The U.S. combat presence in Iraq is over, and it is likely all troops will be gone by the end of next year. But strong support will still be needed in the weeks and months to come, lest the country slip back into chaos and conflict.
Thursday, the last U.S. combat brigade to leave Iraq crossed into Kuwait, fulfilling
President Barack Obama's pledge to withdraw all but 50,000 American troops from
a country with which the United States has become intimately, and painfully,
familiar over the last seven and a half years.
remaining soldiers and marines will stay in Iraq until Dec. 31, 2011, for
training and other support purposes. Although the possibility cannot be ruled
out, it seems quite unlikely that their presence will be extended beyond the
2011 deadline. Political imperatives in both Iraq and the United States seem to
work against this possibility, even though there are those in both countries who
argue that a longer-term U.S. residual force is needed.
in Baghdad as U.S. ambassador to Iraq at the end of June 2004, I find it a
truly remarkable and positive accomplishment that we are able to look to the
day not too far off when Iraqi security forces will be able to assume full and
complete responsibility for their country's security. At the time of my
arrival, Iraqi security forces were, for all practical purposes, nonexistent.
There was, for example, only one -- yes, one -- Iraqi army battalion and it was
composed of various ethnic and sectarian elements. Today, there are some
600,000 Iraqi security forces and important strides have been made toward
giving Iraq's security organizations a national rather than partisan character.
This is no small achievement; it has taken seven years to accomplish and only
after some false starts and perilous moments.
wake of the Samarra Mosque bombing in 2006 and the ensuing sectarian strife,
those of us concerned with Iraq could not have imagined the dramatic reversal
of fortunes that would occur in the ensuing two years -- the death of al Qaeda
in Iraq leader Abu Musab al-Zarqawi, the liberation of Basra by the Iraqi army,
and the extension of the government's authority to the country as a whole. By
2008, these improvements had given the government of Iraq the necessary
self-assurance to negotiate the withdrawal arrangements that are now being
But can Iraq
really remain stable once U.S. troops have completely withdrawn? While there
are no guarantees, the prospects for Iraq's security and stability beyond 2011
look as good or better than they have at any time in the recent past. The Iraqi
army now has close to 200 trained combat battalions, a formidable increase from
the somber days when I arrived in 2004, and they are spread throughout the country.
The specter of sectarianism poisoning the ranks of Iraqi military and police
forces remains the single most serious threat to be guarded against. But
progress since the 2007 surge in nurturing the army and police as truly
national institutions has been encouraging. Vigilance and political maturity
will be needed to ensure that this positive trend continues.
military role in Iraq ends soon, as it most likely will, then what will be the
glue that holds our two countries' relationship together? For one thing, the
United States intends to maintain a robust civilian diplomatic and
developmental presence in Iraq for the foreseeable future -- so as not to
jeopardize the hard fought gains of the last seven years. The sending of senior
diplomat James Jeffrey to Baghdad is a signal of continued high-level interest
and concern for the stability and well-being of Iraq. But this signal needs to
be reinforced by congressional support for the funding requests that have been
submitted for programs in areas such as technical assistance, rule of law,
poverty reduction, women's issues, and economic development. And we need to
continue efforts to encourage U.S. private-sector involvement in Iraq's
economy. Last, but certainly not least, our reduced military profile will place
an even higher premium on proactive regional diplomacy. While the focus of U.S.
military efforts abroad has now shifted irrevocably toward Afghanistan, falling
short of our diplomatic and funding commitments to Iraq risks allowing the
country to slip back into conflict and chaos.
the steadying influence of U.S. diplomacy on the Iraqi political process can be
maintained as our military presence diminishes? It's hard to say, but it was
inevitable that sooner or later this aspect of our relationship also had to be
normalized. Just as in the transition from occupation to full sovereignty Iraq
is assuming responsibility for its security, so too must it take complete
ownership of its own political arrangements. The achievement of a parliamentary
democracy in Iraq so soon after the demise of a long-entrenched dictatorial
regime is a remarkable accomplishment. That's not to say that the current
situation, with the recent spike in suicide bombings and a continued stalemate
in forming a government since the March elections is ideal, but there has been
real progress. A continued U.S. civilian presence will be a strong
encouragement to that process, but the days of backroom political deals
brokered by the U.S. Embassy in Baghdad will be fewer and farther between.
doesn't mean the United States won't remain critical to Iraq's future. Too
often in the past we have tired of an international undertaking when our
military role has finished and "our boys have come home." We should not
underestimate the effect that a continued demonstration of interest and concern
can have on Iraq's future. It is important that not only Iraq but the region as
a whole understand that this long-suffering country continues to enjoy strong American
support. A properly endowed U.S. government civilian presence in Iraq can help
preserve the gains of the past seven years and help avoid a repeat of the
instabilities of the past.
