Opposing Soft Diplomacy

The Economist makes the case this week (Nul points: http://www.economist.com/node/21555919) against overlooking domestic oppression in the selection of international contests. While Eurovision is at the heart of the argument, the article also touches on the upcoming EURO 2012 championship, which a number of European leaders have pledged to not attend in light of Ukraine's treatment of its former Prime Minister Yulia Tymoshenko, who is jailed under dubious charges.

It seems funny that this, albeit short, article fails to mention international contests that cross European borders. For instance, the 2018 FIFA World Cup was awarded to Russia, a bastion of regression towards authoritarianism and international malaise over the past decade. 2022 was awarded to Qatar, which recognizes neither gay rights nor Israel. Brazil, home of the 2014 Cup, is little better, having improved democratically in recent years, but continues to undermine human rights by forcibly removing settled populations for construction and aesthetics. Another event subject to controversy is the Formula One Grand Prix, most recently in Bahrain, where human rights concerns have been raised regarding the government response to protesters. Even the biggest international contest of them all is no stranger. The 2008 Summer Games were held in China. 2016 - Brazil. 2014 Winter Games - Russia.

One aspect nearly all of these contests have in common is the fact that they are awarded by committee. The sole exception is Eurovision, which automatically transfers from country to country based on the victor. Perhaps that unique aspect of Eurovision gives it some semblance of fairness that other international contest selections lack. Instead, countries should not only pledge to politically boycott awarded games, but sometimes a more thorough boycott is needed. For example, how would Ukraine have responded under threat to move the games out of Ukraine (Poland's neighbor Germany seems to have some recently-built soccer stadiums). Despite claims, politics and sports are not separate. Sport is often used to divert attention, build loyalty, and promote populism. Does it do more to make international contests seem inclusive, so long as one has the ability to fund them, whether that funding comes from economic success or economic subjugation, or does it do more to make international contests exclusive, reserved for only those nations who agree on certain basic principles, such as human rights and representative government?

Europe's Greek Tragedy?

As Greece heads towards elections on June 17, the drama is unfolding not unlike one of its ancient tragedies. While Europe is enveloped in the melodrama of successively failing Greek governments and the potential for Greece's exit from the Eurozone (even becoming termed the "Grexit" as I've learned from The Economist), the rest of the world is watching cautiously.

The question on every European politican's mind is whether an exit by Greece, a seriously indebted outlier, could trigger the collapse of the Eurozone altogether and the death knell of an integrated Europe. Greece is followed, in no short order, by Portugal and Ireland, with Italy and Spain not lagging far behind. Further concern over France and the Netherlands continues to grow daily. It is perhaps Germany who seems the strongest, but 40% of its exports are to the Eurozone. If a domino effect were to occur, Europe would be shorn apart.

At least until mid-June, it seems that the threat is grave, but overstated. The "contagion" problem, and the ramifications of the collapse of the Euro are so great, that it is unlikely that Europe's stronger economies, namely Germany, would allow a weak economy to so significantly affect them. Protection against the sovereign risk of a Greek default or a Greek exit is minimal, with the default being more likely and easier to work through (though not easy in any means). In essence, Europe's strong would need to convince investors, the people, and other nations that a Greek exit would have little to no effect on the Euro. All in all, that is highly unlikely to occur, and even less so in the course of a single month.

Therefore, if Greece were to stay, it would need to be controlled. In order for it to be controlled, a more unified Eurozone fiscal and budgetary policy would need to be implemented. So although we see a Europe today in crisis, is it really in any more crisis than when Ireland rejected the Lisbon Treaty in 2008 or when the European Union enlarged in 2004 and 2007? Recall that the Lisbon Treaty was ratified in time and European expansion has slowed, but never fully stopped (Croatia looks to be next to join). This is the dichotomous story of Europe since World War II - always either about to collapse into itself or integrate further. The value of integration has been well illustrated over the decades, and the value of collapse well understood by two major wars and some smaller, but still noteworthy conflicts. The question really remains: do today's politicians, and today's citizens for that matter, remember what happened when Europe collapses? If they don't, or if they choose to ignore it, the tragedy they're watching may simply be a story within a story, with the themselves as the main characters failing to see the relationship to their own situation.

