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True, Trump has pulled off a masterpiece, acting with out-of-character discretion and without a tornado of tweets. The UAE was followed by Bahrain, and in due time, Oman and Saudi-Arabia may join in, especially since the “Gulfies” never act without Riyadh’s blessing. Morocco and Sudan could be next.

This diplomatic coup is withdrawing the strategic map of the Middle East. But Trump could not have done it without Iran’s “Supreme Leader,” Ali Khamenei, who unwittingly wrote the script and set the stage. Though rarely seen in public, the Rahbar has been the Islamic Republic’s highest authority since the death of Ayatollah Khomeini in 1989. He has the ultimate say over foreign and military policy. Whatever Iran’s ungodly role in the Middle East, he should share the Oslo stage with Trump.

A Peace Prize for Khamenei? It sounds like satire running amuck. After all, the Islamic Republic has been the single-most dangerous denizen of the Middle East. Here is the shortlist: At home, the regime has killed thousands of dissidents. Under Khamenei, Iran has asphyxiated the democratic “Green Revolution.” Corrupt down to the lowly mullah level, these pious revolutionaries have immiserated the nation long before Trump’s brutal sanctions began to grind down the economy.

Nor is Iran a model citizen abroad. Continuing where the Shah had taken off with four reactors acquired in the seventies, the theocracy has diligently assembled the building blocks of a nuclear armory, and never mind the JCPOA (Joint Comprehensive Plan of Action) Barack Obama had touted as a path to a no-nuke Iran.

Khameinist Iran has trained and armed terror groups in the region and beyond. Starting with next-door Iraq, it has built a “land bridge” across Syria all the way to the Mediterranean—to Beirut in the north and Gaza in the south. In the words of the Lebanese-born U.S. scholar Fouad Ajami, Iran has “bought itself a border with Israel.” Its Quds Force ranges across the Levant. In Yemen, Iran is fighting a cruel proxy war against the Saudis. It threatens tanker traffic in the Gulf and bombs Saudi oilfields.

This rap sheet is to make a larger point. A big chunk of the credit for the diplomatic revolution just celebrated in the White House must go to Khamenei. Why else would the Gulf potentates treat with the despicable Yahud who figures as “ape” and “swine” in the Koran? Why would the Hundred Years’ War against the Zionist project pale now?

The answer is “Imperial Iran,” which transformed ancient enmities into a marriage of convenience between Muslims and Jews. What was feted as a “miracle” is actually nothing new under the sun. In Christendom, think about the Thirty Years’ War (1618-48) high schoolers learn to view as faith-driven mayhem. Not so. It wasn’t Protestants vs. Papists, but an all-out hegemonic conflict between Catholic France and Catholic Habsburgs. The French had no qualms about allying with the Protestant Swedes and the Lutheran princes of the Holy Roman Empire. Protestant Denmark played both sides of the street. Power beat the pulpit.

Thus again in the Middle East today. Against Iran, the Israeli infidels are God-sent. For the Gulf states, Iran is the supreme ideological and strategic foe right next door. Israel, on the other hand, is at a safe distance, and it does not want to overthrow Sunni regimes. As a nuclear-armed regional superpower, the Jewish state is the only real counterweight against the grasping heirs of Darius who ruled the entire Middle East at the height of the Persian Empire.

Closely linked to the United States, Israel looks even better than America, the midwife of this progressive realignment, with foes and friends trading places. The U.S. has proven a fickle protector. Most recently, Obama tried to make nice to Tehran at the expense of Israel and the Arabs, a traumatic turn that along with the JCPOA accelerated the rethink.

Israel is a much lower risk because it shares with the Sunni states the same deadly threat posed by Iran. It’s the old saw: “The enemy of my enemy…”—but with an extra bonus. As a global power, the United States is always open to new flirts, and it regularly abandons local favorites. Jimmy Carter ditched the Shah in 1978. Barack Obama dropped Egypt’s Mubarak and opened the way for the Muslim Brotherhood. Nor have Arab potentates forgotten Ronald Reagan who not-so-secretly supported Saddam in his Eight Years War against Iran in the 1980s. George W. Bush brought him down in 2003. But the Israeli-Arab marriage will endure as long as Iranian imperialism does. Robust interests make for reliable bedfellows.

So, if justice were to be done, Ali Khamenei should get half the Nobel because, against all Iranian interests, he played the matchmaker. Let’s fantasize some more. For the make-believe Oslo ceremony, the Supreme Leader should bring along a whole coterie of henchmen. One honored guest should be the present commander of the Quds Force, a branch of the elite Revolutionary Guards, who have executed military and clandestine operations abroad since 1988.

Posthumous recognition should go to his predecessor Qasem Soleimani who masterminded Iran’s march to the Med from 1998 to 2020 when he was killed by an American drone. Merit badges should be pinned on the scientists and engineers who worked on nuclear weapons and long-range missiles. They all strained hard to turn Tehran into an existential threat to Israelis and Arabs alike.

The list goes on. In this fantasy scenario, Barack Obama gets a special mention for his JCPOA that could merely slow down Iran’s nuclear quest, fanning fears from Cairo to Riyadh. Donald Trump would get the other half of the Prize for his masterly diplomacy without the bragging and hyperbole that normally attend his global antics (the grandstanding came after the fact).

In particular, No. 45 deserves kudos for talking Binyamin Netanyahu out of the partial annexation of the West Bank. Incorporation would have been the deal-breaker, a lethal insult to both Palestinians and the Arab states. The Abraham Accords were enough of a blow, putting paid to Palestinian dreams about wielding a veto over Arab policy toward Israel.

This time, the Arab League did not even protest. Silence is the loudest proof of connivance. It warns the Palestinians that history may be passing them by. The “core” of all Middle East conflicts, demanding “Palestine first,” has dwindled into a sideshow on a stage that now runs from North Africa via Ankara to Afghanistan. The drama is dominated by an intra-Islamic civilization of clashes where Israel is but a mighty bystander.

The actors are Muslim states, sects, and tribes driven by interest, fear, and greed for power. The Palestinian “core” has always been a convenient fiction fed not so much by sympathy for the Palestinian cause as by resentment of Israel and its patron America. The so-called center of all conflicts has been shrinking into a nuisance ever since the Egypt-Israel peace. Note that it was signed on March 26, 1979, less than two months after Ayatollah Khomeini took power in Tehran.

Of course the Peace Prize for Khamenei and Trump is a figment of the dramaturgical imagination. Neither will get it, for this duo is neither inspiring nor loveable. Certainly, the Supreme Leader is no peace monger; Iran stands for dominion, subversion, and revolution. But bizarrely, Allah’s vanguard has done right by its intended victims, turning arch-enemies into allies. So chalk one up for Hegel’s “cunning of history” which undoes the best-laid plans of mice and mullahs. Power will beget counter-power, pushing aside culture and faith.

There is a hitch, though. Robbed of their veto and betrayed again, the Palestinians won’t go away. So, let’s dream on by fielding another unlikely candidate for the Peace Prize down the line: Binyamin Netanyahu. Israel’s eternal prime minister might just join the august company of laureates Menachem Begin (1978), Shimon Peres, and Yitzhak Rabin (both in 1994). Picture “Bibi,” swollen with pride over the Abraham Accords, superseding tactical cunning with wisdom and generosity—admittedly not his greatest fortes. Israel is no longer the waif of 1948, nor the almost-casualty of the 1973 Yom Kippur War. This little superpower has gained peace from the banks of the Nile to the shores of the Gulf. It has a per-capita income slightly higher than France’s, Britain’s, and Japan’s. Plus, an army that, soldier-for-soldier, is probably the best in the world.

Isn’t this the moment for magnanimity in victory—for a good-faith initiative in the Palestinian-Israeli arena: two states, one peace? There are a hundred reasons why failure may be fated once more. And Abu Dhabi is not Ramallah the capital of a failed non-state. But as the Romans preached: Carpe diem, seize the moment—and a peace prize, to boot. If Netanyahu survives the courts and the coalition warfare at home, he might not only pocket a shiny Nobel but also score one against Henry Kissinger who famously quipped: “Israel has no foreign policy, only domestic politics.”

The post A Peace Prize for Ali Khamenei? appeared first on The American Interest.

More memorable than the politics was the public debate. Like unexpectedly walking into a sauna, it was suffocating. While social media was suffused with partisan emotion and was predictably unreasonable, the moment was best captured by what was happening to Never Trump conservatives: many seem to have rediscovered their party colors. Bret Stephens’ column in the New York Times, titled “For Once, I’m Grateful for Trump,” is a good stand-in for several conversations I had with right-leaning friends that week. “The other side had gone too far,” they said. “I don’t like Trump at all, but I’m not with these people either.”

With the passing of Ruth Bader Ginsburg almost a full two years later, the country finds itself in an even more fraught situation. Though writers like Stephens have not repeated their performance this time around, instead urging Republican senators like Mitt Romney to respect the precedent set by Mitch McConnell during the closing months of the Obama presidency and not vote on the candidate until after the next president is chosen, it’s striking how little such pleas have resonated. Senators Lisa Murkowski and Susan Collins aside, the entire Republican Party seems to have fallen in line to support Trump’s nominee, with little regard for the institutional consequences such a move could provoke.

It remains an open question whether this will boost turnout for Trump himself, but it’s possible to assume that it might. High enthusiasm for Trump himself as a candidate is only at 46 percent among those likely to vote for him, according to the poll aggregator Five Thirty Eight. It could be that an issue that allows partisans to re-connect with their partisan identity despite their reservations about Trump’s character and competence could be a boon for him. Should this dynamic prove decisive in November, partisanship—more specifically, negative partisanship, where your loyalty to the in-group is defined by opposition to the out-group—will have delivered the presidency to Trump a second time in a row.

