Thursday, April 9, 2009

The G-20 and the End of Ideology: From Washington to London to New York

The G-20 and the End of Ideology: From Washington to London to New York. By Daniel Kaufmann
The Brookings Institution, Apr 09, 2009

The Summit of the G-20 heads of states had just come to a conclusion in London last Thursday, April 2, having reached agreement on a joint communiqué. The U.K. Prime Minister, Gordon Brown started his major media briefing announcing that the Washington Consensus has been declared dead, and suggesting the dawn of a new consensus era—akin to a London Consensus.

Without belittling some concrete achievements at this London Summit, beyond expectations in fact, there is always a significant dose of political rhetoric, such as in this case declaring the Washington Consensus dead, and the advent of a new paradigm.

In actuality, the most tangible result of the London Summit is the empowerment of the IMF as a global financial supervisor, stabilizer, and aid provider, through a revamped mandate and a vastly larger resource base. There is a tinge of irony in this, since historically the IMF and the U.S. Treasury Department were inextricably linked to the Washington Consensus.

A counter-argument to this apparent paradox would point to the expected shift in internal governance and in the menu of prescriptions (if there are any left…) at the IMF. This line of thinking would argue that such changes would be expected to distance the future “revamped” IMF from the main “Washington Consensus” mantra of combining prudent fiscal and monetary policies with liberalized markets.

Yet there is little doubt that in the coming years one can expect a move toward broadened voice and representation by governments of powerful emerging economies within the IMF, so to redress the current over-representation of (mostly) Europe. The head of the IMF will be selected according to merit and not nationality. Its ability to assess and warn prior to a large scale financial crisis would need to dramatically improve. Such efficiency and governance reforms are likely to result in some changes in how the IMF operates. An inkling of this is already in the offing through the recommendations of the Trevor Manuel Commission.

But other than abandoning orthodox dogma and embracing more pragmatism, it would be a mistake to expect a dramatic substantive shift in terms of what works for an economy, and what does not—particularly once the global economy steadies. After all, the IMF will still reflect the collective (economy-) weighted will of its shareholders. Rather than a mirror of a G-1, G-2 or G-7, its mantra may move closer to some weighted average of the G-20.

The End of Ideology

On economic matters, the world at large, proxied by the G-20, does not currently have a real counter-ideology to the Washington Consensus. Rather, the process leading to the two recent G-20 Summits, and a close reading of the agreements just reached in London, suggests the end of ideology in the global economy arena, and the advent of pragmatism instead. Notwithstanding political expedient grandstanding, the end of ideology is taking place in the economic policy-making approaches within the main individual countries in the G-20 as well as in the G-20, collectively.

Take the fiscal and monetary policies in the U.S. and the U.K. For the short term, they have vastly deviated from the strictly conservative neoclassical and monetarist mantra, and are squarely in a very Keynesian corner of the spectrum. Not too far are Japan and China. All four differ from Germany and France, who have taken a more conservative fiscal stance, although even they have engaged in a non-trivial fiscal expansion. Virtually without exception around large countries, Keynesian fiscal expansion is under implementation in different degrees.

Yet once the global economy is clearly in a recovery path, expect the mantra to turn quickly to fiscal and monetary conservatism. This will most notably be evident in the U.S. in the medium term, given the country’s onerous debt burden and the recognition that its historical dis-savings and lax past fiscal policies contributed to the crisis. No other country is likely to take issue with such a medium-term conservative turn in U.S. economic policy-making.

The risk is in the reverse: that some countries may go too far in mimicking the U.S. in its medium-term conservatism. This is a risk because the global macro-economic structural imbalances that were a determinant of the crisis still loom large and remain unaddressed globally. The U.S. and the U.K. need to move away from their status as a large financial deficit country, while the large financial surplus countries (such as Germany and China) need to move toward overall financial balance (at the national level, including the current account). So the fiscal and monetary policies of countries such as Germany and China should not be as tight. Addressing such structural imbalance challenges will require political leadership and global coordination. It is not a matter of ideology.

