Mounting World Crisis

Report International Economies

Mounting World Crisis

November 20, 1998 35 min read Download Report
Governor George Allen

This lecture was held at The Heritage Foundation on October 6, 1998.

I visited Moscow in mid-July, and although I saw some signs of the impending doom at that time, I was there before the devaluation of the ruble. However, what I saw then and what I have seen since is an economy in free fall. The stock market has all but disappeared. The ruble, which has been devalued since August 17, has lost as much as 80 percent of its value in real terms. There is a debt moratorium. Banks have collapsed; some of them have been nationalized. The designated Prime Minister, Viktor Chernomyrdin, has called for what he terms an "economic dictatorship" to collect taxes. He has promised more nationalization of industries and re-inflating the economy. Many people believe these measures will be a sure cause of the return of high inflation in Russia.

While I was in Moscow, I spoke with a number of economists about what is causing this crisis. There seems to be any number of culprits. The first is budgetary. Despite all the promises of reform, the Russian government failed to curb its spending. This has caused mounting deficits and debt. Sixty-one percent of the federal budget in Russia was being paid on interest on the debt. Early this year the government deficit exceeded 7 percent of gross domestic product (GDP). Since the Soviet Union collapsed, Russia has added $51 billion to its foreign debt. This was largely because its government refused to curb spending. This situation is unsustainable. One of Russia's prominent economists, Andrei Illarionov, predicts that default on Russia's foreign loans is practically unavoidable.

A second culprit is the currency crisis. Currency reserves in the central reserve bank were rapidly depleted despite the influx of foreign capital in 1997. Many people do not seem to realize that 1997 was a good year for the influx of foreign capital into Russia. The problem was that the rise of foreign capital was not producing a concomitant rise in reserves in Russia's Central Bank.

The Central Bank began depleting its reserves for a number of reasons. One, to keep the value of the ruble artificially high. Reserves were used to support the federal budget and to try to reduce the deficit. Reserves also were used to subsidize imports. And there have been accusations that some of the money in the Central Bank disappeared because of corrupt practices.

In sum, Russia's fiscal and currency crisis was caused by the failure to get the budget under control; a decision to prop the ruble up to artificially high levels; the negative impact of the economic crisis in Asia; and the drop in oil prices in 1997 and 1998 by 30 percent that caused the crunch that led to the current economic meltdown.

Who is to blame for the crisis? Three Russian officials and two institutions. Most at fault are President Boris Yeltsin and former Prime Ministers Viktor Chernomyrdin and Sergei Kiriyenko. They refused to cut spending or restructure the economy. They maintained a punitively high tax system that caused massive tax evasion. And they relied on their oligarch banker friends to create a virtual economy that encouraged corruption.

Some people, of course, think the culprit is too much capitalism, or the West's forcing a free-market system on Russia. These accusations are misplaced. Russia has an oligarchic capitalist system or a crony capitalist system. It has been named many things, but it is not by Western standards a free market. There always has been heavy state intervention in Russia's economy and, despite privatization, there was an overly cozy relationship between the oligarchs who owned the newly privatized industries and the government. For this state of affairs, President Yeltsin and his administration cannot escape blame.

An institutional culprit is Russia's Central Bank. It wasted valuable currency reserves by trying to prop up the weak ruble. This was the proximate cause for the devaluation of the ruble.

Another institutional culprit is the International Monetary Fund (IMF). The IMF made the crisis worse by not providing the proper incentives for reform. Russia made repeated promises of reform and budgetary constraint but, despite its failures to comply with IMF conditions, the IMF funneled billions of dollars into Russia. In the July 13 package promising $22 billion, Russia pledged expressly to avoid devaluation and to promote reform. However, neither promise was kept. To me, this seems quite a serious failure.

The IMF gave Yeltsin's failed policies a legitimacy they did not deserve, and it got the opposite of what it intended because its funds covered the costs of not reforming. They anesthetized the pain that would have resulted if Russia had instituted the necessary reforms. As a result, the underlying disease in Russia continued to worsen to the point at which it now has practically killed the patient.

In this sense, given the fact that President Bill Clinton supported the IMF so strongly over the years, he, too, must share some blame for Russia's crisis. Clinton was never very tough on Yeltsin. He never gave him the tough medicine he needed. When the reforms did not come, the money and the supportive rhetoric continued as though nothing had happened. Clinton's support for the IMF loans to Russia became a sort of surrogate Russia policy for his Administration. It enabled his Administration to hide behind slogans of supporting democracy and capitalism in Russia while Russia continued to deteriorate economically.

