Peter Riddell slams Labour and Tory “peripheral initiatives” on economy

Peter Riddell is the doyen of Times columnists and his insights into politics are usually pretty spot-on. It was therefore gratifying to see him arguing in yesterday’s column that the “irrelevant initiatives and hectic trips around the country” of Gordon Brown and David Cameron are merely a substitute for action, and that their many and varied proposals are economically flawed and designed to buy-off political constituencies rather than achieve macro-economic recovery.

Brown's pledge to create 100,000 jobs and Mr Cameron's new savings package do not address the cause of the deepening recession: the lack of credit. Everything else is secondary… [T]he job and savings initiatives are distractions. They address symptoms not causes…

Both the Brown and Cameron initiatives are about political positioning: to demonstrate their concern about the recession and to show they are doing something. The most damaging charge now is of inaction. The plans are also aimed at potential supporters, with Mr Cameron generating a positive response from Tory websites and activists seeking tax cuts, even though he has been criticised by independent commentators.”

Riddell is entirely correct. The only way this recession will end is if the equilibrium between borrowing and lending is established, and preferably at a level that sees interest rates reflecting real time preferences, rather than being massaged down by governments in an effort to stimulate short-lived but vote-winning “booms” (today rebadged as “soft-landings” and even “recoveries”).

I am not entirely sure I agree with his thrust that this should be achieved by the Government pumping vast sums of extra money in to the banking sector: today’s Times headline brings tears to the eye. Excess credit expansion is what brought us to this sorry state and further credit expansion is only going to bring us her again in the future (‘If you are in a hole, the first thing to do is stop digging’). However, whether one accepts that the economy needs to go through a period of readjustment or you believe that masses of liquidity needs to be pumped into the banking sector to stop an outright collapse, the fact remains that bail-outs for car companies, government make-work schemes and financial gestures are not only going to fail in their objectives, but will in the process make the situation a lot worse.

Riddell is not nearly firm enough in this, however, and occasionally lapses into Keynesian fantasy. “Bringing forward capital projects makes sense,” he claims, before admitting that it “is unlikely to have more than a marginal impact.” Similarly, he thinks that “There is a case for boosting saving in the long term, but not in the short term when the need is to raise spending,” ignoring the fact that money saved equals money spent: banks can’t hang onto money for long, and sooner or later it has to be invested in businesses or – as the result of more misguided government intervention – used to buy government bonds, which means that either way it ends up in the “real economy”. One man’s saving is another man’s (or company’s) borrowing and spending.

He also gives his blessing to the idea of extended state guarantee for loans that has been proposed by both the government and the Tories. But this is an extremely dangerous proposal for two reasons. Firstly, businesses are currently going bust because lenders are not willing to extend credit to them for fear that they will go bust anyway and thus default. If government guarantees these loans, banks will have no reason to exercise one of their primary roles – as arbiters of who is credit-worthy and who is not – and will be inclined to loan money to all and sundry, knowing that the bank is shielded from loss. The result will be that the government will end up with huge numbers of loan defaults to cover.

And that creates the second problem, which is the moral hazard facing the government as a result of these loans. According to Riddell, “The answer is not unconditional bailouts, as in the 1970s, but some way of breaking the credit logjam”. But once a firm that has outstanding loans backed by government guarantee is faced with bankruptcy, it will have a far more powerful hold over government when it seeks a bail-out. The argument that a subsidy of a few million will avert a collapse and default that saddles the taxpayer with a debt of tens of millions will be hard for government to resist. Conversely, the flood-gates of industrial policy will be open as government will expect influence in return for its largesse: as Riddell himself admits, “the larger that government guarantees become - and they could be enormous - the greater the demand for specific commitments in return.”

British foreign policy: a tour d'horizon

Every international security pundit would like to summarise the broad sweep of strategic concerns facing the United Kingdom in a single hour. This is just such a lecture.

Sadly (or, for those of you reading it, happily), this is not mine. My comments are limited to parentheses. At least, not originally. Rather, it is a summary of the hour-long inaugural lecture of Professor Michael Clarke, the new director of the Royal United Services Institute.

Prof. Clarke began with the rather trite comment that this was a very uncertain time in international affairs. At such a time think tanks such as RUSI had a lot to offer, for they had the luxury to stoop and think while politicians were too busy reacting to events.