On trade policy, commitments to conduct global trade devoid of protectionism were already made during the Washington G-20 Summit last November. Those commitments were consistent with the old Washington Consensus. Yet the promises were not honored, even if the protectionist “damage” over the past few months was not large. In London last week, while proclaiming the death of the Washington Consensus, the G-20 leaders restated their commitments to shy away from protectionism and extolled freer global trade. In practice, we may expect to see some creeping (but not fatal) low-grade protectionism, and continuing delays in concluding the Doha Round.

On financial regulation, as compared with the U.S. and the U.K., Europe has been pressing for more of a mandate to be given to global regulatory institutions, and also for more regulatory intervention at the country level. But in spite of the expansion in representation in the Financial Stability Forum, and its renaming as the Financial Stability Board, and in spite of the renewed mandate of the IMF, these are not becoming global regulatory institutions, and there are no others in the offing.

Further, the U.S., through the recently unveiled Geithner regulatory reform blueprint, has sent a clear message of financial regulation reform convergence to Europe (and beyond). There is consensus that the laissez-faire era of financial sector regulation is over. As an interesting aside, in the economic development field it was accepted wisdom long ago that the systemic characteristics of the financial sector set it apart from the enterprise sector, and thus justified some regulation.

The pending questions and debates on financial regulation are more in terms of crucial details, mostly devoid of ideology: how best to attain an improved regulatory system with proper disclosure, oversight and supervision? What is the proper balance between transparency and disclosure-related measures, on the one hand, and regulatory control by fiat, on the other? How to regulate across financial institutions, products and jurisdictions in a manner that avoids perverse incentives and a race to the bottom?

In terms of the pending bank clean-up and restructuring, the G-20 London communiqué is rather circumspect. But the evidence is already clearly pointing to a major new role for government intervention and ownership, albeit temporary. Paradoxically, this major deviation from the Washington Consensus model, at least in the short term, is taking place in a particularly pronounced fashion in the Anglo-Saxon countries and preceded the London Summit.

It was particularly telling that the most contentious issue at the G-20 Summit last Thursday in London had nothing to do with any overarching ideological mantra (or with one of the top priorities, for that matter): the closing down of tax havens and publishing a list of offending jurisdictions. This issue almost derailed the overall G-20 accord. At the last instance, it was “solved” by somehow ensuring that no jurisdiction linked to any G-20 member stayed on the list of offenders (Jersey and the Isle of Man have not been in the latest list, while Hong Kong and Macao were dropped on Thursday evening…).

Toward a New York Consensus?

The expectation is that the G-20 will meet again in the fall for a summit in New York. By then there may be further consensus on some of the pending issues, such as regulatory reform and the approach to clean-up the banks, although countries will tailor their actions to their needs. Given the track record of some aid donors, the pledges to help the poorest and most afflicted countries will need monitoring, and actual progress on trade policy will also require close scrutiny and, where needed, recourse.

At the same time, two large issues that have remained unaddressed will need particular attention. Neither is ideologically laden, rather they are both politically sensitive. First, tackling the challenge of macro-economic structural imbalances alluded to above. And second, beginning to put in place at the national level, priority governance reform measures that mitigate future prospects of regulatory (and state) capture and corruption. Such capture and legal corruption played an important role in leading to the financial crisis, and instituting proper safeguards, transparency reforms and incentives against such capture will be important to restore trust and attain institutional resilience. And for this there are also useful lessons that can be drawn from well governed countries outside the G-20.

It would be fitting that the very site of much of the capture and legal corruption that took place prior to the crisis becomes the venue for a “New York Consensus.”

The history of arms 'control' isn't good

Naïveté Invites Aggression. By David Lewis Schaefer
The history of arms 'control' isn't good.
WSJ, Apr 09, 2009

In response to North Korea's rocket launch, President Barack Obama has committed the U.S. to reducing our supply of nuclear weapons, urged the passage of a ban on nuclear weapons testing, and through Secretary of Defense Robert Gates, proposed scaling back our missile-defense program. In short, Mr. Obama apparently believes that the chief lesson to be learned from Pyongyang's missile launch is the need for more arms-control initiatives.