Negative partisanship—also sometimes called affective political polarization—seems to be at the core of what ails us as a country, and it has been on the rise for decades. Polling studies focusing on the phenomenon pop up regularly, and seem to indicate that things are getting worse. An often-cited statistic is that in 1960, around 5 percent of partisans said they would be unhappy if their child married someone from the other party. By 2010, a study found that the share had increased to half of Republicans and a third of Democrats. The mutual dislike has only been increasing since then, and appears to have gotten more uniform across both parties.

Attempts to analyze what is going on largely fall into two major camps. The first is that there exists a silent, increasingly frustrated “sensible center” that only needs to be appealed to for a new party or coalition to dominate American politics for a long time. The argument comes in many forms, and has been the bread-and-butter of newspaper punditry for years. But social science findings—such as the widely-cited “Hidden Tribes” report, published in 2018—exist to back it up, too. Part of the evidence presented is that parties’ own positive programs are rarely fully satisfying to the voters, who are less politically engaged overall, and are, indeed, repelled and discouraged from participating more given the growing polarization reflected through politicians in Washington and an increasingly toxic and partisan media. The solution to the problem is to simply offer up the kind of centrist policies that these voters would like to see more of, and the problem is at least mitigated.

The second sees the problem through the other end of the telescope. It takes it for granted that irreconcilable political differences divide the nation—differences, indeed, that some argue are grounded in fundamentally divergent sets of moral intuitions—and instead looks at what has changed institutionally. Lee Drutman’s recent Breaking the Two-Party Doom Loop makes the case that flaws in the design of our democracy have made it completely rational for parties to sort themselves into ideologically pure voting blocks. Exhorting parties to play for the center makes no sense, since if there was an easy “win” to be had there, someone would have capitalized on it. The solution, then, is to change the system in ways that will encourage new alternatives to emerge. One such proposal, Ranked-Choice Voting, has been written about extensively in these pages by Larry Diamond.

A report from one of the various initiatives trying to understand the problem, FixUS, seems to have confirmed that both analyses seem to be at least partially right. The group undertook a “roadshow” across the United States in 2018, speaking to voters from all walks of life in both red and blue states. The fatigue among voters, they found, is real, and there is a palpable desire across the country for a government that simply works better. At the same time, there seems to have been little in the way of easy solutions that came up during the discussion.

Paul Stebbins, one of the founders of FixUS, told me that there was a “real market for change out there.” Describing himself as an amalgam of a Jacob Javits Republican and a Lloyd Bentsen Democrat, Stebbins became interested in polarization as he worked on initiatives to get the United States’ debt under control. The false choices being offered to him by the parties on just this one issue hinted at a deeper problem. As he went around the country talking to people, he developed a more profound sense that the system itself is broken. Having published its report, FixUS continues to run events that seek to ameliorate the polarization by putting concerned citizens face-to-face, and getting them to talk to each other—a place where conversations are happening in calm ways. But Stebbins himself seems to be under no illusions that this will be enough, or that a singular policy platform exists that could bring the country together.

Seymour Martin Lipset correctly noted that division and polarization, and the competition between parties that it breeds, are the lifeblood of a healthy democracy. Competition acts as a transmission mechanism, allowing a democracy to be properly responsive to the will of its constituents. But there is a resulting dark side to this. “Without consensus—a political system allowing the peaceful ‘play’ of power, the adherence by the ‘outs’ to decisions made by the ‘ins,’ and the recognition by the ‘ins’ of the rights of the ‘outs’— there can be no democracy.” Elsewhere, Lipset notes that consensus is easier to obtain when the issues at stake are economic. Bartering over goodies comes naturally to people. Bartering over values, however, is a non-starter, and leads to intractable conflicts. And fights over incommensurate values often spring up as groups start manifesting separate identities.

Having been born in the Balkans, I find this last facet of our fight particularly troubling. The case of Bosnia is instructive. Though the institutions in Bosnia were poorly designed and implemented after the dissolution of Yugoslavia, an even more destructive force has been the erosion and continued undermining of a cohesive Bosnian civic identity that has continued well after the killing stopped. If, as a state, you don’t have a coherent overarching identity undergirding everything, and if politics becomes dominated by sub-identities, democracy simply doesn’t work. And while Bosniaks are no longer literally at each others’ throats, its failed, sclerotic, stalled democracy is both sad to behold and vulnerable to disruption and catastrophic collapse.

The United States, thankfully, has not yet been balkanized and indeed is worlds away from the kind of toxic dynamic that tore the former Yugoslavia apart. Still, as polarization worsens and a kind of atomizing identity politics tightens its grip on both the Left and the Right, it’s worth remembering that “democracy” can’t solve these kinds of problems, and that in fact it is likely exacerbating them.

That’s the frame through which best to watch the upcoming elections. Polls show that, Ruth Bader Ginsburg’s succession aside, Joe Biden is still a strong favorite to win, and may even win convincingly. That the American people could potentially be brought to something like a consensus opinion by the poor performance, corrupt character, and general unfitness of Donald J. Trump should not lull us into complacency. As Stebbins told me, “Even if Trump goes, Biden has no magic wand” to make our divisions disappear. There’s a lot more work that needs to be done.

The post To Cure What Ails Us appeared first on The American Interest.

These cities are located downstream from China’s many dams, several of which have been releasing floodwater as the rains have accumulated. Most of these cities have as a result experienced flooding and associated damage and disruption. These floods, the increased amounts of water currently being discharged from dams in China, and satellite imagery have raised recurring concerns regarding the structural stability of dams in China, especially the Three Gorges Dam (TGD), among other such infrastructures.

The annual flood season in this part of China only begins in earnest around July, but authorities had started letting water through in June of this year. They had claimed that the opening of the dam’s spillways was for electricity-generation purposes. Some days later, however, Beijing admitted that the water release was a part of emergency floodwater discharge.

Authorities have also begun blaming “foreign forces” for trying to “tarnish” the dam and the Chinese government’s image. As noted above, the release of these floodwaters from the dams has compounded flooding in downstream regions. This—and not the alleged foreign propaganda—has been the cause of locals China raising questions regarding the TGD’s structural integrity, and whether the floodwater release has something to do with the dam’s structural weaknesses. Although greater clarity is needed, the locals’ doubts are not entirely unfounded.

Right from the start, the TGD, which is located in Hubei Province, was controversial due to its ambitious scope and attendant environmental impact. Based on sheer capacity, the TGD, which became fully operational (i.e. including with electricity generation capabilities), in 2012, is currently the world’s largest power plant. The structural integrity of this dam has, however, always raised questions. For example, shortly after the reservoir was filled up for the first time, approximately 80 cracks appeared on the dam. Even as recently as June 2020, scholars and scientists raised red flags regarding the structural integrity of the TGD, but Beijing denied those claims.

Scholars have also stated that the construction of this dam has also contributed to exacerbating seismic activity (such as earthquakes) as well as droughts in lower riparian regions. Even as far back as 2011, the Chinese government had admitted to the scale and scope of the threats posed by the TGD. For instance, during a State Council Executive Meeting, Chinese officials admitted that the TGD had “some urgent problems” with regard to “ecological environmental protection, and geological disaster prevention.”

It might seem as if the TGD is a problem for China alone. But the doubts regarding its structural integrity also give rise to questions regarding the quality and durability of Chinese mega-infrastructure construction projects abroad. Beijing has initiated or supported several construction projects of dams, roads, and pipelines in many foreign countries in Asia and Africa under the Belt and Road Initiative (BRI). If China’s own major dam in its own country is structurally unsound, how safe might infrastructure projects constructed by Chinese enterprises in foreign countries be? Moreover, what would happen if a situation like the one ongoing in China occurs in the downstream areas of dams in those foreign countries? Given how many of the BRI mega infrastructure projects are being conducted in developing countries with relatively lesser economic strengths, would they be able to recover from the massive human and economic losses that such disasters might bring with them?

Already in South Sudan, communities are being devastated by oil spills and contamination from a Chinese-constructed pipeline in Upper Nile and Unity States. The pipeline, which was constructed at a breakneck speed in the late 1990s during the height of the civil war, is owned and operated by Chinese companies and has since shown signs of major problems. The spills from the pipeline and the poor management of contaminated waste have led to horrific health conditions among communities living near the oil fields. According to one report, birth deformities in the Ruweng County of Unity State (located at the heart of the oil field) have increased from 19 percent in 2015 to 54 percent in 2017. Premature births in the same county have quadrupled, going from 41 in 2015 to 118 in 2017. Moreover, according to lab analysis of water samples from the area, the level of mercury and manganese in the water was seven and ten times, respectively, from what the U.S. Environmental Protection Agency considers permissible. In fact, South Sudan’s own ministries of Petroleum and Health have conducted at least two studies (aside from numerous independent reports) that have linked the health effects directly to oil pollution.

Instead of addressing this clear health emergency, the Sudanese government has opted to bury these reports and turn a blind eye to the suffering of its people. Recently, the oil companies along with the National Security Service of South Sudan have placed severe restrictions on disclosure of data in relation to health problems emerging from the oil fields. The only available health facilities in the oil fields are operated by Chinese oil companies themselves.

In addition, large sections of a road that was under construction by a Chinese company were washed away in May when the rainy season began. The project, implemented by Shandong Hi-Speed Company in coordination with the Ministry of Roads and Bridges, has already cost hundreds of millions of U.S. dollars. The knock-on effects on surrounding communities have prompted human rights lawyers to threaten lawsuits against the Government and the company for the substandard work. The whole episode was another embarrassment for President Salva Kiir, whose office directly handled the contract, and led him to fire the Minister in his office who oversaw the project.

While these two examples demonstrate the structural unsoundness of Chinese construction projects, they also highlight how official corruption in South Sudan works. The government doesn’t dare criticize its patrons in Beijing, even if the lives of its own people are at stake.