Do We Really Need an Arms Trade Treaty?

In a word: no.

Most people don't know that the next big treaty on the United Nations' horizon is an Arms Trade Treaty.  This summer, diplomats, scholars, NGO representatives, and other interested parties, will descend upon the Big Apple to hammer out a multilateral treaty that will (in theory) regulate the international trade of conventional weapons.  While it is always good to promote ideals and advance the rule of law, the most likely outcome of this treaty will be millions of dollars wasted and an ineffective human rights-promoting institution.

So, what exactly are we talking about when we say "arms trade"?  The arms trade includes conventional weaponry -- mostly consisting of firearms, assault rifles, rocket and grenade launchers, artillery, surface-to-air missiles (SAM), anti-ship missiles, tanks, helicopters, and aircraft.  Meanwhile, the term excludes WMD -- nuclear, biological, and chemical weapons.  Conventional weapons arms trade is massive.  Because a great amount is unreported, underreported, and/or illicit, the exact amount is unknown.  The best estimate, though a few years old, puts conventional arms trade at approximately $55 billion per year.

In addition to providing states with finished weaponry, arms exports may assist states that are in the process of developing their own weapons systems.  China, for example, imported parts from Canadian, British, Italian, French, and German companies while developing a new attack helicopter.  Furthermore, China could export those finished attack helicopters to a state like Sudan that has a record of human rights violations.

So, at first glance, the notion of an arms trade treaty seems like a great idea.  However, when looking at the practices of the biggest arms-exporting countries, one might find reason to pause.

The United States, for example, sells billions of dollars of weapons per year and is the single biggest exporter of conventional weapons.  At the same time, the U.S. has an extremely robust arms control regime.  In considering arms exports, the U.S. considers its own national security interests, potential effects on the recipient state and region, and the possibility of re-transfer to third-party states (22 U.S.C. § 2751).  As far as process is concerned, the State Department reviews most sales and Congress has the power to express disapproval for export sales over $1 million; preferential treatment and streamlined approval is given to NATO members and other close allies (22 U.S.C. § 2776).  For various reasons, including state sponsorship of terrorism, U.S. regulations restrict sales to certain state and sub-state actors (including, for example, Burma, China, Cuba, Iran, and Syria).  The U.S. export regime also closely analyzes sales of dual-use items (commercial items that might have military purposes).

While the U.S. arms export regime is considered by many to be the "gold standard," other states and organizations are not always so careful.  The EU's arms export program has some similarities to that of the U.S., but less strict in certain areas -- for example, EU states export hundreds of millions of dollars' worth of weapons per year to China.  Germany also exports arms to Iran, Libya, and Syria.  Russia, meanwhile, has sold billions of dollars' worth of weapons to Iran.  China sells weapons to Sudan, Nepal, Burma, Chad, and Tanzania.  China claims that its arms sales are "cautious and responsible," but it does not participate in any multilateral arms export treaties seeking to prevent the use of exported arms to human rights-violating states.

For those states already desiring to restrict arms sales to certain states, there are several international bodies attempting to address the serious issues.  For example, the U.N. Security Council maintains embargoes against Cote d'Ivoire, Liberia, North Korea, Somalia, al Qaeda and the Taliban, nongovernmental forces in the Democratic Republic of the Congo, nongovernmental forces in Iraq, nongovernmental forces in Lebanon, nongovernmental forces in Rwanda, nongovernmental forces in Sierra Leone, and the Darfur region of Sudan.  These arms embargoes are regularly violated, however.  While widespread violations of Security Council embargoes could well serve as an indicator of an arms trade treaty's ineffectiveness, NGOs actually (and disingenuously) use the embargoes' ineffectiveness to argue for an arms trade treaty.

There are also voluntary multilateral institutions like the Wassenar Arrangement, which promote best practices in arms export control among member states.  Such arrangements are voluntary and non-binding, and thus contain no system for determining or punishing violations of the Arrangement's principles.  At the same time, the Arrangement has the flexibility to allow member states to participate how they see fit; such flexibility and voluntary participation are perhaps the best indicia of states' desire to engage in responsible arms export practices.