This blind support also had an unfortunate side-effect on U.S. foreign policy overall. President Clinton bent over backward to tolerate Foreign Minister Evgeny Primakov's increasingly anti-Western foreign policy. There were difficulties with Russia over Iraq. There were difficulties over Iran. Russia's support for proliferation continued unabated. There was even the instance in which Yeltsin likened U.S. retaliation against the terrorist bombings in Africa to terrorism itself.

These are not the kinds of statements or policies you would expect from a country or a leader who is a friend of the United States. If the idea behind support for Yeltsin and IMF aid was to encourage Russian foreign policy to become more pro-Western and more pro-American, I am afraid it has not worked.

The greatest tragedy of all is that market economies have been discredited by both Yeltsin and the IMF. When I was in Russia last July, I talked about the rule of law and real privatization, but I was countered with, "These are mere slogans. They don't mean anything anymore to us Russians because we've heard President Yeltsin and successive Prime Ministers use these slogans. They don't work. So be done with your Western advice." The tragedy is that pseudo-reforms have discredited the real thing.

It may be that things have to get worse in Russia before they get better. The situation politically in Russia right now is not ripe for doing the right thing. Russia's political clock needs to be reset in some way. We hope at some point something will fundamentally change and the political situation in Russia will improve. Perhaps, if things get worse, Russians will be forced to adopt a true market economy and real democracy as the only viable alternatives.

How have President Clinton's scandals contributed to the crisis? I think that the main contours of Clinton's Russia policy existed before the scandal. I do not think you can say, therefore, that the White House scandal in any way caused the failures of U.S. policy toward Russia. However, I do think that the distractions of the President may have contributed to his failure to think seriously about charting a new course when evidence was mounting that the old policy was not working.

There were signs of serious problems in Russia late last year, but they were ignored. Therefore, it is probably a combination of prejudice and distraction. A President more engaged should have been asking tougher questions of his advisers. A more attentive President surely would have seen this crisis coming and would have been more prepared. I think that surely, at the very least, the September summit should have triggered a fundamental review of U.S. policy toward Russia. The fact that it did not shows that the summit was intended mainly as a photo opportunity.

How can Clinton cope if impeachment proceedings get under way? I simply cannot imagine that he would not be distracted to the point at which his ability to lead the country is affected. If Russia defaults on its foreign loans or suspends democracy, or if violence breaks out, this will cause a huge international crisis. For one thing, it will send shock waves through Europe and its markets. This will, in turn, affect us as well as our markets. But the President has shown no sign so far of understanding how serious the crisis may be.

There is also the question of credibility. When I was in Moscow in July, quite frankly many Russians were ridiculing the United States and the President because of the scandal. It is quite an embarrassing situation. If things get very tough, the question will naturally arise as to whether any of Clinton's words or his policies will be taken seriously in Russia.

-- Kim R. Holmes, Ph.D., is Vice President, The Kathryn and Shelby Cullom Davis International Studies Center at The Heritage Foundation.

By William W. Beach

I think it is fair to say today that we are facing a global economic crisis potentially as large as the one we faced during the oil crisis of the 1970s. There are very prominent voices in the economic policy community who are suggesting that this has the early contours of a global crisis as large as that faced by the industrialized world at least in 1931.

This is a time, however, to step back from radical rhetoric with respect to our global woes. It's time to make an assessment of what is happening on the ground, and what the United States can do to shape events through its rhetoric and through its public policy over the next 18 months.

We are truly at a critical juncture economically, which presents important political and market dangers. As you know, this juncture was created by the Asian financial crisis, and much of the Asian financial crisis stems from the growing pains we have seen time and time again in emerging and developing economies. One way to view the Asian crisis is to imagine a child's teeter-totter. On one side sits an athletic, efficient management sector that is stranded in mid-air by the weight of a flabby, inefficient financial sector. The United States went through these growing pains, as has Great Britain.

At a deeper level, however, the financial crisis in Asia stems from truly abysmal banking practices, incredible leverage ratios, and policies on the part of banks that supported unsustainable loans. We now know that the non-reporting, non-performing loans in Japan are not of half a trillion dollars, but of a full trillion dollars. Throughout Asia--particularly South Korea, Malaysia, Thailand, and the Philippines--similar ratios exist. We also know that when the assault on key Asian currencies began in early 1997, that real estate "bubbles" and bubbles in other parts of the economy sustained by bad banking practices began to burst. Financial markets began to find whatever value in hidden places could be found. Currencies collapsed. We had a payment problem as a result of the collapse in currencies, which led to significant contractions in the Asian economies.

It is important for us to recognize that markets are working fairly well in assessing the problem, balancing it, and finding sustainable investments to burst this bubble in an orderly fashion. That is, I think, a very important bottom line of this crisis. The Asian financial crisis has reduced demand in Asia for exports from the United States and Europe. It has significantly reduced the ability of Asian economies to export their own products to the rest of the world. Asia emerged during the 1980s as such an important part of the global economy; now, there is a contraction of that global economy, which raises considerable concerns on the part of economists and policy analysts around the world. How large is that contraction?

