A Friend in Need

Why Israel should count itself lucky to have a straight-talking pal like John Kerry.

John Kerry is Israel's best friend. Seriously. He's not the kind of friend whom you're going to call to play Frisbee with in the park, plan your bachelor party, or be there for you after a nasty breakup.

Israel has lots of those kinds of friends. They're the ones who tell it what it wants to hear or come to its defense when other people say harsh (but true) things about it. These people call themselves the "pro-Israel community."

Kerry's a better friend than that.

He's the kind of friend who will cut you off at the bar when you've had enough to drink or who will step in and prevent you from getting in a fight. In the case of Israel, he's the friend who's not afraid to speak some unpleasant truths about the dark future that could be facing the Jewish state -- as the U.S. secretary of state did this weekend in raising the specter of Israel becoming a virtual apartheid state if no peace agreement with the Palestinians is achieved.

Alas, with the deadline for the Kerry talks to end having now come and gone, Israel has failed to heed the wise counsel of its good friend. In the process, its leaders are making a historic and catastrophic mistake that will quite possibly doom Israel to a near-term future of isolation, delegitimization, and violence.

Things did not have to be this way.

Nine months ago, when Kerry's quixotic peace effort began, Israel could not have been in a better position: a weakened Palestinian national movement helmed by a leader more committed than any other in Palestinian history to a two-state solution, a neutralized Hamas, a decline in support among Palestinians for armed struggle, and an Arab world willing, even eager, to end the conflict. After the constant drumbeat of suicide terrorism in 2002 and 2003, Israel is enjoying a rare period of sustained peace and security. While Israelis remain skeptical about the potential for a permanent solution, a large percentage of the country continues to support a two-state solution and -- as poll after poll shows -- are willing to make concessions in the pursuit of peace.

Perhaps above all, the Israelis had a friend in Kerry willing to bend over backward to pacify Israel's security concerns.

Yet the response of Prime Minister Benjamin Netanyahu was not to embrace the possibility for peace, but to consistently and flagrantly undercut it. For example, the United States convinced the Palestinians to put aside their demand that Israel end settlement construction in the West Bank as a precondition to begin talks and instead accept the release of Palestinian prisoners from Israeli jails. What was Bibi's response? According to a report from the settlement watchdog group Peace Now, the Israeli government has, since the talks began, approved the construction of 14,000 more settler homes in the West Bank and Jerusalem. Netanyahu seemingly has gone out of his way to stick a sharp pencil in Palestinian Authority President Mahmoud Abbas's eye (while also standing largely silent as members of his own cabinet publicly disrespected Kerry).

Public conciliation efforts by Abbas -- like floating the idea of an extended Israeli presence in the Jordan Valley, publicly waiving his own right of return, or last week recognizing the unique horror of the Holocaust -- should have been welcomed by Israeli leaders. Instead they were trivialized, denigrated, or ignored. No serious effort was made by Bibi to prepare the Israeli public for the possibility of peace, as is constantly demanded by Israelis of Palestinian leaders. Instead, Netanyahu and his right-wing minions continuously disparaged Abbas as a partner for peace and put more and more obstacles in the way of a potential deal.

While Abbas's decision to seek international recognition and later strike a unity deal with Hamas had the nominal effect of throwing a monkey wrench in the negotiations, he has made a far more serious effort to find common ground. Netanyahu's apparent strategy has been to wring as many concessions -- no matter how minor -- out of his Palestinian interlocutors while offering nothing but bluster in return. It's zero-sum peacemaking, and it has blown up in his face -- because unlike in the past, there isn't going to be any question about who will get blamed when yet another round of Arab-Israeli peace talks falls apart.

Indeed, one of the more striking developments over the past few weeks is how much more nimble and effective Palestinian diplomacy has been in comparison to that of Israel. For much of the past year, Abbas was forced to withstand Netanyahu's constant humiliations, wary of being blamed if talks fell apart. But in March, as the prospect of the failure of the talks increased, U.S. pressure on Israel grew, and Netanyahu refused to abide by previously agreed-upon commitments to release prisoners. Abbas responded aggressively. He sought entry into 15 international organizations; he reached a unity deal with Hamas; he refused to walk away from negotiations, even going so far as offering to meet Bibi "at any place and at any time." "We salute the American efforts," Abbas reportedly said, "but Israel is procrastinating."

