Saddam Hussein

The Anti-American Blowback from Bush’s Korea Policy

The victory of the liberal Roh Moo-Hyun in the December 19 South Korean presidential elections has been presented in the Western media as a source of future tension with Washington. Roh, a long-time liberal and human rights advocate, when compared to his more conservative opponent, Lee Hoi-Chang, does represent a more challenging partner for future South Korean-U.S. relations. The new president’s stated aims include continuing the “Sunshine Policy” of engagement with North Korea, renegotiating the Status of Forces Agreement (SOFA) for the 37,000 U.S. troops in South Korea, and maintaining a more independent foreign policy in international and regional affairs. However, it is difficult to argue that anything Roh does could place more tension on Seoul’s relationship with Washington than the Bush administration’s unilateral foreign policy.

read more

U.S. Support for the Iraqi Opposition

FPIF Policy Report January 2003 U.S. Support for the Iraqi Opposition By Chris Toensing Chris Toensing < ctoensing@merip.org > is a contributor to Foreign Policy In Focus (online at www.fpif.org ), and he is editor of Middle East Report , a publication of the Middle East Research and Information Project. The views expressed here are his own. Contents Searching for a Pliant Iraqi Partner Toward a New Foreign Policy Sources for More Information PRiraqoppsupp.pdf On December 17, 2002, a long-delayed conference of the Iraqi opposition in exile concluded in London. After four days of contentious debate among over 300 attendees representing a spectrum of opposition groups, a smaller number of delegates entered a closed-door conclave to select a “coordinating committee” tasked, in the view of some delegates, with the eventual formation of a transitional government that can replace Saddam Hussein the moment he falls. White House and State Department spokesmen promptly hailed the conference as “the broadest gathering ever convened of free Iraqis opposed to the tyrannical regime in Baghdad,” pledging to “work with” the coordinating committee in achieving its goals. Days earlier, press reports revealed that George W. Bush’s administration has released $92 million to train 1,000 Iraqis screened by the Iraqi National Congress (INC), a group that most Iraqi opponents of Hussein regard with scorn, to help U.S. soldiers police a post-Saddam Iraq. These contradictory signals from Washington–applauding with one hand an inclusive Iraqi opposition while feeding with the other hand the ambitions of one narrow faction–partly reflect rancorous and ongoing battles within the Bush administration over dealings with “Free Iraqis,” as U.S. officials have begun calling the organized Iraqi opposition. They also indicate the end of U.S. reliance on Iraqi opposition groups in their plans for overthrowing Saddam Hussein’s regime, even as the outward signs of cooperation increase. U.S. support for Iraqi opposition groups has become primarily an exercise in “public diplomacy” aimed at showing American and international critics of the administration’s push for “regime change” that Iraqis want to be liberated from the grip of Saddam Hussein and the ruling Baath Party. But the Bush team is also spinning its intentions for the sake of Iraqi public opinion. “I want to create the national story that Iraqis liberated themselves,” said Patrick Clawson of the Washington Institute for Near East Policy, a think tank close to key policymakers in the Bush administration. “It may have no more truth than the idea that the French liberated themselves in World War II,” he added. In Bush administration thinking, such fiction is necessary to stave off resentment toward U.S. soldiers occupying a post-Saddam Iraq–still the likeliest scenario for “the day after.” Though different agencies of the U.S. government nurture their own theories about who will emerge to take Saddam’s place, nobody really knows the nature of a postwar Iraq. Despite the appearance of unity in the London conference’s endorsement of a democratic, pluralistic, federal Iraq, the ambitions of different opposition groups clearly conflict. In mid-September, the formerly warring Kurdish Democratic Party (KDP) and Patriotic Union of Kurdistan (PUK)–who control two Kurdish enclaves in northern Iraq–agreed on a draft constitution for a federal Iraq that reserves for the Kurds, among other things, either the presidency or the prime ministership of the country, their own court system, and the right to maintain their own militia under arms. The latter provision in particular is highly unlikely to win support from Iraqi Arabs, whose concepts of federalism offer the Kurds more limited autonomy. The Iran-based Supreme Council for Islamic Revolution in Iraq (SCIRI) wants to build some form of an Islamified state, while most other oppositionists are firmly secular in their politics. Iraqi exiles disagree sharply over the scope of “de-Baathification,” which Iraq will likely undergo after the regime is gone, creating the possibility of extrajudicial retribution. Defectors from the Iraqi Army, touting their contacts who still command strategic posts, argue that the best way to forestall postwar revenge attacks is to encourage a coup–in which case numerous officers stained by the current regime’s depredations may never be investigated. One such general, Wafiq al-Samarra’i, former head of Iraqi Military Intelligence, was named to the coordinating committee, which may reconvene in Erbil, a city in Iraqi Kurdistan, in January 2003. The INC, for its part, has relentlessly asserted a bogus claim to be an “umbrella” for the opposition. Though by all accounts the INC has the weakest claim of any opposition group to a social base inside Iraq, its leader Ahmed Chalabi and other members are prominent on the coordinating committee. Given the persistence of disputes within the Iraqi opposition, the Bush administration is keeping the exiles on the margins of actual planning for Iraq’s future. Washington dispatched Zalmay Khalilzad, formerly the chief U.S. advisor to interim president Hamid Karzai in Afghanistan and now America’s envoy to Free Iraqis, and Deputy Assistant Defense Secretary William Luti, a vociferous hawk, to London. Their main task–at which they succeeded–was to ensure that conference delegates did not form a provisional government. White House Press Secretary Ari Fleischer described the coordinating committee as “a follow-up advisory committee,” a designation that falls considerably short of the government-in-exile called for in working papers prepared by conference attendees. The U.S. envisions the 1,000 INC-affiliated trainees acting as “guides and go-betweens” for American troops; the INC views the trainees as constituting the nucleus of a new national army. Although Khalilzad assured SCIRI that the U.S. would not sponsor an anti-Iranian government in Baghdad, the U.S. is not arming and training SCIRI fighters, and Washington will