After North Korea's alleged torpedo attack on its southern neighbor, it seems likely that tensions will increase between the two Koreas, which is likely to draw in China, Japan, the US, and Russia as well. This is the moment to encourage China to take on a more active role in maintaining stability in the world. China has not yet really demonstrated that it is willing or capable of doing this, but this is a situation in which I think the US ought to try to leave much of the work up to China. For one thing, China often uses North Korea as a bargaining chip in relations with the US and South Korea. You want to be responsible for North Korea? Fine, have at it!
There is more to this than cynicism, however. With the US still guaranteeing the security of South Korea, increasing its partnership if necessary, China will have even more riding on the North's stability than it does now. China dislikes having a nuclear-armed neighbor. Sure, the US and Russia have nukes too and may be too close for comfort, but they have shown themselves so far to be relatively responsible and predictable custodians. Not so the erratic Kim Jong Il. China also worries about the streams of refugees that might result from a collapse of the North Korean regime. Make this China's responsibility, and it might just take up the initiative and begin to act strongly, with US backing (as well as the backing of the rest of the Security Council, presumably).
Of course, the US should lay out a few clear conditions first, the main one being that, should the North Korean regime collapse (whether sooner or later), the people there will be guaranteed their right to democratic self-determination. They must be given the choice to become an independent state or to unite with the South, should the South agree to this as well. In such a situation, international aid, particularly from China, the US, and Japan, would be helpful in assisting South Korea in absorbing the devastatingly impoverished North.
With this foundational agreement set, the US could leave most of the footwork up to China. China is a major power, striving to Great or even Super Power status, at least economically. For the moment, it has shied away from pushing for these goals politically and militarily, content to simply make deals wherever the money is good and leave the US responsible for maintaining order and allow the free trade from which China (and everyone else, the US included, of course) so greatly benefits. It may be unsettling to some to imagine China as a Great Power (this author included), but there is an air of near inevitability about the progression. It is therefore better that China start practicing the work aspect that its weight brings with it. The US can help it do that while benefiting itself. Stepping back and letting China in would do nothing to reduce the relative distance between the two states in capabilities. Perceptions to this effect arising out of the appearance of a concession to China would be irrelevant and wrong. After all, how would it be a concession to nudge China to do more?
Monday, May 31, 2010
Wednesday, May 19, 2010
The Japanese-American Military Relationship: Call the Divorce Lawyer?
At the end of the Second World War, Japan was disarmed. Non-aggression clauses were even written into its constitution. Japan had no need of a large military because the United States vowed to protect it. At that time, the US was probably also the only force that would have been capable of attacking Japan in East Asia. Today, things look a bit different. Although China is rising and has been increasing military spending, Japan nonetheless remains a military lightweight, assured by security guarantees from the United States, much as Western Europe has been since the end of WWII.
Recently, however, there have been squabbles over American military bases in Japan, particularly in Okinawa. The previous government told the Americans the base could expand in size. Local residents, however, would rather see the base disappear altogether. Japan's new government at first agreed to review the case, putting off the Americans (though it has now reneged on this promise and plans to keep the base as previously planned). Is this a sign of further tensions down the road and the erosion of the Japanese-American security arrangement? In short: probably not. The Japanese know that the Americans insure not only their security, but the stability of the entire region. They are unlikely to kick them out any time soon, as evidenced by their eventual decision to let them stay, albeit possibly at a more remote location on the island. Even China has reason to wish for a US presence there. The strategic relationship is likely to recover and to remain at least as strong for the next two decades at a minimum. Whether the arrangement itself will be enough to stop an arms build-up and further tensions in the region, however, is in the stars.
America's presence in the Japanese archipelago is a central element in the area's security, part of the architecture of the modern "Pax Americana." Not only does it serve to protect Japan from outside attack, it also obviates Japan's need to build up its own defenses, which in turn makes other states in the region (notably both Koreas and China) feel less insecure and therefore less inclined toward military buildup themselves. South Korea's shipping lanes pass close to or through Japanese territorial waters and it is reliant on its trade links to the rest of the world.
