Archive for March, 2011
The question mark in the title is not there for Orwellian irony, but simply to express my own genuine confusion about this contradictory war. After all, had Gaddafi’s army had a free hand in Benghazi, who doubts that it would have slaughtered thousands? Does anybody think this ‘leader’ is anything other than a rogue, in Robert Fisk’s words ‘completely bonkers, flaky, a crackpot on the level of Ahmadinejad of Iran and Lieberman of Israel’.
Nevertheless, however crackpot and dangerous Gaddafi may be, there are some compelling reasons for opposing this war—or at least for treating the ‘coalition’s’ stated aims with the utmost scepticism. First, there is the sheer hypocrisy of the US, Britain and France (plus a few hangers-on) speaking of ‘protecting civilians’. In the past two decades, hundreds of thousands and possibly a million civilians have died as a result of the imposition of no-fly zones and/or outright invasion to secure western interests, Iraq and Afghanistan being the most obvious examples. Did anybody call for a no-fly zone in Gaza when the Israelis were using white phosphorous bombs against the Palestinians? At the moment, civilians are dying daily in Yemen and Bahrain, in the latter using military equipment from the Saudi monarchy supplied by the coalition. That any Westrern politician could publicly back the war without pointing out this contradiction is itself an assault on the humanitarian values we purport to uphold.
Next are the practical arguments, already amply covered in the press. What exactly is the aim of this operation? Clearly it cannot be merely to ‘protect civilians’ since, as long as Gaddafi remains in power, opposition civilians will remain at risk. So either the country must be permanently divided—which nobody either in Libya or the West wants—or else Gaddafi must be taken out. Despite repeated denials, that was obviously the US intent in hitting his bunker.  But it is doubtful that the Libyan leader, having gathered a human shield to protect it, was anywhere near when the Americans struck.
Given the size of the country, even the most sophisticated aerial intelligence cannot be sure of his whereabouts. Large numbers of ‘boots of the ground’ are necessary for this kind of work. As much as the coalition would like to see it happen, it seems unlikely that the Libyan opposition can quickly capture Tripoli to achieve this end given that, even in the wake of the French air strike, they have been unable to push loyalist forces fully out of nearby Adjabiya. With the exception of some defecting units of Gaddafi’s army, the opposition has little military training. In sum, one can expect the dirty work to be done by a battalion or two of coalition ‘special forces’ operating under a suitable PR guise.
Let’s assume for convenience that Gaddafi is killed quickly (which would be advantageous for all concerned). As Patrick Cockburn argues, what then? In the absence of a politically coherent opposition with a wide popular base—which in a largely tribal country is difficult to form even under the most favourable conditions—-the coalition will end up occupying Libya to ‘maintain stability’, just as has been the case in Iraq and Afghanistan. Don’t expect the coalition to allow the country to spiral downwards into Somali-style anarchy, not where oil and a strategic geographical position are at stake.
To paraphrase Cockburn, Yasmin Alibhia-Brown, Robert Fisk and other journalists who know the region, it will not take long for the coalition’s Libyan operation to be seen across the Middle East as hypocritical and self-serving, and resisted as such.
However circumspect Mervyn King may have been about raising interest rates in the Bank of England’s (BoE) quarterly inflation report issued in February, it is clear that the City wants him to do so. Indeed, judging from the fact that 12-month interest rate futures are now 1.4%, it is generally thought that there will be three to four quarter-point hikes over the next twelve months, while over the coming two years the rise may be twice that figure. One must ask, first of all, is such a rise justified by inflation; and secondly, if not, what damage will raising UK interest rates do?
The proximate cause of the problem is that the Retail Price Index (RPI) has jumped to just over 5% in the UK, mainly reflecting rising world food and energy prices, but also the effect of a sterling devaluation of over 20% in 2008 working its way through the economy as well as January’s VAT rise. Even the Consumer Price Index (CPI), which strips out housing costs, is rising at a rate of 4%, twice the BoE’s 2% target.