As events in Hubei province demonstrate, the structural weaknesses of Chinese mega projects both at home and abroad are rooted in official corruption. This corruption is enhanced by the authoritarian nature of the Chinese regime, which has successfully exported to many countries in Asia and Africa, including South Sudan. Without transparency and accountability, officials in China have become enormously wealthy even when such projects directly jeopardize the safety of their people. They are now encouraging their friends abroad to emulate them.

The post How Chinese Corruption Spreads Misery Abroad appeared first on The American Interest.

Viewing this issue as only the result of “corruption” or as an aspect of power politics alone is flawed. The dangers highlighted above are not the result of aberrations in an otherwise functioning system that can be patched by some legal reforms. Rather they are a feature of how the international financial system has evolved to serve the world’s most powerful, whether they are kleptocrats in the developing world or reputable fortune 500 companies. The global financial infrastructure, as it has evolved in the post-war period, requires vast pools of offshore dollar accounts, so-called Eurodollars. This credit money, “issued at the book maker’s pen” forms the basis for global payments and currency exchange. Within these money pools, often held in tax havens with opaque ownership law, it is impossible to distinguish kleptocratic activity “threats” from “legitimate tax optimization” by multinational corporations and high net worth individuals. Moreover, without these wholesale money market “deposits,” the global monetary system would find itself short of liquidity as even formal bank institutions are deeply intertwined with offshore finance.

Instead of viewing these activities as national security threats created by the exploitation of a legitimate financing system by illegitimate actors, any attempt to curtail these activities must be done in the context of a radical reform of the global monetary order. This is not simply an academic distinction. If one sees kleptocracy as simply a form of corruption, the solutions presented are traditional anti-corruption measures focused on transparency and the strengthening of civil society. However, if we accept a systemic perspective that incorporates the centrality of offshore cash pools to the “dollar system,” then we must take a broader perspective that calls for wholesale monetary reform and the mobilization of U.S. monetary power, specifically to move toward a “systemic” reform of global capitalism itself.

The formal definition of a “Eurodollar” is a dollar deposit in a non-American domiciled banking institution. As such, Eurodollars are pure credit instruments. They have no formal backing at the United States Federal Reserve. That means that unlike onshore credit money, Eurodollars have no explicit guarantee for their par value. As such, Eurodollars are secured via a set of inter-bank funding agreements benchmarked by the London Interbank Overnight Rate (LIBOR). Eurodollar deposits emerge when non-American domiciled firms book a dollar inflow in non-American domiciled banks. These banks then ultimately lend these deposits to other financial institutions that require immediate dollar funding and expect a dollar-denominated inflow at some future period. The creation of a Eurodollar deposit is represented in Figure 1 through a set of stylized balance sheets.

Fig 1: An Anatomy of a Eurodollar Placement [Marcia Stigum and Anthony Crescenzi, Stigum’s Money Market, 4E, 4th Edition (New York: McGraw-Hill Education, 2007), 217.]

As we can see, Eurodollars are initially funded through an interbank transaction with a U.S. domiciled bank and its foreign branch. From the point of view of the onshore money system, no actual dollars have left the United States. However, credit has now been issued that can ultimately be multiplied many times over to create a system of dollar funding.

Moreover, the term Eurodollar is often used not only to describe the specific type of money market instrument described above, but also the larger global market for wholesale dollar funding. This market and its instruments—Money Market Fund Shares, Repurchase Agreements (Repos), and asset-backed commercial paper—form the backbone of the global “shadow banking system.” One can think of shadow banking as the expansion of the category of banking beyond registered bank holding companies. There is a robust academic debate as to what counts for deposits within this system, but a general consensus is that the key to the shadow banking system’s operation are large institutional cash pools, often held in offshore banking jurisdictions. These pools of Eurodollar deposits—essentially credit entries—require cash inflows to validate holdings. As such, an army of money managers has arisen to attempt to find returns for these large, global pools of cash.

The Eurodollar system is thus “hybrid,” insofar as dollar denomination depends on a state action—the U.S.-issued dollar—but is intermediated by and created through private credit. This is not an accidental arrangement but a set of political choices. A popular legend holds that the offshore dollar market was created when the USSR, fearful of seizure, wanted to hold its dollar deposits outside of American banks. More realistically, the Eurodollar market seems to have arisen through intercorporate “swaps” of currency liabilities designed to get around Bretton Woods-era capital controls. These swaps evolved into markets and eventually became the source of funding for offshore issued “Eurobonds”. In the 1970s, as the Bretton Woods system began to collapse, regulators began to give up on efforts to coordinate to control this system and financial globalization was born. More importantly, a whole industry of consultants, often with the encouragement of major governments, sprang up to offer newly decolonized states—often with common law systems—roadmaps to becoming offshore financial centers.

The existence of shadow banking and wholesale Eurodollar financing makes it increasingly difficult to draw specific borders between national, and global financial systems and between legitimate transactions and kleptocratic activities and “strategic corruption.” Disclosures of offshore structures such as the Panama Papers reveal a mix of both obviously political corruption and “normal” corporate tax optimization. An anatomy of several transactions demonstrates just how similar and indistinguishable both activities are.

Take the “double Irish” tax structure favored by pharmaceutical and technology companies. Company A in California develops a piece of software. It sells the patent for this software to a wholly-owned subsidiary in the Cayman Islands for one dollar. That subsidiary then revalues the patent to 100 dollars and pays no taxes on that re-evaluation. Next, the Cayman company “sells” right to the patent to an Irish subsidiary of Company A, which markets and sells the software in Europe. The Irish company thus pays low taxes on European sales and renumerates its American parent through licensing fees, paid in dollars, to the Caymans subsidiary. Note that at this point, the Irish subsidiary has entered the Eurodollar market to transform its Euro receipts into dollar deposits and has then transferred those deposits to a bank in the Cayman Islands. This bank can now engage in Eurodollar funding with its dollar deposit. Meanwhile, the Cayman company can lend to the parent firm at a zero-interest rate to bring profits home or can purchase the parent firm’s assets. Taxes have been minimized with no violation of the law.

Now, let us examine a “kleptocratic transaction” that uses a similar set of channels. A politically exposed person (PEP) in Country A wishes to benefit from a privatization scheme of a state-owned company. To do this, the PEP sets up a company in Cyprus which has a tax treaty with Country A. The individual then swaps shares in the worthless Cyprus company owned by him and the valuable firm in Country A. Thus, the Country A firm’s profits are now captured, and it is effectively privatized. The firm in Cyprus then sells its shares, in dollars, to another firm owned by the PEP in the Cayman Islands, thereby eliminating any tax liability and creating a dollar deposit in the Cayman Islands. Again, these chains of firms have entered Eurodollar markets to both convert cash flows from Country A to dollars, and to then deposit these receipts. The PEP can now use his dollar deposit to purchase property in London or to make investments in an American PR campaign. Again, a dollar deposit is now created within the Caymans and, with the likely exception of laws in Country A being broken, nothing illegal has happened.

The parallels between “tax optimization” and “corruption” are so strong that the illegality of the latter is only present because in the United States, we have made tax optimization legal and acceptable de jure. Moreover, both of these schemes have created Eurodollar deposits that can then be lent and borrowed in the global dollar system to fund trade, investments, and capital goods that are completely unrelated to these transactions. The incentives for not tampering with this existing system are thus quite high.

The offshore financial system was created in the wake of the collapse of the Bretton Woods System as a means to avoid high-cost political decisions while allowing an increasingly globalized financial system to serve the needs of a global elite. While this elite was largely in line with the interest of the United States, the national security establishment has paid little attention to the misery that the offshore world has caused due to lost tax revenue, illegal privatization of public assets, and financial instability. Now, however, that these structures are not only used by multinational corporations but also by state-related actors that might threaten American sovereignty, the national security and foreign policy establishment has woken up.

The tools it has offered us to combat these problems are a mix of relatively effective measures to boost transparency and some half measures that at best will try to restrict access to the offshore world to legitimate actors. Indeed, beneficial ownership legislation, now being championed by many in Washington, will not only help American officials push foreign counterparts to adapt their own transparency legislation but give us better ideas about the American side of many transactions. However, there is an open question about whether this legislation alone will allow the United States to effectively deal with the holes of global sovereignty caused by the offshore world. Efforts to empower civil society in corrupt states are noble but will not address the root causes of what makes Kleptocracy so simple: the easy movement of capital through offshore networks.

Most importantly, these policies do not take into account the fact that such transactions are critical to global dollar funding. If the United States is really serious about fighting offshore finance and kleptocracy, it has to put in some deep thought into what the outlines of a global financial system that replaces it would look like. At the original Bretton Woods Conference, John Maynard Keynes proposed a global clearinghouse system denominated in an international currency called Bancor. States would not actually use Bancor but would settle accounts in it. States with persistent surpluses of Bancor would be charged a negative interest rate to encourage them to lend to states that needed funding. Capital controls would help contain private international finances.

It would be exceptionally hard for a New Bretton Woods to happen. However, we can simulate some of its features unilaterally and eliminate incentives for other countries to serve as nodes in the offshore system. A major reason that a country like the Cayman Islands might want to be a tax shelter is to attract foreign exchange to its country and thus have sources of financing for development, as well as to sustain the value of its own currency relative to a global funding currency like the dollar. The United States has a tool to sustain the purchasing power of the Cayman’s currency: the central bank swap line. Swap lines have come into public consciousness during the 2008 financial crisis, when the Fed allowed major central banks to exchange their local currencies for dollars to backstop Eurodollar deposits. During the COVID-19 crisis, larger swap interventions prevented a general, global economic collapse. The United States should consider giving countries with strong macroprudential policies, open trade practices, and, most importantly for this piece, transparent financial systems pre-approved access to Federal Reserve swap lines.

