian Verenex Energy

Sudan China’s largest overseas oil project.

Sudan now sends 60% of its oil output to China Kenya

Guinea: $7bn oil and minerals deal with junta

Offshore oil exploration deals

Chad: Building 300km pipeline

Côte d’Ivoire China-India joint venture to explore deep water oil field off coast

500 miles 800km

Nigeria Bought 45% stake in Akpo field for $2.3bn. In advanced talks to take over underutilized blocks owned

by Royal Dutch Shell Gabon Deals for three oilfields under discussion Angola Developing $1.4bn oil deal.

China’s largest oil supplier, covering 18% of its needs

© GRAPHIC NEWS

Source: UNCTAD

IMF: «Expected Growth for Gulf Arab Economies

According to the International Monetary Fund (IMF) the Gulf Arab economies will grow 5.2% next year as oil prices rise, credit markets will improve and the property industry will stabilize. Growth Forecasts for Saudi Arabia, Oman, Qatar, Bahrain and Kuwait are based on the $ 76.5 a barrel in 2010. Crude oil prices are currently experiencing a rise to $71 a barrel as opposed to the prior 5 year , low in December at $32.40 a barrel. IMF s Middle East and Central Asia Department Director urged Gulf Arab Oil exporters to «continue , with public spending next year because we re not out of the woods».

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Zimbabwe Investment in platinum, gold, nickel and diamond mines Democratic Republic of Congo $9bn deal to refurbish war-ravaged cobalt, copper mines and associated infrastructure

DIFC Conference on Islamic finance On 20 October 2009, a colloquium was held at the Dubi International Financial Centre to explore new opportunities in Islamic finance, based on the solutions it provided to relieve the growing concern in the aftermath of the global financial crisis. DIFC executive director pointed out that even with a slow economic progress, many expect a breathtaking growth rate in this sector of about 15% in 2009. Among the issues discussed during the colloquium were: Islamic finance in GCC countries, funding of infrastructural projects and risk management in Islamic finance.

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Reviews Books

Issue 1529

Reports

Readings

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Reviews - Books

The Dilemma of Sunna and Reform Sunna and the Reform Process Abdallah Al-Arawy The Arab Cultural Centre 2008 Sunna and the Reform Process is primarily a philosophical book that sheds light on the Sunna and their process of reform. The book’s focus is not to persuade the reader with a particular argument.

Instead, the author aims to allow historical evidence to speak for the resilience of Sunna for itself.

S

unna and the Reform Process

by Abdallah Al-Arawy is the author›s reply to a message sent by a Muslim woman. This woman was a divorcee of a middle easterner and had a child whose future she cared about since they lived in a multiethnic environment. In an introduction to his reply to this woman›s letter, this Moroccan thinker sheds light on mythology, theology and philosophy.

Al-Arawy traces back to a world that existed a thousand of years before Islam, since Alexander›s conquests.

The author uses this letter to raise questions that may be in the minds of many Muslims all over the world, especially those who live in mixed communities where Islam is not the dominant religion The author addresses questions such as: What is the relation between Islam and other religions. Or how do Muslims deal with differences within their own religion? The book tackles the way Islam, specifically Sunna, presents itself to the world and how it interacts with the «other,» 24 October, 2009

namely the West, in a context in which geographic boundaries are collapsing and isolation is no longer a valid option. The book takes the reader on an historical journey years before Islam passing through the origin of Sunna by applying the methods of a historian. In other words, the author discusses the possibilities of Sunna and reform from an historical perspective.

What differentiates this book from others of its kind is the author’s consistent methodology as well as his reference to history. In this way the author questions whether there could be a reform of Sunna? Could Muslims use their past to enlighten their future?

The dilemmas of Sunna and reform have been troubling the minds of many in recent years, not only Muslims or religious thinkers. Intellectuals all around the world have been trying to find answers for the issues tackled in this book. The author argues, albeit implicitly, that «Sunna» can transcend difference and divisiveness. As a result, it can stand the test of time

since the logic of Sunna is in fact quite harmonious and interrelated.

Despite the strong adherence to the methodology of an historian, the book lacks coherence in other areas. For example, when the author refers to the letter that sets the tone of the book in the beginning, he does not share it with his readers. This adds a degree of unnecessary confusion that might have been avoided if the author had applied a more coherent structure to his work.

A further weakness of the book is that at times it can be overly philosophical which can either be confusing or seem unnecessary. This makes the book overly theoretical and complicates the reader’s ability to apply its lessons to the problems of the real world.

Finally, a draw in terms of the book’s merit is found in the author’s attempt to remain relatively objective in his analysis. As a result, however, the message put forth by the author sometimes appears to lack a distinct direction.

