Monthly Archives: July 2015

This is not the discussion you are looking for

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“They are so many, and our country is so small. Where will we find space to bury them all?”

— Finnish soldier during the Winter War, 1939

“We have won just about enough ground to bury our dead.”

— Red Army general during the Winter War, 1940

With their horrendous Chinese housing investment analysis Labour hoped to start a discussion. Well, they’ve done that. For 11 days until yesterday, the story led, or nearly led the news. The question is: are they happy with the discussion they’ve started?

They may really have wanted a discussion about race, dressed up as a discussion about housing, or they may have genuinely wanted a housing discussion with a slight racial frisson. Regardless of their hopes and ambitions, the party at this point has to have a long, hard look at their choices, for in reality, they’ve had neither of these two things. What they have had is an excruciating public discussion about one of the most boring and alienating topics it is possible to imagine: research ethics and methodology. For eleven straight days, during most of which time they had the agenda to themselves because the Prime Minister was out of the country, Labour has unsuccessfully defended its commitment to good social science practice.

Unsuccessfully, because yesterday, 11 days on, an increasingly frustrated Labour leader was still defending the data. “This is how the debate gets out of control,” said Andrew Little to Patrick Gower — and for once, he was right. “The Auckland housing market is not a morality play,” said housing spokesperson Phil Twyford, and he was right, too, but that’s all anyone has been talking about for 11 days.

Earlier in the day the party’s statistical guru Rob Salmond
half-arsedly apologised, on the fourth page of comments on a blog post, for misrepresenting three of his most rigorous methodological critics in a column published in the Sunday Star Times, which is read by somewhere north of 100,000 people. Three critics — Keith Ng, Tze Ming Mok, and Chuan-Zheng Lee, all of whom just happen to be Chinese, and who seem, horrifyingly, to have been misrepresented so as to give Labour the ability to say “look, we can’t be racist, here are these three Chinese people who agree with us!”

This is a horror show. Quite apart from giving unreconstructed racists an opportunity to pretend outrage, and appropriative neo-colonialists grounds to go around trumpeting about the coming race war, Labour has spent 11 days debating the definition of “is”, losing, and looking like mendacious buffoons into the bargain. Quite apart from the vileness of this exercise, it has been handled even more badly than I have come to expect.

They need to just stop. There is no ground to be won by these means, and further fighting will mean more dead to bury. The only poll since the announcement has them effectively stagnant, following a poll taken mostly before the announcement, which had them well up. Pretending nothing is wrong with their work, that their high-minded-if-admittedly-risky project has been hijacked by a mendacious media and the leftist-liberal fifth-column is no kind of strategy, even if it were true. The keys to the twitter accounts need to be taken away and, as much as possible, a dignified silence maintained. Go away and get some evidence, find a way to return the discussion to the issue of housing prices and non-resident investment, because those are serious issues about which we deserve a serious discussion which Labour’s delusional incompetence has rendered impossible.

L

Blog Link: Understanding institutional lag in foreign policy.

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I have been working on a long term project that focuses on intelligence networks in the South Pacific. A number of off-shoots have stemmed from the central concern (mapping intelligence communities and alliances), including strands dedicated to the NZ intelligence community and the problems of threat assessments in general. In this piece I outline three undervalued concepts in the study of foreign policy and offer some observations as to the causes of Western intelligence failures to adequately adjust, forecast and assess the evolving post Cold War threat environment.

Loansharking Greece and odious debt.

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I do not purport to be an economist nor would I ever want to be. Theirs is a world of implicit assumptions and pseudoscience that only a brave few have challenged from within. However, theirs is also a discipline that in theory and practice can shape the fate of millions, which is why I pay more than casual attention to them. Thus it is that I came to ponder the financial situation in Greece, a place that I lived in in 2010 at the start of its downward slope towards the current moment (my wife has researched and written on matters of Greek political economy and I have an interest in Greek civil-military relations, so our stay was mutually beneficial). Here is my non-expert view of things.