probably seek to limit Iranian influence in whatever new government is formed. Strategic calculations in Washington are likely to undercut the agendas of opposition forces within Iraq as well. Leaked war plans reveal that the U.S. will move quickly to occupy oil-rich Kirkuk, currently controlled by the Iraq regime but regarded by the Kurds as their capital, to prevent a Kurdish move on the city. Turkey, which fears aspirations toward autonomy by its own Kurdish population, has threatened to intervene if the Kurds take Kirkuk. Every scenario for postwar Iraq is speculative. But the agendas of Iraqi opposition groups are so incongruous with each other, and with the strategic goals of the U.S. and its regional allies, that U.S. war planners have abandoned proposals for substantive Iraqi participation in the impending war. Continued U.S. encouragement of opposition organizing serves to silence domestic critics who complain that the Bush team has no plan for reconstructing Iraq after the war. Washington’s public behavior also impugns pundits who argue that the U.S. will have to occupy Iraq for a long time after the Baathist dictatorship is gone. It is a strategy for marketing the war, not for building a democratic alternative to Saddam Hussein. U.S.-Supported Groups The Iraqi National Accord , headed by Iyad Alawi, comprises former military and intelligence officers and Baath party officials in exile. Originally organized by Saudi intelligence and subsequently funded by the Central Intelligence Agency, British intelligence, and the Saudis, it staged a disastrous coup attempt in 1996. Despite this failure, the group still enjoys CIA patronage. The Iraqi National Congress (INC), based in London but often frequenting Washington, was founded in 1992. Described by retired Gen. Anthony Zinni as “Rolex wearing, silk-suited guys in London,” the INC falsely claims to be representative of the opposition as a whole. Many formerly participating groups dropped out because they perceived the INC as merely a vehicle for its leader, Ahmed Chalabi, who fled Iraq in 1958. Other nominal INC groups work independently, also because they distrust Chalabi. Still, the INC enjoys fervent support in Congress and among hard-liners in the Bush administration, and it has received millions in U.S. aid for military training. The Movement for Constitutional Monarchy is headed by Sharif Ali Hussein, nephew of the Hashemite king killed in the revolution of 1958. The visit of fellow Hashemite Crown Prince Hassan of Jordan to an opposition meeting in August 2002 ignited speculation that the U.S. would support a postwar reinstallation of the monarchy, but the monarchists’ fortunes appear to have declined of late. The Iranian-backed Supreme Council for Islamic Revolution in Iraq (SCIRI), the main Shia opposition group, is based in Tehran. SCIRI claims to have thousands of men under arms at bases both inside and outside Iraq. Headed by Muhammad Baqir al-Hakim, the group has recently moderated its call for an Islamic republic in Iraq. Its public statements about U.S.-led “regime change” have varied considerably, depending upon Washington’s rhetoric toward Tehran at the time. The Kurdish Democratic Party (KDP), historically the main Kurdish party in northern Iraq, was formed in 1945 and fought the central government from 1961-66, 1969-70, 1974-75, and again immediately after the 1991 Gulf War. Led by Masoud Barzani, the KDP has enjoyed a “golden age” in the 1990s, living in the U.S.-British northern no-fly zone and reaping profits from smuggling Iraqi oil into Turkey. Jalal Talabani’s formerly Leninist Patriotic Union of Kurdistan (PUK) split from the KDP after the Kurdish rebellion of 1974-75, which failed when then-Secretary of State Henry Kissinger reneged on promises of U.S. support. The PUK squabbled with the KDP from 1994-97 over territory and oil smuggling revenues, but in 1998 a rapprochement was negotiated. In 2002, the KDP and PUK agreed on a draft constitution for Iraq and the Kurdish region. Other Groups The Iraqi Communist Party (ICP), established in 1934, worked in opposition to the king (sometimes with the Baath Party) and then in opposition to successive Baathist regimes. Saddam Hussein ruthlessly repressed the ICP, driving many members into exile. Much of the information about human rights abuses in Iraqi prisons comes from the ICP, which opposes a U.S.-led regime change. Al-Da’wa al-Islamiyya (Islamic Call) is a Tehran-based Shia group that supports the creation of an Islamic state in Iraq. Several groupings of ex-military officers advance ideas for overthrowing the regime through a coup supported by units of the Iraqi Army. Among the most important are the Free Officers’ Movement , led by Najib al-Salihi, the Higher Council for National Salvation , led by Wafiq al-Samarra’i, and the Iraqi National Movement , led by Hassan al-Naqib. Al-Sammara’i and another former high-ranking general, Nizar al-Khazraji, are among the officers suspected of involvement in the Iraqi regime’s war crimes and crimes against humanity. The Islamic Movement of Iraqi Kurdistan (IMIK) is based in Halabja, site of the most infamous gas attacks on the Kurds, in the PUK-controlled enclave. In 1998, a radical faction under the leadership of Mullah Krekar broke off from IMIK over the latter’s decision to join the PUK administration. Extremist guerrillas affiliated with Krekar, some of whom fought with al Qaeda in Afghanistan and who now call themselves Ansar al-Islam, apparently control an area between Halabja and the Iranian border. Searching for a Pliant Iraqi Partner Well-publicized infighting has plagued Bush administration policy toward the Iraqi opposition. Neoconservatives clustered in the Defense Department and the vice president’s office, together with conservative Republicans in Congress, have championed Ahmed Chalabi and the INC, even though the INC has conspicuously little endorsement from other opposition groups. “The Iraqi National Congress has been the philosophical voice of free Iraq for a dozen years,” key neoconservative Richard Perle told The American Prospect , in typical exaggeration of the INC’s clout. Eagerly and publicly supportive of Bush’s war plans, the INC scores more points with the neoconservatives by embracing U.S. strategic goals in the Middle East as its own. “American companies will have a big shot at Iraqi oil,” Chalabi told the Washington Post in September 2002. Defectors spirited out of Iraq by the INC also supply much of the Bush administration’s purportedly “bulletproof” intelligence about Iraq’s putative illegal armaments. The special intelligence gathering unit under the supervision of Defense Department official Douglas Feith–formed because the administration’s war planners did not like the information they were getting from established agencies–is said to rely very heavily on the reports of INC associates. Given the INC’s crystal-clear prowar agenda, the administration may be making major decisions