He began (apologetically) with a biblical quote: “the race is not to the swift, nor the battle to the strong … [for] … time and chance happeneth to them all”. The them for (and title of) his essay was Strategy and Fortune, for luck as much as good planning played a role in foreign (one might argue all) policy. Good strategies can ride over bad luck, whereas bad strategies were destroyed by it.

Having said this, he turned to a long analysis of the Blair years. Until 1997, UK foreign policy had been shaped by Realist orthodoxy: sovereignty; territorial inviolability; balance-of-power. Blair characterised this as a “doctrine of benign inactivity” (though it was clear that he did not see this as quite so benign, as bystanders watching the tragedies of the Balkans and Rwanda might appreciate).

By comparison, Blair’s own foreign policy would be shaped by three strands:
1) Policy designed around values such as liberty, democracy, tolerance and justice, where “idealism becomes Realpolitik”
2) The integration of “hard power” (the power to compel) with “oft power” (the power to attract)
3) A recognition that the world was not benign to the UK and that we would therefore need to fight for our values: thus the liberal interventionism exemplified in his Chicago Speech.
This liberal interventionism would have to be based on two strategies: Leadership and Positioning. Leadership meant that the UK should be in the foreground – as it was with Kosovo, climate change and Iraq. Positioning meant that the UK’s success would depend on where it stood; in Blair’s view, the best place to be was among democratic allies, shoulder-to-shoulder with the United States.

Clarke then described Blair as a Shakespearian character whose great successes were followed by great tragedy. And he did indeed begin successfully: his first term saw an increased give and take within the EU, more focussed on the bigger picture; successful intervention in Kosovo where British and French leadership – the willingness to break a deadlock by using ground forces – won the war with Milosevic; a textbook humanitarian intervention in Sierra Leone; and Operation Desert Fox, which Clarke argued was in retrospect far more successful than was at first thought – it nearly led to Saddam’s ouster.

But the events of September 11th changed both the world and Blair’s fortune – not because of what Al Qaeda did, but because of America’s reaction to it. Blair’s April 2002 meeting with President Bush at Crawford, Texas left Blair convinced that the US would invade Iraq and that the UK must therefore back them. He therefore came up with a five point plan that highlighted both his focus on positioning and his self-belief (some might argue hubris). He would
1) Get Europe to back the US, which would encourage
2) The US to work though the UN, which would include
3) The US committing to a renewed push for peace in Palestine, which would lead to
4) A regional settlement for the whole Middle East, which would
5) Draw in the Neo-Cons in Washington as it would play into their democratisation agenda.

Eventually (perhaps sadly) he failed on all counts. Consequently the US went it “alone”, and the UK was bound to join them because of Blair’s conviction that this was the position that the UK must adopt if it was to have influence internationally. Four years later the objectives of the coalition have been radically revised, from creating a peaceful, democratic and free Iraq, they are now happy just to retreat with honour from an Iraq stable enough to hold together while Iraqis settle their own differences. The result for Blair was that he lost his power to lead or to take the initiative; indeed, an axis formed against him personally, led by Putin, Schroeder and Chirac. Blair tried to recover. Clarke noted the focus after 2003 on Africa, the environment and global poverty. Gleneagles was a personal triumph for Blair but perhaps also a parting gift from a G8 glad to be seeing the back of him.

The key messages from the Blair era were that
1) Globalisation is not inherently benign (especially if you are from the Third World) and is certainly not equitable
2) The UK is very well placed to benefit from Globalisation because it has an open society and a flexible economy]
3) The UK lives (and dies) by collective action
4) There is a crisis of collective action in the world today.

At this point Clarke turned to the future, and noted that the challenges for the future depended on how one viewed it. Traditional international security problems would focus on the Middle East, a resurgent Russia, Britain’s place in Europe. Trans-national problems included crime, terror, WMDs, energy-, cyber- and food-security. Structural problems include global inequality, climate change, health and failing states. What is not clear is in what way these impact on Britain. What is clear is that the international consensus is weak, unclear and ineffective, and that even the powerful were struggling to impose their will.

