Critical Questions for 2013: Global Challenges

  • Globe in CSIS & UM colors
    Jan 25, 2013

    In Critical Questions 2013 CSIS's world class experts give their take on what they see as the most pressing challenges facing the world in 2013. Transitions in U.S. defense policy, regional flashpoints, and global-scale issues are likely to dominate what will be another year of international transformation. Read below to find the answers to next year's most critical questions on Global Challenges or use the links to find additional questions.

    Defense and Security

    A Defense Strategy We Can Afford
    Maren Leed, senior adviser, Harold Brown Chair in Defense Policy Studies and Ground Forces Dialogue

    Living within Our Means: Redefining Defense Priorities for an Era of Limited Resources
    Clark Murdock, senior adviser and director, Project on Nuclear Issues
    Kelley Sayler, research associate, Defense and National Security Group

    Maritime Security 2013
    Carl Baker, director of programs, Pacific Forum CSIS

    Meeting The True Fiscal, Social and Political Challenges to U.S. National Security
    Anthony H. Cordesman, Arleigh A. Burke Chair in Strategy

    Sustaining an Effective and Affordable Nuclear Deterrent in 2013
    Clark Murdock, senior adviser and director, Project on Nuclear Issues
    Stephanie Spies, research assistant and program coordinator, Project on Nuclear Issues

    Global Challenges

    Democratic Governance and Budgets in 2013
    Gerald Hyman, senior adviser and president of Hills Program on Governance

    The Demographic Picture in 2013
    Richard Jackson, director and senior fellow, Global Aging Initiative

    Economics in 2013
    Matthew P. Goodman, William E. Simon Chair in Political Economy

    Energy and the National Interest
    Sarah O. Ladislaw, codirector and senior fellow, Energy and National Security Program

    How Does America Avoid Becoming Japan or Europe?
    James Andrew Lewis, director and senior fellow, Technology and Public Policy Program

    Instability and Crisis in 2013
    Robert D. Lamb, director and senior fellow, Program on Crisis, Conflict, and Cooperation (C3)

    The Prospects for Nonproliferation in 2013
    Sharon Squassoni, director and senior fellow, Proliferation Prevention Program

    Rewriting the U.S. Narrative
    Brad Glosserman, executive director, Pacific Forum CSIS

    Support the Doing Business “Revolution” through U.S. Leadership
    Daniel Runde, William A. Schreyer Chair and director, Project on Prosperity and Development

    Transatlantic Security in 2013
    Stephen J. Flanagan, Henry A. Kissinger Chair in Diplomacy and National Security

    U.S. Trade Policy and Economic Growth
    Scott Miller, senior adviser and Scholl Chair in International Business

    What’s Next in Cybersecurity?
    James Andrew Lewis, director and senior fellow, Technology and Public Policy Program

    Regional Issues

    The Arctic in 2013
    Heather A. Conley, Senior Fellow and Director, Europe Program

    Asia in 2013: Whither the Pivot in 2013?
    Michael J. Green, Senior Vice President for Asia and Japan Chair

    China in 2013
    Christopher K. Johnson, Senior Adviser and Freeman Chair in China Studies
    Bonnie S. Glaser, Senior Adviser For Asia, Freeman Chair in China Studies

    Europe in 2013
    Heather A. Conley, Senior Fellow and Director, Europe Program

    India in 2013—and Beyond
    Karl F. Inderfurth, Wadhwani Chair in U.S.-India Policy Studies

    The Challenge of China and North Korea for Madame Park Geun-hye
    Victor Cha, Senior Adviser and Korea Chair

    Russia in 2013
    Andrew C. Kuchins, Senior Fellow and Director, Russia and Eurasia Program

    Southeast Asia in 2013
    Ernest Z. Bower, Senior Adviser and Sumitro Chair for Southeast Asian Studies

    Western Hemisphere 2013
    Stephen Johnson, Senior Fellow and Director, Americas Program


    Democratic Governance and Budgets in 2013

    Gerald Hyman, senior adviser and president of Hills Program on Governance

    No doubt, the Middle East and South Asia represent the most immediate and obvious foreign policy challenges for 2013: Syria, Egypt, Iran, Afghanistan, and Pakistan. But from a long-term perspective, the bigger governance problem is debt and deficit.  They pose fundamental threats to the major global stabilizing forces—Europe, the United States, and Japan—none of whose governing institutions seem capable of successfully wrestling with these problems. The gap between the publics’ understanding of the problems and the solutions their democratic institutions seem incapable of providing might be unprecedented. The publics understand that continuous debt is unsustainable and that some combination of reducing public spending and increasing public revenue is required to restore a sustainable balance. Yet the democratic institutions of these countries, which supposedly derive their advantage from their public accountability, seem inadequate to the challenge.

    Part of the answer to that conundrum is that public understanding may be more conceptual than real. In fact, notwithstanding the opinion polls which point to overwhelming support for shaving spending and increasing revenue to solve the problem, the same publics reject specifics for both; when asked about particular program cuts or explicit recommendations for their contribution, the overwhelming consensus collapses.  Perhaps not unsurprisingly, publics seem to want more government and more public services than they are willing to pay for—unless they are not paying for it themselves. In that respect, the democratic institutions accurately, almost exactly, reflect their constituencies.