based on politicized intelligence whose veracity the CIA disputes. The State Department, the CIA, and the INC have a long history of mutual antipathy. Both U.S. agencies suspect the INC of slippery accounting for funds disbursed to it during the 1990s, and they disbelieve the INC’s claims to command a following inside Iraq. Relations between the INC and the CIA have been hostile since the CIA abruptly withdrew its support for an INC covert military operation against the Iraqi Army in 1996. The INC base in Erbil was crushed when an erstwhile INC member, the KDP, invited the Iraqi Army into Kurdish-controlled territory to help the KDP defeat its rival, the PUK. Republicans in Congress kept INC financial support alive during the Clinton years. Still, by 2000, the State Department had released only $8 million of the $97 million allocated for Iraqi opposition military training–much of it earmarked for the INC–by the Iraq Liberation Act of 1998. The installment of Bush in the White House brought the INC’s neoconservative champions into power, and Chalabi’s group renewed its claim to represent the opposition as a whole. Over the summer of 2002, the State Department and the CIA encouraged the formation of the “Group of Four” (the KDP, PUK, SCIRI, and the Iraqi National Accord), coalesced by a common disdain for Chalabi’s maneuvering. But the neoconservatives successfully blocked this effort to marginalize the INC, tasking the Defense Department with managing INC funding. Chalabi’s group remains one of the six officially recognized by the State Department, along with the Group of Four and the Movement for Constitutional Monarchy. The tumultuous destiny of the INC has been directly tied to the notions of their U.S. patrons in Washington debates. Iraqis inside the country do not respect the INC, according to a report from the well-regarded International Crisis Group (ICG), based on interviews in three cities (Baghdad, Mosul, and Najaf) conducted in November 2002. One informant told the ICG rapporteur that “the exiled Iraqis are the exact replica of those who currently govern us…with the sole difference that latter are already satiated, since they have been robbing us for 30 years.” Mainly for this reason, the two opposition forces who do have considerable strength on the ground–the Kurds and the Shia–are usually careful to maintain their independence from Chalabi’s group. Tensions between the major U.S.-supported opposition groups are under wraps for the time being but are likely to resurface. Prior to the London conference, Chalabi met with KDP leader Masoud Barzani and the Iranian-backed Shia leader Muhammad Baqir al-Hakim in Tehran to work on unifying their positions. But perceptions of INC manipulation dog the appearance of unity. The “Transition to Democracy in Iraq” document presented at the conference was not adopted, because its call for a “transitional government” was seen to privilege INC ambitions. Delegates representing the Islamic Movement of Iraqi Kurdistan stalked out of the London conference, arguing that the agenda had been rigged by Washington to favor the six main groups. These debates are likely moot, for the U.S. knows it cannot completely refashion the Baghdad regime. The practicalities of maintaining territorial integrity and public order in postwar Iraq, not to mention ameliorating humanitarian crises caused by U.S. bombing and any scorched-earth tactics to which the current regime may resort, dictate a different approach. The U.S. is likely to adopt a minimalist definition of “de-Baathification,” leaving much of the existing governing structure intact. This course of action would anger those in both the organized and unorganized oppositions who want a cleaner sweep, and would enhance the likelihood of revenge attacks. Further, it would make a mockery of Bush’s already dubious claim to be “liberating Iraq” because of the current regime’s dismal human rights record. Perhaps the worst prospect, but one still under discussion, would have the U.S. sharing power with high-ranking Iraqi Army commanders who desert Saddam Hussein after the bombs begin to fall. A genuinely unified, democratic, and representative Iraqi opposition may not have emerged without U.S. interference, but the relentless neoconservative campaign for the INC–a pliant but unpopular Iraqi partner–has certainly made matters worse. This meddling, coupled with perennial rumors of U.S.-backed coup plots, calls into question the Bush administration’s commitment to establishing a democratic government in postwar Iraq. As conservative analyst Anthony Cordesman points out, “we already have nondemocratic priorities,” because of the U.S. need to placate Turkey and other regional allies. Cordesman notes: “We virtually must enforce territorial integrity and limit Kurdish autonomy. There will be no valid self-determination or democratic solutions to these issues.” Finally, there is no basis for the administration’s optimistic predictions that Iraqis will welcome a U.S. presence in their country indefinitely. The London conferees unanimously agreed that Iraqis do not want an American military protectorate.   Toward a New Foreign Policy Bush’s race toward war, following previous administration funding of corrupt and marginal exile groups, demonstrates scant regard for ensuring a democratic alternative in Iraq. Yet, Saddam Hussein’s brutal regime can hardly be described as a victim in the current crisis, as some opponents of war and sanctions would have it. The regime has fought two wars of aggression that wreaked havoc on Iraqi society, once among the most prosperous in the Arab world. It has murdered and repressed its domestic critics and has perpetrated crimes against humanity, particularly against the Kurdish population in the north, that rank among the worst of the late twentieth century. The regime must share responsibility with the UN and the U.S. for the humanitarian disaster of economic sanctions. In the hearts of the numerous Iraqi exiles who have kept their distance from the U.S.-backed opposition, apparent U.S. determination to achieve regime change in Iraq creates agonizing ambivalence. Few welcome the prospect of a U.S. invasion or have illusions about the imperial vision that animates the war party in the White House. Many worry about communal strife erupting during or after a war. Such concerns moved 23 independent Iraqi exiles to issue a statement repudiating the London conference’s de facto support of U.S. war plans. But many also feel that the regime cannot be dislodged without external intervention, and that whatever government accedes to power after Saddam Hussein is gone cannot possibly be worse than his dictatorship. Even Hamid Majid Musa, secretary general of the Iraqi Communist Party, who opposes the war, says that “there is no way to get rid of Saddam Hussein without the Americans.” Though it is impossible to gauge public opinion inside Iraq with precision, the available evidence indicates that Iraqis in the country harbor a welter of competing emotions about the prospect of U.S.