As a means of reducing the dangers of nuclear proliferation and nuclear war, this makes no sense. Once a country passes a minimal threshold, there is no reason to suppose that increasing its nuclear arsenal heightens the likelihood of its use. The only means of deterring rogue states from using (or more likely, threatening to use) nuclear weapons once they have acquired them are first, the capacity to threaten a much more massive response, and second, an effective program of missile defense.

Reducing our nuclear arsenal only gives outlaw states (including China) the incentive to increase theirs, to try to rival ours. And eliminating nuclear-weapons testing reduces the reliability of our arms and hence their effectiveness as a deterrent.

Mr. Obama's flight to arms control demonstrates the persistence of a dangerous illusion of the 20th century -- the notion that reducing a democratic nation's armaments is a means of mitigating the threat of war. Here's some of the history:

  • Beginning in 1906, Britain cut back an ambitious program of naval construction, begun under a previous administration, in the hope of thereby avoiding an "arms race" with Germany. But the change in British policy actually encouraged Germany's Adm. Alfred von Tirpitz to redouble his efforts to build a navy that would rival Britain's. This perception of British weakness may well have buttressed the confidence that led the Germans to launch World War I.
  • The Washington Naval Conference of 1922 set limits on battleship construction by the U.S., Japan, Britain, France and Italy. But as a result, Japan instead focused on building other kinds of warships, paving the way for Pearl Harbor.
  • Britain's policy of restraint in military production during the 1930s -- combined with the refusal of British and French governments to send forces to turn back Hitler's then weak army when it violated the Versailles Treaty by remilitarizing the Rhineland in 1936 -- did not placate Hitler. It only whetted the dictator's appetite, generating what Winston Churchill called the "unnecessary war," World War II, which might never have occurred had the Western allies maintained their armaments and a firm policy during the years that led up to it.
  • The U.S. signed the Strategic Arms Limitation Talks antiballistic missile treaties with the Soviet Union in 1972, expecting they would produce a "stable" balance and ultimately a reduction in nuclear armaments. Instead the Soviets continued their race for nuclear superiority, as summed up in congressional testimony by Jimmy Carter's Defense Secretary Harold Brown in 1979: "[W]hen we build, they build. When we cut, they build." As President Ronald Reagan observed in a 1985 radio address on the Strategic Defense Initiative missile defense program the Soviets never accepted the "innocent" American notion "that being mutually vulnerable to attack was in our common interest."
  • As soon as the Soviets signed the 1972 convention banning the manufacture of biological weapons, they immediately (secretly) ramped up their production of such weapons.
  • The end of the Cold War and the collapse of the Soviet empire were brought about not by arms reductions, but by Reagan's unwillingness to give up work on SDI. Soviet Prime Minister Mikhail Gorbachev recognized the Soviets simply lacked the means to compete.

The likelihood that reducing America's strategic forces is going to elicit reciprocal behavior from our antagonists is nil. Nor will anything short of forceful sanctions (such as the George W. Bush administration applied, but then withdrew, against North Korean financial assets), have any effect in halting their march towards nuclear status.

In the words of the Joan Baez antiwar song from the 1960s: When will they ever learn?

Mr. Schaefer is professor of political science at College of the Holy Cross.

Death tax on the WSJ Editorial Page: These days, the political class is so voracious that even taking 35% of a man's lifetime savings is insufficient

Death Blow. WSJ Editorial
Even 35% isn't enough for the envy club.
WSJ, Apr 09, 2009

We'll take pro-growth victories wherever we can find them these days, and last week saw a small one in the U.S. Senate, of all places. The Members voted 51-48 to cut permanently the death tax rate to 35% and exempt all estates of less than $10 million per couple ($5 million for a single taxpayer) from any tax. President Obama wants a 45% rate with only a $7 million exemption.

Every Republican voted for the lower rate, and so did 10 Democrats. This is the closest thing to bipartisanship we've seen so far this year on Capitol Hill, but naturally the White House and most of the media are appalled. Their idea of bipartisanship is when three Republicans cross party lines to pass $780 billion in "stimulus" spending.

Perhaps this explains why Majority Leader Harry Reid blew a gasket during the floor debate, calling the death-tax amendment by Jon Kyl (R., Ariz.) and Blanche Lincoln (D., Ark.) "outrageous," a "stunning act of hypocrisy," and a tax cut for those "at the very top of the food chain."