    The challenge for leadership is to convince the publics that what they know conceptually is right is translated into support for the painful policies that they also resist: fair and broad sacrifice for precise and concrete mixes of diminished services and increased revenues. The democratic leadership for that critical task is in very short supply.

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    The Demographic Picture in 2013

    Richard Jackson, director and senior fellow, Global Aging Initiative

    Demography shapes the national security environment the way water shapes rock—slowly but inexorably. However, a juncture occasionally arrives when the cumulative impact of demographic forces that have long been in play suddenly impinges on the near-term policy debate and forces critical choices. The year 2013 promises to be such a juncture.

    In the United States, the choice is whether to enact the sweeping reform of entitlement programs that is needed to put the federal budget and the national economy back on a sustainable trajectory.  While the current budget debacle, with its fiscal cliffs, sequesters, and debt ceiling brinksmanship, was precipitated by the economic crisis that began in 2008, the underlying cause of our fiscal problems is the steep projected growth in age-related entitlement spending.  While there are many reasons for the weak economic recovery, the most fundamental is the growing concern on the part of businesses, markets, and families that the nation has lost control of its fiscal and economic future. This loss of confidence is also behind the ominous decline in the U.S. fertility rate, which has now sunk to its lowest level in twenty-five years. Regaining control and restoring confidence will require grappling with entitlement reform. If we fail, we will face one of two alternatives: either creeping economic decline or a hard landing accompanied by a free fall of the dollar, draconian budget cuts, and a deep new recession.  If we succeed, we could enter a new era of economic renewal. At home, we would see growing opportunity for the rising Millennial generation, who increasingly find themselves locked out of the American Dream. Abroad, we would have the fiscal room to make crucial new investments in fostering peaceful development in the emerging world—and in forging the new security alliances on which U.S. and global security will increasingly depend.

    In Europe, demographic trends are also pushing policymakers toward a crucial decision point. Beyond the current sovereign debt crisis, there is a more serious threat to the Eurozone’s survival—the diverging demographic trajectories of the monetary union’s members, some of which are due to age far more than others, and the differential fiscal impact that this divergence will have. Compounding the differences in degree of population aging across the monetary union are equally large differences in the generosity of old-age benefit systems, as well as in the capacity of governments to reform them. If the EMU—and perhaps even the EU itself—is to survive, it will not only have to move toward closer political and economic integration, but also toward harmonizing its welfare states, whose design is still almost entirely within the purview of national governments. While Europe has been able to avoid the issue up to now, it no longer can. Just as in the United States, the economic crisis, by erasing any fiscal room countries may have had, has turned the long-term aging challenge into a near-term challenge.

    Meanwhile, the countries of East Asia are reaching their own demographic tipping point. Over the past few decades, demographics have leaned strongly with economic growth as child dependency burdens have declined and the share of the population in the working years has risen. But with large age waves now beginning to roll in, the demographic climate is changing abruptly. The challenge is especially serious in China, whose aging population threatens to undermine the twin pillars of the current regime’s legitimacy: rapid economic growth and social stability. In response to the threat, the Chinese government is rapidly moving to repair its tattered social safety net. It is also debating whether to relax or even abolish the one child policy, which is not only the cause of China’s “premature aging,” but has also created a socially dangerous gender imbalance. How well China manages its aging challenge will help determine the future course of its development—and perhaps whether its rise remains peaceful.

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    Economics in 2013

    Matthew P. Goodman, William E. Simon Chair in Political Economy

    The "politics of growth" is likely to be the main theme in the international economy this year.  Many of the world's major economies – including the four biggest: the United States, China, Japan, and Germany – are in the midst of political transitions and each face serious economic challenges.  There is opportunity for leaders in these countries to use their fresh mandates to move ahead with structural reforms required to strengthen growth over the medium term.  The challenge is that messy domestic politics may impede the necessary reforms or even imperil growth in the near term.

    In the United States, the main challenge is of course finding middle ground between Democrats and Republicans on the country's formidable fiscal problems.  For China's new leadership, it is pulling the state back from the marketplace and shifting the growth model to one driven by consumption rather than exports in the face of entrenched interests and rampant corruption.  Japan's new government has declared war on deflation using monetary and fiscal stimulus but it must also plough ahead with painful labor market and regulatory reforms to create more lasting dynamism in the economy, all of which would be facilitated by an early decision to join the Trans-Pacific Partnership.  For Germany, which faces elections in the fall, the challenge is on two fronts: reviving growth following a slowdown that began last year, while effectively underwriting efforts to contain financial risks, and restoring growth in the periphery of the Eurozone.  New governments in a number of other large countries, from Italy to South Korea, face a plethora of economic challenges of their own.  

    In all these countries, the economic prescriptions are easier to devise than overcoming the political obstacles.  If new leaders rise to the challenge, markets may reward them and push global growth in 2013 above the current consensus forecast of around 3 percent – a disappointing pace several years after the Great Recession.  But many risks remain and another round of crises cannot be ruled out if governments, especially in the Big Four, don’t get the policy and politics right.

