Why IMF Will Never Solve Ukraine’s Economic Problem

Hundreds of protesters have gathered outside the country’s parliament building in Kiev on Dec 23, 2014 to protest the extreme austerity measures as the government plans to reduce the state budget by 10 percent. Up to 2,000 protesters rallied to demand the government not cut social benefits and abolish subsidies and price controls on utility rates. Ukrainian PM Arseniy Yatsenyuk is seeking financial aid from the IMF, World Bank and other financial institutions. Ukraine has already received $9 billion (€7.35 billion), but will need another $15 billion (€12.3 billion) next year. 

Ukraine’s Austerity Measures

Ukraine’s government is in the middle of implementing a set of stringent economic reforms agreed to in April with the International Monetary Fund (IMF) in exchange for a $17 billion bailout.  Kiev’s decision to implement painful austerity measures during its own political turmoil leading to even more instability and crisis.  

Reforms that reduce corruption and cut government spending and subsidies are necessary if Ukraine is ever going to come close to reaching its economic potential. However, with a collapsing economy and an ongoing war, Kiev needs a semblance of stability far more than shock therapy. 

Ukraine is currently in economic free-fall. Despite the economic crisis, the IMF’s loan requires Kiev to enact a series of policy changes, all of which will accelerate the collapse of the economy and decrease the purchasing power of ordinary Ukrainians. Ukraine government should make cutbacks to reduce fiscal deficit. To meet this requirements, Kiev enacted a series of laws raising excise and property taxes, reduced social income support expenditures for retirees and public employees, frozen the Ukraine’s minimum wage, cut public sector wages. 

Furthermore, it also targets the energy sector in which the government has to increase natural gas and heating tariffs for consumers by 56 percent and 40 percent in 2014, and by 20 to 40 percent annually from 2015 to 2017. As gas prices rise dramatically, gas subsidies to end users will be terminated over the next two years. In addition, National Bank of Ukraine has also applied a floating exchange rate for its national currency, the hryvnia, ending its fixed peg to the dollar. Both businesses and consumers have difficulty servicing their dollar-denominated loans. The country’s entire banking system is at risk of wholesale default. 

Why Austerity Program Will Not Help the Situation

The austerity program will not ease the situation in Ukraine. Majority of Ukrainians have opposed the decision. The policy would further alienate the people in Donbass, the restive eastern region currently hosting the worst fighting. If the country will ever be put back together, the people of the east must feel that Kiev takes their concerns into account. Unfortunately, by implementing austerity when industrial output has as of July declined by 29 percent year-on-year in Donetsk and a whopping 56 percent in Luhansk, the government in Kiev provides just the opposite message to the east. 

The Donbass is heavily industrialized. However, the IMF’s mandate that Kiev slash the large energy subsidies provided to its energy-inefficient Soviet-era factories and mines in the Donbass. It results in the region’s economy facing a double whammy from both war and the cutback in financial support. This in turn could raise unemployment in the Donbass, which is not exactly a recipe for promoting reconciliation. 

Austerity measures are part of the package of the Government’s decision taken to resort to the IMF’s aid to avoid the economy’s default. Yet, The Ukrainian government’s decision to deal with the IMF is a mistake that will bring about the country’s economy bleaker in the future. 

A Lot of Bad Examples Around to Look at for Ukraine 

Nevertheless, Ukraine is not the only country which has taken the wrong path overcoming the crisis with IMF’s receipt. A number of repeated histories should have made the Ukrainian government take more precautions in dealing with the IFIs. The debt crisis crippling the Latin American economies and Africa in 1980s and Asian Crisis in 1990s showed that external borrowing is not the key to growth neither the panacea for crisis. 

Like other banking institutions, the World Bank and IMF also seek for profits through giving loans. Interest rates and a number of policy recommendations are imposed potentially meddling in the domestic affairs of a country giving the IFIs opportunities to strengthen its foothold in the countries’ politics and economy. Moreover, the influx of capital in form of loans only creates the countries’ illusion of self-sustained development and encourages further unsustainable debt. 