China has formally overtaken Japan as
the world's second largest economy. Yet, for all the recent excited commentary, there's
less cause for baijiu toasts in Beijing than they
might think. That's because China's economic growth has followed
what's sometimes called "the Japanese model." In Japan and other Asian countries, this model has proved extraordinarily
successful in the short term in generating eye-popping rates of growth -- but it always eventually
runs into the same fatal constraints: massive overinvestment and misallocated capital. And then a period of painful economic adjustment. In short: Beijing, beware.
Japan's "lost decade" of the 1990s -- from
which it still has not emerged -- followed a period of high growth, at the heart of which were massive subsidies for manufacturing and investment. The
Japanese model channels wealth away from the household sector to subsidize
growth by restraining wages, undervaluing the currency, and, most
powerfully, forcing down the cost of capital. In every prior case, once the train gets rolling, it has been very difficult to correct course. That's because too much of the economy depends on hidden subsidies to
Nor is Japan the only country to rise quickly and then suffer in this fashion.
Brazil, which experienced "miracle" growth years during the 1960s and
1970s, had its own lost decade in the 1980s, for similar reasons. Beijing would do well to heed these tales of caution.
From a distance, China's boom times seem unstoppable. It's worth looking closer. In early June, the head of China's
official carmakers' association forecast that 2010 sales will exceed 15 million
units, surpassing the United States this year as the largest market for new cars in the
world. But there was bad news buried in this seemingly good number. After
growing 48 percent in the first half of 2010, and 45 percent last year, this forecast
suggests a 20 percent contraction in
car sales in the second half of 2010.
These numbers will likely intensify the
already-fierce debate over Chinese consumption growth. In order to rebalance China's
economy, which still depends heavily on exports, Beijing must raise its very
low consumption share of GDP. That share declined from 46 percent of GDP in
2000 to an unprecedented low of 41 percent in 2003 -- and then shrank further to
an astonishing 38 percent in 2006, finally falling below 36 percent in 2009. (In
August, Credit Suisse released a study by the China Reform Foundation's Wang Xiaolu, which suggested that if we
include China's unrecorded economy -- market activity that isn't reflected in
official data -- the consumption share
is even lower.)
Chinese policymakers aren't blind to the urgency of reversing this decline. A low consumption share is the obverse
of China's excessive reliance on export surpluses and investment. Unless domestic
consumption expands dramatically, China can continue growing rapidly only by
increasing investment well beyond what is economically useful or by forcing
larger trade surpluses onto a reluctant world.
To raise consumption, Beijing has implemented a number of policies in
the past five years, and especially since 2008,aimed at boosting Chinese consumption. But are they working?
On the positive side, automobile sales
surged last year. For most analysts, this was immensely good news,
signaling a major shift in the consuming behavior of Chinese households. But
skeptics disagreed. They claimed that the surge in demand for automobiles was
caused mainly by unsustainable government subsidies and tax rebates. Last year also saw a surge in durable goods, but they were also backed by subsidies.
More importantly, the skeptics argued,
any current increase in automobile and durable goods sales would be reversed in
the future as households absorbed the cost of the subsidies. Subsidies must be
paid for, ultimately by the household sector -- and as they are paid out of
future income, consumption will rise today, but inevitably decline tomorrow.
It seems the skeptics may have been
right. If the growth in automobile and other consumption is indeed
substantially weaker in the following months, as evidence seems to suggest, it would
suggest that low consumption in China is not a discrete problem that can be
resolved with administrative measures. It would argue instead that the
consumption problem is fundamental to China's economic growth model and
therefore cannot be resolved without a substantive change to the status quo.
Most economists continue to argue
nonetheless that surging retail-sales figures and rising wages show China's
shift to greater consumer spending is on track and that, within ten years,
consumption is likely to be anywhere from 47 to 50 percent of GDP -- but this is still too
low by most measures. Even if the rest of the world were willing to run the
large trade deficits needed to support China's low relative consumption for so
long, the math that gets us there is tricky at best.
In order to get consumption to generate
47 to 50 percent of GDP in ten years, every year consumption needs to grow faster
than GDP by 3 to 4 percentage points, something it has never been able to do.
If China continues growing at 7 to 9 percent for the
next decade, as many analysts are projecting, consumption must grow by 10 to 14
percent, much faster than it ever has in post-reform Chinese history. Yet all projections show China growing more slowly than it ever has during these next ten years.
It's arithmetically possible, of course,
but there are two schools of thought abouthow to proceed. One school argues that relatively low-consumption growth can
be reversed without changing the fundamental growth model. Many reasons have been given for low Chinese
consumption -- demographics, Confucian culture, skewed tax incentives, amateurish
marketing, the sex imbalance, the tattered social safety net, etc. If Beijing
takes administrative steps to address the correct cause of low consumption, so goes the theory, it
will automatically rise.