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    Energy and the National Interest

    Sarah O. Ladislaw, codirector and senior fellow, Energy and National Security Program

    Throughout its history, the United States has been a resource abundant country with ample energy, agricultural, water, and mineral resources, and it has used those resources to fuel its economic growth. However, over the last several decades the size and pace of growth of the economy made the United States ever more reliant on imported oil and natural gas. This growing import dependence and the reality of our vulnerability to the often volatile global oil markets (and the long-held view that import dependence and price volatility would only deepen) cultivated a notion that the United States was a relatively resource constrained and energy insecure country.

    Now, the combination of lower demand (from greater efficiency and the economic downturn) and important new sources of energy have put the United States in the position to be a net exporter of natural gas and reduce our net oil imports in the coming years. In many ways this outlook is a fundamental departure from the energy reality of the last 40 years. The situation has serious policymakers asking the question; how do we use this situation to advance our national interest?

    There are several concrete ways that this question could be explored over the course of 2013. The first is the long standing question of whether to permit the Keystone XL pipeline bringing oil sands crude from Canada to the United States. Folks in the security community argue that dedicated supplies from Canada have been and will always be a fundamental source of U.S. energy security. Opponents of the pipeline argue that with abundant new domestic oil there is no need for the pipeline and warn against the environmental risks and competition for clean energy sources it brings. The State Department will make a permit decision based on its assessment of whether the pipeline is in the “national interest.”

    Similarly, the Departments of Energy and Commerce have authority to provide permits for natural gas and oil exports, respectively. While the gas export question is further developed, several companies have applied for crude export licenses as well. Proponents argue that energy exports will have positive economic benefits for the economy as a whole and for U.S. trading partners. Opponents of the export projects suggest that these resources should be used domestically to reindustrialize the United States or that access to world markets will drive more production and increase associated environmental risks. Again, both agencies must make a determination of whether these exports are in the “public interest” or “national interest.” For a country that has been preoccupied with reducing import dependence for several decades, the process of exporting notable quantities of oil and gas is politically charged with economic winners and losers.

    Adding to this complexity is dimension of climate change and clean energy. The Obama administration has long asserted that tackling climate change, developing renewable energy sources, and deploying highly efficient energy technology is in the United States’ long-term “national interest.” A recently re-elected President Obama has signaled his desire to tackle climate change as one of his legacy issues for the second term. It is still unclear what this means or if the administration will even have time to get to this portion of its agenda given the current operating environment in Washington. However, it does raise some fundamental questions: How does the administration balance the undeniable economic benefits of domestic oil and gas resurgence with the need to promote alternative fuels, including nuclear? How do all the energy-related tax, subsidy, regulatory, and research and development funding get wrapped up into the fiscal cliff debates now likely to be spread out over much of 2013? Does energy infrastructure and technology funding get promoted as necessary economic stimulus and the foundation of long-term growth or unnecessary and unaffordable government spending?

    Finally, there is the question of what the new energy reality means for the U.S. relationship with other countries in the world. Some analysts have suggested that a reduced reliance on imports will have dramatic implications for U.S. relationships abroad, particularly with the Middle East. In reality, the United States is part of the broader geopolitical fabric for reasons that run much deeper than energy trade flows.  But on the energy trade front, despite the slowdown in demand growth the United States is still one of the largest energy consumers in the world. The U.S. market is home to some of the most dynamic and innovative companies in the world. The unconventional oil and gas revolution is one of the most remarkable energy developments in recent history and may have lessons that are transferrable to countries around the world with similar resource potential. Our emission reduction decisions are materially important to global climate change efforts. The United States plays a foundational role in global energy governance institutions and how they evolve going forward. Perhaps most importantly, the United States has been one of the most ardent supporters of a global free trade system where energy trade and open investment frameworks made up a fundamental pillar of U.S. energy security strategy. In short, the prospect of greater energy self-sufficiency does not change our ties with the global energy community and those relationships should not be forgotten when we assess the relationship between global energy issues and our national interest.

    As the United States continues to explore the relationship between this new energy reality and our national interest, a new energy identity is likely to emerge. 2013 holds the potential for some key developments on this front but is very much the beginning of a process and not the end.

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    How Does America Avoid Becoming Japan or Europe?

    James Andrew Lewis, director and senior fellow, Technology and Public Policy Program

    The United States’s debt is a symptom of the larger problem of stagnating growth. This is not the result of some external force outside of our control; it is the result of policy and legislation. The United States needs to focus on productivity agenda—chanting “innovation” does not count—if it is to avoid the long decline we have seen in Japan and Europe.

    In large part, the United States’s global leadership has been the result of its lead in productivity growth, or the ability to create more wealth with the same number of “inputs,” known to classical economists as land, labor and capital. Productivity growth ended in the 1970s, returned briefly in the 1990s, and has since been in the doldrums. To increase productivity a country needs more inputs, better inputs, or a way to reorganize inputs to get more out of them. Economists argue that productivity growth in a developed economy requires technological change and the need for technological change explains much of the hoopla about accelerating innovation.