Since its establishment, the IMF and the World Bank envision aid/external borrowing and investment as the condition for growth. Accompanying such a vision, a government should do a number of “adjustments” or austerity measures such as cutting off public spending or subsidies, privatization of assets, and some regulation reforms to make the country more appealing to investors. 

Many developing countries have undergone this process coming to an endless further economic hardship. The IFIs defender might blame the flaws of domestic policies and corruption done by debtors’ government. However, would neoliberal approach ever be compatible with the non-neoliberal structure having immature society? Moreover, the IFIs did support and were engaged with corrupt and dictator regimes. The institutions did neither suspend the debts nor revising its policies knowing the regimes corrupting the aid. 

 

The fact shows that once a country receives the credit from IMF and World Bank, it has the tendency to depend on them on the following years. More than 70 countries have relied on IMF for 20 or more years; 24 countries have depended on IMF credit for 30 or more years. Consider Kenya and Jamaica as examples. Interestingly, countries that discontinued its relations with IMF and the World Bank, either totally or partially, experienced higher economic growth than that of the countries continue to repay external debt, and won back significant degree of autonomy vis-à-vis the donor countries. Take Singapore as a model. 

Furthermore, the IMF’s bailing out economies create moral hazard both for investors and the debtors signaling IMF will come to rescue for each crisis and therefore resulting in risky behaviors of both by investors and governments.  Ukraine needs all helps it can get to ease their situation, but not the IMF kind of help.

FARC's "Christmas Gift"

Colombia's FARC rebels have announced on December 17, 2014, that it would begin a unilateral ceasefire for an unlimited time starting from Saturday December 20, 2014. The group stated the ceasefire after killed five soldiers in an ambush. The statement was welcomed by the UN and the European Union. However, President Juan Manuel Santos rejected calls for a bilateral truce, warning this would give them the chance to consolidate the group. It is understandable President Santos calls the unilateral truce declaration by FARC as “gift full of thorns” after the FARC rebels kidnapped General Ruben Dario Alzate and two his companions in September  2014 that suspended the negotiations. The rebels then returned the General in November unharmed to revive the talks. The rebels said the truce should become a formal armistice and would only end if they were attacked. 

 The announcement was made in Cuba where Columbian Government and FARC have been holding peace talks aiming to end the conflict since 1960s resulted in 220,000 people killed and 5 million displaced people. If the talk between Columbian Government and FARC is successful, it will motivate other rebels to negotiate with the government, reduce national problems significantly and start to move on for other important development agenda. 

How big is the FARC ?

The FARC is Colombia's largest guerrilla group and one of the world's richest rebel movements, allegedly due in large part to drug-trafficking and other illegal activities. FARC has 8,000 fighters down from 16,000 in 2001, according to Columbian military.  

FARC’s asset itself is just 30 percent in Columbia. While the remaining 70 percent of the assets are held outside Columbia in countries like Venezuela, Costa Rica, Panama, Mexico, Ecuador. Columbian Attorney General’s Office also traced the assets in Holland, Norway, Denmark, Sweden, Germany. Attorney General’s Office calculated the FARC’s annual income from drug trade and other illicit activities to be estimated amounting to $1.1 billion.  

The rebels a decade ago controlled nearly a third of Colombian territory, now mostly operate in remote rural areas or through hit-and-run attacks. Several FARC commanders have been killed or captured in the last few years. But the rebels are not yet defeated and have demonstrated great capacity to adapt.

Rebel associated problems in Columbian National Development

Columbia is a democratic country that has high level of internal violence from insurgencies, politics, and crime rates. The biggest left wing insurgent groups in such as FARC, ELN, and AUC operate in Colombia with big assets. FARC also funded itself with narco-trafficking, although it denies this allegation. Therefore, peace talks initiated by President Santos would include not only the end of conflict but also the eradication of coca crops. Many of the armed forces financed themselves illegally through kidnappings and coca trafficking. 