Meanwhile, over the last five years, support for an arms trade treaty has increased amongst NGOs, the U.N., and states.  The common theme is that a binding, multilateral treaty would codify the "highest possible common international standards for the import, export and transfer of conventional arms" (this language appears in multiple U.N. General Assembly resolutions).

While the final makeup of an arms trade treaty is unclear, draft resolutions acknowledge "the right of all States to manufacture, import, export, transfer and retain conventional arms for self-defence and security needs and in order to participate in peace support operation."  The treaty will also probably set a base level of standards with which states should comply before exporting arms.  The U.S. insists that states should be able to unilaterally set higher arms control standards, but it remains unclear how this principle would be reconciled with the right of states to import conventional weapons.

Furthermore, setting aside the politically questionable issue of state ratification, one must question the extent to which an arms trade treaty would affect state behavior.  Without U.S. support, the treaty would not include the vast majority of arms export sales.  Meanwhile, Russia and China abstained on the vote for the latest U.N. General Assembly resolution calling for an arms trade treaty.  This is particularly important, as these two states are major arms exporters as well as permanent members of the U.N. Security Council.  This leaves both states well-positioned to block Security Council arms embargoes, block any Security Council action against Russia or China for violating already-existing arms embargoes, and circumvent the provisions of an arms trade treaty without consequence.

What should one think, meanwhile, of the numerous states that support an arms trade treaty but currently do not employ rigorous export controls?  There is already ample evidence of states (even developed European states) permitting arms exports to states with dubious human rights and/or retransfer practices.  Will an arms trade treaty affect their behavior?  Scholars and NGOs supporting an arms trade treaty appear to think so.  They point to violations of an EU embargo on sales to China as evidence of the need for a multilateral treaty.  If a 27-member institution of developed states cannot control its own export practices, however, what is the expected efficacy of a much broader treaty with a much more diverse polity?

Take China, for example.  Faced with China’s dubious export practices, Amnesty International pushes hard for an arms trade treaty and calls upon China to participate in that treaty process.  The countervailing strategy that Amnesty implicitly rejects is strengthened political pressure from other states.  Of course, this might reflect the simple reality that other states are ill-positioned to coerce a state with the world’s largest population, third-largest economy, and a permanent seat on the U.N. Security Council.  Regardless of how one views China's arms export practices, the very dubious likelihood of China and other states changing their arms control practices calls into question the great need for an arms trade treaty.

While we do not know what the arms trade treaty will look like in its final form, it will not likely solve many of the problems its proponents cite as justification for the treaty.  Regional and international structures exist – notably the Wassenaar Arrangement, on the international scale – for those states interested in developing better arms export practices.  Those states currently not interested in setting high arms export standards would not likely care to develop them after an arms trade treaty.  Rather, like human rights treaties, states would likely comply when there are low costs of compliance or when faced with non-treaty coercive pressure.

The United States, in particular, should view the development toward an arms trade treaty with caution.  It should make sure that, regardless of whether it ratifies the treaty, such a treaty embraces high standards of export control and permits states to surpass those standards.  A failure to do so could allow the treaty process to be hijacked by states seeking to set low standards or simply embarrass the United States by forcing it to accept low standards or not sign the treaty at all.  Because the arms trade treaty would not likely solve the problems it identifies, greater attention should be paid to already-existing agreements amongst those states truly seeking to set high standards for export control.  If states earnestly tried to address arms trade problems through those agreements and still found those agreements unavailing, then it might be time to seriously consider an arms trade treaty.


Further reading:
http://www.un.org/disarmament/convarms/ArmsTradeTreaty/
http://www.state.gov/t/us/136849.htm
http://armstradetreaty.blogspot.com/
http://en.wikipedia.org/wiki/Arms_Trade_Treaty
http://www.oxfam.org/en/category/freetags/arms-trade-treaty
http://www.heritage.org/research/reports/2009/08/the-uns-arms-trade-treaty-a-dangerous-multilateral-mistake-in-the-making

Don't cry for Argentina...