Abbas clearly was not content to sit on his hands. Instead, he has run diplomatic circles around the flat-footed Israelis, who have responded by rolling out the same, barely credible talking points blaming the Palestinians for "unilateral moves" that doomed the talks (as if unceasing settlement construction builds trust between both sides).

All of this leaves Israel in a terrible spot.

Palestinian efforts to gain international recognition -- which could, ominously for Israel, include the International Criminal Court -- are going to create a diplomatic wildfire for Israel. The United States has long carried water for Israel in international forums like the United Nations, but this could prove increasingly difficult. As President Barack Obama recently noted in an interview with Bloomberg's Jeffrey Goldberg, "If you see no peace deal and continued aggressive settlement construction … if Palestinians come to believe that the possibility of a contiguous, sovereign Palestinian state is no longer within reach, then our ability to manage the international fallout is going to be limited."

Obama's words are another harbinger of troubles ahead for the Israelis. When one factors in Obama's inclination to pursue a nuclear deal with Iran (against the strident opposition of Israel), the declining influence of AIPAC in Washington, and the evident frustration among American diplomats over the apparent failure of the current peace talks, we seem to be entering a period of frostier U.S.-Israel relations.

Far worse for Israel, however, will likely be the economic fallout. Over the past year, a movement to boycott, divest from, and sanction (BDS) Israel over its policies in the West Bank has gathered steam. It began in July 2013 when the European Union offered new guidelines that prohibit EU money from partnering with entities that operate east of the 1967 lines in occupied Palestinian territory. A number of European companies have followed suit. Notable academics such as Stephen Hawking and musicians like Roger Waters and others have also heeded calls to boycott Israel. It's hard to imagine the BDS effort not ramping up if the talks officially break down.

As Israeli Finance Minister Yair Lapid noted earlier this year, a "European boycott" will affect Israeli trade relations with its largest trading partner and mean a higher cost of living, a reduced national budget, and potentially up to 10,000 lost jobs.

Then there is the security side. For the past several years, the Israeli government has outsourced security in the West Bank and administration of the occupation to the Palestinian Authority, which has by all accounts performed admirably in preventing renewed violence against Israelis. How long will that continue in the absence of any negotiating path toward a Palestinian state?

For Israelis, there is a widely held view that the status quo can be maintained ad infinitum. That may very well be true -- until it's not true anymore. Yes, it's possible that in the near term nothing much will change: that Palestinian efforts to delegitimize Israel will fail, that the BDS movement will crash and burn, that the U.S.-Israel relationship will remain unchanged, and that Israel will somehow be able to maintain its democratic character even as it rules over a majority population of Palestinians who lack full political rights.

Or, it will no longer be possible -- and if that happens, Israel will be desperately seeking a friend to help it out of the hole it has dug.

Indeed, it's precisely this possibility and the uncertainty of what happens next that should be most worrisome to Israelis. A peace agreement right now -- no matter how painful to accept -- is the most certain path for the Jewish state. That's what Israel's best friend has been trying to tell them for the past year. Kerry has given Israel an exit ramp -- and the country's leaders have ignored it.

When all is said and done, John Kerry may face personal embarrassment at the failure of his peace process gambit, but it's Israel that will experience the real tragedy.

Photo by Yonatan Sindel-Pool/Getty Images

Democracy Lab

Can Ghana's Democracy Save It from the Oil Curse?

Ghana is one of Africa's big economic success stories. But the discovery of oil has confronted it with some tricky problems.

The phrase "African oil" doesn't conjure up much in the way of positive connotations. The exploitation of the continent's oil reserves has led to Libyan petro-authoritarianism, the rampant kleptocracy of Equatorial Guinea, and the militarization of Chad (whose defense expenditures increased by 633 percent between 2000 and 2009). African oil has frequently ruined the countries that produce it, as the Financial Times has noted: "From the civil war battlefields of southern Sudan to the slums of Angola and the swamps of the Niger Delta, the discovery of crude has done little to improve local lives. Often, it has destroyed them."

This brings us to Ghana, a vibrant democracy that prides itself on having one of the best-developed governance structures in sub-Saharan Africa. Ghana entered its oil-producing phase with a strong civil society and government institutions firmly in place. Since the restoration of democracy in 1993, Ghana has developed a strong two-party system, strictly adhered to its two-term limit on the presidency, held five regularly scheduled free and fair elections, and peacefully transferred power between parties. A highly participatory democracy, Ghana boasts a strong and independent media, the rights to freedom of speech and association, civilian control of the military, and a strong rule of law.