Prior to the 1980s, the FARC and ELN did not pose serious challenges to national security. Only after the price shocks of commodities occurred did the insurgent groups start to become involved in crimes, mostly for financing. There was a positive correlation between the price commodities shock and the increase of conflicts or attacks as seen by James Robinson. Oendrilla Dube and Juan Vargas in “Commodity Price Shocks and Civil Conflicts: Evidence from Colombia”, also confirmed the positive correlation of coffee price change, labor market outcome, and violence. This correlation was also found in the case of oil (oil and coffee were the top two Colombian exports) but no positive correlation between price commodities and conflicts related to other commodities, such as palm, bananas, and sugar. 

The increasing crime rates reduced Columbia’s growth rate from around 5% annually between 1950-1980, to around 3% annually from 1980-2000. This was directly associated with the crime rates. The explosion of crime was the consequence of rapid expansion of drug trafficking activities and intensification of the armed conflict, fueled by the rents from the drug trade. The increase of criminalities diverts capital and labor to unproductive activities. 

Today’s Colombia is also still challenged with the existence of paramilitary forces. The Urabeños gang, which takes its name from the Uraba region of northwestern Colombia, controls a drug trafficking organization that handles from a third to half of the 300 tons of cocaine shipped to the United States last year, according to the U.S. Drug Enforcement Administration. The gang is causing mayhem in Buenaventura because it is fighting other gangs for control of the city, which is Colombia’s largest Pacific port and a gateway for cocaine shipments to the U.S. The instability in the city also caused forced displacement last year of 19,000 people from the city of Buenaventura. 

The Buenaventura situation is especially alarming because the Colombian and U.S. governments have poured millions of dollars in aid into the city during the last decade to try to develop the port and give the mostly impoverished Afro-Colombian residents economic alternatives to crime.

Kenyatta: At It Again?

Just weeks after the International Criminal Court dropped all charges for crimes-against-humanity against Kenya's President Uhuru Kenyatta, he signed a new national security law that quickly brings his previous charges to mind.  Those charges included murder, rape, persecution, deportation, and other inhumane acts as an "indirect perpetrator" in the violence following Kenya's 2007 elections.

The new national security law was signed today over the objections of human rights groups.  This law will allow police to hold "terror suspects" for up to a year without trial.  It also increases sentences for acts of terror and broadens the government's power to tap phones.

The law also addresses the press, saying that journalists could face several years of imprisonment if their reports "undermine investigations or security operations relating to terrorism" or if they publish pictures of victims without the police's permission.  This infringes on the civil liberties and freedoms of the Kenyan people as guaranteed by Kenya's constitution and international human rights law.  Kenya has ignored statements made by Western governments criticizing the law, though the country's opposition coalition has vowed to challenge the law.

In addition to the charges its president faced for crimes against humanity, Kenya has also been negatively in the news for the actions of its counterterrorism police.  Coming merely days after the charges against Kenyatta were dropped, Kenyan police have admitted to assassinating nearly 500 terrorism suspects as part of an extrajudicial killing program.  This program was allegedly supported by intelligence from Israel and the United Kingdom.  Officers from the Anti-Terrorism Police Unit have said that police assassinated these terrorist suspects on government orders.  One officer claimed to have killed over 50 people since he was employed.  The officers have found that Kenya's weak judicial system fails to produce enough evidence to prosecute suspects, so assassination is the only option.  These claims have been denied by Kenyatta and the spokesman for the National Police has refused to comment.  Israel and the UK have denied providing intelligence, equipment, and training to Kenyan officers on how to eliminate suspects.

The claims of assassinations have some evidential founding, as well as those of third-party involvement, despite the denial of all parties supposedly involved.  It seems apparent that Kenya, at least, is willing to continue pursuing less legal routes in an attempt to combat its terrorism problem.  The new law confirms this, assassination program aside.  How effective this strategy will be in tackling Al-Shabab remains to be seen.

What's the Pope Got to Do with It?