Take a look at the IMF's economic forecasts produced in May 1997 and May 1998. To what extent had the IMF's economic forecasting unit captured the crisis? In May 1997, the IMF forecast for calendar year 1998 a growth in Japan's GDP of 2.9 percent, a handsome expansion for any economy currently facing the crisis in Asia. By May 1998, IMF economists refused to make a forecast, and there is a very significant dash in that particular cell of their report. I take that dash to indicate they were uncertain as to whether the economy would continue to grow at a small rate or contract at a small rate.

We know, however, that by May 1998 the Japanese economy was already in recession. We did not know that the recession was as deep as it is now turning out to be. In May 1997, the Korean economy was expected by the IMF to grow at a rate of 6.3 percent. That is a positive rate of 6.3 percent. By May 1998, the IMF economists had recognized the recession, but said that the economy in Korea would contract by only eight-tenths of 1.0 percent. We know that the contraction now in Korea is more like 7 percent or 8 percent for 1998, and it will continue through 1999 and the year 2000.

We have some recent forecasts by J. P. Morgan--which are achieving support among a growing number of economists--of what's happening now in Asia. For example, J. P. Morgan sees the contraction in Japan this year reaching somewhere in the neighborhood of about 3 percent. In Russia, they are looking at a contraction of 6 percent this year and 7 percent next year. And this contraction in all of the principal Eurasian economies is beginning to spread to the rest of the world.

The fourth point I would like to make is that the anchor of the global economy remains the U.S. economy. To the extent that the U.S. economy can continue to grow, we have some hope of making this a transitional moment in world economic development as opposed to a moment of true crisis.

The problems in Asia and in Russia and other parts of the world, like Central and South America, are beginning to affect the U.S. economy. We now have had five months of fairly stagnant industrial production. The purchasing manager's index, which is a very good indicator of the future expectations of the U.S. manufacturing sector, has been in decline for the past three months. Consumer confidence is bouncing around--a little bit of growth here, a little bit of decline there. Our own forecasts at The Heritage Foundation indicate that, if the crisis in Asia continues at its current pace and a devaluation of the Chinese currency occurs, the U.S. economy will lose about 50 percent of expected growth next year.

A broad assortment of economic forecasters, from DRI McGraw-Hill and Wharton Econometric Forecasting Associates to those in banking and investment houses, share Heritage's views. In other words, our growth rate will drop from about 3 percent to about 1.5 percent if the Asian crisis worsens. If that happens, we will lose about 1.6 million potential jobs next year--jobs that should have been created but won't be. Our export and import imbalance will worsen. And this anchor to the world economy will become less of a certain thing.

What's happening in the United States is happening in Latin America and Canada, too. The United Kingdom is expected next year to grow at less than 1.0 percent. Canada is expected to grow near 1.0 percent. Mexico and Latin America are also badly affected by the Asian crisis.

Given the severity of this moment and the pivotal importance for global growth, what can President Clinton do? How are his current problems constraining the ability to act?

The good news is that, so far as we know, the Chairman of the Federal Reserve, Alan Greenspan, is not part of the presidential crisis. Thus, we will have leadership in the United States in handling this global crisis. The emergence of a stable Federal Reserve Board under good guidance by Chairman Greenspan is very important in assessing the ability of the United States to make correct and prudent moves to encourage stability or to discourage panic. But the President plays an important role no matter how strong the Chairman or the Board is. The President's problems, no doubt, have been factored into the world stock markets. I spoke last night with a Washington, D.C., stockbroker who argued that maybe as much as 60 percent of that big collapse that we had last week in the stock market was simply discounting, now, for the President's problems, and that this set of problems has been fully "priced in" to stock values.

What if the problems get worse? If there are fluctuations in foreign markets due to uncertainty as to what the United States will do, much of that uncertainty can be laid at President Clinton's door. I am particularly worried about our lost leverage with Japan. The key to recovery in Asia is not only prudent moves by the troubled economies of Korea, the Philippines, and Indonesia, but the ability of Japan to design good public policies that allow the market to work and an evaluation of assets to be properly made.

The United States has played an important advisory role in the past 10 years with respect to Japan. I am sorry to say that I think the President's problems will undermine some of that leverage, and that leverage at this critical moment may not be present--and, indeed, may not be present for some time. Obviously, if we cannot leverage the leadership of the United States--if we cannot be in a position to lead--that simply further aggravates uncertainty in equity and commodity markets.