Then he actually said: "We can only turn the page from recession to recovery if we watch every single taxpayer dollar the way families watch every dollar in their budget." We'd say Mr. Reid was being deliberately ironic, but Harry doesn't do irony. He's an outrage man. And speaking of which, he was at that very moment working to pass a 2010 budget outline that includes record spending and trillions of dollars in new debt.

We've long argued that the fairest death tax rate is zero, because the money was already taxed when it was earned. Assets, such as stocks or property, in estates that have appreciated in value over time should be taxed at the capital gains rate of 15% in the year of the sale. These two changes would prevent the all-too-common and tragic firesale of businesses and farms when a family member dies. Senator Jim DeMint of South Carolina proposed an amendment to abolish the estate tax, but Mr. Reid blocked even a vote. Ah, the new bipartisanship.

He should listen to Senator Lincoln, who talked about the Arkansas companies and farmers whose assets are looted by the estate tax. "These are the people," she explained, "who employ more than half the workers in Arkansas. These are the people who, if we reform the estate tax, will invest in their businesses and create more jobs." Evidently, if they aren't government jobs, Mr. Reid isn't much interested. The battle now goes to a House-Senate conference, where liberals plan to strip the lower death tax rate. These days, the political class is so voracious that even taking 35% of a man's lifetime savings is insufficient.

At the G-20 meeting in London, officials from many nations said that the US is to blame for the world recession

It Didn't Start Here. By Alan Reynolds
This article appeared in the New York Post on April 9, 2009.

At the recent meeting of G-20 nations in London, officials from many nations agreed on one thing -- that the United States is to blame for the world recession. President Obama agreed, speaking in Strasbourg of "the reckless speculation of bankers that has now fueled a global economic downturn."

One problem with this blame-game is that last year's recession was much deeper in many European and Asian countries than it was in the United States.

By the fourth quarter of 2008, as the nearby table shows, real US gross domestic product was just 0.8 percent smaller than it had been a year earlier. The contraction was twice as deep in Germany and Britain and much worse in Japan and Sweden.

In February, US industrial production was 11.8 percent lower than a year before -- while Singapore was down by 22.4 percent, Sweden by 22.9 percent and Japan by 38.4 percent.

What was the mechanism by which US problems were supposedly spread to other countries? It wasn't international trade. The dollar value of US imports didn't start to fall until August 2008, and imports of consumer goods didn't fall until September -- many months after Japan and Europe fell into recession.

Indeed, most of the economies that fell first and fastest were not heavily dependent on exports to the United States. Even Japan accounted for just 6.6 percent of US merchandise imports last year, compared with 15.9 percent for both Canada and China -- whose economies fared relatively well.

Even if all of the weakest European and Asian economies could plausibly blame all their troubles on the relatively stronger US economy, how could anyone possibly blame banks? There were no bank failures last year in Japan, Sweden, Canada or any other country on this list except Britain. And US and British banks didn't fail until September-October -- at least nine months after the Japanese and European recessions began.

Yet it's clearly US/UK banks being fingered as the villains. German Finance Minister Peer Steinbrueck, for example, criticized an "Anglo-Saxon" attitude in America and Britain that encouraged risky lending and investment practices because of "an exaggerated fixation on returns."

But Germany's GDP and industrial production was down 19.2 percent for the year ending in January -- versus an 11.4 percent decline in Britain and a similar US drop. Are we supposed to believe that German (and Japanese) firms are more dependent on US and UK banks than American and British firms?

Another problem with blaming the United States is that the timing is all wrong. If the US recession had simply spread to other countries like a mysterious infection, shouldn't the US economy have been the first to start contracting?

Yet US industrial production only started to decline from its peak after January 2008 -- long after production began to slow in Canada (July 2007), Italy (August 2007), France (October 2007) and the Euro area as a whole (November 2007). Aside from a one-month uptick in February 2008, Japan's industrial production peaked in October 2007.