Mindful of past disasters related to sudden oil affluence, Ghana's late President John Atta Mills urged early on that "those who are in leadership positions... ensure that [oil] becomes a blessing, not a curse." (In the photo above, an optimistic Mills visits an oil-processing vessel in 2010.) In classic democratic fashion, Ghana's government responded to widespread requests from the private sector, public bodies, and the international community by putting policies into place to channel the country's oil and gas earnings into sustainable and equitable development while assuring transparency in revenue collection and use. In 2011, the country's parliament passed the landmark Petroleum Revenue Management Act (PRMA), enshrining transparency of financial flows among companies and the government and establishing a Public Interest and Accountability Committee to oversee implementation of the law. Oil contracts are public, and the Ministry of Finance discloses payments received, barrels of oil production, and details of the country's new petroleum discoveries.

The PRMA succeeded in the sense that it averted the rampant personal corruption and keptocracy seen in other African oil states. The new revenues were not, however, channeled into sustainable development as the law intended. Instead, politicians increased patronage spending in an attempt to meet the rapid rise in public expectations fueled by the discovery of oil.

Such expectations were extremely high when Ghana began exporting oil in December 2010. Export earnings in the first quarter of 2011 were two-thirds higher than in the same period of 2010, and real gross domestic product (GDP) for 2011 was forecast to increase between 12 percent and 13 percent. Such expansion would have made Ghana's economy one of the five fastest growing in the world. More importantly, it was hoped that becoming an oil producer would quickly raise the standard of living for large segments of the population.

Reality quickly fell short of predictions. Ghana's oil endowment is modest: At current prices, it is roughly equivalent to about $75 per capita -- a fact poorly understood by the man-in-the-street. Thus, despite the added oil revenues, the government has had an increasingly difficult time managing public demands.

Consequently, a fall 2012 survey conducted by the prestigious Afrobarometer found that 63 percent of Ghanaians polled perceived the country's economic conditions to be "very bad" or "bad," despite several years of rapid, oil-driven economic growth. This figure showed a sharp deterioration from the previous Afrobarometer survey in 2008, when only 45 percent characterized economic conditions in such dismal terms.

The situation has continued to worsen, as evidenced by recent headlines in Ghanaian newspapers: "IMF mission warns of challenging times for the economy" (February 27, 2014), "What is the solution to Ghana's economic crisis: Prayer, proper planning, or both? (March 17, 2014), and "Ghana's economy in crisis: $20 billion squandered by government" (March 25, 2014). So has Ghana finally succumbed to the oil curse despite its promising start?

There is no question that oil is at the center of Ghana's economic problems, although at least some of the country's difficulties initially stemmed from the 2008 global economic crisis and the resulting fall in commodity prices. Growth rates are still respectable by most standards at 5.5 percent, but remain considerably below expectations. The value of the country's currency, the cedi, has dropped considerably compared to 2009. Inflation is above 10 percent and rising, and the government's fiscal deficits as a percentage of GDP are in the double digits, despite the continued inflow of oil revenues.

Ghana has always had a tendency to run large budget deficits -- especially in election years. With buoyant oil revenues on the horizon, the government committed a serious mistake: It failed to enact a fiscal rule restricting public expenditures in high revenue years. Such a rule can enable resource-rich countries to maintain remarkable budgetary stability in the face of volatile revenue streams, as Chile has demonstrated.

Instead, Ghana's tendency to overspend was reinforced by two pieces of favorable economic news that minimized initial concerns about the corrosive effects of oil. In 2010, the country's national income accounts underwent revision, or rebasing. Initial estimates by the International Monetary Fund suggested that Ghana's revised GDP might be up to 25 percent higher than was previously thought. The new and much larger GDP figure dramatically lowered Ghana's perceived debt burden (official debt as a percentage of GDP). Next, between January 2009 and July 2012, the Mills government quickly and remarkably brought the budget deficit down from 24 percent to 10 percent of GDP (pre-rebase figures), and inflation down from 20 percent to 10.68 percent.

Unfortunately, still further reductions in spending were imperative, but public expectations of an oil bonanza spiraled out of control and eroded the political will to enact them. Furthermore, because voters would interpret any fall in living standards as mismanagement of the oil revenues, the government felt compelled to maintain and even expand expenditures, the bulk of which (94 percent) were recurrent, patronage-type expenditures -- wages, salaries and other non-investment items -- rather than more productive, long-term capital and infrastructure investments.