    But hoopla is not enough. Productivity growth is the best measure of innovation and by this measure, America is falling flat. This reflects a failure to invest in research but that is not the whole story. Our tax policies encourage the misallocation of resources into unproductive activities. Badly designed regulations impede entrepreneurship and protect existing businesses. Deregulation is essential, but in the United States deregulation has come to mean sacrificing the public good rather than streamlining to promote competition.

    Countries need human capital for growth, which is determined by birth rates, immigration, and education. All developed countries have falling birth rates but government policy shapes immigration and education. Immigrants bring skills and more importantly they bring an entrepreneurial spirit and compensate for declining birth rates. Immigration restrictions reflect either nativism or protectionism, neither of which makes for sound policy. The United States would benefit if it returned to its traditional approach to immigration and let the market decide how many people can come in.

    There is a steady decline in education levels despite increased demand for educated workers. The number of high school dropouts points to a crisis in secondary education. Even when people manage to graduate from high school, fewer of them can afford college and the United States is steadily falling in global rankings. The United States is approaching the point where it no longer makes economic sense for individuals to go to college because the costs are so high.

    Badly designed taxes distort investment but the biggest misinvestment comes from government spending, but not the way it is usually portrayed on Capitol Hill. Government spends 39 percent of U.S. GDP but the bulk of Federal spending is for health care, social security, defense, and income security. These four categories account for about 85 percent of government spending. Defense spending takes up 22 percent of the budget. In 2005 the United States spent $500 billion on defense, almost half of global military spending. This has since increased by 50 percent and it is fair to ask if the United States is now 50 percent safer. The defense budget is unsustainable without wartime tax levels.

    Transfer payments, which redistribute wealth rather than create it, account for three quarters of the federal budget. In the 19th century, there were very few transfer payments but this was a harsh culture and saw shameful levels of poverty and disease. The failure to educate workers or build infrastructure hampered growth. Industrial nations moved away from this Darwinian approach in the 1930s, but perhaps the pendulum swung too far. The growth of an entitlement culture, where people expect to receive benefits just for existing and governments borrow to pay for them, is one of the problems that dogs Europe and puts its fiscal health at risk. The biggest U.S. transfer payment is in health care. The return on investment from U.S. health spending, measured by life expectancy, suggests that the U.S. health care system is the most inefficient in the world. Uncontrolled spending in healthcare takes money away from productivity growth and explains much, but not all, of the growth in debt.

    Everything else—space exploration, diplomacy, scientific research, law enforcement, transportation—programs that are often mocked as wasteful add up to about 4 percent of national income. These are the programs that undergird economic growth and provide technological leadership. One might think that the federal government is a spendthrift and a wastrel. In fact, the federal government’s discretionary spending outside of defense is frugal and offers a good return on investment.

    Some say that federal discretionary spending can be cut and any damage to growth will be offset by the gains from tax cuts. But the decade that followed the tax cuts of 2001 saw one of the lowest rates of growth in U.S. history. Cutting discretionary expenditures, particularly for key public goods, will do little for the debt but would be a disaster for the economy and for long-term national power. Government actually looks like quite a bargain.

    Political decisions are the root of slow productivity growth. Any good technocrat can explain how to change this. When governments invest in infrastructure, research, and education, and promote competition, economies grow; when they invest in entitlements (and this includes corporate tax breaks), economies shrink. The United States needs a serious productivity agenda, not nostrums, if it wants to reignite growth and maintain its global position.

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    Instability and Crisis in 2013

    Robert D. Lamb, director and senior fellow, Program on Crisis, Conflict, and Cooperation (C3)

    The first weeks of 2013 saw rebel groups expand their control over large swaths of Mali and the Central African Republic, continued concerns about armed militias and instability in post-conflict Libya, youth protests and ongoing attacks by armed militias in Yemen, ongoing attacks in Darfur and the threat of a food crisis in southern Sudan amid border skirmishes with its new southern neighbor, uncertainty about what the political successes of the Muslim Brotherhood in Egypt, Tunisia, and, potentially, Libya might mean for the United States, a growing pressure for international intervention into the bloody civil war in Syria, and a visit to Washington by Afghan President Hamid Karzai to discuss the future of U.S. support to that country's stability.

    There is no question that President Obama's new national security team will be more skeptical of a muscular, public role for the United States in these conflicts than his first administration was (which in turn was more skeptical about intervention than its predecessor). But the United States will continue to face pressure from its own citizens and international actors alike to "do something" to reduce violence, protect friendly governments and threatened cities, or tip the balance in favor of those who claim to be fighting for freedom. It is not clear that the second Obama administration will succeed in resisting this temptation to intervene.

    It is even less clear what it could accomplish if it does. Certainly the United States has the capacity to protect the innocent from imminent danger, as in Libya when it prevented Muammar Gadhafi’s army from taking Benghazi, and to encourage some degree of restraint or reform by friendly regimes, as when it suggested Hosni Mubarak step down and begin Egypt's transition. But while the United States can save lives in the short term, its capacity to influence the long-term evolution of these events is much more limited. Attempting to modernize, democratize, or otherwise transform these societies is at least as likely to generate unintended perverse consequences as it is to protect the innocent—or U.S. interests—in the medium term.