The role of the pope of the Catholic Church in international affairs has changed drastically over the course of the position's history.  The role's prominence began to develop in the 4th century.  It's international relations began almost immediately.  The establishment of a Holy Roman Emperor and its empire strengthened the pope's influence.  The territory known as the Papal States were governed by the pope until 1870 when it was annexed by Italy.  Popes have been known to use their skills as politicians and generals to increase their influence on the international stage.

Today, there are about 1.2 billion Catholics worldwide.  This means that the pope still plays an important role in international relations.

Pope Francis the current pope.  He governs over Vatican City and advises the global Catholic population.  As a head of state, he enjoys privileges like diplomatic immunity, and the Holy See enjoys diplomatic relations with many states and member or observer status in several international organizations.

Francis is known for his humble and genuine nature.  He has appealed to Catholics all over the world, particularly the youth, in a manner that harkens back to John Paul II.  His role in international affairs, however, has been highlighted recently.

Early this month, Pope Francis traveled to Turkey in an attempt to build bridges between Christianity and Islam.  Notably, Turkish President Erdogan discussed Islamic State (IS) with Francis, demonstrating the pope's ability to draw attention to an important topic.  Erdogan made it clear that he blamed the rise of Islamophobia in the West as one of the main factors allowing the rise of IS.  Francis spoke of poverty as a major driver for radicalization.  He emphasized that Christians and Muslims must work together to defeat the violence of extremists.    He also stated that it would be "wonderful" if all the Muslim leaders of the world - political, religious, and academic - clearly condemned the violence being done in the name of Islam.  This would help the majority of Muslims offended by the stereotype of Islam and terrorism.  It would also go far in easing tensions between Christian and Muslim populations.

Soon after his visit to Turkey, Francis made a statement denouncing modern slavery as a "crime against humanity" that is worsening every day.  He spoke to the extent of the problem and its hidden nature.  He gathered a group of faith leaders - representing Catholic, Anglican, and Orthodox Christianity, Judaism, Shiite and Sunni Islam, Buddhism, and Hinduism - at the Vatican to sign a declaration pledging to "inspire spiritual and practical action by all global faiths and people of good will everywhere" to eradicate slavery by 2020.  This issue is one of global concern with an estimated 35.8 million people enslaved worldwide, including developed nations.

A common theme in Francis's work is building bridges and easing tensions between groups.  He took a big step towards the resolution of a millennium old division in early December when he signed, together with Orthodox leader Patriarch Bartholomew I, a declaration committing to unity between the two churches.

But Francis takes this drive for conflict resolution further than church affairs.  Pope Francis has advocated for normalized relations between the US and Cuba for some time.  Last summer, Francis wrote a letter making a personal plea to President Obama on this topic.  Indeed, when the two had met in March, they discussed the issue.  The Vatican also hosted talks between US and Cuban delegations in October.  President Obama acknowledged the role of the pope in his announcement of the US policy shift on Cuba saying "I want to thank His Holiness, Pope Francis, whose moral example shows us the importance of pursuing the world as it should be, rather than simply settling for the world as it is."  Francis does indeed appear intent on the pursuit of a better world, and his involvement in world affairs will undoubtedly increase as he stretches his influence to achieve it.

Standing with Australia

A hostage standoff in Sydney, Australia this past week has left the Western world reeling.


On Monday morning, Iranian-born Man Haron Monis stormed a Lindt chocolate café, taking 17 people inside hostage and forcing them to raise an Arabic-script Islamist flag in the window. Media captured images of terrified hostages standing in the café windows with their hands pressed against the glass. The crisis lasted for more than 16 hours, during which 2 hostages were shot and several more were injured. The standoff ended around 2:30 in the morning, when police used stun grenades and finally shot the gunman.

The incident put Sydney's business district in gridlock for hours. Traffic stalled. The Sydney opera house cancelled its performances for the next two days. Snipers, security forces, cameramen and reporters clogged the area surrounding the cafe.

Throughout the day, several hostages were able to escape. Others were not so lucky.

The Guardian

US and Australian authorities have concluded that Monis was not affiliated with ISIS. However, the incident illustrates the still great power of even lone radicalized militants. It also highlights holes in Australia's national security: the gunman, despite a history of mental and behavioral instability and demonstrated radicalization, was not on Australia's national terror watchlist. He had been out on bail for multiple sexual assault charges and conviction in the murder of his ex-wife.

