On the Economy, Be Careful What You Wish For

A major shift in global economic power is approaching. Can the U.S. cope?

Halfway through 2011, we've already seen an extraordinary year of volatility: turmoil across the Middle East and North Africa, the eurozone's ongoing fiscal crises, Japan's triple disaster, the killing of Osama bin Laden. Yet these dramatic events have obscured a slow-moving, underlying shift of much greater long-term importance: global rebalancing. In its simplest form, rebalancing means this: a reset of the global economy shifting the balance of accounts between the world's established and emerging powers or between its biggest consumers and biggest savers. That alone, of course, is a transition of landmark historic significance. Yet it is far from the only consequence, for rebalancing is not just an economic story, but one that will result in a seismic shift in the international balance of power, in every region of the world.

And I have bad news for the United States: Rebalancing won't be the relatively pain-free process some in Washington hope. Faced with an increasingly ugly bilateral trade deficit, many of the most senior U.S. officials -- including many who should know better -- have repeatedly called on the Chinese leadership to empower Chinese consumers to buy more Chinese-made products and to allow the renminbi, China's currency, to appreciate to help them afford it. The Foreign Policy Survey results reported here also suggest Washington is on solid ground: Nearly 100 percent of the leading economists consulted told the magazine they think the renminbi is undervalued.

But in reality it's hard to imagine a better example of "be careful what you wish for."

At a moment when Western-led globalization is under threat from a new brand of emerging-market mercantilism, this sort of decoupling will produce a lot of pain. This is what's happening already in many areas of the fast-transforming global economy -- but unfortunately, U.S. leaders aren't doing much to prepare for this transition, perhaps because they're in denial about its inevitability and its implications for American power. Talk of "winning the future," whether from President Barack Obama or his Republican rivals, allows Americans to believe that all their country needs is to become more "competitive." But rebalancing means that the U.S. economy can't simply grow its way back to the pre-financial crisis era of American profligacy. Instead, it will have to thrive in a new world in which U.S. primacy is no longer a given.

In years to come, U.S. diplomats will have to do more than jet around the world twisting arms and cutting deals. They'll have to find creative solutions to transnational problems that involve multiple players who don't necessarily accept U.S. leadership. American power has always been a mix of hard and soft forms of persuasion: a blend of liberal values, military muscle, and economic leverage. Those values endure, even if the United States itself might not always be loved in foreign capitals. It's the third element of power that is fast waning: the paramount position of the United States in a global economic order built to its advantage. For decades, American consumers have been the engine of growth around the world, and the U.S. economy remains by far the world's largest, two and a half times the size of China's. But the latest projections from the International Monetary Fund forecast that China will surpass the United States by 2016. And China is far from the only rising power on the horizon.

American consumer purchasing power will continue to be an important variable for global growth and the economic health of many countries, but Americans won't have as much money to spend. The financial crisis pulled huge amounts of money from the pockets of U.S. consumers by, among other things, deflating the value of their biggest asset: their homes. And the loss in U.S. purchasing power will be felt in every economy that depends on access to U.S. markets. That's exactly why Chinese policymakers are now working to decouple -- not because Washington wants them to, but because excessive long-term dependence on U.S. consumers puts China's future growth trajectory at risk.

The dollar's preeminent position may be the first casualty of this shift. The United States borrows about $4 billion per day, much of it from China. That borrowing finances the ballooning U.S. debt -- in effect, China loans Americans the money that allows them to live beyond their means (and, of course, purchase Chinese goods). But the meltdown in U.S. financial markets and the dive into recession persuaded many within China's leadership that this system is unsustainable. China's domestic economy can no longer depend quite so heavily on foreign consumers to drive the creation of domestic jobs. As China works to stoke the growth of domestic consumption by investing more of its cash at home, the renminbi will appreciate against the dollar and Americans will pay higher prices until cheaper alternatives become available. And as China develops a consumption-driven economy, Chinese consumers will increasingly be spending their hard-earned cash abroad, leading to the development of deeper and more liquid renminbi debt markets, a necessary prerequisite for China's currency to become a leading global reserve currency. This will be a gradual process, but it will come at the expense of the dollar and the big-spending habits its preeminence enables for both U.S. consumers and their government.

