EXCERPT

Hugo's Banker

How China propped up Chávez.

Hugo Chávez, resplendent in crisply pressed fatigues and paratrooper boots with red shoelaces, had a very special guest. Meeting him that day in mid-September 2011 in Caracas was the world's most powerful banker, who had lent Chávez's government at least $40 billion over the four years from 2008 to 2012, or about $1,400 for every man, woman, and child in Venezuela.

The guest, stooped and looking older than his 66 years, drank chrysanthemum tea, staring across the table at Chávez, bald from his chemotherapy treatments. He handed the Venezuelan president a 600-page book filled with recommendations on how Chávez should run, manage, and build ports, roads, and railroads.

What bank in this day and age can lend so much money to one of the world's riskiest regimes, a country with two centuries of credit defaults, and then tell its debtor how to spend the proceeds of the loan?

Not Goldman Sachs. Chávez's banker had governmental ties that the legendary New York firm, incubator to former U.S. Treasury secretaries Hank Paulson and Robert Rubin, could only dream of. The man sitting across from Chávez was the Chinese equivalent of royalty. His father was one of the founding fathers of the People's Republic of China.

Not the World Bank. That Washington-based product of Pax Americana had a loan book only a fraction of the size of this man's company, the world's biggest policy bank. Chávez's Chinese bank had bragging rights over the World Bank as well, having helped craft the biggest and arguably most successful poverty-reduction program in history, which saw hundreds of millions of Chinese peasants become middle-class city dwellers. The bank has funneled billions of dollars into Africa, stoking Ethiopian exports and reviving Ghana's railroad network after decades of neglect.

Not the Fed. The U.S. Federal Reserve might have trillions of dollars at its disposal, and it might have staved off a depression in the wake of the 2008 financial meltdown. But when it comes to results, Chávez's bank arguably had an even more impressive record: It devised a system to fund local infrastructure projects that helped China sail through the global financial crisis while the United States and Europe stumbled.

Chávez's guest was Chen Yuan, chairman of China Development Bank (CDB) and the world's most powerful banker. You can't buy shares in CDB; it is wholly owned by the Chinese government. But it would be a mistake to call it a government bureaucracy that is at the state's beck and call. It is a bank, claiming the lowest nonperforming-loan rate of any major Chinese lender and having a reputation for hardball negotiations with both domestic and foreign clients. While other low- to middle-income countries have development banks that help fund their national companies and bolster economic growth to catch up to more advanced powers, the scale of CDB and the amount it can lend make it a different animal.

But the world's most powerful bank? Yes. Let us count the ways.

Exhibit 1: China. CDB wrote the manual for the biggest economic and urbanization boom in history, pioneering a system of lending to local government-backed companies that funneled more than $2 trillion across China to build roads, bridges, subways, and stadiums. The turnkey financing system it set up, beginning in 1998 in Anhui province, meant that Chinese growth barely hiccupped while the United States went into the deepest economic crisis since the Great Depression. CDB's recently retired vice governor, Gao Jian, is regarded as the father of China's bond market, now Asia's largest and a growing source of funding for Chinese companies. CDB in one year sold more bonds than China's Finance Ministry, an indication of how easy it is for the bank to access large sums of money in China's financial system.

Exhibit 2: Africa. China has lent more to Africa since 2001 than the World Bank, and CDB's lending is focused on building industry and infrastructure for the next stage of Africa's growth and harnessing its biggest clients, China's elite state-owned companies, to do much of the work. While much of Chinese lending in Africa focuses on the extraction of oil and metals to fuel China's insatiable thirst for raw materials (driven in part by the bank's funding of China's urbanization), that is only part of the story. The bank's private-equity arm, the China-Africa Development Fund, is spurring the continent's manufacturing as labor costs rise at home, helping transform Ethiopia into an exporter of leather and helping Chinese companies such as Chery Automobile open factories. In Ghana, CDB provided a $3 billion loan -- that country's largest ever -- to finance roads, railroads, and an oil terminal and pipeline network. The loan mandates that 60 percent of the money must go to Chinese companies in the form of contracts, guaranteeing Chinese companies will be the big winners.

Exhibit 3: Latin America. CDB's massive, unprecedented lending to Chávez's government has helped secure access for its state-owned oil companies to long-term supply in the competitive global oil market as China's demand continues to rise. CDB client Citic Group, China's largest state-owned investment company, has provided railroads and housing complexes; its client Sinohydro Group, the state-owned hydropower behemoth, has built power stations.