This would, of course, mean crowding out opportunities for private finance to intermediate global monetary transactions. However, if the United States is really serious about fighting global corruption, and treating it as a national security threat, the problem has to be cut out at its root. The centrality of private offshore banking and Eurodollar creation to global funding must be eliminated to counter global corruption, not only abroad but at home.

The United States, as the issuer of the world’s dominant currency, has a responsibility to sustain this “global public good” in a manner that limits the ability of rentiers and oligarchs to exploit this public good. Without recapturing the role of global intermediation from private actors, we will never solve the problem of Kleptocracy. A national security strategy that addresses these new threats must realize that the enemy is not a set of particular corrupt individuals, but the structure of global capitalism itself.

The post The Financial Infrastructure of Corruption appeared first on The American Interest.

In Greek mythology, the concept of the hydra has proven to be one of the most enduring images. Its staying power doesn’t necessarily reside in the fact that the beast maintained eight heads, leering and lunging at passersby and foes alike, though that grotesque imagery surely provided its own longevity. Rather, the hydra’s true legacy lies in the fact that any attempt to defeat the creature was self-defeating: whenever one of the heads of the hydra is lopped off, two grow in its place, inflating the monster’s threat, and increasing the monster’s reach.

A hydra is a mythological invention. And yet, as Sarah Chayes details in her new book On Corruption in America, the myth bundles lessons that help illuminate the modern world in a way many of us have forgotten, or have willfully overlooked. Real hydras walk among us—real monsters that expand and evolve after every attempt to combat them, real beasts that, in their growth, strangle our “slowly dying globe,” as Chayes writes. And there is one monster among them, to which Chayes devotes her book: unmitigated greed.

Greed is rampant across the globe, affects all social classes, and brings ruin to nations. It goes by many other names in its many manifestations, with perhaps the most familiar—certainly one of the most popular, in this era of Trump and Putin and Xi—being “kleptocracy.” At its core, “kleptocracy” is a system whereby the flow of wealth looted by the governing classes in developing nations are laundered via a series of Western industries all too happy to look the other way about the source of the income, regardless of the cost piled along the way. “Kleptocratic networks hold sway in military dictatorships and in apparent democracies,” Chayes writes, “under leftist regimes and in countries whose leadership champions ultra-free-market capitalism.”

Yet this new book from Chayes—one of the U.S.’s leading anti-corruption voices, who made her name trying to steer anti-corruption efforts in Afghanistan—isn’t just focused on this phenomenon. It steers clear of analyzing the more technical, detailed aspects of modern kleptocratic systems. Rather, the book sticks to a higher, more philosophical plane, and tries to situate the phenomenon of “kleptocracy” as the outgrowth of the human condition centuries in the making. Where egalitarianism reigned for prelapsarian humans, modern man knows nothing but unabated greed. And kleptocracy, naturally, follows. “Once the question was, ‘to be or not to be.’ Now it’s, ‘to have or not to have,’” said one senior loan manager at a bank quoted by Chayes.

Chayes’s book is broadly chronological, examining everything from the pre-modern development of money to the emergence of Gilded Age robber barons, to the rise of Reaganomics. She is a steady guide as we watch the center fail to hold, as we see society crumble into little more than a playground for the greedy, as we observe networks of enablers and profiteers form the seemy underbelly of the modern world. Tax policy and macroeconomics, social reform and democratic backsliding—all, Chayes argues, are in some way impacted and infected by this unceasing, reflexive greed. Kleptocracy, kleptocratic regimes, and kleptocratic figures, all unprecedented threats to the flourishing of liberal democracy, are the end result. “The threat to democracy does not denounce liberty and egalitarianism,” Chayes writes. “It claims to represent those values. For that reason, it may be the most dangerous menace they ever faced.”

While certain sections meander, as philosophical treatises sometimes do, Chayes stands at her strongest when she centers her targets. The modern culprits—the major Western institutions, Western figures, Western models that fueled the modern modes of kleptocracy—all come in for a drubbing. There’s Goldman Sachs, for instance, which Chayes says is “for all intents and purposes a criminal entity.” There’s the Clinton Foundation, which Chayes describes as “the U.S. [version] of the ‘charities’ run by corrupt ruling families from Honduras to Uzbekistan,” alongside the “lower-profile Trump Foundation.” There is the entire billionaire class, which Chayes identifies as “parasites and freeloaders.”

Yet On Corruption in America is hardly a warmed-over Occupy Wall Street tract. Not only are there unexpected targets (such as former Secretary of State Madeleine Albright, who has become a private equity profiteer), but Chayes locates her targets—the heads of this particular hydra—in their historical contexts. She also notes that we have, in many ways, been here before—at least in the United States. This is not the first time that spiraling wealth inequality has been married to white ethnic revanchism, pummeling the poor and non-white alike, entrenching corrupt networks that prop themselves up on little more than grievance and lying. The closest historic parallel we have for the current American moment is not the fall of Rome or pre-1917 Russia; rather, it’s the Gilded Age and Redemption, in which unreconstructed Confederates resorted to brute force and bloody terrorism to regain power, all while exhausted liberals across the country simply rolled over so long as the economic engine kept roaring.

That arrangement, as Chayes points out, not only collapsed the post-Civil War momentum toward equal rights, but it helped launch a kind of unfettered capitalism that took its toll. “Two wars, which unleashed two genocides, mass starvation in Europe, and a pandemic of proportions unseen since the bubonic plague; two wars that debased humanity as no events before them ever had. And a global economic collapse,” she writes. “That’s what it took. That was the price the world paid to break the grip of the hydra.”

That’s what we’re up against once again, Chayes argues, as kleptocratic networks continue corroding the sinews of our global order, as a corrupt political class relies on ethnic and racial divisions to continue pilfering and profiting, and as deregulation and legalized bribery continue to flourish. A new hydra is rising.

“The phenomenon we confront is the worldwide equivalent of a forest fire, of the Blitz,” she notes. “We must react accordingly—with that same impulsive solidarity.” Chayes does offer practical solutions—limiting money in politics must be “citizens’ top priority,” she writes—but bills and technical fixes can only do so much. A wholesale reimagination is what’s needed. After all, that first hydra was a product of imagination, all those millennia ago. Can we imagine a world without one?

The post Defeating the Hydra appeared first on The American Interest.

Manny Diaz: Well, we just don’t get it. It reminds me, in this current era we’re living in, of the government being so unprepared for the pandemic. It’s related to this in the sense that—well, for openers, we don’t have a capital plan, which is absolutely unbelievable. Every city, or at least most cities in America, every year, we adopt a capital improvement plan in our cities for capital projects. And yet you don’t have that at the federal level.

I always like to put things into a historical perspective by looking at cities and what cities have been since the beginning of time. They have been the center of commercial exchange. They have been the focal point—the hub—for the movement of people and goods. It’s where people went in search of economic opportunity and a better way of life. And when cities began to develop, they would allow residents to use less energy, make use of multiple modes of transportation—just walking or cycling, or even in some cases, riding a horse. And that’s how our country, and really that’s how the world, developed.

We’ve come to a point in time today, where after the rise of suburban sprawl, there has been a massive rush to move back into cities. 50 to 60 percent of the world’s population is living in cities.

If you look at America, at the end of the day, it’s all about investments and it’s all about returns. And both of those are to be found in our cities. So if you understand the fact that 92 percent of our economic growth in the United States is in the metro areas, and the metro areas produce 90 percent of the jobs—the income contribution to GDP—then you begin to realize that cities are the economic engines of this country. And I would argue that this is true of most countries.

Now, what happened after World War II? We came to falsely believe that upward mobility—social mobility—meant moving to the suburbs. And that put a tremendous strain on cities because now we had to get all of this infrastructure—from pipes and sewers to building schools and everything else that goes with it—we had to get all that out to the suburbs, to accommodate people who wanted to have the 2-3 car garages, and dogs running around, and barbecues every weekend. So we have traffic congestion because you don’t have for the most part public transit that gets you out to the suburbs and back. So what do politicians do? They build more highways, they build more lanes for the highways. But study after study has shown that the more lanes you add, the more congestion—it doesn’t really address the problem.

Overall, the federal government has contributed only 25 percent to the cost of infrastructure. Water and wastewater management has become almost strictly a local expense, 95 to 98 percent of all dollars spent on water and wastewater are spent at the local level. The last figure that I had, between the late nineties and the mid part of the last decade, was close to a trillion dollars spent by local governments.

The other perspective that has been damaging and has put us in the position that we’re in today is this notion that it’s a local problem. Now, remember I said that cities are the economic engines of America, therefore contributing to federal coffers. And yet it doesn’t come back. It doesn’t come back because, thank you for your money, thank you for all the economic output that comes out of your city, but we’re not sending you money back. And infrastructure is clearly one of those areas—only 25 percent of all infrastructure spending is federal. And yet look at the return that they’re getting.

So what has this produced? Well, obviously congestion and traffic and all the other things, but it’s also had a very serious impact on business. Now let’s talk about business, from airport delays to bottlenecks and freight, and road congestion. Because this is two things. This is about moving people. And it’s also about moving goods. And that’s what keeps our country moving forward. And we are losing hundreds of billions of dollars and millions of jobs every year as a result of poor or inadequate, or improper infrastructure investment. From a personal perspective, the average American household spends $10,000 a year on transportation, spends more on transportation than on food and health, combined. That’s a huge number, $10,000. I mean, if you think about it, if you’re making minimum wage, after-tax dollars, look at what a high percentage is going to just getting you around. As the Harvard study says…

CD: So do you want to give us a snapshot of the Harvard study, and then go on to your experiences as mayor of Miami—and Miami’s infrastructure development during your tenure there.