The two killed are being hailed as heroes. Café manager Tori Johnson tried to wrestle a gun away from Monis as he dozed off. He paid with his life. Lawyer Katrina Dawson also lost her life as she attempted to shield a pregnant friend from gunfire. As Australia mourns, it celebrates the lives and heroic deeds of these exemplary citizens.

NBC News

  Too often we focus on the perpetrators of horrific crimes, not emphasizing enough the heroic deeds of their victims. For this reason Monis's image does not appear in this post. For us in the US, the greatest thing we can do is stand together with our friends in Australia, and remember the examples set by these common heroes.

Implications of Cuba Success for Iranian Talks

The US relationship with Cuba is one of both countries' longest standing antagonisms.  Cuba has been one of the epicenters of concerns about American security in the western hemisphere since the failed 1961 Bay of Pigs invasion.  The once-powerful Cuban military has been on the other side of quiet conflicts from American "advisors" and allies from Nicaragua to Angola.  Most famously of course, the Soviet Union's attempt to install nuclear missiles in Cuba was perhaps the closest the US and USSR ever came to World War 3.  Now, though, Cuba is a political and economic backwater.  While a few Americans and many Cubans stand to become much more wealthy through renewed relations, the main benefit of normalized relations is likely that American politics will be able to forget Cuba.  Sure, Havana will blossom back into a go-to destination for tan lines and daiquiris safe from the cartels, future baseball stars will be able to sail to Florida much more comfortably, and bartenders across the US will likely be frustrated by a newfound appreciation of Havana Club and properly made Mojitos...but never again will Cubans and Cuban issues dominate sectors of American politics the way they have for 50 years.

This renewal of relations could be a sign of things to come in negotiations with Iran.  If President Obama and Secretary Kerry were able to negotiate a renewal of relations with Cuba, they may be able to get a meaningful deal with Iran.  They'd piss some Republicans off in the process, of course, but the Obama administration is a lame duck and may not care.  If the message is spun right, being able to conclude a deal with Cuba AND Iran could be public relations gold come 2016 and Republican intransigence on the issue would be a strong call to Democratic voters.

Unlike Cuba, however, a deal with Iran wouldn't just be an exercise in ditching the stale remnants of a Cold War policy that should never have been continued past 1992 except that Cubans are the swing vote in a critical swing state.  Iran is now what Cuba was 40 years ago: an antagonist on the world stage, a potential nuclear threat, and the shadowy funding and advisors behind some of the non-state actors the US is engaged in quiet wars against.  Iran is also a much larger country, with the potential to be a major economic force in the Middle East, which despite various historical antagonisms shares a number of natural foreign policy priorities with America.

Iran has the potential to be a critical US partner in a number of its foreign policy priorities for the Middle East and even Europe, especially if their rivalry with Saudi Arabia can be quietly managed.  They could supply gas and oil to Europe through a pipeline across Turkey (the cancellation of South Stream reopens the Nabucco question), they could provide a counterweight to Islamic extremists across the region, and put pressure on Hezbollah and the Assad government to tone down human rights abuses.  Considering the compounding economic hardships that Iran is facing, and the now-proven boldness of the Obama administration thawing frozen relationships, concluding a meaningful deal with Iran is as likely now as it ever has been (well, ever since things went bad anyway).  This would be a major advance for US interests in the region and should be considered a top tier priority.

Picking our Battles

The difference between us and North Korea? Let's start with handling humor.

The US is no stranger to offensive comedy whether it's racial, political, satire, or something else. These days, it's hard to crack any kind of joke without offending someone. But freedom of speech is a beautiful thing... one that makes us great.

The US itself is subject to all kinds of jokes on the international level. Racial and political issues are probably the top 2. However, we're proud of our mixed heritage. Having a rich social fabric, part of what makes us a target, is also what makes us strong. We know how to roll with the punches.