Washington's security role in East Asia has long paid economic dividends as the United States has translated its military ties into greater trade and investment throughout the region. But as China's consumer markets take on added weight and Americans see their purchasing power reduced by the need to restore the country to long-term fiscal health, East Asian countries will trade increasingly with one another and with fast-growing China. It's already happening. According to Xinhua, China's state-run news agency, "China became the largest trading partner and the single biggest export market of Southeast Asian countries in 2010." China's free trade agreement with the 10 countries of the Association of Southeast Asian Nations, which came into effect last year, is the world's largest in terms of population, and it underscores Washington's inability to continue in its traditional role of free trade champion.

Then there is the reform process in Europe, which also threatens to undermine the dollar in the long run. Of course, America's traditional ties with Europe and the enormous trade volumes moving in both directions across the Atlantic demand U.S. support for a strong European economy. But if Europe's resilient core economies can help build a coordinated European fiscal policy and buttress cash-strapped governments like those of Greece, Ireland, Portugal, and other so-called peripheral countries, a strengthened euro can offer another viable alternative to the dollar as a reserve currency. And a recovered eurozone will further weaken America's ability to act as global lender of last resort, reduce the central role of the United States in the global banking system, and further erode America's singular international influence.

Indeed, the American way of capitalism itself is now under threat. That model was built on open market access and minimal government meddling. But the world loves a winner: China's heavily top-down approach is finding adherents from Vietnam to Venezuela, while the idea of American-style market-driven capitalism has lost some of its allure. As the appeal of state-driven capitalism grows, we can expect a much less efficient global economy. We'll see politics injected into economic policymaking much more often and on a much larger scale -- within both emerging and established powers. We'll see governments defend their political interests with new sets of tools and weapons, like currency policies, market access, intellectual property rights, and new forms of resource nationalism that move beyond oil, gas, metals, and minerals into commodities like food.

For Americans, what this all means is that the long, postwar party is over. The U.S. debt-to-GDP ratio has climbed above 84 percent, putting America's ability to meet its obligations in question for the first time in memory. To close the gap, U.S. consumers will have to pay higher taxes, save more money, delay retirement, and accept less generous pension and health-care benefits.

In coming years, an increasingly cash-strapped U.S. government will have to become more sensitive to the costs and risks of its foreign adventures. It will be harder to persuade more cost-conscious Americans (and their lawmakers) that the stability of countries such as Afghanistan, Iraq, or even a longtime U.S. protectorate like Taiwan is worth a bloody and costly fight. Questions will arise abroad about the U.S. commitment to the security of particular regions, encouraging local players to test American resolve and exploit any weakness they find.

Then there are the economic risks. The dollar has provided the global economy with a deep, liquid, and stable reserve currency that reduces costs and increases efficiency for enormous volumes of commercial transactions. It has offered investors a safe port during many a financial storm, including the 2008 financial crisis. But other governments have already begun to move toward a more diversified basket of currencies and commodities to hold in reserve, weakening confidence in the dollar's long-term dominance. Europe will eventually recover, boosting the euro, and a big wave -- a sharp spike in crude-oil prices or another deep and lasting U.S. recession, for example -- will only accelerate the global drive to diversify. Borrowing costs in the United States will rise, in part because there will be fewer lenders. The cost of doing business will increase along with the complexity of settling transactions in a world of multiple currencies.

Some might argue that the impact of the relative decline of the U.S. economy has already been felt and that a weaker dollar will ultimately make American products more competitive abroad. FP's survey results seem to reflect this optimistic view, though the vast majority of those surveyed are clamoring for rebalancing, with all its pitfalls and dangers. There is no reason to doubt, moreover, the long-term resilience of America's political and economic systems. Democracy offers a degree of domestic political legitimacy that cannot be earned in any other way. America's achievements in higher education and innovation are, and will remain, the envy of much of the rest of the world.