MD: Sure. The Harvard study looks at this annually over a very short timeframe, to keep updating it. And the point of the study is that commuting is the single strongest factor in the odds of a person’s ability in America to be able to escape poverty. There’s a direct correlation between transportation and social mobility—interestingly enough, a stronger correlation than with crime. People think if you come from a family where there’s crime, or a neighborhood where there’s crime, what test scores you got in your elementary school, the percentage of two parent homes—all those normal social issues that you would think would create problems for upward social mobility… No, it’s transportation. It’s being close to a job (where you might make minimum wage) without having to spend $10,000 a year to get you there, that strongly correlates with better outcomes.

So it’s completely upside down. And all of this to me, it goes back to the practical—the return on investment. This is not a partisan issue. Look at the costs of not investing from a business perspective and from a personal perspective. And the money that could otherwise be generated and put into our economy, that is going now to deal with inadequate transportation. So that, by the way, is not American exceptionalism.

CD: That sure isn’t. We don’t rank very highly on infrastructure now.

Manny, could you go into your personal experiences in Miami as mayor in terms of infrastructure development? Because we know you did a lot there, and that’s where your knowledge of all this was collected and experienced. It would be great to hear that story briefly, and then we can go back into more general national issues.

MD: Well, it’s interesting because to me, Miami is sort of a microcosm of the predicate that we just established. Miami had suffered like other cities in America with regard to suburban sprawl. In fact, we were probably a poster child for suburban sprawl. So in the sixties, the seventies, the eighties, the people in Miami that could afford to move out to the suburbs, they got out and moved into the suburbs. That obviously has begun to change. But studies show that lower-income families were spending 72 percent of their income on housing and transportation. That doesn’t leave a lot for anything else.

So what is the context that created? Miami was number one in practically everything bad, from riots, to murder, to poverty. Our unemployment rate was terrible, the city was under financial oversight from the state of Florida. Our educational system was a mess. Our infrastructure was a mess. You name it. And I could go on and on. And by the way, this was the Miami of only 19 years ago. So it wasn’t that long ago.

So when I developed my agenda, I focused on five investment areas that I thought were the drivers of growth. One is to deal with poverty and job opportunity, which includes things like education and affordable housing and homelessness. Public safety—obviously you have got to have a safe city. Infrastructure, which is the one that we’ll talk about in detail. Environment and sustainability. And arts and culture.

So on the infrastructure side, I ran a campaign that was based primarily on grassroots, which is where I came from. Door to door, I knocked on over 10,000. I remember walking down a particular street in our city where after a couple of homes, I noticed that there was no furniture of any kind in either the porch or the foyer, or somewhere entering the house. And I asked the homeowner, I said, why does no one have anything—any furniture? And they said, well, because when it rains—and I mean a mild rain, not a hurricane—water comes into our house and ruins whatever we put out there. These memories kind of stuck with me.

And so I get to City Hall, and like for the federal government, I find out that there’s no capital plan. There’s no long-term capital plan. So we developed the first of its kind in the city. By the way, since there was no capital improvement plan, there was no capital improvement department. Nobody could do it. The only capital projects that were being done were occasionally public works. You know, we’re coming to your neighborhood, to your block, and we drop some asphalt on the pothole in front of your house. And that was the extent of it. There was no study that had ever been done. We commissioned that, knowing that our infrastructure was in horrible shape.

And then we went out and started identifying funding. And we started reaching out to all kinds of sources—from cities, state, federal, private sector, private-public partnerships. And the capital improvement plan that we developed was 700 projects. The net result was that we spent about $10 billion in total.

CD: Regarding the financing, when we hear about these big infrastructure projects, be it one or a whole series like that, is the issue of funding. And this can be very confusing—the municipality provides some of the funding, the state often provides some of the funding and the federal government… How does this all break down in terms of what you experienced in Miami, and more broadly what you observed nationally—this issue of federal, state, and local funding for infrastructure because it sounds complicated? How does that all work?

MD: It is complicated. For openers, when I got elected, we actually approved a general obligation bond issue that was about a quarter of a billion—$250 million. That was sort of the base. Now what happened is that the city just decided to put it on the ballot. They did it on the basis of back of the napkin type calculations.

I’ll give you one example. We had a park called Grapeland Park, which they had listed at a million and a half, and we ended up spending $40 million on. These were just arbitrary figures. A million and a half may have been too much for this park—who knows!—or it may be totally inadequate. In this case, it was totally inadequate, as we later found out. For example, we had to find $9 million of monies that weren’t budgeted for environmental remediation, because the city in years past had used that as a toxic dumping ground.

So we started with that base of our own funds. We collected other infrastructure funding to deal with flooding, money that was not being properly used. We went to the County, which also had pending bond issues. So we sat with them. We worked with the state and the department of transportation. We built a tunnel in our city to get us to the port of Miami—the port of Miami tunnel.

CD: The tunnel was built during your tenure?

MD: Yes, it was approved and started to be built. It was completed after I left office.

An interstate that runs through the heart of our city—the closest I can come to describing it would be to compare it to the Boston bridge, in the North End, by the basketball arena. So those were state monies.

The tunnel, by the way, the tunnel was a P-3—what everybody refers to as a public-private partnership. One of the hardest issues with infrastructure is finding the money today. The tunnel was a billion-dollar project, with a very significant contingency plan, because obviously you’re going a hundred feet underwater and you never know what you’re going to find there. So we worked on the basis of a billion dollars.

The city didn’t have a billion dollars. But the city had potential future revenue streams to tap. There were communities that stood to benefit greatly from the tunnel. Before the tunnel, 5,000 to 10,000 18-wheelers were driving through the heart of downtown Miami in the middle of the day. As a result, you could forget about certain neighborhoods ever being developed! I mean, no one’s going to sit and have a cappuccino in a sidewalk cafe while you have all these trucks blowing smoke your way. So we took money from that. It’s a long-term commitment from the tax increment that is generated in that redevelopment area, with which I can pay you back.

So what do I do? I go to a private company, a private company develops it, builds it, manages it, and operates it. And I pay them availability payments over a period of 30 to 40 years. It’s like a mortgage, right? And they take care of everything. They gave me the key to the house. And they rely on their security—the continuing revenue stream that the city is going to have for the next 30 to 40 years, plus-plus. Because now remember, that whole immediate neighborhood benefiting from the tunnel is now part of a $4 billion project. So not only did I have X amount of revenues the day we cut the deal but now look at all this additional revenue that I have down the road to pay you with.

I-395 is another interesting example of how our transportation system works, because—I actually tried to bury it. This is one of those interstates that they ran through the inner city. What was once a vibrant Black community called Overtown was completely destroyed by being chopped into four pieces by I-95 and I-395. And so like many other mayors who wanted to reclaim a city, one of the things we started fighting was these overhead monsters that run through our cities—by the way, built just to get you from Miami Airport to Miami Beach. That’s basically the purpose of it.

And so I started trying to do a number of other things, and here’s what the response was from the Department of Transportation was: They tell me if you change the project—because this project has been approved, and it’s in the pipeline, which may be 10, 15, 20, 25 years—if you change it, you go to the back of the line again. Right? So think about this: a project that somebody’s designed 15 years ago today is probably obsolete now, not workable, and a lot more expensive than it was 15 years ago. But I still have to build that, because that’s what the federal government approved. It’s absurd.

CD: That makes me think of the Big Dig in Boston. Can you tell us about that? It’s known that the cost overruns were huge. But would you still rate it as a success? And then my understanding also is that there was a lot of federal funding that ended up going into that—a huge amount—and the cost was mind boggling. I forget, three, five, seven . . . however many times over budget. Do you have a take on the Big Dig?

MD: I do. That’s one of the things that inspired me about a tunnel down here. And look, yes, it was over budget, it was delayed. It was a massive undertaking. Thank God for Tip O’Neill in Boston, who was able to keep funding the project despite all that.

What people need to understand is that in America, we can’t think beyond next week. I was in Boston many times before the Big Dig. And it was a city that was ready to explode. You couldn’t get around. I mean the movement of people, the movement of goods, a lack of infrastructure—when all that becomes impossible, your city falls apart. They had to do it. They opened up that entire area, reconnected the North End, which was previously a very bad area. I love the North End now—one of my favorite places. And I can walk there. I can walk over on the Rose Kennedy Greenway.

We yell and we kick and we scream because it’s too much money. But think about this: it’s also a 100-year investment. I’ll give you another example that we had down here in Miami: forming our performing arts center. A lot of people don’t like mayors that are artsy, because they don’t think that there’s value in it. When I was getting into one of those moments where people were criticizing some decision about that project, I had my staff go back and look at the tax profile of that neighborhood for the five years preceding, and for the five years after we had broken ground. The tax base had only grown by $45 million over the preceding five-year period; and in the five years since we started, it grew by a billion.

So I ask again, is that an investment that you would make?  The answer is, yes, of course it is. And so again: it’s that issue of what is the yield, what is the return on the investment that you’re making.

CD: For these infrastructure projects, the benefits are mostly in what economists call externalities, and they’re incredibly hard to measure. It’s very interesting to hear you talk about that sort of thing. And of course, without these projects, we wouldn’t have the city at all.

Let’s take a jump outside our own country for a minute. We certainly are known for having pretty much the worst infrastructure of any of the advanced industrial nations that we compete with. I think that’s almost inarguable at this point, right? So who do you think does infrastructure best? I mean, who should we be looking to, to benchmark how we do things, and maybe different areas where different countries do it better than others?

MD: Well, all you have to do is travel—look at almost anywhere. If you look at the Far East, China spends close to 10 percent of its GDP on infrastructure. The European Union spends about 5 percent, which is over twice as much as we spend.