We are faced with not only a collapse in demand in Asia for our products and a slowing of output and economic growth in most industrialized countries, we also are faced with the very real prospect of deflation due primarily to the falling price of oil. It would be nice to face deflation all by itself and to be able to work through that problem, but facing deflation when we're looking to an economic collapse raises significant challenges for the United States.

Finally, you know that the Clinton Administration has recognized for some time the problems like bad banking practices in Asia. This is not new knowledge. This didn't suddenly become discovered truth. The failure of this government to act like Teddy Roosevelt--to stand up in the "bully pulpit" and to pound away at one potential cause of the economic crisis--is a failure to act that can never be recovered. Well, some of it probably could be if President Clinton had that credibility and strength of character to stand up now and do that. But this President's credibility is deeply weakened.

To sum up, this is a particularly bad time for President Clinton's political crisis to occur, from a global economic standpoint. It is a very bad time indeed. We have not seen the bottom. Global growth is likely to slow more next year than it otherwise would have done because of an absence of leadership in the United States. The President needs to be heard but, more important, I think Congress needs to make a move. If those two things can happen--if Congress effectively completes its business on the presidential crisis and the President's leadership is restored--then a serious contraction on the world economic scene might be avoided.

-- William W. Beachis John M. Olin Senior Fellow in Economics and Director of the Center for Data Analysis at The Heritage Foundation.

By James H. Anderson, Ph.D.

For many years, the conventional wisdom held that terrorists wanted many people watching, not necessarily many people dead. The nerve gas attack in Tokyo's subway system and the bombings of New York City's World Trade Center, Oklahoma's federal building, and the Khobar Towers complex in Saudi Arabia that housed U.S. troops--and more recently the bombing of U.S. embassies in Africa--shattered the conventional wisdom. Clearly, some terrorist groups believe the only way to attract a mass audience in a world awash with low-level violence is to seek mass casualties.

This trend toward super-violence may include even the use of weapons of mass destruction--chemical, biological, and possibly even nuclear devices--on American soil. Unfortunately, the Clinton Administration is not particularly well-prepared to cope with existing and emerging threats, even apart from the President's diminished standing.

The counterterrorism bureaucracy is still too unwieldy. The counterterrorism architecture includes more than 40 federal agencies, bureaus, and offices. This creates monumental coordination problems and turf battles. A major bioterrorism simulation exercise conducted last March revealed serious problems. Streamlining and clarifying lines of responsibility will help, but such efforts will not be enough.

We are psychologically unprepared to wage a sustained campaign against international terrorism. It is easy to declare war on terrorism; following through with effective action is another story. The Clinton Administration has done little to educate the American people about emerging terrorist threats, what is needed to fight a sustained campaign (as opposed to one that is waged sporadically), and what the costs will be.

We are ill-equipped to wage a campaign against international terrorists. Fancy satellites can help in the battle against terrorism, but what we need are low-tech and even no-tech skills and capabilities--namely, human intelligence and paramilitary capabilities. After a revival of sorts in the 1980s, these have atrophied. There does not seem to be an urgency on the part of the Clinton Administration to restore them.

The terrorist danger we face involves not only the potential loss of innocent life and property, but also this: Without a coherent strategy to counter terrorists, there will be increased pressure to retreat from the world. Some isolationists argue the best way to confront terrorism is to lower, in turtle-like fashion, our profile abroad. I believe this approach would be self-defeating in the long run. It would undermine the standing of the United States abroad and, in effect, reward terrorists.

What, then, should we do? The aim should be to put terrorists on the defensive whenever and wherever possible. In other words, a more forward-leaning strategy is necessary. Thus far, the emphasis has been too much on reacting. Our embassies overseas look more and more like ancient fortresses. Obviously, prudent measures must be taken to protect them against possible attack. But the best way to protect our troops and diplomats abroad is to disrupt terrorist attacks before they occur. The United States should not wait around for an exiled Saudi millionaire to act. This is not a game of chess in which players alternate moves in a gentlemanly fashion. Relentless pressure, not sporadic attention, is necessary.

An effective strategy will include four elements. The first element is a comprehensive effort to educate our people and allies about the terrorist dangers. When was the last time one of the Clinton Administration's big guns--the Secretary of State, Secretary of Defense, or Chairman of the Joint Chiefs of Staff--made a memorable speech about terrorism? They need to spell out what our counterterrorism strategy is, the risk it involves, and our objectives. The same explanation must be provided to our allies, who need to be informed as well.

This education effort must stress the moral dimension of fighting against terrorism. There should be no confusion about the difference between freedom fighters and terrorists; yet confusion on this point not only remains, it abounds. The distinction between terrorists and freedom fighters may seem self-evident to us, but it is not clearly understood elsewhere in the world.