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Reviews - Readings

Readings Books Start-Up Nation: The Story of Israel’s Economic Miracle Council on Foreign Relations November 2009

Cover

Daniel Senor How is it that Israel- a country of 7.1 million people, only 60 years old, in a constant state of war, with no natural resources – produces more start up companies than stable nations like Japan, China India, Korea, Canada and the UK? Drawing on examples form the country’s foremost inverts and investors, geopolitical experts Dan Senor and Saul Singer describe how Israel fosters a combination of innovative and entrepreneurial intensity.

Informing Decisions in a changing Climate

Cover

December 2009 National Research Council Staff National Academic Press

Everyone is facing a challenging climate- an environment in which it is no longer prudent to follow routines based on past climate averages. Both conceptually and practically, people will need to adjust what may be life long assumptions to meet the potential consequences of climate change. How and where should bridges be built? What zoning rules may need to be changed? How can targets for reduced carbon emissions be met? These and myriad other questions are addressed in the National Research Council Staff’s book.

Think Tank Reports No Tally of the Anguish Accountability in Maternal Health Care in India Human Rights Watch October 7, 2009

The Human Rights Watch report documents repeated failures both in providing health care to pregnant women in Uttar Pradesh state in northern India and in taking steps to identify and address gaps in care. Uttar Pradesh has one of the highest maternal mortality rations in India but government surveys show it is not alone in struggling with these problems, including a failure to record how many women are dying.

Interviews Iraq’s Worrisome Political System Council on Foreign Relations October 19, 2009

The interview of International Crisis Group Deputy Program director for the Middle East and North Africa, Joost Hiltermann, notes that Iraq is entering a critical phase. Prime Minister Nouri Al Maliki may win the most votes in January’s parliamentary elections but could be deposed because of the large number of political enemies he has acquired during his time in office. In the likelihood of a split vote, Hilterman warns this could lead to protracted negotiations amid a tense political climate. http://www.cfr.org/publication/20444/iraqs_worrisome_political_process.html?breadcrumb=%2Fpubli cation%2Fby_type%2Finterview# Issue 1529

49

Reviews - Reports

Where to Start?

Gulf, Threats, Risks and Vulnerabilities Center for Strategic and International Studies Anthony Cordesman and Adam Seitz August 26, 2009 Middle East’s Dual Challenge: Youth and the Economy Brookings Institution June 4, 2009 The Center for Strategic and International Studies as well as the Brookings Institution provide two different approaches for assessing the threats in the Gulf. Although both focus on less commonly addressed issues, the CSIS takes a broad look at the region while Brookings Institution evaluates the economy specifically for its impact on the Gulf’s stability.

T

he Center for Strategic and International Studies recently released a report assessing the most prominent threats in the Gulf. Interestingly, the report focuses on the lesser explored threats that are present in the region. In doing so, Gulf Threats and Vulnerabilities lucidly demonstrates that while the factors it assesses may be less present in the media, they are no less menacing than the more recognized threats such as nuclear proliferation, sectarian conflict, and the impact of the financial crisis.

Instead, this unique report highlights that the more immediate threats of the region include asymmetric warfare, terrorism, piracy, and non-state actors among others. By including 24 October, 2009

these threats in the report, CSIS provides a comprehensive set of policy recommendations for Gulf States, and other interested regional actors, who would benefit from stabilizing the factors mentioned above. Particularly, the report recommends a significant improvement on regional and international cooperation, focus on both active and passive defence, and intelligence cooperation.

An example of the report’s important insight is the work it presents on the impact of Somalia’s instability. As was witnessed earlier this year, the reality of piracy cannot be overlooked. There have been approximately 300 incidents of piracy since 2008, and attacks originating from the Somali

coast increased by 200% in the last year. These numbers are indicative of the urgency of the problem for Gulf states. Their exports, particularly petrol, pass through water channels that are regularly attacked by Somali pirates. The analysis suggested that in order to confront this issue head on, Gulf states need to focus on promoting stability within Somalia itself. Only by achieving stability on shore, where civil conflict has been the norm for the past two decades, will they be able to bring significant security improvements to the region.

Similarly, Yemen’s internal problems are considered an important threat to the stability of the Gulf. According to the investigations carried out by Cordesman and Seitz, “Yemen 50

However, in comparison to other reports on the region, the CSIS report is not all encompassing, despite its aims to present the under studied threats of the region. Alternatively, the Brookings Institution provides a more focused report. Instead of assessing the different threats the Gulf faces, it looks more at how the economy could impact the stability of the region. In doing so, they demonstrate that the threat to the Middle East is not found so much in the economy itself, but in how it relates to the regions current demographics.

