Non-State Actors and the Future of Military Power

I found a very interesting paper on the future of US military (ground) power by Thomas Donnelly in the Small Wars Journal through Tom Barnett’s blog. Like all SWJ papers it is relatively short (3-5 pages) and it’s well worth reading (one interesting bit: The US Military as a fighting force for use abroad didn’t really exist until WW1, before that it was more tasked with protecting people in the frontiers, etc.). What I found particularly interesting though was the following analysis of the role of the military in fighting ‘extremism’ and/or ‘terrorism’ (of some forms). The idea that groups like Hezbollah are turning into small “privatized” armies and how to countervail them is very interesting:

Even less persuasive is the idea that, because military power is not the only requirement for success, that we won’t need sufficient military power. Or that, because the enemy won’t mass forces the way the Soviets used to, that there won’t be significant “battles.” We’re not fighting a condition called “extremism,” we’re fighting a series of quite distinct enemies motivated by an extremist ideology and a vicious version of a faith that does not much distinguish between the personal and political, a backwards-looking travesty of Islam that not only elevates God’s law above man’s law but in fact finds the vary notion of man-made law to be illegitimate and blasphemous. Thus, Clausewitz still rules: these wars are politics by other means.

Consider the case of Hezbollah in southern Lebanon (read either the brief section on the 2006 war with Israel in Ground Truth or, for a more thorough and recent analysis, The 2006 Lebanon Campaign and the Future of Warfare by Steve Biddle and Jeffrey Friedman). The organizations are wrongly described as “non-state actors;” they are proto-states, or mini-states, but they are clearly entities that evince state-like behavior. And as they become moreso, their military behavior will become more conventional. We had better start counting and understanding Hezbollah-style “brigades.” The true answer to the irregular-verus-conventional argument is “both.”

Extreme Signs of Global Economic Readjustment

The volatility in Oil, Food, Metal, and Transportation Prices is astounding these days, this paragraph in a Washington Post article really hit that point home:

China has also trimmed the importation of other materials that have fueled its spectacular run of growth. [Charles Bradford, metals analyst at Soleil Securities] noted that ocean freight rates for iron ore from Brazil to China are down to $12 per ton today from about $108 last May.

The Financial Crisis and Human Capital Allocation

Here’s an excellent article by Fareed Zakaria on why the financial crisis also presents a huge opportunity to clean up some of the problems of the political, financial, and economic system of the last decade(s) and how the new administration has (available) the brain power to effect this change:

Volcker has also argued that the highly complex financial system was not nearly as stable as people believed and that far-reaching efforts were needed to regulate and stabilize it. Now these issues will get attention at the highest level. The fear on Wall Street is that a Democratic administration would overregulate. But look at who is advising Barack Obama—Buffett, Volcker, former Treasury secretaries Robert Rubin and Larry Summers. It is more likely that what will come from their efforts will be a better-regulated financial system that, while producing less-extravagant profits, will be more stable and secure.

What I personally find really interesting is his succinct summary of something I have heard over and over in the last few weeks – How the inflated financial industry caused a misallocation of talent into the financial sector:

The financial industry itself is likely to shrink, and that’s not a bad thing, either. It has ballooned dramatically in size. Curry points out that “30 percent of S&P 500 profits last year were earned by financial firms, and U.S. consumers were spending $800 billion more than they earned every year. As a result, most of our top math Ph.D.s were being pulled into nonproductive financial engineering instead of biotech research and fuel technology. Capital expenditures went into retail construction instead of critical infrastructure.” The crisis will stop the misallocation of human and financial resources and redirect them in more-productive ways. If some of the smart people now on Wall Street end up building better models of energy usage and efficiency, that would be a net gain for the economy.

Esther Duflo recently wrote about this for VoxEU and two years ago I read an excellent paper on the incentives for productive and unproductive economic behavior by William Baumol that I cannot recommend strongly enough:

[The] allocation between productive activities such as innovation and largely unproductive activities such as rent seeking and organized crime. This allocation is heavily influenced by the relative payoffs society offers to such activities. This implies that policy can influence the allocation of entrepreneurship more effectively than it can influence its supply.

More on the Rising Dollar

I recently posted on how increasingly broad deposit insurance might be one reason for the rising dollar and wanted to post some more on this after seeing the following referenced by Tom Barnett from an Economist article I read a while ago (Btw, the Barnett article is really interesting if you’re following the whole ‘Post American Century’ debate):

[Kristin Forbes] found that a lack of financial development at home makes foreigners keener to invest in America. What attracts them is the size, liquidity, efficiency and transparency of its financial markets compared with what is on offer in their domestic markets. This finding adds weight to theories which explain global imbalances as a consequence of slow financial progress. In this view, poor countries save hard and buy foreign securities because of a dearth of good options at home.

Capital Controls?

Capital Controls (i.e. government regulation on financial flows in and out of the country) are a complex topic that I’ve been meaning to learn more about for a while (and will suspend judgment on for now). I haven’t had the chance to do that yet (and probably won’t for a while) but I did see the following in Paul Krugman’s column on Malaysia’s response to the Asian financial crisis:

The scope of global “contagion”–the rapid spread of the crisis to countries with no real economic links to the original victim–convinced me that IMF critics such as Jeffrey Sachs were right in insisting that this was less a matter of economic fundamentals than it was a case of self-fulfilling prophecy, of market panic that, by causing a collapse of the real economy, ends up validating itself. But I also concluded that the threat of further capital flight would prevent Asian economies from simply reflating, that is, increasing public spending and cutting interest rates to get their economies growing again. And so I found myself advocating temporary restrictions on the ability of investors to pull money out of crisis economies–a curfew, if you like, on capital flight–as part of a recovery strategy.

Krugman (in 1999 at least) seems like a cautious supporter of Capital Controls:

Until the Malaysian experiment, the prevailing view among pundits was that even if financial crises were driven by self-justifying panic, there was nothing governments could do to curb that panic except to reschedule bank debts–part, but only part, of the pool of potential flight capital–and otherwise try to restore confidence by making a conspicuous display of virtue. Austerity and reform were the watchwords. The alternative–preventing capital flight directly, and thereby gaining a breathing space–was supposed to be completely impossible, with any attempt a sure recipe for disaster. Now we know better. Capital controls are not necessarily the answer for every country that experiences a financial crisis; sometimes confidence can be restored without the need for coercive measures, and even when calming words fail, “burden sharing” by banks and other lenders will often be enough. But it would now be foolish to rule out controls as a measure of last resort.

Dani Rodrik seems to be a more vocal supporter, as witnessed by this piece in the FT and his post on Nonsensical Arguments Against Capital Controls. Finally, for those who want to learn more is an empirical study on the Malaysian situation by Rodrik and Kaplan showing that Capital Controls were indeed effective there.