The second element is to reject the sense of inevitability about an attack on American soil involving a weapon of mass destruction. The conventional wisdom among many senior law enforcement and intelligence officials is that it is merely a question of when, not if. An attack on American soil involving weapons of mass destruction should not be considered some type of grim passage into the 21st century. What is needed is a sense of urgency, not fatalism, about this specter.

The third element is to restore human intelligence. Our penchant for technological means has crowded out the development of human intelligence capabilities. The revitalization of human intelligence capabilities is long-overdue. Satellite surveillance is wonderful, but it is no substitute for eyes and ears on the ground to ascertain enemy intentions. Unfortunately, we have lost that ability in key regions of the world, and there does not seem to be any urgency to restore it.

Finally, we need to reinvigorate our covert capabilities. This presupposes an increase in intelligence capabilities. To disrupt terrorist groups, we need to get inside them--and not simply lob cruise missiles at their huts from afar. This is not easy by any means. It requires time, effort, and persistence.

All these measures, if knitted together in a coherent strategy, will narrow the gap between the Clinton Administration's harsh rhetoric and the reality of its performance on counterterrorism. The President's capability of meeting this tall order remains doubtful. It would be a difficult task even apart from his scandal or impeachment proceedings.

This is unfortunate: Left uncorrected, this gap between rhetoric and reality will engender both derision and cynicism about the ability of the United States to deal with the threat of terrorism. That, in turn, may well embolden our adversaries and undermine our credibility to meet other security obligations. To some extent, this has happened already with North Korea and Iraq.

By James A. Phillips

Today is the 36th day that the United Nations Special Commission (UNSCOM) has not been able to conduct inspection missions in Iraq. This should be a great cause for alarm. After all, Iraqi dictator Saddam Hussein has invaded two neighbors: Iran and Kuwait. He has launched missiles at four neighbors: Israel, Saudi Arabia, Iran, and Bahrain. He has worked clandestinely to build weapons of mass destruction: chemical, biological, and nuclear. He has used chemical weapons not only against Iranians, but also against his own people--the Kurdish minority in northern Iraq. Saddam essentially is a mass killer and a serial killer who is reaching once again for weapons of mass destruction.

But the Clinton Administration sought to downplay concern about the breakdown of the inspection regime. This complacency is all the more disturbing given the revelations of former U.S. Marine Corps Captain Scott Ritter, who, I think, is a man of the highest personal integrity. Captain Ritter resigned last month from UNSCOM in protest of the lack of U.S. support for the UNSCOM mission. He revealed that UNSCOM has detailed information that Iraq has all the necessary components, except for fissile material, for three nuclear weapons. He has revealed that Iraq still may be hiding 700 tons of chemical agents. Iraq may have tested biological weapons on live humans as late as 1995. UNSCOM still believes Iraq has an operational ballistic missile force of 5 to 12 Al-Hussein missiles that could be put together and launched on short notice as well the components necessary for building up to 25 more of these missiles.

Finally, and perhaps most disturbing, Ritter has charged that, since November 1997, the Clinton Administration has interceded with UNSCOM on at least six occasions to block or postpone inspection activities. Ritter resigned rather than take part in the charade, saying that the illusion of arms control is more dangerous than the absence of arms control.

Ritter should be applauded for his resignation. It is very rare in Washington, D.C., that someone resigns on a point of principle. But he's been castigated by the Clinton Administration and called "clueless" by Secretary of State Madeleine Albright. "Clueless"--despite the fact that Ritter spent seven years of his life in Iraq looking for these weapons of mass destruction.

Only seven months ago, a high-ranking U.S. official during the last confrontation with Iraq was quoted as saying,

What if Saddam fails to comply and we fail to act, or we take some ambiguous third route which gives him yet more opportunities to develop this program of weapons of mass destruction? Well, he will conclude that the international community has lost its will. He will then conclude that he can go right on to do more to rebuild an arsenal of devastating destruction. And someday, some way, I guarantee you he will use the arsenal.

Incredibly, that quotation comes from Bill Clinton himself. But today, his politically convenient sense of situational ethics has led him to gloss over these disturbing trends in Iraq. In my judgment, President Clinton is incapable of coping with the challenges posed by Saddam. This is because the critical element of dealing with an aggressive dictator is missing from his policies, and that element is credible deterrence. Deterrence must be based on a credible threat of military force and, long before anyone heard of Monica Lewinsky, it was clear that the Clinton Administration's policy toward Iraq lacked credibility.

The causes of the debacle in Iraq are rooted primarily in a series of mistakes by the Clinton Administration. Iraq's latest provocation is a consequence of an aggressive dictator's perception of U.S. weakness. Bill Clinton came into office severely underestimating Saddam. While campaigning, he proclaimed he was not obsessed with Iraq, as if part of the problem with U.S. policy was that President George Bush was personally obsessed. The Clinton Administration initially softened U.S. policy toward Iraq and dropped Bush's insistence that Saddam must be ousted before the United States would agree to lift sanctions against Iraq.

