Global Trends by Martin Khor

Monday 11 December 2006

Bush seems cool to calls for new Iraq policy

Last week saw two important developments.  First was the release of an establishment report calling for a drastic change in American policy on Iraq and the Middle East.  Second was the sharp fall in the U.S. dollar.  Both events could have significant effect on global political and economic affairs.

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Two interesting events took place last week:  the launch of an American report on Iraq that criticised the present United States policy and called for a radical change, and the sharp fall of the U.S. dollar against other major currencies. Both may well have important effects on global affairs.

The report by the Iraq Study Group, which is co-chaired by former U.S. State Secretary James Baker, contained a bold attack on the Iraq policy of the Bush administration.  It said US mistakes had contributed to conditions that are now “grave and deteriorating” and warned of chaos that could cause collapse of the Iraqi government and a humanitarian crisis.

And it called for a change of course.  Most US troops should leave by 2008 (and local troops must be trained now to take over security duties).  And there must be a Middle East initiative that includes involving Syria and Iran.

These two countries have been considered by the Bush government as top enemies, but the Study Group believes they have significant influence on the situation in Iraq and thus they have to be involved in talks for a solution.

The report also pin-pointed the Israeli-Palestinian conflict as a related problem and asked for new efforts to resolve it.

Since the Study Group comprises high-level Republicans and Democrats, its report was seen as an establishment slap on the face of the administration’s policy and performance on Iraq.  Its proposals were thus given a high chance of success in getting President Bush to change his policies.

At the report’s launch on 6 December, Bush said he welcomed its “tough assessment” and vowed to take its conclusions seriously.  But the next day, at a press conference, he was already indicating he did not agree with a quick troop withdrawal, nor would America hold talks with Iran or Syria unless they changed their behaviour.

Bush warned of heavy costs of American troops leaving Iraq too soon.  And the Israeli Prime Minister Ehud Olmert denied there was a strong link between the Iraq crisis and the need to resolve the Israel-Arab conflict.

On their part, the co-chairs of the Study Group have piled the pressure on Bush by urging Congress to endorse their proposals to effect a sharp change of American policy in Iraq.

Thus there appears to be a big fight brewing within the U.S. political establishment, between the “realist” camp that is for cutting America’s losses in Iraq and pulling out by a near deadline while pushing for an Arab-Israel settlement , versus the group around Bush (often called the neo-conservatives) that wants to “stay the course” in Iraq and to continue to support Israel’s aggressive measures against the Palestinians.

The next days and weeks will see whether the Congress, newly controlled by the Democrats, can team up with some Republicans to pressurize Bush to let go of the U.S. grip on Iraq.  It is less likely that the U.S. under Bush will suddenly take on the role of peacemakers between Israel and the Palestinians.

Meanwhile, the continued fall of the U.S. dollar sparked concern around the world.  The dollar has fallen to low points against the Euro (crashing through the one Euro equals US$1.30 barrier) and other major currencies.

The immediate reason is the emergence of more signs that the U.S. economy is weakening (for instance there is a decline in house building), while there are signs that the European economies are strengthening.

Many economists believe however that the American trade deficit has been widening to incredible and unsustainable levels, and that at some point there will be a fall of the dollar.  This point may now be reached.

Hints by various financial officials in China that the country will diversify future foreign exchange holdings and reduce the ratio of the dollar in its reserves have also put currency investors and speculators on the alert.

While almost everyone agrees that the U.S. dollar must inevitably fall, there is now a debate whether this will take the form of a moderate and gradual decline, or a sudden sharp fall causing panic and thus a downward spiral.

If a sudden fall takes place, it could lead to (or be part of) a larger general turmoil in the world’s currencies.  The financial instability will then have a negative effect on the global economy as well as the economies of many countries.

The countries that hold a lot of assets in U.S.dollars (the main ones include China, Japan, Taiwan and Singapore) are very worried that a sudden sharp fall in the value of the dollar would mean tremendous losses to them, valued in terms of what they can buy in terms of the other currencies.

They fear that if they pull out significant amounts of their US dollar, the dollar would collapse.  On the other hand if they keep supporting the dollar, they will suffer even more losses when the inevitable dollar fall takes place.

The two events of last week are related to some extent.  The hundreds of billions of dollars which the U.S. spent on Iraq have contributed to the draining of its resources and to the weakening of the dollar.

It is a rather dangerous time for the world economy, as currency turmoil is a possibility. Developing countries like Malaysia are still dependent on the American economy for markets, and thus a slowdown or a recession of this giant economy will have a negative effect on the developing countries.

We should thus look out for what happens to the Baker report, and what happens to the U.S. dollar in the next few days and weeks.  They will help shape the political and economic developments of the world in the near future.