It seems that the Argentinian President Cristina Fernandez needs a summer crash course in history and economics, particularly as they relate to capital-intensive energy sectors. It is still to a large extent beyond me how Ms Fernandez was the deemed the most qualified individual in a country of approximately 40 million (at the time), but, then again, we haven't made the wisest decisions here at home either over the past decade or so. But enough of past history. The other week, Ms Fernandez decided that the best way to keep Argentina financially afloat would be to nationalize the 51% stake of Yacimientos Petrolíferos Fiscales (YPF), the country's largest energy company. YPF was formerly Argentina's national oil firm, having been privatized just in the past decade. It seems that popular support in the country's senate makes this move likely to actually occur. (EDIT: Approved by the senate!)

Many outside observers consider this an unwise decision, and rightly so. To start, the entire 51% share being nationalized is owned by Respol, a Spanish company (minority owners, largely Argentine, would be less affected). Spain is one of Argentina's largest trading partners, so that doesn't seem like a good way to spur economic development or any growth. Part of Ms Fernandez's claims include the lack of reinvestment by YPF/Respol. Problematically, nationalization scares away investment. This is particularly noticeable in the energy sector where significant amounts of capital are needed just to take chances of finding and producing energy at a profitable rate. Examples just over the past twelve or so years include Russia and Venezuela, while going further back one can look at Libya. All in all, a country such as Argentina needs the expertise, capital, and sheer willpower of large energy firms just to explore, take chances, and invest in developing new energy opportunities. Nationalization is not going to make the multinational companies who lead the international energy sector eager to invest; the risks of energy investment are high enough without the political risk of expropriation.

Respol is asking for upwards of $10 billion for its stake, a sizable chunk for a country that has repeatedly found creative ways to manage its economy over the past few years, including raiding central bank coffers and pension funds. Compounding this situation is that Argentina still has not fully agreed to pay out for its default a decade ago. Respol may not get any compensation (or may get it decades down the line). In turn, this will lead other industries, beyond energy, to toe carefully before entering Argentina. After all, who wants to risk developing products, markets, and infrastructure in a country that may take it all away without any real compensation?

The repercussions of this move, following a number of other, similarly concerning government decisions (noted briefly above), can have ramifications for Argentina's economy for years to come. Perhaps it is time to move beyond populism and revisit economics and history in Argentina, or is it too late? Regardless of the terminal station this road leads Argentina to, don't cry for Argentina; it chose the road itself.

LIBORrowing, LIBORedom, and the financial LIBORdello

Does anyone know what the LIBOR is? Bueller?

Not being in banking or finance, I can't say that I knew until recently. The LIBOR is the London Interbank Offered Rate. Basically, it is a statistical average of the interest rates that banks loan to money to other banks at. It is published daily and utilized by pretty much every banking and financial institution to set their benchmark interest rates.

Before I delve in, I need to make a correction to the statement above. The LIBOR is the average of the interest rates that banks claim they would get were they to borrow money from other banks. That's right, this rate, which underlies nearly all other interest rates, is computed by self-report. It is meant to be computed by staff at each bank independent of staff that manage exchanges.

Self-report is an ideal alternative to regulation, but it does not always work out when that self-report is tied to more than basic data collection. In this case, a self-report system has grown tied to some of the very foundations of modern banking and finance. Reports from a variety of outlets (a few examples are here, here, and here), including some academic work noting that self-reported interest rates were overly similar across different levels of risk at different banks, suggest LIBOR manipulation. More clearly, they suggest that self-reported interest rates were artificially depressed, implying to consumers that the banks were safer bets than the truly were. As the articles note, regulators are investigating.

Apart from all the noise over who manipulated, how they manipulated, who has standing to sue and how much they can get (being from Baltimore, I really doubt that the city will make use of the funds the Economist article suggests it may win), the biggest question should really be: how can the LIBOR be fixed? It does not seem fair to let the banking sector have yet another mulligan. There needs to be a system in place, and a system that operates efficiently enough to continue daily postings of the LIBOR. One option would be to introduce some sort of computational analysis that would combine with the self-report, a la a BCS-style system in NCAA college football; however, if such a system has so little support in football, could it really benefit in finance? Another option would be to develop a regulatory scheme that would compare submitted figures with independent analysis; however, cost and timeliness could be issues. A third option may be to regulate by reviewing submitted data after the fact and adding accountability for accuracy back into reporting. This option is better, but the possibility of backlog and the potential costs may be issues.