By January 2008, when both the US and European recessions are said to have begun, the OECD leading indicators were lower by nearly 0.8 points from a year before in the US -- but down 2.3 points in Sweden, 2.8 points in Japan, 2.6 points in Korea and 4.1 points in Ireland.

Those leading indicators correctly anticipated much deeper recessions in the latter four countries. And the most famous leading indicator -- monthly stock prices -- peaked in October 2007 in the US and UK, four months after stocks had peaked in Japan and the Euro area.

What did all the contracting economies have in common? Not all had housing booms -- certainly not Canada, Japan, Sweden or the other countries at the bottom of the economic-growth list.
What really triggered this recession should be obvious, since the same thing happened before every other postwar US recession save one (1960).

In 1983, economist James Hamilton of the University of California at San Diego showed that "all but one of the US recessions since World War Two have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum." The years 1946 to 2007 saw 10 dramatic spikes in the price of oil -- each of which was soon followed by recession.

In The Financial Times on Jan. 3, 2008, I therefore suggested, "The US economy is likely to slip into recession because of higher energy costs alone, regardless of what the Fed does."

In a new paper at, "Financial Crisis and Public Policy," Jagadeesh Gokhale notes that the prolonged decline in exurban housing construction that began in early 2006 was a logical response to rising prices of oil and gasoline at that time. So was the equally prolonged decline in sales of gas-guzzling vehicles. And the US/UK financial crises in the fall of 2008 were likewise as much a consequence of recession as the cause: Recessions turn good loans into bad.

The recession began in late 2007 or early 2008 in many countries, with the United States one of the least affected. Countries with the deepest recessions have no believable connection to US housing or banking problems.

The truth is much simpler: There is no way the oil-importing economies could have kept humming along with oil prices of $100 a barrel, much less $145. Like nearly every other recession of the postwar period, this one was triggered by a literally unbearable increase in the price of oil.

US Diplomats Discuss Humanitarian Situation in Sri Lanka with Tamil Diaspora Groups

Assistant Secretary Boucher and Ambassador Blake Discuss Humanitarian Situation in Sri Lanka with Tamil Diaspora Groups
US State Dept, Bureau of Public Affairs, Office of the Spokesman
Washington, DC, April 8, 2009

Assistant Secretary of State for South and Central Asian Affairs Richard Boucher and U.S. Ambassador to Sri Lanka Robert Blake met with several U.S.-based organizations representing members of the Tamil diaspora to discuss the humanitarian situation in Sri Lanka.

Assistant Secretary Boucher and Ambassador Blake welcomed the opportunity to listen to the concerns and perspectives of the American Tamil diaspora community and to share the steps the United States is taking to address the humanitarian crisis. Assistant Secretary Boucher and Ambassador Blake emphasized U.S. concern about the plight of the civilians trapped in the “no fire zone” in northern Sri Lanka. They called on the Liberation Tigers of Tamil Eelam to release the civilians. They reiterated that both the Tamil Tigers and the Government of Sri Lanka should stop firing into and from the no fire zone. They outlined the steps the U.S. has taken to support the civilians in the no fire zone.

The United States has provided $23.6 million towards International Committee of the Red Cross (ICRC) regional activities, which includes ICRC activities in Sri Lanka, and $8.3 million to UNHCR for its South Asia appeal and its portion of the Common Humanitarian Action Plan (CHAP) for Sri Lanka. In 2008, the United States also provided $5.9 million in non-food support to the UN and international NGOs operating in Sri Lanka.

Assistant Secretary Boucher and Ambassador Blake emphasized the urgent need for the Government of Sri Lanka to engage Tamils, including diaspora communities around the world, to find a political end of the conflict. Assistant Secretary Boucher and Ambassador Blake concluded by saying that they would like to continue the dialogue with the diaspora community and urged participants to continue to share feedback.

The discussion took place at the State Department with Ambassador Blake speaking through via a digital video conference at the U.S. Embassy in Colombo.