More specifically, the Brookings Issue 1529

Key nuclear facilities

Caspian Sea

Tehran

Missile site

Uranium enrichment plant: Buried in a mountain near Qom. Football field-size facility large enough to house 3,000 centrifuges

Access

Qom

Arak

Natanz: 8,000 centrifuges

Tehran-Qom highway

Ventilation

Saghand uranium mine

Isfahan

Access

I R A N

Bushehr ia

rs

Despite assessing areas that are overlooked, the CSIS report is not lacking in an evaluation of the more commonly noted threats of the region, particularly considering the attention it pays to Iran. In looking beyond Gulf waters, the report also examines the problems created by Iran’s relationships to other states and non-state groups. As a result, the report demonstrates that Iran is not only threatening for its commitment to developing a nuclear arsenal but also for its capabilities in encouraging asymmetric conflict in the region.

Key events in Iran’s nuclear standoff

Pe

functions as a de facto sanctuary for Al-Qaeda groups.” This is partly due to the growing prominence of the Houthi rebel movement in the North of the country. Furthermore, the internal conflict is increasingly problematic as neighbouring countries, most notably Iran and Saudi Arabia, have been implicated in the conflict for alleged ties to the rebel group and the government respectively.

Again, the report notes that for there to be stability in the region, internal tensions within countries like Yemen need to be dealt with. While the problems Yemen faces may originate within their borders, the fact that its instability affects the region should be motivation to increase cooperation amongst countries of the Gulf in order to promote the stability that it lacks.

300km

n

Gu

lf

Gul

185 miles Aug 2002: Exiled Iranians claim Iran has built secret uranium enrichment facility at Natanz and heavy water reactor at Arak in violation of obligations under Nuclear Non-Proliferation Treaty 2002

Suspected centrifuge facility

QOM

2003

Dec: Existence of secret sites confirmed by satellite photographs. Iran’s President Mohammad Khatami says Tehran is committed to its obligations under NPT and has no intention of developing nuclear weapons

Nov 2003: Iran suspends enrichment but admits to International Atomic Energy Agency that it had produced “limited” weapons-grade uranium. IAEA seals centrifuge components 2004

3m

Sep 2005: President Ahmadinejad tells UN Security Council it is Iran’s “inalienable right” to produce nuclear fuel and rejects EU deal 2005

Jun 2004: Iran resumes manufacturing of centrifuge components Nov 2004: Khatami suspends enrichment in deal with European Union Jun 2005: Presidential election won

by Mahmoud Ahmadinejad

m 100 ft 330

5km iles

f of Om an

Pictures: Digital Globe, Getty Images

Jun 2006: Permanent UN Security Council members* plus Germany (P5+1), offer new deal – suspend enrichment in exchange for help to build light-water power plants, support for Iranian World Trade Organization membership and lifting of sanctions.

Iran refuses to end enrichment 2006

Jan 2006: Iran removes seals and resumes enrichment at Natanz.

Ahmadinejad announces in April that Natanz has enriched uranium to 3.5%-pure

2007

Institution notes that there is a peaking youth population and a slumping economy, and that it is the combination of the two that could affect the stability of the region. This situation could easily lead to “…greater poverty, social discontent, and in some places this has already made peace building difficult.”

On the other hand, the Brookings Institution notes that there is a silver lining as many countries have been able to invest in education, thus better preparing their youth for challenging economic situations. However, the report notes that the urgency varies from country to country.

For wealthier countries like Kuwait and Saudi Arabia, who can afford stimulus packages to compensate for the economic crisis, the outlook is not bleak.

On the other hand, poorer countries will need help from other states in the region. In this sense, the recommendations of the report of the CSIS and the Brookings Institution converge as there is a consensus on the importance of addressing threats on a regional basis, even though at first sight they may appear to be concentrated on specific

2008

Oct: Iran doubles nuclear enrichment capacity at Natanz Mar 2007: UN toughens sanctions, imposes arms embargo against Iran Jul 2008: For first time, a senior U.S. diplomat attends P5+1 enrichment talks with Iran in Geneva Feb 2009: IAEA reports Iran’s stockpile of low-enriched uranium is enough to produce 90%-pure weapons-grade uranium for one bomb

Sources: Global Security, Arms Control Association, Iranwatch

Sep 2009: Iran reveals it has second secret uranium enrichment plant near holy city of Qom. Claims it is built within a mountain to protect its nuclear activities from attack 2009

Mar 2009: President Barack Obama extends olive branch, offering Iran “new beginning” to diplomatic engagement

*Britain, China, France, Russia and United States © GRAPHIC NEWS

countries.

While there is much to be said of the new insight that original reports like that of CSIS provides, there are various issues that this should have addressed in more depth if its aim was to provide a complete picture of the threats in the Gulf. That is, while the Gulf, Threats and Vulnerabilities report addressed a multiplicity of issues, it lacked depth in analysis. On the contrary, the report produced by the Brookings Institution was focused on one issue and was thus able to provide a more cohesive argument regarding the impact of one specific threat in the region.