In dealing with the apparent problems highlighted above, however, there was a tendency to ignore the problems of international structures – how one achieves an international consensus. There was almost a tragic fatalism that accepted the failure of international institutions since the Cold War, with new sources of legitimacy replacing “clear pillars” with a “subtle constellation of power”; difficulties of control and influence as a result of network, globalised and disaggregated economies; changing “rules of the game” as international law leant more towards human security.

In fact, international law was weaker rather than stronger, and the West only had itself to blame. The West had played fast and loose with international law – acts of humanitarian intervention had undermined legal norms. This was a dangerous game to play, for in what would be the “Asian Century” the West would lose power and influence, and “rules matter most to the least powerful.”

Yet Clarke remained optimistic. He believe that the US would gain from considering and addressing these issues; the UK would gain by working collectively, which it was traditionally good at; the UK remained part of a broad international consensus (if one looked beyond the immediate challenge of Iraq); and the UK had good armed forces. But Britain must be cautious about using them; their very quality led to a tendency to reach for force too soon. He also lamented (as did Lord Ashdown in his recent book) that while the military was more joined up than ever, it was woefully disconnected from humanitarian and civil agencies.

Blair was, in Clarke’s view, correct to position itself beside the US, but the UK must also recognise that the US is entering an introspective stage, and that when it emerges the old certainty that its Janus-faced strategy would always put the Atlantic fist would be gone; in the coming century, America would be a Pacific power first-and-foremost. The UK’s role in the C21st would be to be a hub rather than a pillar of international security, acting to articulate and lead the consensus (as the Stern Review did on climate change).

As for Europe, it would remain peaceful and prosperous, but in the Asian Century, it would increasingly struggle for latitude in which to manoeuvre.

A full transcript is available from RUSI.

Paddy Ashdown goes to Crete

A little light holiday reading kept me entertained during the long, hard hours lying by the pool or on the beach in Elounda, Crete. I needed something to take my mind off the unending, unforgiving sun. So I took with me a copy of Paddy Ashdown’s Swords and Ploughshares.

Paddy is an interesting writer, though clearly not a great one. He uses the clipped sentences and direct speech of the soldier, yet at times he drifts into mawkish sentimentality (usually when writing about meetings with Bosnian villagers), a habit which the Economist suggests he may have “picked up during his two decades in Britain's third party, the Liberal Democrats.” (Sentimental? Us?!). His writing is also at times a little careless, a flaw which should have been corrected by his editors. In fact, a firmer editorial hand would have been useful all round; several of his anecdotes appear more than once. And there is no shortage of anecdotes – like many military men, he has plenty of good stories to share, perhaps, suggests the Economist, because he has kept the best back for a future set of Memoirs (Ashdown Diaries vol. 3, anyone?).

Nonetheless, it is a compelling book. Lord Ashdown has impeccable first hand experience of conflict prevention, peacekeeping and post-conflict reconstruction. He was involved (unsuccessfully) in efforts to avert a war in Macedonia (which mercifully proved successful in the long run). In the 1960s he fought in the Indonesia-Malaysia confrontation, and in the past few years he was the UN’s proconsul in Bosnia. He explains early on that Swords and Ploughshares is not intended to be a blue-print for the “seamless garment” of prevention, intervention and state-building, but that is clearly what it is. How To Keep The Peace by Lord Ashdown. There’s a new sheriff in town, and that town is Norton-sub-Hamdon.

Ashdown’s justification for intervention is straight forward. While honouring state sovereignty should be the norm, intervention has always and will always occur, and for good reason. Even “internal” conflicts have external effects; threats to international peace and security. When an egregious regime or state collapse leads to mass bloodshed and displacement, the international community must act.

Where his basic justification is simple, his outline for implementation is detailed. It needs to be. The primary legitimising mechanism for intervention should be the United Nations (as it has the legal power to act), but where the UN is stymied by obdurate veto-wielders there are places for regional bodies or “coalitions of the willing” to act instead. International law has a common law basis; law is set as much by precedent as by agreement. Some interventions legitimise themselves, as was the case in Kosovo (which at the time, he noted at the book launch at the London School of Economics, was probably illegal in a strict reading of the law).

However, the UN should never become involved in actual peace-enforcement. It is hopelessly bad at war-fighting, so while it may have a role in permissive environments (Cyprus, Sierra Leone now), in non-permissive environments (East Timor, Sierra Leone in 2000) it should leave the fighting to the professionals (Australia, the UK).