Obama in Ankara: Turkey's Dangerous Drift

Obama in Ankara: Turkey's Dangerous Drift. By Ariel Cohen, Ph.D. and Owen Graham
Heritage WebMemo #2383
April 6, 2009

[Full article w/notes at the link above]

After attending the three summits--G-20, NATO, and the EU--President Obama arrived in Ankara, Turkey, Sunday for the final stop on his inaugural European tour. Obama's visit to Turkey highlights the importance Washington attaches to this country as a key regional player, a veteran NATO ally, and an influential state with a predominately Muslim population.

During the NATO summit on Saturday, the alliance unanimously chose Anders Fogh Rasmussen, Denmark's prime minister, as the next secretary general. Turkey was initially against the nomination, however, alleging that Rasmussen was insensitive to Muslims during the scandal over the Prophet Muhammad cartoons and due to his pessimistic views about Turkey's EU membership.[1] Turkey claimed to speak on behalf of the Muslim world, raising the larger question of Turkey's direction and its trajectory toward the West in general and NATO in particular.

Deterioration of U.S.-Turkish Ties

Until the Justice and Development Party's (AKP) rise to power in 2002, Turkey was considered a reliable U.S. partner. During the Cold War, Turkey's modernizing secular elites championed unpopular causes: the Korean War, support of U.S. operations during the 1991 Gulf War, and Operation Northern Watch in Iraqi Kurdistan (1991-2003).

Turkey also played a vital role in peacekeeping missions in Bosnia, Kosovo, Somalia, and Afghanistan. Likewise, the U.S. supported Turkey against the Kurdish terrorist organization PKK and the 1999 capture of its leader, Abdullah Ocalan. These relations contributed to major mutually beneficial projects, such as the Baku-Tbilisi-Ceyhan main oil export pipeline.

Today, the AKP appears to be moving Turkey away from its pro-Western and pro-American orientation to a more Islamist one. This drift has left many in Washington uncertain over the country's direction. The growing anti-Americanism within Turkey poses a major challenge to bilateral relations.

In 2007, for instance, according to public opinion polls, only 9 percent of the population held favorable views of the United States. The Turkish public was overwhelmingly against the Iraq war and also protested perceived U.S. inaction on Kurdish PKK terrorist attacks launched from northern Iraq. Anti-Semitism and vitriolic anti-Israel sentiment is also rising--often fanned by the AKP-controlled media and politicians--and threatening to destroy a close security relationship between the two countries.

Growing Illiberalism

Turkey's secular elites are increasingly concerned by the country's direction. They argue that the AKP is promoting a creeping Islamic agenda--one that is closer to Muslim Brotherhood fundamentalism than to the traditional Ottoman tolerant religious outlook.

In July 2008, the Constitutional Court, in a split decision, rejected an attempt by Turkey's chief prosecutor to ban the AKP. The prosecution accused the AKP of violating separation of mosque and state in public life, with the intention of leading secular Turkey down a path toward Shari'a law.[2]

While the AKP has enjoyed popular support since it came to power, for the first time since 2002, it lost support, dropping from 47 percent to 39 percent in the March 29 local elections. While the global economic crisis is in part responsible for this decrease in support, the outcome of these elections is also explained by discontent with AKP policies and recognition that the party has strayed from its promises of a more liberal Turkey in the European Union.[3] Prominent supporters of democracy are concerned that the right of dissent and the principle of government accountability are being eroded: The AKP is viewed as increasingly intolerant of opposing views.[4]

Turkey's Foreign Policy Drift

Regarding foreign policy, there are important signs that Turkey is drifting away from the West. In 2006, Turkey became the first NATO member to host the leader of Hamas, Khaled Mashaal. Turkey also enthusiastically hosted Iranian president Mahmoud Ahmadinejad and Sudanese President Omar al-Bashir, whose government has been accused of genocide. Turkey's geography explains its association with Iran but not with Hamas or Sudan; only Islamist solidarity and anti-Western sentiment can explain these ties.

Although Turkey has been trying to facilitate an Arab-Israeli rapprochement, it is losing its impartiality and, therefore, credibility. It is attempting to sponsor an Israeli-Palestinian industrial border zone and an Israeli-Palestinian hospital. It also sponsored an Israeli-Syrian proximity talks in Istanbul.