    The opposition won in Libya, but that victory empowered some armed groups that have extreme or anti-American views, and the rest have not managed to coordinate enough to mount a coherent response. The same concern is being expressed about the opposition in Syria. The United States is helping with "non-lethal" aid but it is not clear what that help might one day achieve, beyond the eventual downfall of President Bashar Assad. Once that happens—and especially if it doesn't—the United States is not necessarily going to have the ability to influence what happens next.

    These challenges offer the second Obama administration the chance to rethink the policy tools at its disposal to influence internal political crises in foreign countries. Drones have been used increasingly in places such as Pakistan and Yemen, special forces and night raids have proven successful at capturing or killing key adversaries, technical assistance and diplomatic pressure have been employed to encourage coherence to opposition movements and restraint by incumbents, and the administration has encouraged multilateral bodies to take the lead when the United States has been hesitant to. Whether these and other tools are the right mix, or whether the civilian and multilateral tools need to be strengthened so that an overt U.S. military role can be avoided, are matters that should be studied closely over the next 12 months.

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    The Prospects for Nonproliferation in 2013

    Sharon Squassoni, director and senior fellow, Proliferation Prevention Program

    In 2013, changing leadership around the world could affect the dynamics of the most intractable proliferation problems, but are unlikely to dislodge the considerable roadblocks to progress. Iran and North Korea remain at the top of the list of nuclear dilemmas.

    While President Obama’s reelection may strengthen his hand vis-à-vis Iran and Israel, a new president to replace Mahmoud Ahmadinejad in Iranian elections isn’t likely to facilitate negotiations since decisions ultimately rest with Supreme Leader Ali Khamenei. That said, there is some hope that talks between the P5+1 and Tehran can yield results before the presidential elections scheduled for June 2013, based on greater U.S. flexibility and increasing pressure from sanctions.

    Hopes for a less belligerent North Korea under Kim Jong Un faded last year, first with an April satellite launch to mark Kim Il Sung 100th anniversary and then again in December with a successful satellite launch one week before South Korean elections. Both were in violation of UN Security Council resolutions, and the first launch scuttled tentative plans to renew U.S.-DPRK talks. President-elect Madame Park Guen-hye may be more open to engaging North Korea than her predecessor but neither side is likely to be in a hurry to solve the toughest security issues. Madame Park must also negotiate the shoals of renewing the U.S. nuclear cooperation agreement, which the Lee Myung-bak administration made into a political litmus test for the U.S.-South Korean alliance. This is an agreement that will be closely watched by all, especially if it expands South Korea’s sensitive nuclear capabilities.

    President Obama’s reelection may provide continuity in US-Russia relations in 2013 but little relief regarding obstacles to reducing strategic weapons. Some unilateral measures may be possible, but significant cuts from Russia are unlikely without a major deal on ballistic missile defenses.  It will be important to get a new agreement with Russia on cooperative threat reduction programs in 2013. Finally, the nuclear arms race in South Asia will likely accelerate this year, as Pakistan’s plutonium production increases and India begins sea trials of its nuclear-missile carrying submarines.

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    Rewriting the U.S. Narrative

    Brad Glosserman, executive director, Pacific Forum CSIS

     

    Two issues hang over U.S. foreign policy toward Asia in 2013. The first is the imperative of rewriting the narrative of U.S. engagement with this region. U.S. policy is seen as reactive and invariably responding to “the rise of China.” Implicit in this story is the notion that China is closing the gap with the United States, that the United States is a declining power, and that the United States begins its Asia policy with China. None of those arguments is necessarily true. The notion of U.S. decline is most important and leads to the assertion that Washington is thus framing its Asia policy around China. U.S. specialists must push back against the narrative—which shouldn’t be too hard since neither assertion is true—to tell a different story. The United States is engaging the region for reasons of national interest and the Chinese element of this policy is just one part of it.

    The second issue is the need for the United States to engage more broadly. Simply put, the United States should not be leading with the military. We have impressive diplomatic and economic assets to deploy, yet they seem to be undervalued by the United States and the nations with which we wish to do business. Of course, the military is important but it should not be the leading edge of U.S. policy. In this instance the United States needs to tell a different story and tell the story itself, rather than let others tell the story.

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    Support the Doing Business “Revolution” through U.S. Leadership

    Daniel Runde, William A. Schreyer Chair and director, Project on Prosperity and Development

    There are concerted efforts among Doing Business’ adversaries, made up of disgruntled World Bank shareholders, internal critics, and special interest groups, to defang, defund, or do away with the Doing Business initiative. In 2013, U.S. policymakers at the Department of the Treasury, the U.S. Agency for International Development, the State Department, and the White House, as well as members of Congress, must continue to protect and fund this incredibly successful and relatively inexpensive program. The Treasury and the U.S. Executive Director at the World Bank understand the stakes and have rightly supported this program, regardless of administration, but they need support in Congress.