It has also been good business for a host of Chinese companies. Chen's point man for Venezuela is a rail-thin man named Liu Kegu, with the buzz cut and booming voice of a Marine Corps gunnery sergeant. Chávez affectionately called him "brother." A decade ago, Li worked under Bo Xilai, the disgraced former Chongqing Communist Party boss who is now awaiting trial for his role in his wife's murder of a British businessman. The Venezuelan opposition frets that Chinese influence is eroding the country's sovereignty and drawing it into a risky alliance of dependence. U.S. companies such as ExxonMobil played the role of bogeymen of 20th-century Yanqui imperialism; CDB might take that role for China.

Exhibit 4: Clean energy and telecommunications. CDB has funneled more than $92.4 billion of credit to China's leading wind, solar, and telecommunications companies, which have used the cash to overwhelm global competitors, securing loans because lenders know the companies have the backing of the world's most powerful bank. Huawei, the Chinese company that is the world's largest telecommunications equipment-maker, is also the biggest single recipient of these credit lines -- to the tune of $30 billion. It has used CDB credit to help its vendors in Latin America, Africa, Asia, and Europe buy its gear. In 2009, Mexico City-based América Móvil, Latin America's largest mobile-phone carrier, was seeking $1 billion to upgrade its mobile network -- and chose CDB. Chinese solar-energy companies continue to ramp up production even as losses mount, backed by CDB lines of credit that dwarf the U.S. government's loans to the now-bankrupt Solyndra. The CDB loans are helping to cement Chinese domination in an industry of the future and helping to drive U.S. and European companies to insolvency. Many Chinese companies have debt loads and quarterly losses that should have driven them to bankruptcy as well, but for the CDB loans.

The danger for China? Local resentment over Chinese loans, such as in a post-Chávez Venezuela, will lead to demands for renegotiation or even default. If that happens, it will be an expensive lesson for a rising financial power.

AFP/Getty Images

National Security

An Army of None

Why the Pentagon is failing to keep its best and brightest.

As the war in Iraq wore into its most corrosive years, a problem began to emerge -- the military, and especially the U.S. Army, was losing its young officers. Editorials were published and examples cited, and by early 2011, the crisis had been recognized at the military's highest levels. But the young captains and lieutenants whose departures at the height of the Iraq war caused this soul-searching at the Pentagon are only half of the story, the superficial half; these are young warriors in harm's way with young spouses and toddlers back home. The military's retention crisis cuts deeper into the heart of the Army. The more complicated and more important half of the story is about the colonels.

Getting a great first assignment after commissioning is essential in climbing the professional military ladder, especially given the nature of Army promotions. Soldiers need to check exactly the right boxes -- get the right jobs, go to the right professional schools on time, earn "distinguished graduate" from those schools -- to prove themselves. And getting into the infantry, armor, or other combat-arms branches is considered important. If one is "going infantry," the ideal path is to get light but not too light. Specialized units such as the Navy SEALs or the Army's Delta Force might be too light, whereas mechanized infantry might be a shade too heavy.

Dick Hewitt graduated near the top of the class from West Point. His first assignment was with the legendary 82nd Airborne Division at Fort Bragg, North Carolina. Hewitt, like many of the young officers that received so much attention at the height of the Iraq war, also decided to leave the Army a few years after the 9/11 attacks. But here's the difference: Hewitt had served a full 20-year career. He had checked all the right boxes, even getting tapped to command a battalion when he was just a major. So when Hewitt decided to leave, it was not because the Army had a minor morale problem causing retention heartburn, but rather it was because of a deeper and more nuanced institutional dysfunction.

"I can still remember how he first impressed all of us during a platoon attack exercise that he commanded one night," remembers Brigadier General Wayne Grigsby about the time they met at the infantry officer basic school. "His charisma, his intellect, the way he carried himself, the way he commanded his soldiers, his physical prowess, the way he worked with his peers -- I have never seen a finer leader in my 28 years of service and 50 months in combat. I thought I'd be working for Dick by now and was sure he was going to be wearing two or three stars, easy." Although the path to general is a narrow one, Hewitt did everything the Army asked and more to stay out front, getting all the right jobs and impressing peers and subordinates along the way. So what happened that got him put onto the Personnel Command (PERSCOM) black list?