However, at the recent Davos World Economic Forum, Turkish Prime Minister Recep Tayyip Erdogan called Israel's operation in Gaza "inhumane." The prime minister has verbally attacked the elderly, Nobel-prize-winning, dovish Israeli President Shimon Peres as a killer of children, thus positioning himself as a Hamas protector. He then stormed out of the Davos panel, only to receive a hero's welcome at home.

Turkey supports the development of a peaceful nuclear power program by Iran but wants transparency and dialog on the subject. However, Erdogan's judgment has been called into question after he stated last year that "those who ask Iran not to produce nuclear weapons should themselves give up their nuclear weapons first."[5]

The Bear Hug

There have also been worrisome developments in Turkey's Black Sea and Caucasus policies. During the Russian-Georgia war, the Turkish prime minister proposed the "Caucasus Stability and Cooperation Platform." The platform proposed a condominium of Russia and Turkey, together with the three South Caucasus countries, but it initially omitted the U.S. and EU, as well as Iran.[6] Moreover, the United States and the European Union were not consulted on these proposals beforehand.

Turkey also temporarily blocked the transit of U.S. warships delivering humanitarian aid to Georgia. And it prioritized rapprochement with the Russian ally Armenia over the ties with the secular, pro-Western Azerbaijan. These developments underscore Turkey's cozying up to Russia as Moscow is providing nearly two-thirds of its gas supplies. Indeed, Russia may have used multi-billion-dollar construction and gas supply contracts as leverage over Ankara.

Turkey is critical to Europe's efforts to reduce its dependence on Russian energy, including the proposed Nabucco gas pipeline that would bring Central Asian gas to Europe via Turkey, bypassing Russia. However, Turkey demanded to fill Nabucco with Iranian gas while it is currently stalling on signing an intergovernmental agreement on Nabucco. Thus, Turkey is throwing the "bypass Russia" gas transit strategy in limbo.[7]

If Turkey's terms do not improve soon, Azerbaijan may be forced to embrace Gazprom.[8] If that occurs, Ankara's actions will threaten to derail a decade of Western progress on East-West energy and transportation.

Afghanistan and Iraq

According to Prime Minister Erdogan, Turkey is open to discussing the withdrawal of U.S. forces from Iraq through Turkey.[9] Considering that Turkey refused to allow U.S. troops to enter Iraq from its territory, this is a questionable statement. Yet Turkey is a major logistical hub of efforts in Afghanistan. The planned withdrawal of troops from Iraq raises the importance of the Incirlik base.

Beyond this, Turkey has played a positive role in Afghanistan. Finally, President Obama is well aware that his statements on the Armenian genocide issue are being watched carefully. He avoided alienating a key ally not by using the "G" word (genocide) in his speeches. However, it is not clear whether the White House can prevent a congressional resolution on genocide from passing, primarily with Democratic votes, for domestic political reasons.

What Should the U.S. Do?

Despite Turkey's movement away from the West, the country continues to play a key role in NATO. Strong bilateral security relations are particularly important for cooperation on the Iraq withdrawal, Afghanistan, dealing with Iran, and addressing a resurgent Russia.

Washington should devote more attention to U.S.-Turkish relations. The Administration should stress that it is in Turkey's long-term interests to remain politically oriented toward the West. However, the timing of Secretary of State Hillary Clinton's and President Obama's visits have provided political support to the ruling anti-American political party at the time of crucial elections and increased criticism on behalf of pro-American secularists, who feel abandoned.

The United States should expand energy cooperation with Turkey. Yet it should also warn that excessive dependence on either Russian or Iranian gas will jeopardize Turkey's sovereignty and security. While U.S. support of the Turkish-Armenian normalization is justified, so is American reinforcement of the Turkish-Azeri ties.

When speaking before the Turkish Parliament, President Obama voiced support for Turkey's membership in the European Union, saying that it would "broaden and strengthen" Europe's foundation.[10]

Instead of sending mixed messages, the Obama Administration should specify clear terms under which Turkish cooperation with the U.S. is welcome. After all, it is up to the Turkish elites to decide whether they want to continue on the path of development with the trusted and powerful ally or seek new friends in Iran, Sudan, and Saudi Arabia.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, and Owen Graham is a Research Assistant at the Katherine and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.