    The World Bank’s flagship influence instrument has been the annual Ease of Doing Business index (“Doing Business”) and the related technical assistance to make it easier to start businesses in developing countries. It has caused a veritable “revolution” in how countries think about the central role of the private sector and private investment in development and it has been the spark for hundreds of policy changes in dozens of countries, making these countries far more business-friendly, transparent, and supportive of entrepreneurs. Doing Business could not have happened without strong U.S. political support and funding, and U.S. leadership at relatively low cost will be needed in 2013 to ensure another ten years of major change.

    Doing Business has been one of the more successful development initiatives in the world. The impact of Doing Business on development lies in its contribution to transparency and its vindication for reformers who had been pushing for change long before the index came about. The rankings and information yielded by the index provide the proof that reformers need to work with their governments to improve their business environments. The Doing Business initiative is essentially a combination of a forced ranking system of countries based on their ease of starting a business along with connected reforms carried out by a large in-house consulting team within the World Bank Group. It has succeeded in identifying excessive and harmful business regulations and spurring the necessary action to improve the situation (we can look at Georgia as an example of a dramatic success in business environment reform).

    Unsurprisingly, the Doing Business index has generated a large number of enemies, including the U.S. labor movement, because one of its metrics measures how easily an employee can be fired. France, Pakistan, and Brazil, to name a few countries, do not appreciate the Doing Business index because they have historically ranked very low in the rankings. These countries have proposed changing the metrics or doing away altogether with such a ranking of countries.

    The United States supports the Doing Business work through its General Capital Increase commitments, its ten-year track record of bipartisan support for the Doing Business metrics on the World Bank board, the State Department’s economic diplomacy that leverages Doing Business rankings and information about bottlenecks, and the critical investments that USAID makes to ensure change happens. The political and financial support of the U.S. Congress has also been critical to the success of Doing Business.

    One of the benefits of supporting the recent General Capital Increase of the World Bank is that the United States continues to broadly influence the intellectual leadership of the World Bank. We have several more payments to make, including one this year (around $300 million). Being a deadbeat funder on the General Capital Increase will hurt our influence and weaken our hand at a critical moment, and Republicans and Democrats on the committees responsible for the 150 Account must ensure that we do not miss a payment. Missing a payment will weaken our leverage and influence in the World Bank board and bureaucracy. There are many voices within the Bank’s board that would happily have the Bank work on other priorities.

    Doing Business is largely an American export. The Doing Business reforms partially build on methodologies started and implemented by USAID, and Doing Business has been politically supported by the United States. In addition, significant amounts of the reform work are funded, and often partially designed by, the United States.

    Of course, the system is not perfect, and there are a number of other criticisms of the Doing Business index, including from econometricians who have questioned the robustness of the metrics involved. Others have noted the inherent lag between implementing reforms and seeing them reflected in the measurements, a discrepancy that can belie the direction a country is actually headed and discourage reform efforts. Yet a significant portion of the criticism against Doing Business comes from a misunderstanding of the index, which many seem to equate with a measurement of investor confidence.

    Doing Business was part of the first wave of development indices that ranked countries against their peers. Most developing countries are not as concerned about how they measure up to Japan, the United States, or Europe, but they are very concerned about how they measure up to neighboring countries that are often rivals. This forced ranking, or as one former Vice President for Private Sector Development at the World Bank put it, “naming and shaming,” has been a very powerful driver for reform.

    In 2013, one of the central ways for the United States to maintain its leadership in global development is to make its General Capital Increase payment and maintain support of the Doing Business “revolution.”

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    Transatlantic Security in 2013

    Stephen J. Flanagan, Henry A. Kissinger Chair in Diplomacy and National Security

    The United States and its European allies and partners confront four major challenges to their security this year: the pace of NATO’s military disengagement from Afghanistan, the escalating violence in Syria and potential spillover, next steps to halt Iran’s development of nuclear weapons, and priorities in combating global terrorism. Each poses difficult policy choices, political divisions, tight budgets, and operational fatigue that will limit options.

    Last May, NATO and its 22 International Security Assistance Force (ISAF) partners affirmed the timetable for a phased transition to an Afghan lead for security in all parts of that country, with a major milestone in summer 2013, and termination of the ISAF mission in December 2014. At their January 11, 2013 meeting in Washington, President Obama and Afghan President Karzai agreed that the transition can be accelerated due to the progress of Afghan forces that are expected to take the lead in protecting 90 percent of the Afghan population by February. ISAF will shift from a combat role to an advisory role in the spring, and U.S. forces will withdraw from Afghan villages and halt most unilateral operations.

    This move will be welcomed by war-weary European contributors, but major uncertainties remain. A December Pentagon report concluded that only 1 of 23 Afghan Army brigades is capable of operating without support from ISAF. Afghan military and police forces cannot sustain their 352,000 personnel without significant international financial support and there are shortfalls in pledges. President Obama said he is open to retaining a limited military presence after 2014 to train, advise, and assist Afghan forces and counter remnants of al-Qaeda and its affiliates if U.S. units are granted immunity from prosecution under Afghan law. U.S. military commanders have reportedly recommended a force of 6-15,000, but numbers between zero and 3,000 have been floated by administration officials. Few allies have met their pledges to the current NATO training mission; only a handful would contribute to any post-2014 force.

