Argument

Arm the Syrian Rebels. Now.

Obama's cabinet had a plan to take down Bashar al-Assad. What went wrong?

Until recently, among President Barack Obama's most senior advisors on national security, an ironclad consensus reigned: Arm the Syrian rebels. In testimony before the Senate Armed Services Committee on Feb. 7, Defense Secretary Leon Panetta and Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, affirmed that they both supported the call by former Secretary of State Hillary Clinton and David Petraeus, former director of the CIA, to provide lethal support to the Syrian opposition.

What were the arguments that convinced Obama to overrule his advisors? We may never know, but one thing is clear: They were not based on a sober reading of the situation on the ground in Syria, where U.S. policy is caught in a contradiction between word and deed. Though the president has repeatedly called for Syrian leader Bashar al-Assad's ouster, he has proposed no credible plan for achieving that goal.

Last week, for instance, Obama stressed that the United States had "joined with nations around the world in calling for an end to the Assad regime." No sooner had he made this statement, however, than he dispatched Vice President Joseph Biden to attempt -- once again -- to engage Russia on a solution to the conflict. But reliance on mediation from Moscow -- with its emphasis on an Assad-led transition -- has proved to be fundamentally flawed. Assad will never preside over his own removal.

The diplomatic back-and-forth has come at the expense of decisive steps toward regime change. Obama has been right, after a decade of war, to ask hard questions about whether greater U.S. involvement can really work in the interests of either Syria or the United States. But his hands-off policy has now proved to be self-defeating. In the absence of American assistance, the rebels' momentum has stalled, and the battles for Damascus, Aleppo, and Syria's other strategic centers have devolved into a grim stalemate.

Meanwhile, Syrian society is fragmenting, and sectarianism is on the rise. While Jabhat al-Nusra, the local al Qaeda affiliate, is growing ever stronger, the Iranians and Hezbollah have doubled down on their support for the regime. Both have, for example, sent forces to fight alongside the Syrian army. In addition, they are training and equipping the Jaysh al-Shabi, a Syrian government-controlled force that, according to at least one Iranian source, is modeled on the Basij militia of the Islamic Republic. Iran is also providing economic aid and propaganda support.

The polarizing influence of Iran and al Qaeda portends a further escalation of sectarian violence, which will inevitably spill over into surrounding countries. To prevent the worst, the United States must assume a greater leadership role, which, as the president's advisors have made clear, means building the capacity of the Free Syrian Army (FSA), a network of nationalist and secular-leaning rebel brigades. This would not necessarily require direct and sustained American military intervention, but it would entail arming the FSA and helping it to develop a countrywide military strategy.

From a purely military point of view, the rebels need help neutralizing the weapons that give the Syrian state its greatest advantages -- namely, armor and fixed-wing aircraft. The provision of light anti-tank weapons would go a long way toward stopping Assad's tanks. However, eliminating the regime's air superiority, which rebels and civilians fear the most, is a thornier challenge. Here the United States and the international community have a crucial role to play in projecting a credible threat of force to stop Assad from indiscriminate bombing. While it may not be necessary to impose a Libya-style no-fly zone (NFZ), it is imperative to keep the threat on the table and to be willing, if required, to carry it out. An obvious alternative to an NFZ is to provide man-portable air-defense systems (MANPADs). But the legal and prudential restrictions are considerable. The use of these systems would require a stronger partnership between the FSA and key regional allies than currently exists.

In addition to weaponry, the FSA needs training, resources, and intelligence support. It currently lacks a sound military strategy. Only the Americans, working together with Arab partner nations, have the requisite diplomatic and military resources to help the FSA develop this capacity. It is often said that the United States has no successful track record of providing this kind of assistance. But that is simply false. In fact, in recent months it has enjoyed a number of quiet successes in Yemen. With a very light footprint, the Pentagon has helped train and equip the Yemeni army, giving it the wherewithal to retake territory that it previously ceded to al Qaeda. While the American drone campaign has grabbed the headlines, the effort to build partnership capacity holds out the greatest long-term promise. The partnership being developed in Yemen is precisely the model that is needed in Syria.

It is important to remember that arming the FSA is a political act. The most important decision of all is simply to provide lethal assistance. The goal of the operation is to build a force on the ground that is more likely to respect American interests and that is committed to building a nonsectarian, stable Syria. Even the provision of light weaponry would be a good start to this project.

This policy does entail the risk of unintended consequences. Some arms may flow to al Qaeda. Some groups may take American aid and then turn against the United States. But inaction also carries risks. The current hands-off policy has hardly succeeded in preventing extremists from acquiring arms. It has simply given them time and incentive to develop their own independent sources of external support.