Although these two reports do complement one another, their comparison demonstrates that the advantage of covering a multiplicity of issues may come at the cost of providing a deeper analysis of a specific problem. http://csis.org/files/ publication/090827_gulf_terror_ assym.pdf http://www.brookings.edu/ interviews/20090604/_middle_ east_youth_dhillon.aspx 51

The Political Essay

Time is up

Common concerns, distinct positions

The shared concern of Western and Arab countries about Iran’s nuclear ambitions contrasts with disparate efforts between both spheres. Until now there have been no relevant inter-Arab diplomatic initiatives to address this issue, barring from a few declarations. Recent developments, however, might suggest something is changing.

A

s most official sources and reports indicate that Iran is moving closer to acquire nuclear weapons capacity, concern grows in the Arab world and within Western countries. This shared concern contrasts with different positions between both spheres. Whereas the US, France, the UK, and Germany are fully engaged in trying to prevent the scenario of a nuclear armed Iran, until now there have not been any relevant inter-Arab diplomatic initiatives to address this issue, apart from a few declarations.

Recent developments, however, might suggest something is changing.

The absence of a common Arab voice towards the Iranian issue is, for the most part, a reflection of the broader state of relations between Arab countries, especially between Syria on one side, and Saudi Arabia and Egypt on the other. These relations have traditionally been intermittent. In the follow up of Iraq’s invasion of Kuwait, the 1991 “Damascus Declaration” raised the hopes of a breakthrough for a divided Arab world. Syria supported the international coalition efforts to expel Saddam’s army out of Kuwait, and this led to the emergence of the so-called “tripartite axis”. Subsequently, Saudi Arabia, Egypt and Syria cooperated for more than a decade until 2003.

This cooperation was damaged by a succession of events, starting with the US invasion of Iraq. Syria adopted a different position than Saudi Arabia, supporting the resistance against the invasion. The situation worsened when Hariri was assassinated with widespread suspicions of Syrian involvement.

Saudi Arabia then supported Syria’s withdrawal from Lebanon. The two countries also took different sides in the issue of Palestine, with Saudi Arabia supporting the Palestinian authority and Syria backing Hamas. Furthermore, Syria’s alliance with Iran contributed decisively in isolating Syria from the other Arab countries.

For

them,

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Syria’s

apparently

Manuel Almeida comfortable position regarding Iran’s regional ambitions was simply unacceptable.

Recently, Syria has been changing its behaviour and strategic thinking. The recent two-day summit between King Abdullah of Saudi Arabia and Syrian President Bashar al-Assad might reflect a turning point. The bilateral relationship between the two countries was not the only matter on the table. International and regional issues were also present, and certainly the pressing issue of Iran was part of the talks.

Not only improving relations with other Arab countries, Syria is also refreshing its ties with the United States, who has always seen the disturbance of the alliance between Syria and Iran as central in its anti-nuclear Iran strategy.

During the last couple of years of conflict in Iraq, Syria has also changed its posture substantially, and started to effectively control its border, a crucial measure to stop the flow of insurgents.

The return of a US ambassador to Syria, George Mitchell’s two visits to the country last year, and Syria’s Deputy Foreign Minister visit to Washington in early October are some of the most symbolic diplomatic events illustrating this rapprochement.

The improvement of relations between Syria and Arab countries, Saudi Arabia in particular, and with the United States, might indicate that Syria has been

changing its perception regarding Iran’s ambitions. It does not seem to be the case that Syria is breaking completely with Iran. However, Syria’s behaviour could constitute a recognition of the need for a common Arab position to face the Iranian issue, something that has been absent for a long time. Such position is necessary for Arab countries interests independently of the several possible outcomes of the Iranian nuclear ambitions.

One of these scenarios is an agreement between the US and Iran which would give the latter a hegemonic position in the region. As Salih al-Kallab wrote on Asharqalawsat “The Americans and the Iranians are about to reach a historic agreement based on balancing the interests of the two parties by rendering unto God what is God’s and unto Caesar what is Caesar’s and redesigning the map of this region.” The rationale behind this is that Iran will concede the military part of its nuclear programme in the face of pressure from the US and the EU. It will also be more collaborative regarding issues such as Afghanistan and Iraq. In return, Iran will receive the recognition of its status as the major power in the region and the opportunity to perform such a role.

Together with the problematic interArab relations, the other main constraint for Arab countries to become more directly involved in pressuring Iran is their unwillingness to be associated with what has been mainly a Western effort to put a stop to Iran’s plans.

Moreover, Arab countries legitimately consider the West’s position towards Israel’s undeclared nuclear weapons program a double standard. In the end, Arab countries are aware that their interests differ from Western interests in the region. However, having different interests in general should not mean the impossibility of adopting a common position if a concern is shared. This would be one of those cases. Indeed, a nuclear armed Iran will not be beneficial to anyone.

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24 October, 2009

Issue 1529