When lenders charge interest on principal loaned, they prefer to have the interest paid rather than the principal. This loan repayment rationale, which is true for states, firms and individuals, keeps the debtor beholden to the lender so long as the principal remains unpaid. Over time, the interest accrued can well exceed the amount lent, which is perfectly fine from the lenders point of view but keeps the debtor permanently saddled in a cycle of interest payment unless the debtor earns additional income (revenue) that can be directed towards paying down the principal. Short of a lottery win, a pay raise or new sources of revenue, debtors on relatively fixed incomes are locked into the cycle of debt.

Greece is in that situation. Until 2008 it was servicing the interest payments on its debt to international lenders (mostly the European Central Bank, various national banks and private investors). Then the international financial crisis of 2008-09 hit, which had nothing to do with Greece per se but which drove up interest rates. With a stagnant economy and flat tax revenues, Greece quickly found itself unable to make interest payments and, in a dramatic revelation, announced in 2010 that it had been systematically underestimating its fiscal deficit in order to maintain interest payments on its debt at a sustainable rate. At that point many private investors dumped their Greek debt holdings and the IMF assumed a significant portion of them as well as some of that accrued by European public banks.

The Greeks were subsequently offered two “bailout” loans that allowed them to continue to pay the interest on their debt, which together with the principal now amounts to nearly 250 billion Euros. With interest set at approximately 4 percent annually, the figure is set to reach the half trillion euro mark in a few years. Even if interest rates were capped at zero, it is estimated that it would take Greece 81 years to repay the amount currently owed.

There are several questions arising from the Greek debt. Why, since the interest paid is now more than the principal borrowed, does not the ECB and IMF put a cap on the debt? Why did investors continue to offer loans to Greece when it turned out that the Greeks were fiddling the books, and that neither the principal or the repayment loans ever trickled down to the general public in terms of public goods and services? Why does it expect the Greek population to pay via austerity for the risky borrowing of Greek elites and the even riskier lending of European banks?

Asking the Greek people to shoulder the burden of austerity–in a country with 30 percent general unemployment and 50 percent unemployment for those under 30, with a massive brain drain of educated professionals, porous borders and deep cuts to public sector salaries, pensions and basic services–is akin to forcing the children of crack addicts to starve and swab floors in order to pay for the rehab treatment of their parents. And the outcome is just as uncertain.

Let’s look at it this way. Capitalism is about assuming risk for higher reward. In the financial world, the riskier the investment the higher the interest paid on it. And just like quick finance and pawn shops are located in poor rather than rich neighbourhoods, high interest bonds are issued on “risky” countries with poor credit ratings and histories of financial instability. For “courageous” investors riding the line between high interest and junk bonds, the rewards for so-called bailouts are great. But the downside of a default is that they will have to wear losses, just as many ill-advised investors have to.

Greece is one such high risk place and those who lent to it knew this from the beginning.

With that in mind is is easy to see that the behaviour of the “troika” (the European Commission, European Central Bank and IMF) can be (and has been) likened to loansharking and needs to be treated as such. When people seek debt relief from loansharks, banks or credit card providers, they arrange to repay a capped sum and a payment schedule is established. The alternative is bankruptcy, which leaves the creditor with nothing. Although suboptimal from the lender’s point of view, the capped payment alternative is better than nothing.

When it comes to states, the decision to cap debt is a political decision, not a financial one. That is because the stability of states is more important than the returns on risky investment, especially when ample returns have already been received, many creditors are no longer at risk and demands for future returns put state stability at peril. In the case of Greece there is a twist, in that the referendum on whether to accept austerity was the first political iteration in a multi-step process. Now that the Greeks have refused more austerity, it is the turn of the EC to make a political decision of its own.

Let’s be clear: this is not a Greek crisis; it is a crisis of European finance capital. The demand for more Greek austerity is not about servicing the debt but about humiliation, punishment and deterrence of others who might dare to do the same.

The people who should seek answers are those who invested in the agencies that undertook the high risk lending strategies that have brought us to this moment. The people who are responsible for the crisis are not average Greeks but suits sitting in fancy offices in Athens, Brussels, Frankfurt and London. They are the ones who took the risk on Greece and they are the ones who need to be held to account.