But rebalancing will upend lots of assumptions, in the United States and around the world, about American economic resilience and its importance for other countries. This transition is not a product of poor decisions or myopic political leadership -- though leaders of both parties in Washington have offered plenty of both in recent years. This is a structural shift, one that has been decades in the making. Resistance is futile. Adapting to its impact can help Americans, and everyone else, thrive in the era to come.

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The Zawahiri Era Begins

What's in store for al-Qaeda's new leader?

Zawahiri's elevation as emir of al-Qaeda was expected, particularly after his eulogy of Bin Laden last week in which he pledged an oath of allegiance on behalf of al-Qaeda to the head of the Quetta Shura Taliban, Mullah Omar. Only the emir would have the requisite authority to make such a pledge.

Zawahiri faces a number of daunting challenges. First, he has to stay alive. Bin Laden was a micromanager and micromanagers usually leave a thick paper trail, as indicated by the persistent reports about intelligence seized from bin Laden's Abbottabad compound. If so, his subordinates are on the run like never before. Al-Qaeda in Afghanistan and Pakistan was already constrained before bin Laden's death, and now the noose has grown far tighter.

Second, Zawahiri has to play nice with the various factions of al-Qaeda. Those who joined before Zawahiri did in 2001 are going to worry that he will take the organization in a direction they will not like. The Gulf Arabs, for instance, are going to worry that Zawahiri and his Egyptian entourage will not give them the respect they feel is their due. 

Third, Zawahiri has to reassure bin Laden's allies in the Taliban that he will not harm their interests.  He also has to ensure they do not withdraw their protection from al-Qaeda. Some measure of his concern about the organization's vulnerability in Afghanistan and Pakistan is evinced by his pledge of loyalty to Mullah Omar in his eulogy of Bin Laden, and by the so-called General Command's pledge the same in their announcement of Zawahiri's elevation to emir.

Fourth, Zawahiri has to manage the chaos in Yemen, so that al-Qaeda's branch there (Al-Qaeda in the Arabian Peninsula, or AQAP) comes out on top. The brewing civil war in that country has given AQAP an opportunity to take a leading role in the Sunni Arab uprisings after being on the sidelines for months. But there are major obstacles standing in its way; al-Qaeda tried this before in Iraq, and blew it, because it did not play nice with the other insurgents and their tribal allies. The United States is also taking advantage of the chaos to attack members of the organization, according to press reports, posing a major threat of disruption to the group's operations.

Finally, the swooning support accorded bin Laden by many jihadis was never enjoyed by Zawahiri, even though Zawahiri enjoyed far greater media exposure. It is not that Zawahiri is not respected; it is that he is not loved.

Despite these daunting challenges, Zawahiri is not a talentless neophyte. He is a career revolutionary, a skilled propagandist, and a clever strategist. He is cautious about alienating potential Islamist allies, and in the past has counseled against sectarian conflict and supported building broad coalitions. He also has a keener appreciation of the utility of non-violent protest than bin Laden or some other al-Qaeda ideologues like Abu Yahya al-Libi. All of this will serve al-Qaeda well in the months ahead, as it struggles to cope with the fallout from bin Laden's death and the aftermath of the Arab revolutions.

William McCants, the founder and co-editor of Jihadica, is a research analyst at the Center for Strategic Studies at CNA and adjunct faculty at Johns Hopkins University.

On May 3, shortly after bin Laden's death in a U.S. Special Forces raid in Pakistan, I wrote a piece for Foreign Policy outlining why I thought Ayman al-Zawahiri, al Qaeda's then-deputy,  would be appointed the group's new emir (leader), and what the process of leadership selection might look like. At the time, I speculated that because of the difficult security environment, al-Qaeda's command council might do away with the organizational requirement to vote on confirming Zawahiri as bin Laden's designated successor. However, it seems that the council members are sticklers for the rules, and despite the delays that have resulted, they did indeed consult on the issue of leadership and appointed Zawahiri in keeping with al-Qaeda's succession guidelines.