-led regime change. A December 2002 International Crisis Group report found that most Iraqis view the war as inevitable and simply want it to be over quickly. They display surprising indifference to the possibility of U.S. occupation and the exiles’ debates over the future shape of Iraqi self-governance. These openly expressed sentiments, coupled with the unprecedented spontaneous demonstrations on October 22 by mothers whose imprisoned sons are still missing after Saddam Hussein supposedly emptied Iraqi jails, appear to be cracks in the previously ironclad edifice of regime control over Iraqi society. Iraqis clearly want an end to their country’s 12 years of international isolation. On the other hand, Iraqi nationalism is strong. Press reports from Jordan in December 2002 quote Iraqis living there who vow to return home to fight an invading force. The neoconservatives’ predictions that the war will be a “cakewalk,” because the population will instantly rally to aid the invaders, appear to be vainglorious at best. Genuine concern for the plight of ordinary Iraqis would, of course, rule out war as an option for U.S. policy. Having borne the brunt of the economic sanctions for 12 years, Iraqi civilians should not now be forced to pay the costs of war: the inherently indiscriminate bombing, an even further degradation of the country’s civilian infrastructure, the prospect of mass refugee flight, tenacious and bloody urban combat, the possibility of chemical/biological weapons use (and disproportionate U.S. response), and the specter of postwar ethnic and sectarian conflict. However, antiwar forces often do not take the horrors of Saddam Hussein’s rule seriously enough to propose third alternatives to war or an indefinite continuation of the unacceptable status quo. A responsible U.S. Iraq policy would respect the authority of the UN and international law. The Bush administration’s saber rattling and arm twisting frightened the UN Security Council into producing the current semblance of international consensus behind toughened weapons inspections, and further bellicosity from Washington–coupled with backroom deals over postwar access to Iraqi oilfields–could be used to assemble a “coalition of coercion” behind war. But if justice is to be served, a genuine and discerning international consensus must be built around measures that directly target the regime and avoid punishing ordinary Iraqis for the regime’s transgressions, as 12 years of sanctions and bombing have done, and as an invasion would also do. Economic sanctions should be lifted, but military sanctions and rigorous border inspections must remain in place. Foreign investment should be allowed as a means of enabling the reconstruction of Iraq’s civilian infrastructure, especially the water and sanitation systems, whose disrepair has caused the majority of the needless civilian deaths under sanctions. The gradual restoration of Iraq’s economy, perhaps spurred by a UN-administered mini-Marshall Plan to rebuild key infrastructure, would remove the regime’s ability to blame Iraq’s problems on foreign powers. The U.S. should back the formation of an international tribunal, under UN or independent auspices, to indict Saddam Hussein and his top lieutenants for war crimes and crimes against humanity committed during the Iran-Iraq War, during the genocidal Anfal campaign against the Kurds in 1987-88, and both during and since the Gulf War. Human Rights Watch estimates that 115 army and security services officers were implicated in the Anfal campaign alone, and that the total number complicit in war crimes and crimes against humanity is much larger. In November, a Danish prosecutor indicted exiled General Nizar al-Khazraji for his part in the Anfal campaign. Some in the Iraqi opposition lamented al-Khazraji’s indictment, because it may discourage his high-ranking peers (who might also face prosecution) from carrying out a coup. But there should be no guarantees of immunity to implicated army or state security officers. The compelling need to bring Iraqi war criminals to justice, rather than using them as a tool for regime change, should drive international justice efforts. Such measures do not promise a quick end to Saddam Hussein’s regime, but they hold out the possibility of peaceful, democratic change in Iraq–a possibility foreclosed by the false choice between war and perpetual rollovers of sanctions. In the meantime, the U.S. should steer clear of anointing any group of outsiders as a government-in-waiting, eschew bankrolling coup attempts in contravention of international and U.S. law, and abandon any plans to govern Iraq through a military proconsul after invading and occupying the country. The political future of Iraq must be for Iraqis to decide. Sources for More Information Publications Anthony Cordesman, “Planning for a Self-Inflicted Wound: U.S. Policy to Reshape a Post-Saddam Iraq,” Center for Strategic and International Studies, December 3, 2002. Robert Dreyfuss, “The Pentagon Muzzles the CIA,” The American Prospect , December 16, 2002. Robert Dreyfuss, “Tinker, Banker, Neocon, Spy,” The American Prospect , November 8, 2002. Peter Galbraith, “The Wild Card in a Post-Saddam Iraq,” Boston Globe Magazine , December 15, 2002. Global Policy Forum, “Iraq Sanctions: Humanitarian Implications and Options for the Future,” August 6, 2002. Human Rights Watch, “Justice for Iraq: A Human Rights Watch Policy Paper,” December 2002. Human Rights Watch, “U.S. Needs to Screen Iraqi Opposition Allies: Denmark’s Charges Against Iraqi General Welcomed” (press release), November 21, 2002. International Crisis Group, “Voices from the Iraqi Street,” December 4, 2002. Faleh A. Jabar, “Difficulties and Dangers of Regime Removal,” Middle East Report 225, Winter 2002. Chris Kutschera, “The Kurds’ Secret Scenarios,” Middle East Report 225, Winter 2002. Ewen MacAskill and Ian Traynor, “Bush Approves $92 Million to Train Iraqi Militia to Take on Saddam,” Guardian , December 11, 2002. Sebastian Rotella, “Defector Urges U.S. to Court Iraqi Commanders,” Los Angeles Times , December 14, 2002. Anthony Shadid, “Questions on Governance Roil Iraqis in Exile,” Boston Globe , November 27, 2002. Craig S. Smith, “Groups Outline Plans for Governing a Post-Hussein Iraq,” New York Times , December 18, 2002. Websites Campaign Against Sanctions on Iraq http://www.cam.ac.uk/societies/casi/ Education for Peace in Iraq Center http://www.epic-usa.org/ Iraqi National Congress http://www.inc.org.uk/ Iraq Research and Documentation Project http://www.fas.harvard.edu/~irdp/ Middle East Research and Information Project http://www.merip.org/ to receive weekly commentary and expert analysis via our Progressive Response ezine. This page was last modified on Thursday, March 13, 2003 3:41 PM Contact the IRC’s webmaster regarding the functionality of this website. Copyright © 2002 IRC. All rights reserved.