It is not competition between Japan and South Korea, however, that is most worrisome. The elephant in the room is China. If the US were to depart from Japanese shores, is there any real doubt that the Japanese would start to feel nervous about their much larger neighbor to the west? The logical reaction to this insecurity would be a military buildup, of which Japan is certainly capable: it has the population (127 million), technology, and economic power. Japan's pursuit of security, however defensive its nature, would serve to make other countries in the region, namely China, but also both Koreas, feel less secure. Further insecurity in North Korea would make South Korea nervous. It is easy to see the chain reaction that would likely ensue.
Taiwan also relies almost exclusively on the United States to ensure that any change in its current status (in limbo between an independent state and a province of China) is not determined solely by the mainland Chinese. If Taiwan were to be wholly incorporated into the mainland, whether peaceably or not, this would extend China's reach into Japanese territorial waters near Okinawa (which in our extended scenario is no longer shielded by American forces). Leaving aside for a moment the worry that a democratic and open Taiwan might become an autocratic and oppressive Chinese province, this would be a serious destabilizing factor for the entire region.
Last but not least, China itself would not necessarily benefit from a US withdrawal. Although the Chinese would almost certainly rejoice if America removed its airbase from Taiwan and stopped supplying it with weapons, China, too, benefits from the Pax Americana. China would be faced with heightened diplomatic and military challenges if the region destabilized and Japan and the Koreas began building up their militaries. It would have to be very cautious not to drive on an arms race by becoming anxious and building its military might as well. The prospects for this restraint are not good. The security dilemma means tensions and even war would be hard to avoid in the absence of America's stabilizing power.
For all these reasons and more (habit, history, and cultural aspects), the Japanese-American connection is likely to remain strong as long as there are no truly severe (and foolish) diplomatic screw-ups. The only question then is: as America's (and Japan's) relative power declines in relation to China (assuming things continue to go well for China), how long will America's security guarantee remain credible? How long can America prevent a buildup and destabilization of East Asia? The continuation of strategic ties to the region may only delay the inevitable. The Pax Americana, like other paces before it (Britannica, Romana), will not last forever. The real issue is: what will replace it? Pax or bellum?
Recently, however, there have been squabbles over American military bases in Japan, particularly in Okinawa. The previous government told the Americans the base could expand in size. Local residents, however, would rather see the base disappear altogether. Japan's new government at first agreed to review the case, putting off the Americans (though it has now reneged on this promise and plans to keep the base as previously planned). Is this a sign of further tensions down the road and the erosion of the Japanese-American security arrangement? In short: probably not. The Japanese know that the Americans insure not only their security, but the stability of the entire region. They are unlikely to kick them out any time soon, as evidenced by their eventual decision to let them stay, albeit possibly at a more remote location on the island. Even China has reason to wish for a US presence there. The strategic relationship is likely to recover and to remain at least as strong for the next two decades at a minimum. Whether the arrangement itself will be enough to stop an arms build-up and further tensions in the region, however, is in the stars.
America's presence in the Japanese archipelago is a central element in the area's security, part of the architecture of the modern "Pax Americana." Not only does it serve to protect Japan from outside attack, it also obviates Japan's need to build up its own defenses, which in turn makes other states in the region (notably both Koreas and China) feel less insecure and therefore less inclined toward military buildup themselves. South Korea's shipping lanes pass close to or through Japanese territorial waters and it is reliant on its trade links to the rest of the world.
It is not competition between Japan and South Korea, however, that is most worrisome. The elephant in the room is China. If the US were to depart from Japanese shores, is there any real doubt that the Japanese would start to feel nervous about their much larger neighbor to the west? The logical reaction to this insecurity would be a military buildup, of which Japan is certainly capable: it has the population (127 million), technology, and economic power. Japan's pursuit of security, however defensive its nature, would serve to make other countries in the region, namely China, but also both Koreas, feel less secure. Further insecurity in North Korea would make South Korea nervous. It is easy to see the chain reaction that would likely ensue.