In fact, revenues from the country's new petroleum industry were disappointing, with the majority of the early income going simply to cover the sector's costs. In both 2011 and 2012, Ghana's oil receipts fell well below budget expectations. In the second half of 2013, oil revenue received by the government suffered a further decline, from $391.9 million in the first two quarters to $176.3 million in the second two quarters.

Then, with the U.S. Federal Reserve keeping interest rates at extremely low levels, investors began pouring money into better yielding emerging market assets. As a democracy with excellent governance, Ghana found it easy to tap international capital markets at bargain rates by borrowing against anticipated future oil revenues -- an attractive alternative to fiscal restraint. The fortuitous flood of funds provided the perfect enabling mechanism for increased governmental borrowing.

Ghana's first 10-year Eurobond, issued in 2007 at the height of excitement over its oil potential, was four times oversubscribed. By 2012, collateralizing future oil revenues involved negotiating a $3 billion loan with the China Development Bank. This loan placed Ghana in the unfavorable position of having to sell its share of crude oil exclusively to the Chinese. All told, in 2012, Ghana attracted foreign direct investment of about 8 percent of GDP, an amount considerably below expectations. Investor concern over the country's deteriorating fiscal position, together with election uncertainties, were largely responsible for the investment fall-off.

In August 2013, Ghana floated a bond of $1 billion with a 10-year maturity potential at a yield of 8 percent. The yield was higher, and the excess bids were lower, than those in other African countries that issued Eurobonds earlier in the year, perhaps partly reflecting the deteriorating financial conditions. By April 2013, Ghana's initial (2007) Eurobond was yielding as little as 4.5 percent.

Clearly, taking on added debt to sustain expenditures has hit diminishing returns. The government's inability to tame widening fiscal deficits has led to deterioration in Ghana's debt ratios. The country's debt now represents just over half its GDP, up from 32 percent in 2008. An expanding current account gap has had a severe impact on the cedi, which has weakened more than 9 percent against the dollar so far this year, following a 24 percent slide in 2013. In a sign of waning market confidence, yields on Ghana's sovereign debt are higher than for any other African country with an actively traded international bond, at around 9 percent for its 2023 Eurobond and over 20 percent for domestic debt.

On October 17, 2013, Fitch downgraded Ghana's credit rating from B+ to B, warning that "policy credibility has been significantly weakened" due to the size of the budget deficit and the rising costs of servicing domestic government debt. Meanwhile, sharp rises in the price of fuel, water, and power have led unions to threaten strikes. Despite the government's best intentions, an oil-fueled vicious circle of unmet expectations, increased debt funded government expenditures, expanded current account deficits, falling cedi, rising inflation, deteriorating living standards, and further unmet expectations has set in.

On the one hand, Ghana's experience to date provides a cautionary lesson for the new East African oil producers (Uganda, Kenya, Tanzania, and Mozambique): Even well-governed democracies that go to great lengths to avoid the oil curse can stumble if the government fails to manage public expectations and practice budgetary restraint. On the other hand, Ghana's situation differs from the classic oil curse phenomenon, in which a surge in oil-financed public expenditures leads to a strengthening currency (i.e., Dutch Disease), contraction of the non-oil export sector, and the rampant corruption and erosion of democratic institutions. Ghana has not suffered the irreversible damage usually brought on by the oil curse. There has been neither massive deindustrialization nor the cancerous spread of personal corruption. The country's democracy is intact, public involvement and scrutiny are on the rise, and Ghana has at least a reasonable chance of regaining its luster in the next several years, with IMF guidance and assistance on proper stabilization and fiscal consolidation.

The role of stepped-up borrowing in the current crisis has to a sharp rise in public participation, with citizens groups pushing for fiscal responsibility legislation that would limit borrowing against future oil and gas revenues. If passed, such legislation could prevent future excessive borrowing that constrains the country's finances and jeopardizes the steady expansion of its economy. The increased public scrutiny, combined with the ability of the press and public to track oil revenue allocations, should also make it more difficult for the government to divert funds away from infrastructure and other productive capital investments to non-investment budgetary items in the future.

In the longer run, it is still possible that Ghana could become a model for the effective utilization of new-found petroleum generated wealth. Increasing involvement of organized civil society and the media have created the foundation for accountability and best practice procedures in the management of the country's oil resources. In fact, government efforts to improve transparency in the growing oil and gas sector, together with the country's progress in institutional development and apparent determination to correct and learn from its mistakes, might eventually turn it into a role model for other oil and gas producing countries throughout the developing world.