This does not absolve Greeks from their own mistakes. Certainly the culture of entitlement and the pervasive corruption in Greek society needs to be addressed. But here again, this was well known to foreign creditors at the time they lent money to Greece, and for all the everyday petty corruption in Greece involving phantom war veterans and people faking disabilities, it is the Greek political-economic elite who elevated institutional corruption to an art form. Syriza proposes to confront them as well as the lower-level scams but in order to do so it must show that it can negotiate a debt payment agreement that puts the interests of average Greeks first.

There is a way out of the imbroglio that can leave Greece in the EU without undergoing more austerity punishment. In international law there is a concept known as “odious debt.” Odious debts are those that are incurred by governments that do not go to their stated purposes or are ill-gotten from the onset. Under international law, odious debts are the responsibility of the incurring parties and are not the responsibility of their successors. As such, they do not have to be serviced by others if the responsible parties cannot be made to pay.

One can argue that the debt incurred by pre-Syriza governments from 1999-2008 fall into the odious debt category and should be forgiven as such. If anything the political parties in government during the time the debts were incurred can be sued for repayment (these being the Panhellenic Socialist Party (PASOK) and New Democracy (ND)). Whatever happens, it is clear that Greece has not seen the purported benefits of the loans incurred by previous governments (to include the now abandoned or derelict Olympic facilities) but it has paid more than its fair share of interest on them. By any reasonable measure the remaining debt is now odious.

In the end this is a cautionary tale with minor and major sub-plots. The minor plot is about sustainable debt and the limits of debt relief. The major plot is about the perils of political union. The EU needs to understand that how it addresses the minor plot will determine the conclusion of the major one.

Bonus read: Although I do not agree with some of his observations, Brian Easton has a nice short piece on the Greek situation here.

 

Considering the Implausible.

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From time to time I am invited to give public presentations on subjects within my areas of interest. Depending on the topic I sometimes offer ideas for the audience to consider. At a think tank gathering last year I offered the suggestion that parliament should consider the proposition that New Zealand be the first country to publicly and formally renounce the use of lethal drones at home and abroad. I pointed out that although security conservatives and military commanders would oppose the move because it limited NZDF (and perhaps in the future NZ Police) tactical options, it was worth debating on moral and legal as well as practical grounds given New Zealand’s unique political culture and international standing. Since 90 percent of what military drones do is non-lethal and the NZDF does not have a lethal drone capability as of yet, it seems worth a try.

That proposition went nowhere. Some left leaning commentators supported the motion (most notably No Right Turn and one of the authors at The Standard). But no a single political party, to include the Greens, Mana and the Internet Party, adopted it as a policy proposition and it was never brought up in parliament.

This year I was at another event that featured academicians, students, policy practitioners, journalists and diplomats (foreign and Kiwi) discussing New Zealand’s past, present and future foreign policy. I was matched with a representative of the New Zealand intelligence community and a security academic on a panel that addressed intelligence issues, specifically, New Zealand’s intelligence role in foreign policy.

As part of the discussion I suggested that Edward Snowden had done us a favour by exposing the extent to which NZ is a fully integrated member of the 5 Eyes signals intelligence network. The reason is that with the revelations that have come from the documents that he passed on to journalists, New Zealand has an opportunity to re-negotiate some of the terms of its participation in 5 Eyes. I noted that withdrawal from 5 Eyes was not an option–I said that it was like trying to leave the mafia. But the specific terms of what the GCSB does for 5 Eyes could be discussed given that New Zealand is by far the most vulnerable of the 5 Eyes partners to retaliation from the countries that it targets as part of the division of labour within Echelon. I specifically  mentioned that NZ might broach the subject of reducing its role in spying on China given how trade dependent NZ is on the Asian giant.

A couple of journalists in the room ran stories on the suggestion and the PM was asked about it at his weekly press conference. He rejected it out of hand and said that NZ would not modify its intelligence operations because of trade considerations because what it did in was in the national interest.

The Snowden documents suggest otherwise, but that argument can be left for another moment.