And it’s not just throwing money at the problem. It’s also a cultural thing—they recognize the value of, and place a priority on, infrastructure. There’s a consciousness, I think, of people in Europe for many, many years, that these are the things that make us great!

They also have a European Union infrastructure bank, which we’ve talked about setting up in this country, but which we can’t seem to do. They’ve been doing three P’s—public-private partnerships— for many, many years. So they have got a whole system in place that we can only aspire to.

And that’s why when you travel, you marvel at the high-speed trains. They’re wonderful. The Chunnel—isn’t it great that you can go from London in a couple of hours on a train, underwater, end up in Paris? Can you imagine if we had proper rail service in America? As mayors, we’ve worked on a lot of rail transportation plans to connect major metropolitan hubs. In Miami we’ve been at the bottom—we’re finally going to get a connection to Orlando. But there should be connections in the Midwest, to get from Chicago to surrounding metropolises. In the Northeast, the Acela is pretty good. But we need more Acelas. We need more of those connections between major metropolitan areas because we all benefit from it.

CD: Of course, our distances are much greater than in Europe and other countries that have high-speed rail.

One of my pet ideas for many years has been the use of technology when it comes to infrastructure. Because we’re way behind. We love technology and politically speaking, Americans like investments in technology. Would there be any way to sell a notion that instead of playing catch-up, we should have some sort of DARPA, an accelerated research program, to try to actually leapfrog some of our industrial competitors in terms of infrastructure technology? Is that a pipe dream, or can you imagine any possibilities there?

MD: It’s really the private sector that is making these investments. Government, what are we doing? We’re cutting research and development grants and monies. We don’t even have enough swabs to get COVID tests! I mean, we just don’t invest in things.

But yes, the answer is that the private sector is doing a lot of that. You know, again, going back to the stimulus bill, we got two things into it that we hoped would become permanent fixtures in America. One is a smart grid. An internet of things in Miami. We got the first of two $200 million grants to build a smart grid.

And now that we have that, people don’t understand what they’ve got. Over the long term, what are we talking about? We are talking about the ability to manage the electric grid and know where there is a problem, sitting in some FPL office somewhere, and getting it fixed quickly. My ability to control the energy usage in my house through the internet, by being able to monitor smart appliances in my home. Those are all things that are massive savings in the long run.

There isn’t an element of infrastructure that I can think of that would not be enhanced in terms of service and in terms of savings by being supplemented by technology. So, yes, absolutely. We need more technological improvements.

CD: One last question Manny. If you were the King of Miami, shall we say, what would be the optimal urban infrastructure that you’d like to see, if you had a few years to build that out? What would be optimal?

MD: Transit is a huge issue.  Another one is just simple connectivity—broadband—and making sure that we can connect all our residents. Right now, we could use virtual learning and free internet connectivity.

I was lucky that the cable franchise agreement in the city was up for renewal when I got elected, and I made it a condition of the new contracts that they wire all of our parks and our libraries—where people, adults and children, who weren’t connected at home could at least walk down the street to their park or to their library and have free access.

CD:  And what about the transportation infrastructure?

MD: That’s a mess. You know, it’s hard to reverse the decades of suburban sprawl and take rail, or even light rail, out to the suburbs. It really is incredibly expensive. So my view was bringing people back, bring people back to the city. Our urban core is now over a hundred thousand people. We had a huge population increase and it’s still growing. Because in the urban core, we actually have a decent transit system. I forgot what the percentage is, but it’s a very high percentage of people that have moved back.  The average age is mid- to early thirties, because they want that urban living. They don’t want to get in a car.

Another thing that COVID has taught us is—productivity gains. You know, if you don’t have to spend two hours or three hours in a car, or even in a subway to go to your office, that’s two or three free hours a day that you now have. You can play ball with the kids or produce some extra work or whatever you choose to do.

The post Why We Need Better Infrastructure Now appeared first on The American Interest.

When communism collapsed in 1989, there were fewer doubts about the bright future of post-communist Central and Eastern Europe. In fact, even the prospect of Russia’s eventual joining of NATO and the European Economic Community was not seen as completely farfetched. Thirty years later, the results are mixed. Some countries, such as Belarus, have barely moved in the direction of democracy, individual freedom, and the rule of law; while others, such as Poland and Hungary, have backslid following substantial initial progress. Most, across the Balkans for example, seem trapped in the no man’s land of flawed democracy, ridden with patronage and corruption and cynical about its geopolitical allegiances.

Some blame a backlash against the “politics of imitation” which sought to turn Central and Eastern Europe into a copy of the West, without much regard for local realities. Alternatively, the region might have simply reverted to the long-run version of itself, with some countries settling on the more liberal end of the spectrum and others further away from it.

Yet if Orbán et al. are products of a backlash against heavy-handed efforts to create Western-like institutions from scratch, how does one account for the even worse examples of authoritarian populism in places that never really faced the same pressure, such as Belarus, Serbia, or Moldova? And how come some of the most eager “imitators,” such as the Balts or the Czechs, never backslid in any meaningful sense?

To complicate things further, the reform strategies across post-communist countries varied dramatically. One of the most worrying examples of democratic backsliding today, Hungary, pursued a unique mix of economic reforms—and by no means one prescribed by the “Washington Consensus” of the era. The government prioritized financial-sector restructuring and consolidation over privatization of its state-owned enterprises, avoiding significant social disruption and extended periods of high unemployment.

Upon close inspection, the stories of post-communist transitions thus eschew sweeping generalizations and grand narratives. Instead, they are stories of cumulative institutional change occurring in specific contexts, in which old cultural and political legacies interacted with discrete political choices and accidents of history, oftentimes in unexpected ways.

Some fifteen years ago, Hungary looked firmly like a success story, having made considerable progress on all sorts of metrics of democracy, rule of law, and institutional quality. Today, on measures as diverse as Freedom House’s Freedom of the World Index, the World Bank’s Worldwide Governance Indicators, and the Cato Institute’s Human Freedom Index, Hungary lags significantly behind the Czech Republic, which has not seen a similar degree of “democratic backsliding” or “de-democratization”—in spite of living through its fair share of populist politics.

Has there been a backlash against the “politics of imitation” in one country but not in the other? Or, have the Czech liberal traditions of Tomáš Garrigue Masaryk and Karel Havlíček, and the Trianon- and Horthy-era ghosts of Hungary, simply asserted themselves irrespectively of choices made by policymakers in the 1990s and the early 2000s? The reality is more complicated. As Grzegorz Ekiert and Daniel Ziblatt write, looking for “deep causes” of the current developments is a fool’s errand. It is far more productive to identify “chasms between formal and informal institutions, preventing gradual change and producing patterns of institutional mimicry to cope with institutional ruptures.”

The judiciary in Hungary is a key example of such chasms. In the 1990s, the Hungarian government successfully insulated the judiciary from political pressures by following recommendations by international authorities and setting up an independent council of the judiciary—a step never taken by the Czech Republic, where the executive retained, at least formally, a significant role in running and overseeing the judiciary. In the 1990s, Hungary’s constitutional court was also hailed as one of the strongest in the world—pushing back assertively against government legislation, including striking down its fiscal consolidation package in 1995. It also deployed the doctrine of an “invisible constitution,” filling the gaps in the text of the constitution by borrowing from international law and developing and applying its own abstract concepts, such as human dignity.

Far from entrenching the principles of judicial independence in Hungarian legal practice and political life, these early reforms led to a backlash and ultimately to the full-fledged politicization of the courts under FIDESZ. The reason for the backlash was not “imitation,” however, but rather the politics through which Western best practices were imported into Hungary.

Hungary’s Workers Party transformed itself into a nominally democratic Socialist Party, purging itself of all the communist and totalitarian symbolism, but retaining the bulk of its cadres. When it returned to power in 1994, “full political insulation of their judiciaries vis-à-vis future majorities remained an advantageous strategy.” To that end, the Socialist government pushed for a judicial reform which froze the communist judicial structures in place, unwittingly making the courts fair game for upcoming political struggles. The decision of the Workers Party to go mainstream could have gone the other way. Czech communists never renounced their totalitarian heritage and as a result remained as a fringe political force throughout much of the Czech Republic’s post-1989 existence, with little influence on policy, much less on the reforms of the judiciary.

Another consequential accident of history was the split of Czechoslovakia. Slovak nationalism, dormant under communism, became a significant phenomenon in 1990 and 1991. Yet, the decision of Václav Klaus and Vladimír Mečiar to end the Czechoslovak federation after the election in 1992 was in no way pre-ordained, nor was it forced by the pressure of public opinion. One important effect that the split had was the need for the Czechs to draft their own constitution, which took some inspiration from the German Grundgesetz, especially in its superrigid components designed to prevent democratic backsliding. The Hungarians, in contrast, talked about the need to replace the amended version of the 1948 constitution with something better, but no singular event forced them to cross partisan lines and to do so—until Viktor Orbán secured his constitutional majority in 2010 and passed a new Fundamental Law with FIDESZ votes only. By doing so, he also ensured that the entire pre-2011 jurisprudence of Hungary’s constitutional court went out the window.

The Czech Republic’s constitutional court did not need to invent an “invisible constitution” to stop parliamentary majorities from rewriting the rules of the political game by changing the electoral system or eroding the independence of the central bank. The text of the constitution was quite enough to generate a body of precedents that have cumulatively made Orbán-like power grabs difficult in the Czech context.

One important factor running through these accidents of history was the question of continuity. Not unlike in the case of Germany, where its fresh start under Allied occupation seems to have been the key to its post-war success, the more seamless the transitions from communism into the new democratic age were, in contrast, the more resonance was gained by the narrative of 1989 as of a revolution that was left unfinished or hi-jacked by former communists. Unlike in post-war Germany, compelling arguments can be made for some degree of legal and political continuity in post-communist Central and Eastern Europe. Yet, in retrospect at least, it appears that the difference in seamlessness with which old communist elites retook positions of influence and power within the new system were key to the post-communist countries’ future woes.