If they are right, then presumably
Beijing can goose consumption while keeping GDP growth rates high. But if
that's all it takes, one wonders why they just haven't gotten on with it. Since 2005 the government has wanted to drive up the
consumption share of GDP, and yet it has plummeted.
The other, smaller (but rapidly growing)
school of thought argues the model itself prohibits high consumption: growth is high because consumption is low. China cannot enjoy the double-digit GDP growth generated by low wages,
cheap capital, and an undervalued currency and
stillhave strong domestic
consumer demand. This school has been
arguing for five years that the measures Beijing has taken to boost consumption
growth will fail because they do not address the underlying cause.
We will just have to wait and see who is
right, but the arithmetic seems to suggest that current rates of GDP growth
won't allow for the surge in consumer spending necessary for China to rebalance
away from its excess reliance on exports and investment. Unless China's GDP growth plummets to below 5
percent annually on average, and probably even then, it is very unlikely that consumption
can represent 47 to 50 percent of GDP in ten years.
So why do Chinese consume such a low
share of what they produce -- in spite of determined efforts by Beijing to get
them to increase consumption? Contrary
to conventional thinking, the Chinese have no aversion to consuming. They are
eager shoppers, as even the most cursory visit to a Chinese mall will indicate.
The problem is that Chinese households own such a small share of total national
income that their consumption is necessarily also a small share. And just as the
household share of national income has declined dramatically in the past
decade, so too has household consumption.
This isn't to say households are getting
poorer. On the contrary, they are getting richer quite rapidly, but they are
getting richer more slowly than the country overall, which means their share of
total income is declining.
If Beijing wants to increase the
consumption share of GDP, it shouldn't waste effort and money trying to create
additional incentives for consumption, tinkering with subsidies and taxes, improving
the social safety net, attempting to change cultural habits. What is needed is to
increase the share of national income that households take home. Give them more
money, and they will spend it.
So how can their share rise? Here, the
problem gets very difficult.
One option might be for Beijing to
engineer a huge shift of state wealth to the household sector through, say, a
massive privatization program. This could drive up consumption significantly by
boosting household wealth, but the likelihood of mass privatization is slim, given the political realities in China.
Another option, and ultimately the only
sustainable path forward, would involve reversing the subsidies that generated
such furious growth. Wage growth must at least keep pace with productivity
growth; interest rates must rise substantially; and the currency must be
revalued. But if any of these happen too quickly, we could expect a surge in bankruptcies
-- as old businesses struggle to survive without familiar subsidies.
Unfortunately, the longer China waits to
make the transition from this model of growth, the more difficult the
transition will be. Forcing banks to fund projects at artificially
low interest rates inevitably raises non-performing loans, and these eventually
become government debt. The longer China waits, the more debt there will be and
the more dependent growth will be on the subsidies.
For a worrying case study, one need only look to Japan, which grew very rapidly thanks
largely to very high rates of investment forced through the banking system. For a long time the problem of misallocated
investment -- which was whispered about in Tokyo but not taken too seriously --
didn't seem to matter. Everyone "knew"
that Japan's leaders could manage a transition easily. After all, they were
extremely smart, with a deep knowledge of the very special circumstances that
made Japan unique, with real control over the economy, with a strong grasp of
history and penchant for long-term thinking, and most of all with a clear
understanding of what was needed to fix Japan's problems. Sound familiar?
In the end, they were seduced by their own success. Look what a great job they had already
done: by the early 1990s Japan had generated so much investment-driven growth
that it had grown from 7 percent of global GDP in 1970 to 10 percent in 1980,
and then surged to nearly 18 percent at its peak in the early 1990s. In about
twenty years, Japan's share of global GDP was two-and-a-half times its initial
share. And yet it kept boosting investment to generate high growth well into
the early 1990s, long after the economic value of its investment had turned
Less than 20years later, after a
terribly long struggle to adjust to high debt and massive overinvestment, Japan
is about to be overtaken by China with only 8 percent of global GDP. Japan,
in other words, has given back in less than two decades almost the entire share
of global GDP it had taken in the two astonishing decades that preceded it (during
the same period the United States has roughly maintained its share).
The sooner China begins the difficult
transition, the less costly it will be, but in no circumstance is it likely to
be easy. They key will be to get consumption to grow quickly relative to GDP,
and China might simply not have the time to do it by reversing the wage,
currency, and interest-rate subsidies paid by the household sector. Among other
unlikely things, it will require the rest of the world continue to absorb its
soaring trade surplus. In the end, the only "easy" solution (economically, not
politically) might be a massive transfer of wealth from the public sector to
households, perhaps via privatization. China will probably reluctantly play this card -- but only
after a painful period of sluggish growth forces Beijing's hand.