Consider, for example, this horrifying poster I spotted in Hong Kong over the summer. The rather literal title translates to "Find Ghost, Do Chief Executive!" This horror-comedy features a double-entendre as "ghost" is also a racist Chinese term for foreigners. While the show itself parodies Hong Kong's own politics, there's no denying who the folks on the front cover are. A description of the show in English (or something like English) can be found here.

The difference is, we're not about to hack this Hong Kong production company over a racist depiction of some of our political leaders, including our president. We believe in freedom of speech. And we believe everyone should have it.

That's not to say that productions like this aren't offensive. They're perturbing to me on multiple levels. But I'm not about to call on my government to target those responsible. Even if I did, a parody is not nearly enough of a security concern to warrant such an immense response.

Now, consider the leadership of North Korea, who are so upset by the movie parodying Kim Jong Un that they hacked Sony. The hackers have dumped massive amounts of private data online including scripts, employee PII, salary figures and more. Apparently, a parody movie constitutes a national security-level response. You could call this an overreaction.

CNN

Our government has vowed a response to this hack. If North Korea can hack a private company, doubtless they could potentially pose a threat to our government's cybersecurity. Still, the core national security issue is the hacking, not the joke. We know when to pick our battles, too.

Normalizing Cuban Relations is Good News US Law Enforcement and Intelligence Communities

Normalizing relations with Cuba will pay dividends for US domestic security and law enforcement.  Though the international politics has gotten the majority of the attention throughout the decades-long rift, domestic security is what stands to take the biggest leap forward for the US if the relations go well.

The US and Cuba technically have an extradition treaty on the books dating from 1926.  But it hasn’t been enforced since the US officially cut diplomatic ties in 1961.  The severed diplomatic relations were preceded by a series of Cuban nationalizations and American economic retaliations in 1959 and 1960 led up to a complete US embargo on the island.

Since the 1960s Cuba has been the destination of choice for many criminals on the run.  Fugitives have fled there by the dozens trying to escape the long arm of the US justice system.  The FBI lists 70 wanted individuals that are suspected to be living in Cuba, and many of them are on the Most Wanted list. 

Cuba has historically offered asylum to them, simply to give the US a black eye.  Most individuals have been allowed to stay indefinitely and relatively unmolested, at least until they give the Castro Regime a reason to reverse that decision.

While the FBI may have hope of apprehending many of the dozens of fugitives, there is no doubt that some will see extradition coming the pike and try to slip out of the country before agreements are settled and laws are enforced.  US law enforcement will have to be diligent to catch many of them as they flee the country or perhaps as they enter others. 

Some of these fugitives are more important than others.  Assata Shakur, a convicted cop-killer and domestic terrorist for whom the FBI offers a $1 million reward (and the Attorney General of New Jersey has matched that for a total of $2 million), has been living in Cuba under political asylum since 1984.  The FBI also offers a $1 million reward for or Victor Manuel Gerena, a former Wells Fargo employee who escaped with $7 million in cash during an armed robbery, also suspected of living in Cuba.

The thawing relations have already resulted in two important events, the release of as development worker and a prisoner exchange between the two nations.  On December 17 Alan Gross, a USAID employee jailed for accusations of spying, was released on humanitarian grounds.  This was a watershed moment provided the US with good faith about the prisoner exchange on the same day. 

The US released the “Cuban Five”, a group of five Cuban intelligence officers arrested in 1998 and convicted of conspiracy to commit espionage and conspiracy to commit murder.  In return Cuba released an unnamed Cuban spy who spent nearly 20 years in prison after being convicted of working for the US.  Suspicions are that this unnamed spy was Rolando “Roly” Sarraff Trujillo, who was a Cuban cryptographer and double agent for the CIA.

These are legitimately large steps on the part of both the US and Cuba.  President Obama should be given credit for taking steps that no president did for half a century.  And Raúl Castro should get credit for being willing to break out of the mold that his brother cultivated for 50 years.  The FBI and other law enforcement and intelligence agencies are some of many, hoping to benefit the new momentum in improving the US-Cuba relationship.