When Iraq failed in an attempt to assassinate former President Bush in April 1993 in Kuwait, the Clinton Administration equivocated and delayed before launching cruise missiles at secret police headquarters in Baghdad in June. This attack was a mere slap on the wrist for such a brazen attempt to assassinate a former U.S. President. The limited size and the symbolic nature of the U.S. attack--25 Tomahawk cruise missiles at an empty building in the middle of the night--probably did little to strengthen U.S. deterrence against Saddam. I would argue that the weak U.S. response probably encouraged Saddam to contemplate further challenges to the United States.

More recently, the Clinton Administration has responded feebly to other Iraqi provocations. Since 1991, Baghdad has repeatedly blocked the efforts of UNSCOM inspectors to certify compliance with Iraq's obligation to dismantle its weapons of mass destruction, but the Clinton Administration did little but to pass the problem off to a listless U.N. Security Council. The Clinton Administration has put Iraq on the back burner while it intervened in strategic backwaters for humanitarian rather than strategic interests--in such places as Bosnia, Haiti, and Somalia. In Somalia, it was following up on Bush Administration policy, but President Clinton greatly expanded that intervention.

The United States also severely neglected its close ally in the region, Turkey. Relations with Turkey are crucial for maintaining support for the Iraqi opposition. The Clinton Administration also failed to provide adequate support for that opposition. Iraqi opposition leaders repeatedly warned the United States in 1996 that the situation in Iraq was deteriorating, but the Administration was asleep at the switch and failed to avert growing tensions between two Kurdish factions that were the major pillars of the Iraqi opposition.

In August 1996, Saddam took advantage of Kurdish infighting and invaded the Kurdish areas. The U.S. reply was another round of pinprick air strikes that accomplished very little. The current standoff between the United States and Iraq is the result of the Clinton Administration's failure to resolve successfully the situation going back to October 1997, when Saddam sought to block U.S. personnel from participating in UNSCOM inspection teams. The Clinton Administration unwisely acquiesced to a questionable plan by Russia's Foreign Minister, Evgeny Primakov--a long-time personal friend of Saddam--to provide Saddam with a face-saving escape from that crisis. Later, the Administration went along with U.N. Secretary General Kofi Annan's plan, which greatly weakened U.S. policy and put the focus of decision-making on the U.N. rather than on Washington.

How can we get out of this trap? Very briefly, allow me to outline three suggestions. One is that the United States should be trying to overthrow Saddam, not just trying to contain him. This implies coming up with a comprehensive long-term and systematic effort to unify the Iraqi opposition, giving them the economic, diplomatic, and possibly military support they may need. It is particularly important to help to unify the Kurds and help them to work more closely with Turkey, our most dependable ally that borders Iraq. The United States should work to cement an alliance between the opposition forces, help them to broadcast appeals on Radio Free Iraq, and help them to lobby for international recognition.

Second, we should be prepared to launch serious military attacks in the next crisis, not just pinprick symbolic attacks that accomplish little. We should go after the bases of Saddam's support: his secret police, the Special Republican Guard, and his various intelligence organizations. These are also the forces he is using to hide his weapons of mass destruction. Third, we should retrieve control of U.S. policy in Iraq from the U.N., where Iraq essentially has veto power because Baghdad has cultivated support from China, Russia, and France.

In conclusion, it makes no sense for the United States to pull its military punches against Saddam in a misguided effort to preserve a U.N. coalition that will not support military action anyway. Rather than subcontract our Iraq policy to the U.N., the United States should seek to protect its national interest through close cooperation with Iraq's immediate neighbors, particularly Turkey, Saudi Arabia, Bahrain, Kuwait, Jordan, and even Iran, if Tehran proves willing. The goal should be to treat the cause and not the symptoms of the Iraqi challenge--which means removing Saddam from power, not just containing him.

-- James A. Phillipsis Director for Administration of The Kathryn and Shelby Cullom Davis International Studies Center at The Heritage Foundation.

By Daryl M. Plunk

Four years ago, North Korea's nuclear weapons development program put the United States eyeball-to-eyeball with that renegade communist regime. In Geneva in October 1994, the Clinton Administration blinked. It signed an agreement with Pyongyang that has showered North Korea with hundreds of millions of U.S. taxpayer dollars' worth of food, fuel, and technical assistance. In return, Pyongyang promised a number of things, including steps toward ending the cold war in Korea.