By establishing itself as the most important international player shaping the conflict inside Syria, the United States will lay the groundwork for helping the Syrian people forge a genuine national dialogue on the nature of their transition. This should include the creation of a national platform that brings together Syria's diverse ethnic and religious communities -- including Sunnis, Shiites, Alawis, Christians, and Kurds, as well as tribal and religious figures -- to discuss the future of the country. In particular, it should include Alawis who enjoy wide legitimacy within their community, but who are also willing to talk about a post-Assad Syrian regime.

At the same time, the United States should bring together key international and regional powers to create an international steering group. This group -- including China, Russia, Turkey, and key Arab and European states -- should agree on a number of basic goals for the transition and set benchmarks for their effective implementation. The immediate focus should be on protecting civilians, minorities, and vulnerable groups through the creation of an international stabilization force; addressing humanitarian issues; safeguarding chemical and other unauthorized weapons; and supporting Syrian-led transitional governance and transitional justice efforts.

For this to succeed, Obama must first persuade Russia to abandon its demand that Assad play a role in the transition. If Moscow remains defiant, however, the president must be willing to pursue an independent policy -- while still keeping the door open for Russian President Vladimir Putin to eventually join the international consensus.

The Syria challenge is difficult. Its intractability is what initially made nonintervention attractive. But developments on the ground have since made it an increasingly dangerous option for American interests. It's time Obama listened to his foreign-policy and national security advisors.

Javier Manzano/AFP/Getty Images

Argument

The Wisdom of the Market

Forget politics and ideology. It's the Dow that should guide America's path to renewed prosperity.

In an era of bubbles, crashes, tarnished reputations, and outrage over the gulf between the wealthy and the struggling classes, it may seem like the height of insolence to suggest that stock markets hold the key to economic recovery in the United States and Europe. Wasn't it market misbehavior that got us into this mess in the first place? But, in fact, policymakers would still do well to look to the stock market as an essential indicator of the likely impact of their reforms.

Stock market reactions to economic reforms provide powerful forecasts of policy effectiveness because changes in stock prices reflect the average opinion of thousands of shareholders who care little for ideological debates and simply consider whether a given change will create or destroy value. This predictive ability makes market movements an important complement to the traditional backward-looking measures Washington is fond of, including growth, inflation, and unemployment.

In particular, policymakers in the United States and Europe need to study the movements of markets over the last few decades in what we used to call the "Third World." With Europe back in recession and the United States offering temporary solutions to its problems that inspire little confidence, advanced countries sorely need a new direction. By enacting large, unprecedented policy changes over the last three decades, developing countries turned around their economies and became the "emerging markets" that now drive global growth. Historical analysis of stock price reactions to policy-reform announcements made by governments in emerging economies across the globe demonstrates repeatedly that decisive, clearly communicated plans to implement market-friendly policies are what drive growth and create value -- not just for shareholders but for all.

When it comes to the debate in Western countries over the merits of austerity versus stimulus, for example, emerging economies' stock markets show us that one size does not fit all. In countries where large, persistent deficits have seduced governments into monetizing their debts and have spawned runaway increases in the cost of goods and services, the stock market tells us that austerity or "cold-turkey" policies designed to stop spiraling inflation dead in its tracks are both necessary and desirable. In contrast, equity markets react extremely negatively to government policies that doggedly pursue fiscal austerity when inflation is not out of control.

Take Brazil. In 1994, then-Finance Minister Fernando Henrique Cardoso enacted a radical stabilization program to eliminate inflation. The government introduced a new currency and abruptly stopped printing money to pay its bills. In the course of just one year, the country's Bovespa stock market index jumped 75 percent as a result of the policy change. The market anticipated the program's success and was ultimately proved correct. In just three years, Brazil's inflation rate dropped from 3,000 percent to the single digits. As a result of the fall in inflation, lower deficits, and greater openness to flows of goods and capital, the economy took off by the first decade of the new millennium. Between 2001 and 2011, growth and the implementation of anti-poverty measures lifted 20 million Brazilians out of poverty and into the country's growing middle class.

In contrast to the situation in Brazil, the stock market tanked in Chile when the government decided to implement austerity measures under three successive agreements with the IMF between 1983 and 1989. Because inflation was not the major economic issue facing the country at that time -- Chile needed to rebuild its financial system, reduce import tariffs, and make its exchange rate more competitive -- the announcement of cold-turkey approaches to macroeconomic stabilization triggered an average 87 percent drop in the stock market in each of the 12-month periods preceding these IMF agreements. Consistent with the market's gloomy forecast, real GDP fell sharply with the onset of austerity and did not return to its pre-recession level until 1986.

Moving beyond Brazil and Chile, between 1973 and 1994, the stock market indices of 21 emerging countries jumped an average of 44 percent in response to announcements of austerity programs implemented in the midst of high inflation. In countries with only moderate inflation, however, markets fell an average of 24 percent when governments pursued austerity.