In the summer of 1980, Hewitt was a freshman at West Point. He graduated with the class of 1984 during the height of the Cold War, and was promoted to captain exactly four years later, just like everyone else in his year group. Hewitt's second assignment was a one-year tour of duty as the battalion maintenance officer for the 1-5 Infantry Mechanized, Second Infantry Division. A year later, Hewitt was given a company command at Fort Ord, California. Next, he was sent to the University of Chicago's Graduate School of Business, followed by a two-year assignment as a professor of economics back at West Point's famous Sosh department. At some point, he was selected a year before his peers for promotion to major. After a year of advanced military training at the Command and General Staff College at Fort Leavenworth, Kansas, Hewitt was sent "home" to Fort Bragg where he checked all the boxes: one year on division staff, one year as battalion ops officer, and so on. This is where his story gets interesting.

At that moment, Major Hewitt was a prime candidate to serve as a general officer someday, maybe even lead the Army if he played his cards right. He had been tapped for promotion to lieutenant colonel (known as "major P" for "promotable"), and now awaited the outcome of the Army's boards -- formal committees of senior officers who rank-order officers in the zone for battalion command openings in the coming year. Once the list was announced in early 2000, congratulations rolled in.

The next step for the selected officers -- there were 16 that year for light/airborne/air-assault infantry commands -- was to submit a list of their preferences to PERSCOM, then located in the Hoffman building in Washington, D.C. The staff there would sort through the preferences in order to produce an optimized match, a process known as "slating." Hewitt submitted his preferences, ranking the 16 options from first to last with a remote tour of duty in South Korea ranked last. He told the officers at Hoffman over the phone that the Korea job in particular would be hard on his family. With two preschool sons and another little one on the way, the separation required by the Korea assignment might be more than the family could bear. "It will not be well received in my house," he bluntly told the assignments officer. Now it was in the hands of the planners at PERSCOM to slate the officers and issue orders through the acquiring commanders.

As you might guess, a few weeks passed, and then Hewitt received a phone call. It was Major General Dees, calling from South Korea. "Congratulations, Dick. Welcome to the team."

Hewitt said all the right things on the phone that day and even accepted the first month of command training at Fort Benning in Georgia before realizing the outcome just wasn't acceptable. He had two conversations with senior officers to see if there was any flexibility in the process to change the assignment -- maybe he could trade with someone? -- and was told it was a done decision.

In a move that sent tremors through the Army, Hewitt called the planners at the Hoffman Building and declined command. The staffer on the other end of the phone was surprised and calmly warned: "Do you understand that this means your record will be marked ‘declination with prejudice'?" He offered Hewitt 24 hours to think it over. Not necessary, Hewitt answered. In his mind, it was a choice between career suicide and tearing apart his young family.

Even though he seemed destined for high rank, that one clash with the inflexible Army personnel system essentially ended his career after 15 flawless years. Hewitt committed no crime, disappointed no commander, and lost the faith of none of his troops. In fact, his career was flying high when he made the mistake of asking for a one-year reprieve from the fast track.

The story of Hewitt's departure from the Army has two footnotes.

First, in early 2000 he received a phone call from the Pentagon. The chief of staff of the Army, General Eric Shinseki, was having a bad year because, among other things, dozens of officers had declined battalion command. Hewitt wasn't alone. In armor, engineers, infantry, and aviation, all the branches were suffering from high rates of dissatisfaction with the command slating. So Hewitt and others like him were invited to the Pentagon to give feedback to the vice chief, General Jack Keane. Questions were asked, data collected, and the day ended. As Hewitt changed into civilian clothes for his flight home, another officer asked what assignment he had turned down.

"Korea."

"Funny," said the other officer. "My wife is from Korea. I would have loved that job."

The irony here is painful.

Second, consider what the Army did with Hewitt afterward. In mid-2000, Hewitt had only one year left at Bragg, then three years before he could retire with the standard 20-year military pension. He had an MBA from one of the top schools in the nation, so it was a no-brainer for the dean of West Point, Dan Kauffman, to bring him to campus as the director of the economics program. While at West Point, Hewitt impressed the superintendent, General William Lennox, who asked him to stay for another four or more years as permanent faculty. Hewitt agreed. Lennox sent a letter to Hoffman asking for them to "rebranch" Hewitt in strategic plans, making official what was already the unofficial end of his infantry career. The commandant of cadets, Leo Brooks, sent a letter of support, as did the dean.

At that time in 2004, the folks at PERSCOM understood fully that Hewitt had no further obligation to stay in uniform, and that if he was not allowed to rebranch, he could simply retire. But in their records, his file was stamped with a bright red "declination with prejudice." So the story ends this way: Hewitt's wife received a letter from PERSCOM while he was teaching classes at the Academy, so she called him during his free hour and read him the jargon-filled letter over the phone. It explained that the needs of Army prevented his rebranching.

"What does that mean?" she asked.