At that time, The Heritage Foundation and many other institutions and individuals protested that the so-called Agreed Framework deal was fatally flawed. Still, the Clinton Administration touted the deal as a major foreign policy success. The deal needed funding from a skeptical Congress, however. The Administration promoted its policy through tactics at which it excels--intimidation, not of North Korea, but of congressional critics. They were told that if the United States did not fund this process, the North would restart its nuclear weapons program and perhaps trigger war. And that burden would rest on the U.S. Congress, the Administration warned.

In February 1995, an angry Senator John McCain (R-AZ) called Secretary of State Warren Christopher's bluff in this regard. During a formal committee hearing, Senator McCain lamented that if Congress refused to fund the Clinton Administration's North Korea scheme, any resulting tensions would be blamed on Hill Republicans. So, he said, he and his colleagues would wait until the deal's flaws became obvious to all and collapsed under its own weight. He predicted that the Clinton Administration would get the blame when that time came.

I think Senator McCain's prediction has come true, and the agreement is on the verge of collapse. North Korea's nuclear facilities are "frozen," the Clinton Administration stresses, but Pyongyang has not dismantled any of them and, furthermore, has all major components of its nuclear program in its possession. Pyongyang has bomb-grade material hidden from International Atomic Energy Agency inspection and perhaps has built several nuclear weapons and assembled several weapons. The Clinton Administration concedes this.

North Korea explicitly promised in 1994 to resume productive peace talks with South Korea. It has refused to do this. The North's armed incursions into the South continue on a regular basis, sometimes with deadly consequences. Meanwhile, Pyongyang aggressively markets its Scud missile technology to various states, including Iran, Pakistan, and Egypt. Last week's provocative missile shot by North Korea over the skies of Japan was the last straw in the minds of many in Washington, D.C., I believe. North Korea poses a deadly threat to South Korea and, in doing so, poses a grave threat to the 37,000 U.S. troops that are stationed in South Korea. Pyongyang's recent shot across Japan's bow shows it is becoming an expanding regional threat. Its missile sales show that it threatens stability in South Asia and the Middle East.

What has been the Clinton Administration's response? The North has become one of the largest recipients of U.S. taxpayer-funded foreign assistance. Since 1994, the U.S. government has provided humanitarian, fuel, and technical assistance aid to the North, valued at about $262 million. I think the Clinton Administration had hoped this fact would not make it into this presentation, but it did. Much of this aid came in the wake of North Korea's threats to back out of the Framework deal. The North has proved itself extremely skillful at brinkmanship and blackmail. The Clinton Administration, in response, has stooped to concession and appeasement.

The economic, political, and security interests of the United States in Northeast Asia are very high, as I think we would all agree. If the North ever makes good on its threat to turn Seoul into a "sea of flames," the entire region would be destabilized and, of course, many Americans would die.

The Clinton Administration's policies have done little more than paper-over the threat and kick the can down the road. Part of the Framework deal involves offering a multibillion-dollar, light water reactor package to the North, a project that would be funded mainly by South Korea. But, again, Pyongyang has refused to engage in peace talks with the South and, instead, has pressed for maximum concessions from the United States. But this is a futile game. The North's needs are far greater than Washington and Seoul can fulfill; perhaps that is what Pyongyang has concluded as well.

As the North continues its slide toward economic collapse, it can expect only token assistance from the United States and its allies. The structure of the Geneva deal should be changed. For more than a year, we at The Heritage Foundation have called on the Clinton Administration to change the deal and come up with a new package of incentives that would be tied very specifically to steps toward reducing tensions. The Administration has failed to move in that direction. Now Congress is beginning to do that for the Administration.

This brings me to the question of President Clinton's scandal and whether it affects policy. I think it does. The President is not leading on this policy. Congress is acting for him. Last week, amendments were passed in the Senate pressing the Clinton Administration to tie any future aid to North Korean behavior and actions. Will the President's woes continue to affect policy toward North Korea? I think so, because it is a very complicated, volatile situation. In addition, the current policy needs a complete revamping. We see no strong leadership in the White House or in the State Department to get us out of this conundrum.

By Richard D. Fisher, Jr.

Can President Clinton do his job and save foreign policy? Or perhaps worse, is he using foreign policy to save his presidency? I would answer these questions by saying that, since 1996, the Clinton Administration has made some real mistakes. And, in 1998, it certainly did try to use the U.S.-China summit in June to try to bolster sagging domestic fortunes. This is not a headline. All Presidents try to use summits to help their domestic political standing, but it is curious and significant to note that, when the summit was being first planned early this year, it was projected for after the November election. Instead, the summit was moved up to the summer. At the time this decision was made, the Administration was facing the possibility of a summer lawsuit from Paula Jones. There is speculation is that the Administration agreed to move the summit up in order to counter the expected negative publicity of a lawsuit.