Let me explain why NZ has an opportunity to re-negotiate the terms of its agreement with the Anglophone powers even though it cannot withdraw from 5 Eyes entirely.

If NZ were to withdraw from 5 Eyes it would lose the substantial benefits, unique to a small country, that it accrues from being in an alliance with four bigger partners with global reach. The flow of intelligence within 5 Eyes is very much reciprocal but what NZ receives is far more than what it delivers to the network. It is tasked with using shared technological means located on or operated from NZ soil (including its diplomatic missions) to target  specific entities of common interest to the larger partners, and in exchange it receives global as well as more NZ-specific intelligence from those partners.

That is just one reason why withdrawal is unlikely. But think of the consequences if NZ unilaterally decided to opt out of Echelon. It is in possession of some of the most advanced signals interception technologies on the planet. The GCSB knows the processes, procedures, means, methods and protocols of the entire network. Fear that this knowledge and technologies (say, for example, X-Keyscore and Prism) could fall into hostile hands will inevitably prompt a negative response from NZ’s erstwhile intelligence allies, and that response will not be confined to the field of intelligence (I am aware of reports that some of the technologies and methods mentioned in the Snowden documents have been decrypted by Russian and Chinese intelligence but am not sure as to what extent this may have occurred).

Were NZ to try and establish an alternative signals intelligence network with other powers, the remaining 5 Eyes countries would likely move beyond defensive measures and into the field of offensive intelligence operations against NZ. In other words, the exit costs will be too high given the uncertain benefits received in the event of withdrawal.

That being said, the GCSB is integral to 5 Eyes operations. The partners cannot afford to alienate NZ on issues that are critical to NZ but marginal or less costly to them. Although they never thought that their operations would be exposed in the measure that they have, the 5 Eyes partners are now acutely aware, thanks to Snowden, that they rise and fall together when it comes to exposing how they go about signals intelligence acquisition and who they target. They can therefore ill afford to call NZ’s bluff on a matter that is of critical importance to the latter.

I would argue that bilateral trade with China is one such matter. Even if they have a pretty good idea of what the GCSB does for Echelon, public revelation of NZ having a lead role in spying on the Chinese at home and abroad will force the PRC to retaliate in some fashion, even if just to save face as an emerging great power with super power pretensions. It must show that it should not be disrespected and meddled in by small states no matter who those states are allied with. The means by which it can reach out and touch NZ in a bad way are myriad and not confined to diplomatic or economic relations.

The only reason that it would not do so is if it has counter-intelligence access to GCSB operations and wants to keep those “backdoor” channels open in spite of the publication of specifics about NZ espionage against it.

If NZ were to say to its partners that given its vulnerability to Chinese utu the GCSB would prefer not to take a major role in spying on the PRC, it is possible that the other partners will listen and consider the request. The GCSB can still spy on South Pacific, Latin American and other nations that do not have much leverage over it, as well as the UN, various NGOs and private firms as it is doing now. But it would give a pass to spying, at least in a major way outside of NZ territory, on the Chinese.

In my view, such a position would not prevent the GCSB (and SIS) from conducting counter-intelligence operations against Chinese espionage at home and abroad. Even if they know about these defensive measures the Chinese will likely not make an issue of them given that they instigated the back and forth. Where I would draw the line is on offensive operations against Chinese targets, especially when at the behest of the larger partners.

I am not surprised that John Key has no interest in this proposition. To do so requires political courage and a commitment to putting NZ national interests first. Neither is in his repertoire. Plus, even if he were to think about the dilemma posed by NZ’s increasingly counter-poised trade and security interests, any renegotiation along the lines I have posed would be done quietly and not publicly announced, much less at a press Q&A. But I doubt the latter is the case.

In any event, this is a potential moment of opportunity to redefine the terms and conditions of NZ’s involvement in 5 Eyes, however implausible that may seem at first glance. There is a supposed review of the NZ intelligence community now underway that could serve as a sounding board for opinions on the suggestion, and I am happy to add my two cents to the discussion should that be deemed worthwhile.