"It means we're retiring," he said.

The Retention Crisis

All cadets who graduate from the U.S. Military Academy commit to serve a minimum of 5 years as a military officer, after which they can resign their commissions or continue on, presumably toward the full 20-year career. Retirement is available to everyone who serves 20 years or more, which means half of one's monthly pay for the rest of one's life, plus full benefits. A few cadets agree to longer commitments (two to five additional years) in exchange for graduate school or flight training.

When the U.S. Military Academy (USMA) class of 1999 reached its five-year mark in 2004, 72 percent of the graduates chose to stay in uniform, and 28 percent resigned. This net retention rate sends a signal about the overall health of the junior officer corps, and 2004 was an early warning sign compared to the normal range of 75-80 percent. A year later, the retention rate dropped again to slightly less than 66 percent, the highest departure rate in 16 years. Not since the end of the Cold War had so many young officers left the service after their initial commitment. In the late 1990s, junior officers were being asked to leave, but by 2005 the military was begging them to stay.

While all branches of the military experienced challenges, only the Army was in crisis. According to a March 2007 story in USA Today, the retention rate of West Point graduates was "as much as 30 percentage points lower than the rates for graduates of the Navy and Air Force academies." A common complaint was that the elitist academy graduates were the problem, not the Army per se, since ROTC and Officer Candidates School (OCS) officers remained at high rates, but that's a myth. Retention problems afflicted ROTC scholarship officers even more than West Point graduates. A 2010 monograph by Colonel Casey Wardynski, Major David Lyle, and Michael Colarusso analyzed the retention of officers in the 1996 cohort by commissioning source. While it is true that the percentage of West Pointers in the class of 1996 drops dramatically at the five-year point (from 90 to 60 percent), it must also be said that OCS officers started the year at 70 percent. And while the USMA rate declined steadily to 41 percent at the eight-year mark, this mirrored the ROTC officers who had three-year scholarships, and was higher than the 35 percent eight-year retention of four-year ROTC scholarship officers.

The Wardynski monograph made it clear that the exodus was as real as it was widespread. But the puzzle as to why remained. As author Wardynski asked: "How did the [the Army] move from a senior captain surplus, then to shortage, then to crisis in the decade following the end of the Cold War?"A report by the Government Accountability Office (GAO) in January 2007 provided even more details:

[T]he Army is experiencing a shortfall of mid-level officers, such as majors, because it commissioned fewer officers 10 years ago due to a post-Cold War force reduction. It projects a shortage of 3,000 or more officers annually through FY 2013. While the Army is implementing and considering initiatives to improve officer retention, the initiatives are not integrated and will not affect officer retention until at least 2009 or are unfunded. As with its accession shortfalls, the Army does not have an integrated strategic plan to address its retention shortfalls.

There were many reasons for the crisis, but the explanation that seems most obvious is the ongoing wars in the Middle East. Remember that late 2006 to early 2007 was the lowest point in the war. The Bush administration was starting to admit what troops on the ground had been saying all along: the strategy in Iraq was not working. In the words of Colonel Jeff Peterson, now a permanent member of West Point's faculty: "We were losing in Baghdad in 2006. We were losing. The enemy was winning. It had to change."

Relying on a volunteer force is challenging, especially when the economy is strong (meaning demand for talent is high), but even more so during a conflict that the public dislikes. That's all the more reason to think carefully about the intertwining issues. Peterson wasn't saying that the war or the volunteer force was the source of retention and recruiting woes. He was simply commenting on the nature of fighting an insurgency. Peterson, like almost all officers, supports the all-volunteer force and he also disagrees with characterizations of the personnel system as being in crisis. The news media, however, found the war explanation too convenient.

Here's the catch. None of the war explanations can explain why retention problems preceded the 9/11 attacks. In a 2002 RAND report, James Hosek and Beth Asch "identified a roughly 5 percent decline in officer annual continuation rates among those [officers] in their midcareer." The authors argued that the number is deceptively small, but "small declines in annual continuation rates can translate into dramatic declines in manpower over a several-year period. Therefore, this decline must be taken seriously." Likewise, Wardynski et al. argued that declining retention has been a problem since 1983 and that "by 2001 the captain retention situation was becoming untenable."