Having to fight is a sign of failure. The international community needs to identify and move to avert conflicts much earlier. Usually, it is not until the villages are on fire that the press, and so the public, and so politicians take an interest in conflict. But by then it is too late – the refugees are already washing up on our shores and the costs of restoring peace to the country will be far higher. Far more effort needs to be devoted to preventing conflicts before they occur. This is the time for soft power, for massive amounts of development aid and offers of mediation, institution building, confidence raising and whatever help we can offer. But in the background a threat must lurk: if the offer of help is spurned and conflict does break out, action will be taken to restore peace.

Where armed intervention is required, the actual war-fighting phase will be brief and may not require much manpower. But the subsequent occupation will need enormous amounts: compare the 60,000 NATO troops that successfully occupied Bosnia, a country of 4 million, in 1997 with the 200,000 that have unsuccessfully occupied Iraq, a country of 27 million, since 2003. The first and most important priority must be to ensure security on the ground. Only once the security of the citizens is assured can any post-conflict normalisation and state building take place. The second priority then must be the rule of law; people must know that the police and judges are incorrupt, that criminals will be prosecuted, and that their families and their property are safe. After that economic reconstruction is the next step. Only much later come elections.

This is an interesting and crucial point. As Ashdown notes, as liberals we see democracy as vital, and democracy is synonymous with elections. But in fact elections are only one aspect of democracy, and one of the most easily corrupted. In post-conflict environments elections are all-too-easily captured by the former war-leaders (a leading UN policing expert once told a conference that I attended that the players in the post-conflict stage are usually not the former faction leaders, but their quartermasters – those who have the money, the networks and the knowledge necessary to transfer easily into politics). In fact, elections can be very divisive and so undermine the peace. They can also leave former warlords in power. In fact, elections should be left as late as is decently possible (in post-war Germany, elections did not take place for four years).

Once the conflict phase is over, the state can be rebuilt. Not, note, the nation. Nations cannot be built by outsiders; they must grow organically through a shared culture and sense of community within and among the people. But the international community can help rebuild the structures of the state: a functioning economy; public services; an impartial civil service not appointed by politicians; businesses free of political interference; a simple tax code; a law code that is fair, but that reflects local principles; media freedom; swift and proper justice, etc. This will be a long haul – politicians from intervening nations do neither their own people nor those on whose behalf they have intervened any favours by pretending that the boys will be home before we know it. Some presence may be necessary in a country for a generation. That is why it is better to prevent these problems before they occur.

Ashdown cannot stress often enough the importance of seeing the whole process as a “seamless garment” (he repeats the phrase so often I can be forgiven for using it twice!). Planning for the post-conflict phase should take place as the same time and on the same footing – indeed, with the same people – with planning for the war. The fact that force may be used to end a conflict must be a clear part of the prevention process (threat). And all of it needs a clear narrative from the very beginning. To generalise: “The international community will not tolerate this behaviour, if it continues these will be the consequences, if necessary we shall intervene with force to restore peace, and when we do so we will aim to ensure that this country can function independently as a viable state, in which all its citizens can enjoy peace and security. If at any time those conditions are met, the international community will acknowledge that this country is a functional member of the community and will leave the government alone to run its country in the interests of all its citizens.” The narrative should not simply reflect our prejudices, however: parliamentary democracy may be a wonderful thing, but it is up to the people to construct their own system of government; a market economy is a sign of freedom, but it must develop from the freedom that is given to people rather than be imposed by outsiders.

There’s a lot more to it, of course. In fact, Ashdown makes it sound deceptively easy (though I’m sure he would be appalled at the suggestion). He comes from a long tradition of Liberal internationalists who believe that there are universal laws that bind all mankind. It is a fine line between such high-minded visionaries and the fanatical saints that would impose their view of goodness upon the world. Ashdown himself notes that of the major international interventions that have taken place since World War II, half have gone sour. He thinks we need to do better. The truth is, we may not be able to; it may be that international intervention is so fraught with problems that we can never hope to get it right every time. But if anything can be done to improve our strike rate, Ashdown has probably put his finger on it. It would be well worth future interveners – liberals and saints alike – picking up a copy.