read more

The Case Against a War with Iraq

The United States still appears determined to move forward with plans to engage in a large-scale military operation against Iraq to overthrow the regime of Saddam Hussein. In the international community, however, serious questions are being raised regarding its legality, its justification, its political implications, and the costs of the war itself. Such an invasion would constitute an important precedent, being the first test of the new doctrine articulated by President George W. Bush of “preemption,” which declares that the United States has the right to invade sovereign countries and overthrow their governments if they are seen as hostile to U.S. interests. All previous large-scale interventions by American forces abroad have been rationalized—albeit not always convincingly to many observers—on the principle of collective self-defense, such as through regional organizations like the South East Asia Treaty Organization (SEATO) or the Organization of American States (OAS). To invade Iraq would constitute an unprecedented repudiation of the international legal conventions that such American presidents as Woodrow Wilson, Franklin Roosevelt, Harry Truman, and Dwight Eisenhower helped create in order to build a safer world. Despite the pretense of “working through” the United Nations, it appears the Bush administration is determined to pursue its objectives unilaterally.

read more

A New Development Paradigm Domestic Demand-Led Growth

The Washington consensus, with its emphasis on export-led growth, has failed. It is time for a new development policy agenda that focuses on domestic demand-led growth. Achieving such an outcome will require a new constellation of policies. Domestic demand-led growth rests on four pillars: (1) improved income distribution, (2) good governance, (3) financial stability and space for counter-cyclical stabilization policy, and (4) an adequate, fairly priced supply of development finance. The policies needed to put these pillars in place are (1) labor and democratic rights, (2) appropriate reform and regulation of the financial architecture, and (3) a combination of debt relief, increased foreign aid, and increased development assistance provided through expanded SDRs.