Taiwan also relies almost exclusively on the United States to ensure that any change in its current status (in limbo between an independent state and a province of China) is not determined solely by the mainland Chinese. If Taiwan were to be wholly incorporated into the mainland, whether peaceably or not, this would extend China's reach into Japanese territorial waters near Okinawa (which in our extended scenario is no longer shielded by American forces). Leaving aside for a moment the worry that a democratic and open Taiwan might become an autocratic and oppressive Chinese province, this would be a serious destabilizing factor for the entire region.
Last but not least, China itself would not necessarily benefit from a US withdrawal. Although the Chinese would almost certainly rejoice if America removed its airbase from Taiwan and stopped supplying it with weapons, China, too, benefits from the Pax Americana. China would be faced with heightened diplomatic and military challenges if the region destabilized and Japan and the Koreas began building up their militaries. It would have to be very cautious not to drive on an arms race by becoming anxious and building its military might as well. The prospects for this restraint are not good. The security dilemma means tensions and even war would be hard to avoid in the absence of America's stabilizing power.
For all these reasons and more (habit, history, and cultural aspects), the Japanese-American connection is likely to remain strong as long as there are no truly severe (and foolish) diplomatic screw-ups. The only question then is: as America's (and Japan's) relative power declines in relation to China (assuming things continue to go well for China), how long will America's security guarantee remain credible? How long can America prevent a buildup and destabilization of East Asia? The continuation of strategic ties to the region may only delay the inevitable. The Pax Americana, like other paces before it (Britannica, Romana), will not last forever. The real issue is: what will replace it? Pax or bellum?
Thursday, May 13, 2010
Rating Agencies: Why the Fuss Is Overdone
Ever since the financial crisis hit in 2008, the issue of the rating agencies has come up again and again. And yet: there has been little in the way of reform. This is for two reasons: one, there has been a lack of promising suggestions for replacing the current setup; and two, much of the hullabaloo has been overdone. The reason: the structure of the rating market itself is its most attractive attribute.
It's true: rating agencies are paid by the very people they rate. If this seems like an area for a potential conflict of interest, it's because it most certainly is. Producers and providers in competitive markets have to compete for customers by giving the customers what they want. There's just one catch here: the rating market is uncompetitive. It is, in fact, an oligopoly.
Oligopolies represent one of the three market failures (cure: anti-cartel authorities). The other two are one-sided information (cure: laws requiring transparency and information sharing) and externalities, which are goods or services that are either enjoyed by many but paid for by few or vice versa (cure: usage restrictions/regulations and externality charges). The rating market is oligopolistic, which is bad for consumers of its products. The good news: the direct consumers of its products are banks and its products are ratings, used by everyone and paid for only by the banks (a positive externality it makes sense to maintain).
Standard and Poors (S&P), Moodys, and Fitch, the big three ratings oligarchs, do not really have to compete very much for customers. Securities almost have to be rated by at least one of them in order for them to even have a chance of being traded, and many or most are rated by two or more, especially by S&P and Moodys. This puts the Big Three in a position of power. They do not have to offer better ratings for higher prices. In fact, doing so would be pretty much the only thing that could damage them because it would damage their credibility.
So why is their credibility already so damaged? Their ratings were horrendously inadequate and had not been adjusted to the new instruments that have been coming to the market over the last 15-20 years. They failed because of poor modeling and a system in need of updating (ratings are based mostly on past credit performance), not (or at least, not usually) because of collusion with the banks they were supposed to rate. The agencies now have every incentive to reform because their most valuable asset, their credibility, is at risk.
The rating agencies are likely to last, however, because there is no real alternative! Out of disgust over "speculative attacks" on Greece and Portugal after rating agencies downgraded both countries' debt (due to very real fears the countries may not be able to pay lenders back), European leaders recently stated their intention to create a European rating agency. As Austrian commentator Eric Frey put it, "That a European rating agency is called for in this particular situation illustrates that such an agency would be stillborn. If a rating agency has to first ask (French President) Sarkozy and (German Chancellor) Merkel before lowering a rating, no one will ever take it seriously."1 It's not like government agencies did such a bang-up job protecting the economy from the crisis, nor did most experts anticipate the full extent of the crisis. Why should we expect some new goverment-run agency to do better, especially one that is politically compromised?