    With Bashar al-Assad defiantly rejecting international and Russian mediation efforts, the Syrian civil war is on a course for further carnage with enduring potential for regional destabilization. U.S. and European governments remain wary of direct military intervention in Syria, which carries far greater risks and uncertainties than the Libyan operation and is firmly opposed by Russia and China. Given repeated cross-border incidents and the flow of 150,000 Syrian refugees into Turkey, NATO leaders agreed to review plans for the defense of Turkey and to deploy Patriot air defense batteries there, making clear that these moves should not be seen as a precursor to military action against Syria. The Turkish government had called for establishment of a limited no-fly zone and safe havens in northern Syria, coupled with further military assistance to the Syrian opposition, but allies remain skeptical of their effects. President Obama has said the U.S. red line would be the regime’s use of its chemical weapons or loss of control over them. But if the death toll of 60,000 rises to 100,000 or there is some other dramatic escalation of the violence, political pressures could build in the United States and Europe for the formation of an ad hoc coalition to take military action to constrain the Syrian armed forces and try to force Assad into a political settlement.

    The deteriorating situation in Syria will also impact the already dim prospects for a negotiated solution to the Iranian nuclear crisis. Iran’s position on the nuclear issue could harden if Assad’s control declines. Iran’s alliance with Syria is a critical link to Hizbollah in Lebanon and a central pillar in maintaining its “axis of resistance” to Israel and its allies. President Obama has affirmed that all options remain on the table and has rejected a containment strategy. Estimates of when Israel’s red line might be crossed have been pushed back, and sanctions are taking a real toll on Iran’s economy. But prospects for UN/P5+1 talks appear dim and Iran’s supreme leader has yet to accept the U.S. offer of bilateral talks. The U.S. and Europe will have to reconsider their strategy at some point this year with no good options in sight.

    Finally there is the question of European and American priorities in the ongoing struggle against terrorist organizations. In the wake of the Libyan crisis, France and other European governments have been focused on the threat posed by the growing strength of Islamist militants in the Maghreb and West Africa, particularly in northern Mali. European and American militaries have been developing plans to for months to train and support a west African regional force that would assist the Malian government. In the face of a mid-January militant assault into the south of the country, President Hollande ordered French ground and air forces into action to help the Malians. Hollande said French forces will remain in Mali as long as needed, and Paris will seek U.S. logistical and intelligence support, as well as acceleration of the deployment of the west African force. Meanwhile, U.S. drone strikes against terrorist groups around the world remain controversial in some circles in Europe. Continuation of these strikes without a clearer legal and policy rationale could become a source of friction in European-American relations, akin to earlier differences over extraordinary rendition and Guantanamo.

    All this will be unfolding against the backdrop of diminished spending for defense and foreign affairs by both Europe and the United States. The weak European response to continuing entreaties from Washington to staunch the decline of their military capabilities could lead to new transatlantic battles over burden-sharing as U.S. defense cuts begin to be felt. The United States would like to see European governments invest savings from the end of their Afghanistan operations in sustaining critical military capabilities. If Europeans opt for a peace dividend, congressional support for retaining the U.S. military presence in Europe—already set to be reduced by about 11,000 to just under 70,000 by 2017—and building new missile defense sites there will likely diminish. A better course would be more focused transatlantic cooperation to ensure the most efficient use of limited defense and foreign assistance resources in addressing the aforementioned challenges, and others, looming to our mutual security.

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    U.S. Trade Policy and Economic Growth

    Scott Miller, senior adviser and Scholl Chair in International Business

    President Obama is about to begin his second term, and the 113th Congress has convened. Despite December’s “fiscal cliff” drama, unresolved issues of federal budget, tax, and spending will take center stage in early 2013. Specifically, four related matters face lawmakers before the end of March 2013: First, Congress passed a six month continuing resolution (CR) for FY 2013 prior to November’s election. The CR expires March 31, 2013, and Congress must agree on funding for the remainder of the current fiscal year. Second, the “sequester,” an across-the-board spending reduction enacted in 2011, will take effect March 1 unless action to replace it is agreed upon. Third, the debt ceiling will need to be raised. Fourth, the President’s FY 2014 budget is due on February 4, launching the budget and appropriations process for FY2014.

    Postelection, one missing element from the U.S. political conversation is economic growth. Overall, growth remains substantially below historical rates, leaving unemployment at stubbornly high levels. Further, subpar growth is a contributor to debt and deficits. In 2012, Federal revenues totaled only 15.8 percent of GDP, compared to 18.2 percent in prerecession 2007 with similar tax policies in place. Domestically, key sectors such as housing, autos, and energy are showing signs of recovery. What can policymakers do to accelerate growth in international commerce?

    Q: What are the opportunities for trade liberalization in 2013?