read more

After the Fall: The Argentine Crisis and Repercussions

FPIF Policy Report August 2002 After the Fall: The Argentine Crisis and Repercussions By David Felix, Washington University in St. Louis David Felix < felix@wueconc.wustl.edu > is professor emeritus at Washington University in St. Louis. Felix is the author of “Is Argentina the Coup de Grace of the IMF’s Flawed Policy Mission?” an FPIF policy report available online at http://www.fpif.org/papers/argentina.html . Contents 1.Argentina’s road to disaster 2. Policy options 3. The global context 4. Current prospects 5. The contagion effect PRargentina2.pdf The inevitable happened. Beginning in 2000, the government of Fernando de la Rúa set out to revive Argentina’s sinking economy with new IMF credits and foreign capital. To appease the IMF and Wall Street, it chose to retain a policy triad that had ceased to make sense: to defend at all costs a severely overvalued peso exchange rate; keep up full servicing of the oppressively large dollar debt; and balance the fiscal budget in the face of skyrocketing unemployment and falling production. The frantic effort of de la Rúa’s economic policy czar, Domingo Cavallo, to implement the triad was an abject failure on all fronts. The result was debt default, a run from the peso that rapidly diminished its value in the exchange market, an expanding fiscal deficit, and a resounding no from the IMF and Wall Street to requests for more credit or help in rolling over the existing foreign debt on more viable terms. A violent popular uprising drove Cavallo and de la Rúa from office, leaving the economy in shambles and the polity in crisis. The failure was foretold not merely by academic critics, but more importantly by bond investors who by 1999 had come to see Argentina as over-indebted and the peso as overvalued. They began to reduce lending to Argentina and to raise the risk premium for holding Argentine paper. More difficult to foretell is what the future may bring. A brief review of Argentina’s decline from poster child of the IMF and Wall Street during most of the 1990s to pariah today may help lay out alternatives.   1.Argentina’s road to disaster More avidly than any other developing country, Argentina opened its financial markets and privatized its public assets in the 1990s. New monetary laws in 1991 strengthened these structural reforms. The cornerstone of the new policy was the Convertibility Law, which froze the peso/dollar exchange rate and tied the peso money supply tightly to the stock of hard currency reserves. To bolster Wall Street confidence, the Argentine government in 1991 also announced a major foreign policy shift from nonalignment to an all-out pro-U.S. position–“in carnal embrace,” as Foreign Minister Guido Di Tella sardonically put it. Argentina was graded A+ by Wall Street and the IMF. European and U.S. direct investment poured in to exploit privatization opportunities, giving the depressed economy a strong initial boost. Although such inflows slackened by the mid-1990s as the stock of assets to be privatized shrank, portfolio capital inflows kept rising, notably to purchase Argentine dollar bonds. Pleased with the strategy, the IMF was quick to protect it with emergency credits against the flightiness of portfolio capital. The defense worked during the 1995-1996 “tequila” crisis, but repeated injections of credits failed to revive private capital inflows or the economy, following the 1998 Brazilian crisis. The strategy had reached a dead end. Essentially, the Convertibility Law had transmuted from magnet for foreign capital to millstone depressing the economy, and had become a repellent to foreign capital. As the dollar rose after 1995 relative to the currencies of Argentina’s chief trading partners–Europe and its Latin American neighbors, notably Brazil–the peso became severely overvalued. Badly squeezed, industrial exports declined, and cheapened consumer imports displaced domestic production. Industrial production stagnated and unemployment reached double digits. Keeping the economy afloat by incurring additional dollar debt, albeit with rising risk premiums, worked for a while to cover the widening trade deficits and rising debt service. But with the overvalued exchange rate holding down exports, it became evident that Argentina was headed into a debt trap. Each year’s debt service augmented the next year’s in an expanding series that was becoming unsustainable. The bond markets hastened the denouement by raising the risk premium on Argentine bonds to levels that effectively closed the international markets to Argentine placements. Neither a 1999 IMF rescue package nor a much larger one in December 2000 was able to reopen these bond markets on viable terms. The dilemma for Argentina was that while devaluing and reducing the dollar debt service were essential for reviving the economy, capital decontrol had encouraged a major domestic buildup of private dollar debts, whose servicing costs would be substantially increased by a devaluation. Without capital controls and financial support via the IMF or other channels to minimize transitional turmoil, devaluation would be economically and politically difficult to implement. But Washington, and hence the IMF, would not offer more aid. De la Rúa had a political opening for changing policy direction. His predecessor, Carlos Menem, left office in 1999 pursued by corruption charges and accusations of having brought on the recession and debt crisis by overissuing dollar bonds to finance fiscal deficits. De la Rúa’s center-left coalition, which campaigned on an anti-corruption and economic recovery platform, won a decisive victory in the elections. Could he have used this political momentum to revise the Convertibility Law and bargain successfully with Washington and the IMF for transitional help in scrapping the senseless policy triad? We will never know. After some initial dithering, de la Rúa chose to break with his coalition and pursue the triad to its bitter end.   2. Policy options The popular uprising dramatically altered the political parameters shaping economic policy. Three policy changes became certain: default on the dollar debt, an easing of monetary-fiscal austerity, and exchange rate depreciation. Formal dollarization, favored by conservative Argentine economists and politicians as an alternative to devaluation, was no longer a viable option. The Peronist party, which still controlled the Congress, and the Peronist interim president, Adolfo Rodríguez Sáa, pledged to suspend service on the dollar debt immediately while negotiating a “haircut” with bondholders–a permanent write-down of at least 30% of the debt. Complete suspension of the $155 billion in federal and provincial dollar debts would have released around $28 billion for emergency jobs and other social programs in the coming year. But complete suspension was unlikely, since at least $64 billion of the dollar debt was held by local banks and privatized pension funds formed to replace the national pension system. Among Cavallo’s last acts was to force these institutions to accept a replacement of their federal bond portfolio with lower interest rate issues, which weakened their cash flow. Suspending payments on these bond holdings would risk driving many into insolvency, deepening the domestic financial crisis and probably setting off another popular explosion. Initially at least, payment suspension would release only a fraction of the $28 billion debt service for 2002 to fund fiscal outlays on proposed emergency programs.As for devaluation, Rodríguez Sáa’s confusing pronouncements increased the likelihood that it would be disorderly. He opposed repeal of the Convertibility Law, because devaluation of the peso would lower real wages, and proposed instead to issue enough of an inconvertible new currency, the argentino, to nearly double the domestic money supply. Some financially strapped provinces had already issued similar currencies, lecops, to make wage payments. These circulated at substantial discounts from face value, so that workers paid in lecops were already taking a real wage cut, and responding with mass protests. Lecops also had a “Paul paying Peter to rob him” effect on fiscal revenues. Firms accepted them at substantial discounts primarily to cut their tax bills, since they could be used at face value for payments to provincial and federal governments. Issuing argentinos in massive amounts would have further cut real fiscal revenue as well as real wages. Rodríguez Sáa’s confusing monetary pronouncements seemed to reflect demagoguery more than economic illiteracy. The Convertibility Law still had backers, notably among businesses and households with heavy dollar-denominated liabilities, whom the Peronists were fearful of antagonizing. They were also reported