In fact, the Army has been plagued with talent bleeding for decades, and its personnel practices have never been reformed to address the problem. President Harry Truman appointed a committee to consider the problem in 1949, and the secretary of defense asked the Brookings Institution's Harold Moulton to do the same in 1950. Two more task forces were commissioned early in the Eisenhower administration, calling attention to an annual retention rate of enlistees of just 20 percent. Then in 1954, after the Korea hostilities stopped, the Senate Armed Services Committee called attention to the "critical and delicate" problem of the officer brain drain. Arthur Coumbe, a military historian, attributes the severity of the competency weaknesses in the officer corps to the centralization of command and control in the 1960s. Regardless, retention rates simply collapsed late during the Vietnam conflict, down to 34 percent for OCS officers in 1969 and 11 percent for ROTC officers in 1970. All this goes to show that the current crisis has a long precedent.

RAND's Hosek produced another study in 2006 that examined the "unprecedented strains on the all volunteer force" to identify the causes behind the most recent exodus. The study was comprehensive in scope, reviewing published literature and surveys of military personnel conducted by the Defense Manpower Data Center, as well as original focus groups of active-duty service members. What Hosek found was the deployments alone were a positive, not a negative, factor in retaining soldiers. Service members valued deployments as an opportunity to participate in an activity and mission that they believed in and that also enhanced their career prospects; however, the frequency and duration of deployments were weighing negatively on soldiers. "High op-tempo" is the phrase used to describe the high demands on soldiers' time -- long hours of work every day with few days truly off. Wartime means there is immense stress placed on soldiers, but also on their families, with troops facing mental fatigue or worse from multiple deployments.

Now, half a decade after the crisis broke into the public's consciousness, the matter may seem resolved. Already history. The war is over, so we can forget about how hard it was, right? That would be an error.

Time for a Total Volunteer Force

In 1973, the United States abandoned the euphemistic citizen Army which drafted unwilling labor into its ranks in favor of a professional Army which used only volunteers. The All Volunteer Force (AVF) transformed all branches of the military into the finest fighting force in history, but the recent wars in Iraq and Afghanistan have exposed nagging retention problems. The Army in particular proved able to attract and retain top quality talent for its corps of junior officers, but proved unable to manage them well enough to keep the right numbers from resigning as combat-experienced young captains. Even worse, talented senior officers were badly mismatched with the optimal jobs because the Pentagon continued to use a command-and-control personnel system right out of a Soviet playbook, rather than trusting the voluntary nature of their volunteers.

Surveys reveal that the main drivers of attrition were not high op-tempo but frustration with the personnel bureaucracy. In short, the voluntary nature of the AVF lasts for a single day. Starting on day two, coercion dominates how America organizes its fighting men and women.

The way to fix the personnel bureaucracy today is to continue the professional revolution of the 1970s: use more autonomy and less coercion. Here are five steps that the Pentagon and Congress should embrace in designing a Total Volunteer Force:

  • Empower commanders with hiring authority. The coercive nature of Human Resource Command has robbed commanders and officers of autonomy and judgment, and for what? Rotating people through jobs at an ever faster pace encourages ticket-punching, at a cost of efficiency, mission accomplishment, and lives. The singular reform of giving commanders the authority to hire any officer for any job -- and bearing responsibility for how they perform -- is the only reform that can break the status quo.
  • End year-groups. Professionals should be treated as individuals, not interchangeable components in year-group cohorts. Promotion zones today drive the services away from merit and toward seniority alone. Cohorts are empty categories that are essential for central planning, but serve as barriers to excellence in a labor market.
  • Promotion boards should authorize rank rather than give it. With commanders in charge of hiring, central boards may seem irrelevant, but they are not. Boards are essential in determining who qualifies for certain jobs and ranks, which is their strength, not determining who actually gets called for which job. Likewise, personnel officers should be trusted advisers at the unit level, not faceless bureaucrats thousands of miles away.
  • Let force-shaping be natural. If fifty colonels are needed and seventy are available, using top-down layoffs or early retirement creates perverse incentives. If instead commanders are free to hire the best fifty, then the remainder can retire without the trauma of firing.
  • Allow veterans to re-enter the service by applying for any active-duty position. Thickening the market with more talent can only be good for the mission. Arguments against civilians entering at mid-rank have no bearing if the pool is limited to former officers, plus they will bring fresh ideas into the military, and will help bridge the military-civilian cultural gap.

Bleeding talent still happens every day in the Army, Marines, Air Force, Navy, and Coast Guard. It happens in peacetime as well as wartime. The talent that was lost and mismanaged during the Iraq War will have consequences for decades to come, and the unresolved dysfunction in the personnel system is likely to get worse if the armed forces use force-shaping techniques based on seniority instead of merit. A potential drawdown in the years ahead must draw lessons from what caused the midwar manpower malfunction.

DVIDS/Airman 1st Class Kate Thornton-Maurer