The Clinton Administration has made two major mistakes in its China policy. And taking a cue from the Chinese zodiac, I would call 1998 the year of the two blunders. The first blunder, during the course of the summit, was an explicit limitation of U.S. support for Taiwan, which was at variance with all previous U.S. policy on Taiwan. The second blunder is the notion promoted by the Administration that the democratic United States can somehow be a strategic partner of still-communist China.

These blunders can trace their policy route to 1996, when the Clinton White House took direct control of China policy formulation and began a new course. This course was sparked by its fears over the near-possibility of a conflict or war with China during the confrontation over Taiwan in early 1996. In 1995 and 1996, as you'll remember, China launched missiles near Taiwan to protest or oppose what it viewed as independence activism, which could lead to a declaration of independence by Taiwan. China has said this would be cause for war.

At that time, Taiwan's President, Lee Teng-hui, was not campaigning for explicit independence. Taiwan had become a democracy. There was a real debate in Taiwan, and there still is an ongoing debate, over the future of relations with the mainland. As more and more Taiwanese look at the mainland, they do not find the prospect of a forced political union with the mainland very appealing; so it is to be expected that this would be a controversial issue there.

But I fear that in 1996 the Administration drew a flawed lesson on which it has based subsequent policy: that Taiwan was more to blame for the crisis in 1996 and that China subsequently was placated in order to prevent future military confrontations. In 1996, the United States sent two carrier battle groups to deter Chinese military action. But by 1998, U.S. policy toward Taiwan had become the bully on the Taiwan Strait that was having more impact than the targets of the Chinese missiles.

The principal policy change that probably emerged in 1996, but that did not become explicit until the October summit last year, was what has since been called the "Three No's": The United States will not support independence for Taiwan; it will not support a "one-Taiwan, one-China" formulation; and it will not support membership for Taiwan in international organizations for which statehood is a requirement.

These were first stated by a low-level State Department spokesman. But that was not enough. In April, Secretary of State Madeleine Albright stated them again. Still, that was not enough. When President Clinton went to Shanghai during his recent visit to China, there was a staged event so that the President himself could repeat the Three No's. And what did he get for this concession? Any promise not to attack Taiwan? No. The only thing that I can determine the President really gained was some air time in Chinese broadcasting. And while he said many useful things, I don't think his words will have any real lasting impact.

And what did China gain? First, it put the U.S. President on record as not supporting independence for the people of Taiwan. Since the beginning of U.S. relations with China in the Nixon Administration, the United States has been studiously agnostic, avoiding any words that would prejudge the ultimate fate of Taiwan. There was no mention of independence and no advice on unification. All that we said is that we want this process to be resolved peacefully. The Clinton Administration for the first time created a clarification in U.S. policy that denies U.S. support for something on Taiwan; and that "something" is independence. I am not in favor of starting a war in the Taiwan Strait, but why did President Clinton have to betray American principles to satisfy China? Would Thomas Jefferson approve of William Jefferson Clinton's decision not to support the option of self-determination for the people on Taiwan?

The other policy blunder of 1998 is this notion that we can somehow create a strategic partnership with China. When I think of strategic partners, I think of our democratic allies like Japan or Britain, or even a country with which we are not allied but with which we have extensive cooperative arrangements, like Singapore. Does China match any of these?

In military terms, it appears that the Administration hopes that, by engaging the People's Liberation Army (PLA) extensively, someday the PLA will decide to become our friend. I don't think this is going to happen any time soon. In the meantime, we have given the PLA access to high-level technology: attack submarines, stealth fighters, and command-and-control centers. And we have received nothing in terms of equivalent access to the PLA.

I think there is a good chance U.S. and Chinese interests will clash on the Korean Peninsula and in the Taiwan Strait. As the PLA increases its strength and succeeds in modernization, there will be greater temptation to use force, which may cause direct conflict with the United States. Although there is no immediate war-causing crisis on the Taiwan Strait that would confront President Clinton during his current weakened state, I would submit that weakness in his presidency this year probably contributed to his decision to trade high-profile headlines in China for limitations on the extent of U.S. support for Taiwan. This was an awful precedent to set: It was a betrayal of our principles, it was the wrong message to send to a new democracy on Taiwan, and it will force us to intervene more frequently in Taiwan events as both sides ask us to define the term "independence." If there is a future crisis, I think that the Administration will probably make further concessions, perhaps limiting future U.S. arms sales to Taiwan.

In short, while President Clinton indeed purchased some headlines in China this year with his "Three No's" statements, I think he has created much more trouble for the United States in the future.

-- Richard D. Fisher, Jr., is former Director of the Asian Studies Center at The Heritage Foundation.


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