Given that the inflation rate for the United States, the eurozone, and other advanced economies in 2012 was less than 2 percent, the implications of these stabilization lessons for First World fiscal policy seem straightforward. Attempting to balance budgets in the eurozone by 2014, as called for by the European fiscal compact that came into force this Jan. 1, would require a drastic swing in investment and consumption that would exacerbate the region's economic woes. Instead, European countries should adopt a long-term target for fiscal deficits along with clear and credible measures to drive a process of gradual deficit reduction. The United States, having avoided a free-fall off the fiscal cliff at the start of 2013, also needs to resist radical attempts to eliminate its deficit overnight.

Stock market responses in emerging markets also suggest the best way to resolve the problem of debt overhang that plagues European countries like Greece, Italy, and Spain. People familiar with the bleak economic landscape of heavily indebted developing countries in the late 1980s should recognize the problem -- and the solution. After a decade of lost growth and insistence that debt relief had no place in a solution to the Third World debt crisis, the U.S. Treasury changed tack in 1989. Treasury Secretary Nicholas Brady designed a plan under which 16 countries would receive roughly $65 billion in debt forgiveness from the banks to which they owed money.

In anticipation of debt relief, stock markets in these countries rose 60 percent during the 12 months prior to the official announcement. Importantly, the stock prices of major U.S. commercial banks with large developing-country loan exposure also jumped -- 35 percent over the same pre-announcement window. Since the Brady plan led to higher valuations in both debtor and creditor countries, debt relief was not a zero-sum game: The reduction of debt did not simply transfer wealth from the international commercial banks to the developing countries.

Debt relief under the Brady plan was not free, nor should it have been. When the government of a country accumulates liabilities beyond a manageable threshold, both lenders and borrowers must acknowledge their mistakes and share the burden of adjustment. Debt relief was given to the 16 Brady countries on the condition that they adopt additional economic reforms to drive growth: labor market reform, greater commitment to free trade, and privatization of inefficiently run state-owned firms. The countries that implemented and sustained these reforms began to flourish. The three countries that failed to sustain reforms under the Brady plan -- Jordan, Nigeria, and the Philippines -- experienced a much smaller initial rise in the value of their stock markets than the other Brady countries: 30 percent versus 60 percent. And those increases completely evaporated within a year as their lack of commitment to reform became clear.

So while the stock market tells us that debt relief must be part of the plan for growth in European countries that suffer from debt overhang, real reforms are also needed -- primarily changes that reduce the cost of hiring and firing workers. Debt relief will restore market confidence, investment, and economic growth only when accompanied by structural adjustments that increase productivity and encourage firms to invest. Yet European economies continue to flounder because governments have yet to act decisively on the need for debt relief and reforms that serious leaders know must happen.

Viewed in the aggregate, the experience of emerging equity markets gives us a sense of the kind of value governments can create when they demonstrate clear commitment to market-friendly policies. Shareholders in Latin America predicted that reforms -- free trade in Mexico, stability in Chile, and greater openness to foreign investment in Colombia, to name a few -- would improve economic performance, and they were correct. The impact was striking, both on stock valuations, which rose fourfold over a period of roughly three decades, and on traditional measures of economic progress. Stock markets rose throughout Latin America because economic reforms, difficult as they were to implement, would eventually make these countries -- and the companies within them -- more profitable places to do business.

Of course, it's worth asking just who benefited from these profits. Did stocks in the developing world rise simply because the reforms signaled a political triumph of rich over poor and the anticipation of further redistribution of income from workers to shareholders? The rise in valuations did create more wealth for owners of shares. But higher stock prices also reduced the cost of capital for firms, making it cheaper for them to invest in factories, equipment, and new technologies. With more and better machines to do their jobs, workers became more productive. Higher productivity, in turn, boosted the wages and material well-being of workers in the manufacturing sector of countries all over Latin America. In other words, the stock market serves both as a useful predictor of whether policy changes will have positive effects on the lives of people at all levels of society and as a conduit through which those effects are actually transmitted. Income inequality is still an issue in Latin America, but economic stability has generated a burgeoning middle class in places such as Brazil and Mexico.

Reviewing the history of developing countries' struggle with economic reform through the lens of their stock exchanges leaves little doubt about the change of direction needed to restore growth and jobs in advanced countries. The United States needs legislation to place the country on a sustainable fiscal path. Troubled European countries need to embrace structural reforms to raise productivity and improve competitiveness, even as their creditors agree to write down substantial amounts of their outstanding debt.

While the recipe for turnaround is clear, at present the United States and Europe appear unwilling to take the stabilization and structural-adjustment medicine they've been prescribing to developing countries for years with the help of the IMF and the World Bank. As a result of this aversion, stock markets on both sides of the Atlantic are left guessing what comes next. And as long as the uncertainty continues, so will the volatility in stock market indices from the DAX to the Dow. But don't blame market mood swings on behavioral economics. Pin them instead on the bad behavior of First World governments neglecting their duties.

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