The length of the delay in issuing the statement is, however, unusual. First, the rather obvious point needs to be made that just because the General Command statement was not publicly released until today, Zawahiri's confirmation could have feasibly taken place much earlier. Indeed, as Will McCants, Yassin Musharbash and Murad Batal aptly noted, Zawahiri's eulogy of bin Laden may have implicitly indicated that this status had already been conferred upon him when he reissued his pledge of allegiance to Mullah Omar. Still, the delay in publicly acknowledging Zawahiri's succession raises some interesting questions, particularly given that in some jihadi circles it is held that an emir should be appointed within a period of three days and nights after the loss of the previous leader.

Security requirements were undoubtedly a factor in the delay. In addition to the ongoing pressure on al-Qaeda from drone attacks, its command council would have also had to contend with arranging to confer on the issue without knowing how badly their security situation was compromised after the seizure of bin Laden's archive. Clearly, however, their communications channels are robust enough that consultation has taken place, although it cannot be fully ruled out that the statement affirming Zawahiri's promotion misrepresents the succession process.

Additionally, as Zawahiri steps up to become emir, he faces new security requirements and will need to step back from the more active, hands-on role he played as deputy. A chronic micromanager, he may find this requirement challenging. It is possible that one reason for the delay was that there was a need to demarcate new roles and responsibilities, possibly including the selection of a new, yet-to-be-announced deputy.

Al-Qaeda's command council would have also needed to renegotiate how the leadership structure and command and control processes will work now that Zawahiri has become emir. This may have taken time, and may not have been a straight-forward process. For example, the council would have needed to determine who would be Zawahiri's point(s) of contact. Its members would have also been seeking to establish means of building redundancy into communications networks they cannot be certain have not already been or could become compromised as the U.S. works to derive actionable intelligence from the bin Laden raid. And then there are the designations of roles and functions within al-Qaeda; while Zawahiri is likely to favor maintaining the status quo, his rise upwards deprives the command council of the strong role he played as deputy. It will now have greater maneuvering room and autonomy as he will be reliant on its members, or a key person (deputy or chairman of the council) to manage things as he did. Thus, there may have been the need to determine who manages what, and establish other organizational priorities.

Al-Qaeda's is most vulnerable if several leaders are removed in quick succession. Because the organization's second-tier leadership has experienced some losses, as well as the loss of bin Laden, a decision may have also been made to more formally demarcate position responsibilities in the event a number of senior leaders are killed or detained. This too may have required extended consultation. Here, the consultation may have extended to al-Qaeda's franchises and branches to ensure that communications channels remain open in the event of more leadership changes. In this respect, just because Zawahiri's confirmation as emir was not made public, it does not mean that others were not made aware of the decision earlier, in order to privately deal with any communications and general command and control issues that required addressing before the announcement was made.

Thus, while there has been a delay in telling the world about al-Qaeda's new leadership, it is more likely that these administrative issues, along with security requirements, were responsible for the wait, rather than a power struggle within the organization over Zawahiri's appointment. Any such schisms, should they arise, are likely to come later, as al-Qaeda settles into its post-bin Laden future.

Leah Farrall is a former senior counter terrorism analyst with the Australian Federal Police and lecturer on terrorism and insurgency. She is author of the blog allthingscounterterrorism.com.

Osama bin Laden saw the American economy as his enemy's critical vulnerability, and helped to shepherd al-Qaeda's strategy for attacking it through several distinct phases. After initially using a catastrophic strike (the 9/11 attacks) to deal severe economic damage to the U.S., al-Qaeda would later concentrate on embroiling America in draining wars abroad and attacking the world oil supply. While catastrophic strikes are still part of its repertoire, in its current stage of fighting America the group has increasingly concentrated on smaller and more frequent attacks, something that al-Qaeda in the Arabian Peninsula's online magazine Inspire called "the strategy of a thousand cuts" in November 2010. This basic framework is unlikely to change under Ayman al-Zawahiri's leadership, at least in the near term.

The reason al-Qaeda moved toward smaller, more frequent attacks is related to the near-collapse of the U.S. economy in September 2008. To put it simply, this event made America seem mortal, and al-Qaeda realized that it could drive up the U.S.'s security costs even through "failed" plots. For example, Inspire described an October 2010 plot involving PETN-based bombs hidden in printer cartridges as a success because it would create "the spread of fear that would cause the West to invest billions of dollars in new security procedures" -- this despite the fact that these bombs didn't destroy the planes on which they were placed.