    A: The current policy agenda offers five key avenues for action:

    1. The Trans-Pacific Partnership (TPP): The U.S. and its ten negotiating partners have announced their intention to conclude the TPP by fall 2013. If the U.S. is able to achieve the high-standard, comprehensive outcome it seeks, the TPP would become a cornerstone of economic engagement in the fast-growing Asia-Pacific.
    2. Corporate Tax Reform: While the “fiscal cliff” agreement addressed personal income tax rates, reform of the corporate income tax remains a top priority of the House Ways & Means Committee chairman Dave Camp (R-MI). The White House has also expressed interest in corporate tax reform. A lower statutory tax rate and a move to a territorial system would enhance competitiveness of globally engaged U.S. companies.
    3. A Transatlantic FTA: A report from the U.S.-EU “High Level Working Group” on a transatlantic FTA is expected this month. The EU is our largest export market with whom trade is based on most-favored-nation rates. Beyond market access, a U.S.-EU agreement could improve efficiency for already deeply integrated economies. Both the US and Europe badly need growth.
    4. Farm Policy: During 2012, Congress failed to complete work on a new Farm Bill. The 2007 law was extended through September 2013, and the 113th Congress will begin again on a new agriculture policy for the coming years. With one in three acres planted for export and the challenges of trade-distorting subsidies, the Farm Bill provides opportunity to boost agricultural trade.
    5. Unilateral Liberalization: Congress also failed to pass a miscellaneous Tariffs Bill which would have reduced tariffs on almost 800 imported products for which there is no domestic source. Congress should follow the example of Canada and the EU, which crafted an administrative process for eliminating nuisance tariffs. Given that the average US export has 21% import content, eliminating non-protective tariffs would enhance US export competitiveness.

    Q2: What is the likelihood of progress in 2013?

    A2: The American people voted to continue divided government in the 2012 elections. On many matters, gridlock will remain the default option. Yet looking back at the past two years, trade policy was a rare area of bipartisan success: three FTAs and normalized trade with Russia, all Obama administration priorities, passed Congress with strong majorities.

    The 113th Congress is similar enough in leadership and composition to the prior Congress to expect continued support for expanded trade. Less obvious, however, is the extent of the President’s support for an ambitious, progrowth international agenda. It wasn’t a campaign issue. The second term cabinet is only now taking shape, with change expected at the U.S. Trade Representative, and at the Treasury, State and Commerce Departments. Second terms typically provide some insulation from political pressures, yet each of the five opportunities listed above will require presidential leadership. The President alone can represent the American people on matters like tax reform while the Congress will face competing interests; similarly, the President alone can make the tough calls and calculations needed to conclude a big trade agreement like TPP.

    In simplest terms, what will be the Obama second term trade policy?  The successes of the past two years amounted to completing the prior administration’s agreements (in the case of the three ratified FTAs) and continuing but not concluding existing negotiations (TPP and the Doha Development Agenda).  For the moment, there are few clues. 

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    What’s Next in Cybersecurity?

    James Andrew Lewis, director and senior fellow, Technology and Public Policy Program

    Congress is unlikely to pass any legislation, but if there is an executive order to strengthen cybersecurity in critical infrastructure there won’t be as much need for new laws.

    Iranian cyber activities have increased significantly. Iran has built a national cyber capability and has used it against U.S. banks and, in a more damaging attack, against Saudi Aramco. Iran doesn’t seem to be deterred by U.S. warnings, most notably in an October speech by Secretary Leon Panetta, on how the United States would use military cyber capabilities to prevent damaging attacks. The Iranian efforts against banks did not rise to this level of threat, but it may be time to abandon the idea of “cyber deterrence.”

    Russia and China made a big push to “capture” control of the internet at a meeting of the International Telecommunications Union in December 2012, with the goal of restricting access to information. They received a surprising degree of support. Many countries are disenchanted with the orthodox multistakeholder model of internet governance, find it incapable of meeting their governmental and developmental needs, and are quietly moving in towards a "non-western" model of internet governance. Authoritarian regimes have seized on this dissatisfaction and are attempting to exploit it for their own political ends. There has been almost no new thinking in the West on how to move beyond the internet’s ancient orthodoxy, created for a time when the world still revolved around the Atlantic Ocean.

    A promising start at the Organization for Security Cooperation in Europe (OSCE) towards agreement on cyber confidence building measures failed when Russia suddenly backed away from earlier deals. This may have been a reaction to the U.S. Congress’s passage of legislation on Russian human rights, but there is a bifurcation among states on how to approach the internet and cyber security, strongly based on attitudes towards democracy, human rights, and economic development. There likely will be little progress in international cooperation on cybersecurity if the Russians remain adamantly opposed, and this may force the United States towards a new approach that first moves toward agreement among ‘like-minded” nations.

    A summary for 2013 would be no legislation, a tough international negotiating environment, but good progress by the executive branch in clarifying military cyber activities, linking them to cyber defense, and on setting standards for making critical infrastructure more secure. New standards that target the most common vulnerabilities would, if widely adopted, accelerate this trend. U.S. cybersecurity has improved despite the impasse in Congress but further progress will require international agreement to constrain malicious activity in cyberspace and that seems to be a distant prospect. The United States is safer than it was five years ago, but still not safe.

     

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