In the Baltic states, national existence was incompatible with any form of continuity with the Soviet oppression. On the other end of the spectrum, little actual political change accompanied the formal demise of the communist regime in Belarus, Ukraine, or in Shevardnadze’s Georgia. Between those two poles, there are varying degrees with which old communists reinvented themselves as pro-EU liberals (as in Hungary), seized sizeable assets during the wilder phases of privatization of state-owned enterprises (as in Slovakia), or moved to the margins of economic and political life.

Could things have been done differently, and better, in countries where communist elites continued to exert their influence, perhaps after a rebranding? While history does not allow for controlled experiments, the experience of the past 30 years does suggest that clean breaks are often the best way to fix not only toxic relationships, but also societies governed by toxic institutions.

The post Is There a Recipe for Democratic Success? appeared first on The American Interest.

Viktor Anatoljevitch Bout is currently serving a twenty-five-year sentence in U.S. federal prison. He is known as the “Merchant of Death” or the “Lord of War”  depending on whom you ask. Bout is an arms dealer. In 2004, he was placed on a United Nations travel ban list for shipping weapons to convicted war criminal and former dictator of Liberia, Charles Taylor. Taylor was not the only dictator Bout served through his weapons trafficking empire. Throughout his career, Bout supplied arms to both sides of the civil war in Angola, transported and supplied arms to Rwandan soldiers who were fighting in the Eastern Congo, and leased cargo planes to Muammar Qaddafi.

How Bout ended up in United States custody is a fascinating and at times deeply troubling story. In 2004, pursuant to a United Nations Security Council resolution, Bout was placed under the U.S. sanctions regime on Liberia. But it was not until almost a year later that the Office of Foreign Assets Control (OFAC), the United States government agency in charge of sanctions enforcement, placed Bout’s companies under sanction. Among those thirty companies was one registered in Wilmington, Delaware called Vial Company.

When procurement experts in the U.S. Department of Defense searched the newly sanctioned entities in their databases, they found something highly disturbing. Bout’s companies had been delivering frozen food and tents to U.S. troops in Baghdad while they were engaged in fighting the war in Iraq. All told, the U.S. government paid Bout’s organization up to $60 million. U.S. taxpayers funded the “Merchant of Death,” all through the veil of secrecy provided by anonymous companies. According to Nicholas Schmidle, a New Yorker reporter who interviewed Bout in August 2014, that money helped Bout’s empire “get back on its feet” after years of targeting by U.S. and international authorities. Bout could not travel outside Russia without getting picked up by INTERPOL but he was free to profit off the Defense Department and government contractors.

Bout was finally arrested on March 6th, 2008 after a Drug Enforcement Agency (DEA) sting in Thailand recorded him offering to sell anti-aircraft missiles to DEA agents posing as members of the Colombian FARC guerilla group, planning to use them to kill U.S. troops. After a long extradition battle, in 2011 he was tried and convicted in federal court of conspiracy to kill U.S. nationals, conspiracy to kill federal officers, conspiracy to acquire anti-aircraft missiles, and conspiracy to provide material support to a foreign terrorist organization.

Bout’s arms trafficking empire was built on anonymous shell companies. These companies, run by his accountant Richard Chichakli, allowed Bout to launder his gains and spend them around the world. Bout registered his companies all over the world, from Côte d’Ivoire to the United Arab Emirates to Kazakhstan. He registered three companies in Gibraltar, a notorious United Kingdom tax haven. Yet of all the countries Bout used for his secretive empire, the one he seemed to like the most was the United States, a country with arguably the strongest anti-money laundering enforcement in the world—a country that had been hunting him for years. Bout used at least eleven U.S. companies located in Texas, Florida, and Delaware to launder millions of dollars from his arms trafficking empire‚including Vial Company.

It turns out, Bout is far from unique. According to a 2011 World Bank survey of “grand corruption” cases, the United States was the leading jurisdiction for the incorporation of shell companies used in “grand corruption” cases. Viktor Bout’s decision to use the United States for his arms-dealing empire was the same decision criminals and kleptocrats were making all over the world. 

On the surface, this fact should seem strange. The United States generally has a reputation for the most aggressive anti-money laundering enforcement in the world. The U.S. has numerous law enforcement agencies tasked with combating money laundering, including the Financial Crimes Enforcement Network, the Office of Foreign Assets Control, the Federal Bureau of Investigation, the Internal Revenue Service’s investigations arm, the Secret Service, Homeland Security Investigations, Immigration and Customs Enforcement, among others. The Justice Department aggressively prosecutes money laundering. From October 2017 to September 2018, the federal government brought money laundering charges against almost 800 defendants. In its 2016 evaluation of the U.S., The Financial Action Task Force (FATF)—the international body tasked with monitoring compliance with global anti-money laundering standards—rated the U.S.’s financial intelligence and money laundering investigation and prosecution capacities “substantial,” its second-highest rating.

The U.S. also aggressively enforces its tax laws abroad. This effort is best exemplified by the U.S. crackdown on Swiss banking secrecy and the story of banker Bradley Birkenfeld as chronicled by journalist Oliver Bullough in his recent book Moneyland. Birkenfeld, an American working for the bank UBS in Switzerland, marketed his ability to use Swiss banking laws to help rich Americans avoid taxes. But in 2007, he flipped on his employer to U.S. prosecutors. The investigation eventually implicated multiple Swiss banks, including UBS and Credit Suisse. As a result of this scandal, Congress passed the Foreign Account Tax Compliance Act (FATCA). The goal was to prevent U.S. persons from dodging taxes by using foreign financial institutions. Since the legislation was enacted in 2010, the United States has reached agreements with 113 countries and jurisdictions to ensure they comply with the law. Soon after the U.S. passed FATCA, the rest of the rich world followed suit. The Organization for Economic Cooperation and Development (OECD) implemented the “Common Reporting Standard” (CRS) in 2013, a system for the automatic exchange of tax information between countries.

But, while the United States may have inspired the CRS, it did not sign on. While the United States insists that countries automatically share financial information about Americans with funds abroad, the U.S. is under no obligation to automatically share the same information about foreigners’ assets in the United States. Financial transparency is a one-way street. As Bullough puts it, “The United States has bullied the rest of the world into scrapping financial secrecy, but ha[sn’t] applied the same standards to itself.” The result of this gap in U.S. standards has been a kind of financial backflow in which anonymous money has seeped back into the United States from the countries it is policing abroad. Professionals in the field of international tax law are well aware of this force driving their business. Bruce Zagari, a Washington-based lawyer at international law firm Berliner, Corcoran & Rowe, told the Financial Times, “I think the US is already the world’s largest offshore center. It has done a real good job disabling competition from Swiss banks.” The problem driven by FATCA highlights a paradox in U.S. anti-money laundering enforcement: despite proactive prosecutors, able financial intelligence authorities, and a foreign policy apparatus dedicated to cracking down on transnational crime and global kleptocracy, the United States has been failing to secure its system at home.

Much of this problem has its roots in a key component of the U.S. governmental system: federalism. In the United States, there is no solely federal incorporation system. Each state sets its own standard for what it takes to make a corporation. The result is that in every state in the union, it requires more personal identity information to obtain a library card than to create a company. This fragmented system allows corporate service providers like the one that Viktor Bout used to sell anonymous companies to their clients, affording them the secrecy they need to launder money.

In fact, my research has revealed that these companies that create other companies often have remarkable control over how states decide the rules for how companies are formed. In two of the most notoriously secretive U.S. states, Delaware and Nevada, corporate service provider lobbyists wield a significant amount of influence over corporate law-making and incorporation regulation. Their lobbying seems to have made these two states the most secretive and friendly to money laundering in the nation. Competition between these two states for incorporation revenues locks them in a struggle for supremacy that results in more secrecy and more corrupt money flowing into the United States. If Delaware stops marketing secrecy, corporate service providers will move their business to Nevada or one of the many other states getting into the game. 

The results of this political process are stark. According to research by an international team of experts on anonymous shell companies, Delaware and Nevada are two of the jurisdictions where it is the easiest to obtain the anonymous companies money launderers like best. Those states are in fact significantly less transparent than famous tax havens like the British Virgin Islands.

But if this is a state problem, it would be easy to assume the solution could also come from the states. Maybe those ‘laboratories of democracy’ can cook up the solution to the problem they created. Yet the fundamental forces at play in the secrecy game make state-driven change impossible. The competition between states like Delaware and Nevada sets up a classic commitment problem. If one state unilaterally reforms, it immediately begins to lose incorporation revenue to the state that did not reform. As Nevada Senator Tick Segerblom explained to the Las Vegas Review-Journal, “We are known as the Delaware of the West…We don’t want to make changes and shoot ourselves in the foot unless other states make the same changes.”  Delaware legislators have similarly expressed opposition to unilateral reform. The Delaware Senate passed a resolution embracing federal reform noting that only a federal solution can “[maintain] Delaware’s corporate tax revenue stream and [protect] Delaware’s corporate brand.”  Senior political leaders in both of these states have no interest in unilaterally disarming by forbidding anonymous shell companies. Given these incentives, a grand state compact on transparency without federal intervention seems unlikely. If there will be no state compact, the only solution remaining is a federal solution.

Even if consensus solutions like beneficial ownership transparency are enacted by the federal government, the river of dirty money will likely continue to flow into the U.S. The money laundering problem corporate service provider lobbying in part created will not be solved with simple transparency. Financial secrecy is like whack-a-mole; criminals will find new legal vehicles and new entities to hide ill-gotten funds. 