This trend toward smaller and more frequent attacks focused on driving up the West's costs will likely continue. A 100-minute video released earlier this month-featuring such figures as Adam Gadahn, Abu Yahya al-Libi, and significantly, Zawahiri himself-encouraged jihadis with no al-Qaeda affiliation to strike at targets of opportunity. The video praised "lone wolves" who struck when the opportunity arose, such as Fort Hood shooter Nidal Malik Hasan, Dutch filmmaker Theo van Gogh's killer Mohammed Bouyeri, and fundamentalist Rabbi Meir Kahane's assassin El-Sayyid Nosair.

Zawahiri even recognized the importance of striking the American economy, as when he stated in an October 2002 recording, "We will also aim to continue, by permission of Allah, the destruction of the American economy."

Moreover, smaller-scale attacks allow al-Qaeda to lay low while its central leadership regroups. Al-Qaeda did the same thing after losing its safe haven in Afghanistan in late 2001; affiliates and more localized jihadi groups stepped to the fore while the central leadership established itself in Pakistan. Examples include the two gunmen linked to al-Qaeda who opened fire on U.S. Marines on the island of Failaka off Kuwait's coast in October 2002, bomb plots executed the same month by Indonesia's Jemaah Islamiyya against tourist targets on Indonesia's Bali island, and Chechen terrorists seizing a Moscow theater packed with 850 people. The fact that affiliates were taking the lead in operations caused some analysts to mistakenly believe that al-Qaeda's central leadership had become marginalized. This false belief assisted al-Qaeda's recovery then, and Zawahiri and his deputies certainly hope the West will make a similar mistake this time around. The organization could benefit from having less pressure on its leaders, especially because they no doubt fear the intelligence that the U.S. was able to glean from the Abbottabad raid that killed bin Laden.

Analysts have noted that Zawahiri faces two potential pitfalls with respect to his ability to raise funds from al-Qaeda's traditional donors: the fact that he isn't as charismatic as bin Laden, and that he is Egyptian rather than Saudi (many traditional al Qaeda donors hail from Saudi Arabia or the Persian Gulf). If he does experience increasing financial pressures, this could prompt a shift in al-Qaeda's strategy, perhaps causing it to try to carry out another catastrophic strike to demonstrate its continuing capability and relevance. There are pitfalls involved in this approach, however, as investing greatly in a single failed attack could bolster the perception that al-Qaeda has become impotent.

Some analysts have also questioned how well Zawahiri will relate to a younger generation of jihadis, but unless his authoritarian management style is prohibitive, he can likely address this perceived weakness by making sure more charismatic figures like al-Libi are prominent in al-Qaeda's propaganda efforts.

Zawahiri's ascension is unlikely to shift al-Qaeda's strategy in the short term. But in the longer term, his failings as a leader might push the group in a new direction-one that could be particularly dangerous to the West, or perhaps to al-Qaeda itself.

Daveed Gartenstein-Ross directs the Center for the Study of Terrorist Radicalization at the Foundation for Defense of Democracies. He is the author of the forthcoming book Bin Laden's Legacy (Wiley, 2011).

Osama bin Laden liked having Americans in his entourage. Mohammed Loay Bayazid, a former resident of Kansas City, took notes at the meeting in which al-Qaeda was founded. Wadih El-Hage, formerly of Tucson, was one of the terror network's first members and eventually became bin Laden's personal assistant.

Now that Ayman al-Zawahiri has ascended to al-Qaeda's throne, he will likely bring along his own American courtier -- Adam Gadahn, also known as Azzam the American, formerly of Orange County, California.

Gadahn has served as one of al-Qaeda's most visible spokesmen for several years. He joined the terror network in the late 1990s as a translator and low-level aide, later becoming part of its increasingly important media strategy.

Al-Qaeda produced video for years prior to September 11, consisting of lengthy, costly productions that resembled feature films and took about as long to make and distribute.