to be exploring ways of imposing haircuts on private dollar debts, to ease the pain to dollar debtors of a devaluation. The demagoguery increased the likelihood that bringing the exchange rate to a lower, but stable level would be a disorderly, drawn-out process. De facto, however, the Convertibility Law was well on its way to desuetude. The flight to the dollar by Argentines reduced the dollar reserves of the central bank below its stock of peso emissions, putting it in violation of the law, while in the foreign exchange market, the forward rate on dollars was rising rapidly. To enforce convertibility, the Peronist government would have had to reduce drastically the peso money supply. The The pledges to preserve convertibility merely implied that it would die by neglect rather than by formal repeal. The Peronists also ruled out formal dollarization as an alternative to devaluation. The central bank lacked sufficient dollar reserves to buy up its peso emissions. Augmenting central bank reserves with new IMF and/or G-7 dollar loans could have ruled in dollarization. But Washington, and thus the IMF, remained firmly opposed to more lending unless Argentina first imposed more austerity measures to reduce the fiscal deficit. Dollarization proponents suggested devaluation first, followed by dollarization. But that fallback had no appeal to the Peronists in control, since dollarization would curb the financing of their expansionary fiscal programs. It might yet become an active option were repercussions from failed economic revival efforts to produce an explosive inflation and financial chaos sufficient to bring a rightist regime to power, by ballot or bullet.   3. The global context Convinced that the immediate global repercussions from Argentina’s default would be minimal, the Bush administration and the IMF were comfortable with their tough love response to Argentina’s carnal embrace. The reasoning was that, in contrast to the Asian crisis, the default was long in coming, giving creditors ample time to take protective measures. Moreover, in summer 2001, the IMF granted Brazil an additional $15 billion standby credit as anti-contagion insurance. This optimism, however, badly underestimated repercussions via slower channels of contagion. A sovereign bond default in each of the past three years (with the latest, Argentina’s, by far the largest), plus the hardening of IMF’s bailout terms, has been a red flag to international financial markets. The IMF reports that net bond flows to developing countries, which had fallen to zero after 1998, turned negative after mid-2001. Syndicated bank loans, which are mainly directed to large private firms of developing countries, have taken a similar downward path. Latin American and Asian countries burdened with large hard currency debts have been facing stiffening terms for rolling over or adding to their debts. And compared to the 1997 Asian crisis, promoting exports to offset the higher debt service is encountering tougher going. The industrial countries are in recession, and the U.S., erstwhile global importer of last resort, is now turning again to selective protectionism. The terms of trade of exporters of primary materials and low-tech industrial commodities have been deteriorating, and intensifying export promotion would intensify the deterioration. Unless the industrial countries recover soon and strongly from their recessions, export-led growth efforts would be immiserating for many developing countries. The direct trade effect of the large Argentine peso devaluation and deepening depression has not been important globally, but is having a significant regional impact. Argentina is a large enough trading partner for Brazil, Chile and other neighboring countries for its troubles to have hurt their economies. Had Eduardo Duhalde, who took over as provisional president in January, been able to carry out his intent to build up regional import substitution as a partial substitute for export-led growth by strengthening MERCOSUR, the repercussions might have been positive for the Southern Cone countries, though contentious for the U.S., since it would have undercut its Free Trade Area of the Americas (FTAA) initiative. Moreover, were Duhalde’s attempted recovery strategy of prolonged debt payment suspension, expanded public expenditure and more protectionist, inward-oriented growth to bring about a sustainable economic recovery, it would gain popular appeal in other debt-ridden developing countries as a viable alternative to troubled free-market, export-led systems, with their heavy dependence on volatile foreign capital. Such possibilities presented the Bush administration with a Hobson’s choice. It could block emergency loans to Argentina and take a hard line on debt renegotiation to ensure the failure of any breakaway from neoliberalism. But that would also increase the risk that the resulting economic chaos would produce political chaos and a return of the jackboots. It would also increase the discontent within the IMF directorate over U.S. dominance of IMF policy toward developing countries, which could further erode the Fund’s usefulness as a key U.S. instrument for globalizing neoliberalism. The alternative for the Bush administration would be to resort to softer Clintonism; i.e., help Argentina financially in hopes that would modify policy breakaways, protect Argentine democracy and ease tensions within the IMF.   4. Current prospects In the event, the hard-line alternative won out initially. Instead of providing liquidity to smooth the downward adjustment of the badly overvalued peso, the IMF embarked on a cynical strategy of moving the conditionality goal posts; that is denying Argentina credits by imposing new prerequisites each time the government agreed to existing ones. The cynical strategy succeeded in thwarting Duhalde’s attempted breakaway from the IMF policy line. Duhalde had begun his term with congressional backing from the Radicals as well as the center-left wing of the Peronists. His proposed recovery effort deviated from neoliberal orthodoxy by prioritizing the revival of domestic industry over the early restoration of debt servicing. Instead of more fiscal austerity, it would focus on reinvigorating MERCOSUR and overcoming the domestic credit crunch by restricting capital flight and pressuring the home offices of the multinational banks to recapitalize their Argentine subsidiaries. Price controls on wage goods were to dampen inflationary repercussions from devaluation, etc. Without new IMF credits, capital flight intensified. So did the credit crunch, as multinational banks chose to cut their losses rather than bring in new capital, which forced the government to tighten restrictions on dollar and peso deposit withdrawals. The dollar/peso exchange rate continued sinking while inflation mounted. Argentine GDP plummeted 15% in the first quarter of 2002, open unemployment rose to nearly 25%, and the number of Argentine households consuming below the poverty line soared above 50%. Duhalde soon ended his effort to get U.S. and IMF support for his program, and instead abandoned the program in a desperate effort to win IMF credits. Under IMF pressure he cut back fiscal outlays and repealed legislation that had subjected banks violating currency regulations to judicial prosecution. But as of early August, 2002 the policy reversal had not brought new IMF credits, merely renewed anti-presidential demonstrations and riots, which Duhalde has sought to pacify by advancing the fall 2003 presidential elections by six months. As is its wont, the IMF justifies its hard line on Argentina by placing full responsibility for the disaster on government mismanagement and corruption. It insists that Argentina must balance its fiscal budget, claiming that chronic deficits have been at the root of the excessive run-up of hard currency debt that produced the defaults. Indeed, to resume servicing that debt so as to regain access to the global financial markets, primary fiscal surpluses were essential. Without the fiscal turnaround, the IMF argues, additional credits would be throwing good money after bad. This new IMF prescription for Argentina makes little economic sense for three reasons. First, it misreads the fiscal trajectory. From 1993 on, Argentina ran a primary surplus every year but 1996, with primary spending–all fiscal expenditure except on interest payments–representing a slightly declining percent of GDP. Rising interest payments that overtook the primary surpluses are what caused overall fiscal deficits to surge after 1996. During most of Menem’s last three years in office, increased borrowing was mainly responsible for the rising interest bill. But the IMF made no overt effort then to discourage the borrowing. Instead, the alacrity with which it came through