But this ingenuity can also be a kleptocrat’s weakness if the U.S. takes the right policy step. Kleptocrats always need help with complexities of corporate structuring and financial accounting, often from the very corporate service providers and law firms that are lobbying state governments. This simple fact creates a potential weak link in grand corruption enterprises, one that governments can exploit. In order to fully tackle the anonymous shell company problem, we must regulate these professional enablers of crime and corruption.

Work has already been done on how to approach this problem. A Financial Action Task Force (FATF) and Egmont Group report outlined how “specialists and professional intermediaries” including lawyers, accountants, and corporate service providers were involved in the majority of the 106 case studies of beneficial ownership concealment for criminal means the report cataloged. Both the 2015 and 2018 National Money Laundering Risk Assessments from the Department of the Treasury warned of the money laundering risks from financial professionals. The Hudson Institute’s Kleptocracy Initiative has outlined how professionals like lawyers, corporate service providers, and financial service providers need stricter regulation to counter money laundering. Democracy expert Larry Diamond proposes regulating these enablers as one of his measures to save contemporary democracy from kleptocracy and corruption in his recent book Ill Winds. The European Union has long taken precautions against the involvement of professionals in money laundering. The EU’s first anti-money laundering directive issued in 1991 applied EU anti-money laundering standards to “those professions and undertakings whose activities are particularly likely to be used for money laundering purposes.” The U.S. has continually failed to impose the same standards on these professionals as it does on banking institutions, despite the fact they are often just as central to money laundering and terrorist financing schemes.

Many professionals, even in well-established firms with otherwise sterling reputations, feel very comfortable exploiting this loophole in the U.S. anti-money laundering system. An undercover sting conducted by anti-corruption campaign organization Global Witness alarmingly found that top New York law firms were very willing to help a fake kleptocrat launder his money using U.S. shell companies. As the leader of the campaign explained: 

[W]e feel like our worst fears were confirmed, yet it was still striking to see how uniformly the lawyers documented in that investigation were all too willing to give advice on how to structure company ownership in a way that would evade or skirt anti-money laundering rules or monitoring.

In real grand corruption and criminal cases, these enablers often claim they were unaware of the criminal activities of their clients. But this is often not the case. These enablers work closely with these criminals. It is their job to understand the needs of their client and tailor their services to these needs. The idea that an accountant, someone who is trained to identify financial malfeasance; a lawyer, who is an expert in what is legal and illegal; and a corporate service provider who is an expert by practice in the normal behaviors of businesses, cannot identify the warning signs of criminality is a proposition that is absurd on its face. 

If the ignorance defense fails, these professionals claim that any attempt to probe into criminal behavior would breach their client’s privacy. This defense is most often employed by lawyers who jealously guard against any attempt to weaken attorney-client privilege rights. This is certainly a legitimate concern in the abstract. But if this right is granted in this particular case, all society gains is a right for wealthy people to structure their assets in full secrecy from the government. Furthermore, this particular privacy right would give professionals carte blanche to suborn criminal behavior. Granting this right results in gains for the very few who can afford to structure their wealth and losses for the many who lose out from the bad actors who use this right to steal, defraud, and corrupt our governments.  

The solution is simple, in theory: these professionals should be required to submit suspicious activity reports (SARs) when they come across behavior that displays warning signs for money laundering. This is the same requirement applied to banks by the USA PATRIOT Act in 2001. Under such a regulation, if a professional received a suspicious solicitation for the incorporation of a shell company like the ones the authors of Global Shell Games sent for their study, the corporate service provider or attorney would be required to file a SAR with law enforcement who could investigate further. Regulators should also impose stiff penalties on professionals who fail to conduct adequate due diligence, allowing their services to be used to launder money. 

Indeed, some states have already enacted a version of this solution to some effect. But the moment cries out for more states to follow suit. If the regulatory incentives remain as they are today, those who create U.S. shell companies will continue to carve out legal havens from favorable state governments. Comprehensive regulation of these intermediaries of corruption is the only thing that can break the cycle of influence that pushes states like Delaware and Nevada to foster anonymity. 

In 1934, Justice Louis Brandeis wrote, “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country” (52 S.Ct. 371, 76 L.Ed. 747 (1932) at 57). In modern application of this quote, it often seems that the “laboratory” element is emphasized to the detriment of its prerequisite: the collective choice of democratic citizens. The unifying theme of the development of secrecy in all jurisdictions is that it is led by a small clique of professionals who hope to profit off the result. In neither Delaware nor Nevada did a large mass of their populations, much less a majority, rise up and demand that the legislature make their home state a corporate secrecy haven. Corporate secrecy in its first iteration has always been about the profits of a few, not rights and benefits for the many.

The cost of these laboratory laws has been great. By innovating on corporate secrecy, states like Delaware and Nevada have not just risked the rest of the country, they have risked the entire world. They have tunneled a gaping hole in the domestic laws of any country concerned with preventing corruption, fraud, tax evasion, drug trafficking, terrorism, and all the other ills facilitated by anonymous shell companies. But even though the American people did not choose secrecy—unwittingly delegating their democratic power to state bar associations and corporate service provider lobbyists—only the choice of the American people can end secrecy.

The post The Laboratories of Financial Secrecy appeared first on The American Interest.

There will always be anti-Zionists for whom the best agreement in the world, if it involves Israel, is null, void, and detestable.

There are the false friends of Palestine fulminating about treason and abandonment at the hands of their champions.

There are Israelis worried about the delivery of F-35 fighter jets to Abu Dhabi under the agreement, because it calls into question their military superiority over their neighbors.

And there is the danger that all of these forces may end up coming together at the last minute to scuttle the deal.

Which would be very unfortunate.

Because the agreement with the United Arab Emirates, announced August 17 in Washington and due to be ratified in the coming weeks, was one of the major events of the summer. I believe, in soul and conscience, that it is a good thing for all parties—and for Israel in particular. And this for five reasons.

First, I do not know the Emirates well. But I do know that their president is one of the few in the region to put himself on the right side of the barricades in most of the hotspots where the battle for peace is being waged. Tolerance at home… Construction of an Abrahamic Family House in which a church, a synagogue, and a mosque will soon be neighbors… Decisive contributions, in the West as well as the Middle East, to the struggle against Salafism, Jihadism, and the Muslim Brotherhood… And the Abu Dhabi Louvre, conceived at a time when ISIS was pulverizing the treasures of Palmyra as a ringing response to the radical iconoclasm at the heart of radical Islam. Who, in the region, has been more eloquent? And who was more inclined than he to making peace, real peace, a peace of hearts and minds, with the only democracy in the Middle East?

Second, Kuwait, Oman, and Bahrain protested, but to no avail. Though a spokesperson in Khartoum was sacked after telling Sky News that his country would soon take the same path, all serious observers realize that, if the Israel – UAE agreement goes through, the domino effect will just be a matter of time. And all of the architects of the accord—Israeli (Mossad chief Yossi Cohen), Emirati (Crown Prince Mohamed bin Zayed), and American (philanthropist Tom Kaplan, MBZ’s friend and confidant)—pray that Abu Dhabi is once again showing the way. So, again, what is there not to be happy about? How can one turn up one’s nose at a process that has already led the very powerful Turki bin Faisal Al Saud, the former head of Saudi Arabia’s intelligence agency who is often considered the official voice of the royal family, to publish on Al Arabiya’s English-language website, an article dated August 21 that, while rehashing the outlines of the Saudis’ 2002 plan, ridicules the alliance that has been so hastily assembled by the Turks, Iranians, and Qataris to reject the Emiratis’ initiative?

Third, Israel’s 1979 accord with Egypt and its 1994 treaty with Jordan had a decisive military impact, sheltering the Jewish state from a possible all-fronts attack by a coalition of Arab armies. But this new agreement, though it may appear more prosaic for being centered on opening air links, intensifying economic exchanges, cooperating to host a world fair, and making development plans (in short, for Montesquieu’s spirit of “gentle trade”), will have a symbolic effect that is just as great, paradoxical as that may seem. For, if the logic of the agreement takes hold and spreads, will not Israel’s image be radically transformed? Will we not be moving from the odious image of an illegitimate state, a cancer on the Middle East, to the contrary image, held by Shimon Peres, of a nation of pioneers, dreamers, and engineers contributing to the wealth of its neighbors?

Fourth, for decades, there reigned in most European foreign offices a postulate that the creation of Israel was the root of all of the region’s ills, and that no settlement was conceivable unless it proceeded from a deal with the Palestinians, the game masters, who were tacitly invited by the international community to chime in at every stage of the bidding. Well, this new bilateral accord, reached in secret in two or three embassies, in good Machiavellian form, followed the opposite pattern. In so doing, it may have pulled off the most difficult and most rare feat in geopolitics: a paradigm change. Yes, we are moving toward peace. Yes, the Palestinian people, if you read the text and note Israel’s obligation to freeze settlements on the West Bank, are being offered a historic new opportunity to advance their national cause. But, for the first time, this is being done without allowing the Palestinian leadership to apply all known forms of blackmail and thus to block everything from the get-go.

Finally, as for the F-35s and the risk of an Arab state gaining access to a weapon that may end up in the hands of who-knows-who, I consider that risk to be real. But although I am no military expert, it seems to me that the most fearsome property of these fighters is their stealth, and that Israel already possesses systems capable of detecting them. I, like the rest of the world, also know that when one ponders side by side the artisanal but horribly effective rockets used by Hamas, the hacking abilities of Hezbollah (who were able, a month ago, to gain control of a drone operated by the Israell Defense Forces), and the planned delivery to Turkey, halted at the last minute, of F-35s of the same model, the question of Israel’s military superiority is one widely encountered and hardly confined to this agreement. Is it really reasonable, then, to fall back on that logic and its rampant uncertainties?

And, to repeat myself, isn’t peace, true peace, the surest route to the most enduring security that one could wish for Jerusalem? That’s my bet.

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