Intelligence sources and a close look at al-Qaeda content suggest strongly that after 9/11, Gadahn helped steer the organization into the digital era, as it adopted computer production tools to turn around less ambitious projects in a much shorter time frame, while exploiting the Internet to replace and outstrip the old, inefficient videotape distribution system.

At first, Gadahn kept a low profile, narrating English-language propaganda and appearing as a masked interviewer in al-Qaeda's short-lived experiment in news programming, "The Voice of the Caliphate." Today he is believed to be a key player  in al-Qaeda's as-Sahab media production company.

But al-Qaeda soon decided that Gadahn could be more even valuable in front of the camera. Zawahiri personally escorted "Azzam the American" to headliner status in September 2006 with the release of a 48-minute video titled "Invitation to Islam."

In an unprecedented personal endorsement, Zawahiri served as emcee for Gadahn's video, appearing in a short introduction to introduce the American by name and encourage attention to his speech, which urged Americans to convert to Islam. Gadahn soon became a staple of al-Qaeda propaganda, appearing as frequently as the group's elite religious and operational leaders.

Like any longtime pet, Gadahn has slowly come to resemble his master. His initial speeches, while often awkward, were still recognizably American. Over time, his rhetoric has become much more like Zawahiri's - hectoring, overlong and off-putting. (One online wag referred to Gadahn as Zawahiri's "Mini-Me.")

Over the last few years, Zawahiri and figures like Abu Yahya al-Libi have served as the public face of al-Qaeda, while the more charismatic bin Laden remained off-camera. Assuming Gadahn's role in as-Sahab matches the intelligence community's assessment, he may have played a role in that subtle programming shift.

Videos discovered during the raid on bin Laden's Abbottabad compound revealed the al-Qaeda leader had recorded high-quality video versions of several recent communiqués that were released by as-Sahab as audio only.  While it's possible as-Sahab deleted the video stream for security reasons, that logic has not deterred other top al-Qaeda leaders. And bin Laden - who dyed his beard and dressed up for filming - clearly intended for his communiqués to be seen.

Zawahiri is now emir of al-Qaeda; if bin Laden was kept to audio releases due to security concerns, we may see Zawahiri follow suit. If Zawahiri continues to issue video messages on a regular basis, it raises the possibility that bin Laden was being subtly marginalized by someone in Zawahiri's camp.

Such speculation aside, Gadahn's star is likely to rise now that Zawahiri has assumed bin Laden's mantle. And he may bring a fellow American along for the ride.

Gadahn was the first member of al-Qaeda Central to spotlight Yemeni-American cleric Anwar Awlaki prominently in an official communiqué, a couple of months after the latter was publicly adopted by the terror network's Yemeni franchise, al-Qaeda in the Arabian Peninsula (AQAP).

In October 2010, Gadahn released a statement refuting the Mardin Conference, a March 2010 effort by mainstream Muslim clerics to undercut al-Qaeda's key theological underpinnings. The message featured a clip of Awlaki lifted from a previously released AQAP video. Gadahn's speech also mirrored an article published by Awlaki just days earlier in AQAP's English-language magazine, Inspire. 

At the end of the video, Gadahn endorsed the concept of individual jihad, the idea that al-Qaeda sympathizers should not wait for help from the organization but should instead act as lone wolves.  This approach has been championed, if not popularized, by Awlaki, and has captured the imagination of many jihadists despite its decidedly weak results and recent reports that bin Laden was actively opposed to some of AQAP's ideas for implementing the concept. 

A little more than two weeks ago, Gadahn appeared in an ambitious new as-Sahab video that represented al-Qaeda Central's strongest endorsement of individual jihad to date. That video also featured previously released clips of Awlaki.

Gadahn's shout-outs to Awlaki are reminiscent of the imprimatur Zawahiri gave to Gadahn back in 2006. If Gadahn's loyalty has earned him a seat in Zawahiri's cabinet, we can expect to hear a lot more about individual jihad and see a lot more of Anwar al-Awlaki in future al-Qaeda communications.

At least until the Navy SEALs come knocking.

J.M. Berger is editor of Intelwire.com and author of the new book, Jihad Joe: Americans Who Go to War in the Name of Islam.

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