with new credits during tight spots partly reassured the increasingly nervous financial markets that payments would be protected. It was during the latter half of the de la Rúa/Cavallo era that the IMF became reluctant to lend. The timing coincided with near universal consensus in the financial markets that Cavallo’s effort to overcome peso overvaluation with tighter monetary-fiscal measures was tanking the economy to a politically explosive degree. It also coincided with the Bush administration signaling the IMF to cut back because it was convinced that IMF bailouts merely encouraged overborrowing and overlending. Risk premiums on Argentine paper ballooned, making default inevitable. The tanking and default might have been averted had the IMF supported de la Rúa’s initial intent to loosen fiscal-monetary policy to revive the economy, on the condition that it be accompanied by a peso devaluation and debt workout. Instead the IMF helped deepen the disaster by backing the policy triad long after it had become counterproductive. It bears partial responsibility for the consequences. Second, elementary macroeconomics tells us that imposing still more fiscal austerity on an already deeply depressed economy, as the IMF persisted in doing to Argentina, can push unemployment and bankruptcies to politically explosive levels. For IMF Executive Director Horst Koehler to throw up his hands at the Argentines’ loss of faith in their political system, declaring it to be “the most difficult problem” impeding IMF assistance, is disingenuous. The IMF had pressured the leaders of each of the two major political parties, the Radicals and the Peronists, to replace the recovery programs they had promised the voters with harsher austerity soon after gaining office. The lost faith and political chaos that ensued should hardly surprise. Third, it insults the intelligence of foreign investors to assume they would plunge back in en masse were further austerity to succeed in squeezing a budget surplus from the deeply depressed and politically demoralized country. Indeed, it may insult the intelligence of the IMF operatives to assume they really believe the economic rationalization they offer for the Fund’s harshness toward Argentina. It seems more reasonable to assume that the chief motive has been to punish Argentina, as a warning to others not to default. This may be morally reprehensible and in violation of the IMF’s fiduciary responsibility under Article 1 of its charter, the Breton Woods Articles of Agreement, to assist members in balance of payments distress on economically viable terms. But at least it gives a rational gloss to the harsh treatment.   5. The contagion effect Washington and the IMF badly underestimated the regional contagion from the Argentine disaster. It is now spreading along both financial and political channels, threatening more defaults and challenges to U.S. regional hegemony. Financial markets view Uruguay and Brazil as headed for default. Uruguay’s foreign reserves have fallen this year by more than half. Despite a hurried $3 billion IMF loan in June, risk premium on Uruguayan government bonds still hovered around 13%, with Moody downgrading the sovereign bonds and the foreign currency liabilities of the country’s banks to near junk levels. After Brazil in June drew $10 billion of its $15 billion IMF standby to stanch capital flight, accompanied by messages of full confidence from Koehler and U.S. Treasury Secretary O’Neill, Brazilian dollar bonds still carried a 15% risk premium and a Standard & Poor B+ rating–on a par with Senegal and Jamaica. Brazil is of course South America’s largest economy, more than twice the size of the Argentine economy before its collapse. But its government debt, about half of it in dollar liabilities, has risen to ratio to GDP that’s nearly 20% higher than Argentina’s on the eve of its default. The Brazilian government has been relying on IMF-approved medicine–raising interest rates and cutting primary spending–but has nevertheless fallen into a debt trap dynamic comparable to Argentina’s. Exchange rate depreciation and rising risk premiums keep increasing both the government’s and the corporate sector’s dollar-denominated debt loads, while higher interest rates for real-denominated bonds add to their domestic currency payment burdens. High interest rates and a credit crunch are depressing industrial output and real wages, with unemployment approaching double digits. The political fallout in Brazil includes a strong likelihood that the runoff in the fall 2002 presidential election will be between two left-wing candidates, each pledged to renegotiate the foreign debt. Analysts disagree on whether even an unexpected victory for the centrist candidate will suffice to avert default. The political fallout extends to Bolivia and Peru, where left-nationalistic populism is on the rise and neoliberalism has become a political kiss of death. But populism can also evoke responses reminiscent of the “national security state” era. Currently, the affluent Venezuelan classes, furious at the redistributive reforms of the Chávez government, are foregoing the electoral process and openly urging the military to drive out that democratically elected government. Latin American governments are also retreating from broad trade liberalization to bilateral and sub-regional trade compacts, and are trying to lessen their dependence on the U.S. by strengthening trade ties with the European Union. Here the main motive is resentment and distrust of the Bush administration for its protectionist moves in steel and agriculture, and its retreat from the Clintonian financial bailout stance, as illustrated by the harsh treatment of Argentina. Even Mexico, upset at the Bush administration, is negotiating bilateral trade agreements with Brazil and MERCOSUR. All this now has the Bush administration and the IMF rushing to shore up defenses against new defaults with an abrupt return to the despised Clinton bailout strategy. On August 4, the U.S. Treasury gave Uruguay a $1.5 billion bridge loan, pending the award of additional IMF credits, which was announced 3 days later. On August 7 the IMF also announced agreement with Brazilian negotiators on a $30 billion standby arrangement of 15 months duration, to begin in September. Eighty percent of the funds for Brazil are earmarked for quarterly disbursement in 2003, and each disbursement is contingent on the government maintaining a primary fiscal surplus in that quarter of at least 3.75% of GDP to cover debt servicing, which works out to maintaining primary budget surpluses of about 18%. Surpluses of this size would put the newly elected government, left-wing or not, in a strait jacket, virtually denying it financial resources to carry out populist reforms. The announcement, however, also puts the two left-wing candidates in a pre-election bind. Fearful of being denounced as spoilers, they have given tepid approval to the new standby, without fully committing themselves to meeting its conditions if elected. Wall Street banks are clearly skeptical. For the past few months they have been reducing their Brazilian exposure by refusing to roll over maturing short-term loans, even export credits, to Brazilian entities. Although they had pushed behind the scenes for the IMF bailout, they have since announced they will wait until after the October elections before deciding whether to resume Brazilian lending. In the interim Brazilian dollar reserves will keep shrinking as firms payoff their maturing dollar debts. All this will put the next president in a still tighter bind. If it’s one of the left-wing candidates, he will be quickly confronted with a Hobson’s choice. Suspend dollar debt servicing and renegotiate the payment terms in order to gain some financial space for funding the reforms he promised the electorate, or become a Brazilian De la Rua or Duhalde, and acquiesce to the IMF austerity conditions. It is too early to predict what the choice in Brazil will be and how it would play out politically and financially. What is clear is that despite the IMF’s reformist rhetoric about “bailing in” foreign investors and distributing adjustment costs more equitably, there is nothing novel about the new IMF standby credit. It is once again about bailing out banks and bondholders. At the same time, Argentina has not yet benefited from the Bush administration’s reprise of the Clintonian bailout strategy. Having already defaulted, Argentina is still left swinging in the wind without IMF financial support.   to receive weekly commentary and expert analysis via our Progressive Response ezine.   This page was last modified on Thursday, March 13, 2003 3:37 PM Contact the IRC’s webmaster regarding the functionality of this website. Copyright © 2001 IRC. All rights reserved.

read more