It is unclear what the best option really is. It may benefit to explore having banks report the rate they claim they could borrow at alongside the rate they would lend at. Also, since banks lend continuously, it may be helpful to group banks by operations and size and have them cross-report lending and borrowing within their cohort. Regardless, accountability needs to be instilled into LIBOR reporting, as well as a penalty scheme for the organization, not just the individual.

Clearly, no option currently on the table is perfect. However, most of the options are better than financial manipulation. Maybe this financial crisis and its after effects will teach us lessons not only about our economic models and their premises, but also about human decision-making.

Ozzie Guillen, Castro, and Free Speech

Although plenty of other news sources have covered the Guillen situation, I feel compelled to add my two cents.  For those of you who avoid sports news, the short of it is this: Ozzie Guillen, manager of the Florida Miami Marlins, uttered the phrase, "I love Fidel Castro."  Everyone went berserk, and the Marlins suspended him for 5 games.  Large numbers of Cubans and Cuban-Americans have understandably expressed outrage and promised to boycott the team while Guillen remains at the helm.  I have no problem with them using the power of the purse-string to make a strong statement of disapproval.  What I do have a problem with, however, is the reaction of both the Marlins organization and Hypocrite-in-Charge MLB Commissioner Bud Selig.

Let's put aside for a moment the fact that, when looked at in its full context, Guillen was clearly expressing admiration for Castro's ability to remain in power and never expressed support for Castro's politics or practices.  The bigger issue is that executives chose to suspend Guillen for what was perceived (rightly or wrongly is irrelevant) as a political statement.  This isn't the case of Ben Roethlisberger, suspended for allegedly committing immoral practices.  I had a problem with that suspension, as it was not based on a conviction or any sort of formal hearing of any sort, just King Goodell holding court and deciding on a whim that a person not even charged with a crime should be suspended for six games.

Rather, this is a suspension designed solely to appease (or try to appease) the Cuban-American population that Miami hopes will form a loyal fanbase (also of note: the sparkling new Miami stadium, financed with taxpayer dollars, sits in the middle of Little Havana).  Now, as I said, that population has every right to express anger over Guillen's statements.  I think that anger is misguided, but again, I support their right to exercise free speech and use their money as they see fit.  There is nothing noble or even justifiable, however, in the reactions of the Marlins and Bud Selig.  The Marlins organization could respond by reiterating the fact that Guillen does not speak for the organization, that people in the organization feel differently, etc.  It could even fire Guillen, should it be of the opinion that its business was sufficiently in jeopardy and that a new direction was needed to maintain/expand its fan base.  A suspension in this case, however, is worse than firing.  Firing could potentially be done as a business/PR justification.  A suspension, on the other hand, signifies improper behavior.  And when it comes to suspending people because of their political speech, the risk of a slippery slope is not just academic.  Honestly: would a player be suspended for wearing one of those hipster Che t-shirts?  Maybe, in Miami, he would be.

Bud Selig, meanwhile -- I have nothing to say about him other than the fact that he's a huge hypocrite (picture of him, on the right, hobnobbing with Castro).

Despite the fact that Guillen is often a moron and says the wrong thing, let's just lay to rest the notion that this suspension and the MLB Commissioner's support of it is anything more than mere grandstanding.

Nine years on, Saddam's fall is overlooked

Granted, there are bigger issues on the political landscape - Libya, Syria, and, of course, our favorite, the looming American election. However, it was noticeable to a select few today that the anniversary of an event that defined a decade and changed the tide of international politics was largely ignored. April 9 represents the nine-year anniversary of the fall of Saddam Hussein.

Though likely next year, at the decade mark, there will be some retrospection, it remains an anniversary that we choose to ignore. It reminds us that nine years later, we have not only not found any direct evidence of weapons of mass destruction, we have not found much direct evidence to suggest that there was much to find in the first place. It reminds us that we put our reputation on the line in front of the world at the United Nations. And most importantly, it reminds us that we've largely left the country in no better shape than it was 9, or even 21 years ago.

It is hopeful that a retrospective on Iraq follows over the next year, one that gives us greater insight into the war within the context not only of our own standard, but also within the changes that follow. Iraq has a future. The only question is how did we contribute or detract from it.