Of course, stripping out food and energy, core inflation is well below the BoE’s target, but inflation hawks would argue that several other factors must be taken into consideration. First, inflation is rising not just in the UK but in the US and the core Eurozone countries such as Germany and France, in part reflecting strong inflationary pressures in countries such as China and Brazil. Secondly, UK firms may be raising prices to recoup the profits lost during the credit squeeze, or even in anticipation of lower future profits. Finally, the fact that the recession has pulled down UK trend growth means that the weight of the structural deficit is all the greater; ie, a return to (lower) trend growth would leave a larger proportional gap between public spending and receipts than would have been the case before the recession. On this view, the larger the structural deficit, the higher are domestic inflationary expectations.
The counter-argument goes roughly as follows. First of all, the main domestic culprits—devaluation and the VAT rise—are once-and-for-all events, so their inflationary impact can be expected to decline over time. Secondly, with regard to the key imported components, mainly food and energy, it is not so much a case of gradual price inflation; rather, these prices have exhibited strong fluctuations. Energy prices peaked in 2008, then fell and have now risen again; there is every reason to believe that they will fall again. And even if imported inflation continues to rise, raising domestic interest rates will not seriously arrest this rise. Thirdly, there is no sign of wage inflation in the UK economy—indeed, with unemployment at 2.5 million and rising, real wages are falling. Moreover, with the bulk of government spending cuts still in the pipeline, unemployment will rise (and real wages fall) further. This being the case, ‘inflationary expectations’ are groundless. As one academic colleague put it, ‘there has been no Phillips curve [expectations augmented or otherwise] in the UK for a generation’.
Little wonder then that Mervyn King is being circumspect about raising interest rates when the prospects for UK growth are so poor and their impact on inflation is likely to be negligible. Nevertheless, it is equally clear that George Osborne wants higher rates and that the MPC, which has been dovish on the matter, is now split and edging towards hawkishness. Such hawkishness will come at a cost. In the words of one commentator:
‘charts in the Inflation Report suggest the Bank now believes the UK economy must grow by about 0.25 percentage points less than it thought in November to avoid sparking inflation. That is a loss to economic output which accumulates by roughly an additional £4bn every year, making fiscal consolidation even more difficult.’
Indeed, such a loss would come on top of the cuts. A recent report by the IMF suggests that, even if interest rates remain near zero, public sector cuts equivalent to 1.5% of GDP per annum over the next four years will subtract an equivalent amount from growth, or about £20bn every year.
According to the IFS ‘green budget’, between 2010 and 2015, the UK is forecast to have the third largest reduction (behind Ireland and Iceland) in the share of government borrowing in national income among 29 high-income countries. As Martin Wolf has noted, using the OBR’s latest figures, the implicit (compound) rate of growth of GDP between 2007 and 2015 is just 1.2% per annum. And if interest rates rise in response to a perceived inflationary threat, the growth rate will be even less.
In a word, Britain under the Tory-led government faces years of not merely stagnation, but quite possibly of something worse: stagflation. Perhaps Monsieur Trichet at the ECB should be pondering the lesson for the Eurozone.
*diagram source: N Cohen, ‘King denies interest rate rise certainty’ FT, 16 Feb. 2011
1 In private correspondence with Martin Hoskins.
2 David Blanchflower is more optimistic and believes the MPC will remain dovish; see http://www.newstatesman.com/blogs/david-blanchflower/2011/02/mervyn-king-growth-inflation
3 See C Giles, ‘Slower growth seen as inflation buster’, FT, 16 Feb 2011; http://www.ft.com/cms/s/0/3279a6ee-3a0c-11e0-a441-00144feabdc0.html#axzz1EDbJnmWK
4 See Duncan Weldon ‘The danger of spending cuts: some advice from the IMF’; http://duncanseconomicblog.wordpress.com/2011/02/15/the-dangers-of-spending-cuts-some-advice-from-the-imf/
5 See http://www.ifs.org.uk/publications/5460.
6 See M Wolf, ‘Britain’s experiment in austerity’ FT, 8 Feb 2011; http://www.ft.com/cms/s/0/5e5a6d1e-33c9-11e0b1ed-00144feabdc0.html#axzz1EDbJnmWK