Is there scope for reform? Probably, on the micro scale. Perhaps agencies responsible for giving ratings could steadily rotate and other things could be done to prevent cronyism, etc. (author's note: I just saw that a proposal for rotation has actually been made that would include a provision for using the accuracy of agencies' ratings to decide how many future ratings they give. Has someone in Washington been reading my blog?). Still, even this is no guarantee - ratings work well until they don't, as this crisis has shown all too well. Our greatest comfort is still that the ratings market is so uncompetitive. Perhaps we could do with a less competitive baking sector as well? Or at least one that values debt and risk less highly for systemic, not personal, reasons?
It's true: rating agencies are paid by the very people they rate. If this seems like an area for a potential conflict of interest, it's because it most certainly is. Producers and providers in competitive markets have to compete for customers by giving the customers what they want. There's just one catch here: the rating market is uncompetitive. It is, in fact, an oligopoly.
Oligopolies represent one of the three market failures (cure: anti-cartel authorities). The other two are one-sided information (cure: laws requiring transparency and information sharing) and externalities, which are goods or services that are either enjoyed by many but paid for by few or vice versa (cure: usage restrictions/regulations and externality charges). The rating market is oligopolistic, which is bad for consumers of its products. The good news: the direct consumers of its products are banks and its products are ratings, used by everyone and paid for only by the banks (a positive externality it makes sense to maintain).
Standard and Poors (S&P), Moodys, and Fitch, the big three ratings oligarchs, do not really have to compete very much for customers. Securities almost have to be rated by at least one of them in order for them to even have a chance of being traded, and many or most are rated by two or more, especially by S&P and Moodys. This puts the Big Three in a position of power. They do not have to offer better ratings for higher prices. In fact, doing so would be pretty much the only thing that could damage them because it would damage their credibility.
So why is their credibility already so damaged? Their ratings were horrendously inadequate and had not been adjusted to the new instruments that have been coming to the market over the last 15-20 years. They failed because of poor modeling and a system in need of updating (ratings are based mostly on past credit performance), not (or at least, not usually) because of collusion with the banks they were supposed to rate. The agencies now have every incentive to reform because their most valuable asset, their credibility, is at risk.
The rating agencies are likely to last, however, because there is no real alternative! Out of disgust over "speculative attacks" on Greece and Portugal after rating agencies downgraded both countries' debt (due to very real fears the countries may not be able to pay lenders back), European leaders recently stated their intention to create a European rating agency. As Austrian commentator Eric Frey put it, "That a European rating agency is called for in this particular situation illustrates that such an agency would be stillborn. If a rating agency has to first ask (French President) Sarkozy and (German Chancellor) Merkel before lowering a rating, no one will ever take it seriously."1 It's not like government agencies did such a bang-up job protecting the economy from the crisis, nor did most experts anticipate the full extent of the crisis. Why should we expect some new goverment-run agency to do better, especially one that is politically compromised?
Is there scope for reform? Probably, on the micro scale. Perhaps agencies responsible for giving ratings could steadily rotate and other things could be done to prevent cronyism, etc. (author's note: I just saw that a proposal for rotation has actually been made that would include a provision for using the accuracy of agencies' ratings to decide how many future ratings they give. Has someone in Washington been reading my blog?). Still, even this is no guarantee - ratings work well until they don't, as this crisis has shown all too well. Our greatest comfort is still that the ratings market is so uncompetitive. Perhaps we could do with a less competitive baking sector as well? Or at least one that values debt and risk less highly for systemic, not personal, reasons?
- Eric Frey, "Zynischer Kampf gegen Windmühlen," Krisenfrey (blog), 8 May 2010, http://derstandard.at/1271376262183/Blog-KrisenFrey-Zynischer-Kampf-gegen-Windmuehlen.
Subscribe to:
Posts (Atom)