The failed Muslim states to come
By Spengler
Financial crises, like epidemics, kill the unhealthy first. The
present crisis is painful for most of the world but deadly for many
Muslim countries, and especially so for the most populous ones. Policy
makers have not begun to assess the damage.
The diplomatic strategy of the industrial nations now resembles a
James Clavell potboiler, in which an earthquake interrupts a
hopelessly immured plot. Moderate Islam was the El Dorado of the
diplomatic consensus. It might have been the case that Pakistan could
be tethered to Western interests, or that Iran could be engaged
peacefully, or that Turkey would incubate a moderate form of Islam. I
considered all of this delusional, but the
truth is that we shall never know. The financial crisis will sort them
out first.
As I commented in the late autumn, the world is not flat, but
flattened (see Asia Times Online, October 28, 2008), leaving the
economies of the largest Muslim countries in ruins. It is hard to
forecast the political fallout, for when each available choice leads
to a failed state, it is a matter of indifference which one you adopt.
As state finances crumble, states will become less important, and
freebooters will seize the stage. Think of the Mumbai terrorists as a
political cognate of the Somali pirates, and the character of a Middle
East made up of failed states comes into focus.
Iran's President Mahmud Ahmadinejad controls Iran through a
kleptocracy of Central African proportions, dissipating the country's
oil windfall into payoffs to an "entire class of hangers-on of the
Islamic revolution", as I wrote in June (see Worst of times for Iran,
Asia Times Online, June 24, 2008), when oil still sold at US$135 a
barrel. What will Ahmadinejad do now that the oil price has collapsed?
According to my Iranian sources, the answer is: Exactly the same
thing, but without the money. [1]
The point of the joke is that Iran's regime cannot reduce subsidies or
raise taxes without losing control of the constituencies that brought
it to power. They are the peasants and the urban poor who barely
afford shelter and food as matters stand. Despite the oil-price
collapse, the government has not reduced energy subsidies that the
International Monetary Fund (IMF) puts at more than a fifth of gross
domestic product (GDP). A proposed value-added tax was withdrawn last
October after strikes in the bazaars, starting in Isfahan and other
provincial towns and spreading to the capital Tehran. Iran is eating
through its $60 billion of foreign exchange reserves, unable to adjust
to a collapse of its only significant revenue source.
Iran must break down, I argued last June, or break out, through a
military adventure. The sand is slipping out of the hour glass, and
the regime must decide what to do within a few months. If it does
nothing, the default position, as it were, is Pakistan.
Iran's Ahmadinejad rules through massive subsidies. Pakistan's
President Asif Ali Zardari does the same thing, but without the money.
Pakistan ran out of foreign exchange reserves in November and obtained
emergency financing from the IMF. Its current account deficit was
running at an alarming 14% of GDP, or about $20 billion a year, a
small sum, but an important one for a country two-thirds of whose 175
million people subsist on less than $2 a day.
Pakistan received just $7.6 billion from the IMF, covering a third of
its current account deficit, which means that imports must be reduced
drastically (although lower oil prices may help a bit). Inflation is
running at 25% a year.
Pakistan has one of the world's youngest populations and an enormous
capital requirement. Young people borrow from old people, and
countries with young populations should import capital from countries
with aging populations. That is out of the question, for the world
markets have turned Pakistan into a pariah. The cost of credit
protection on Pakistani sovereign debt is now more than 3,000 points
(or 30%) above the benchmark London Interbank Offered Rate (LIBOR),
reflecting a complete shutout from capital markets.
Cost of credit protection for Pakistan government debt (5-year term,
in basis points of spread to the London Interbank Rate).
Shown on the right-hand scale is the most populous Muslim country,
Indonesia, where investors pay 1,000 basis points (10 percentage
points) above LIBOR for five-year credit protection.
Pakistan was at least able to raise a modicum of official support.
What will Iran do if its reserves run out? The same thing as Pakistan,
but without the money, for Iran is a geopolitical pariah without
access to official aid.
The Muslim risk premium has become so pervasive that investors are
looking cross-eyed at Saudi Arabia. The cost of credit protection on
the Kingdom of Saudi Arabia has jumped since August, and now is
considerably higher than Israel's.
Cost of 5-year credit protection on Saudi Arabia and Israel
Israel credit protection trades at 185 basis points above LIBOR, about
the same as Italy, while Saudi Arabia is at 236 basis points.
Considering the kingdom's resources, that must be interpreted as a
political risk premium.
Turkey has been able to keep afloat through the crisis, but barely so.
The Turkish currency has fallen by a third, its stock market has
fallen by nearly 80% in dollar terms, and the central bank must keep
interest rates at a punishing 20% to prevent money from fleeing the
country. Turkey has a real economy with a few first-rate manufacturing
companies, unlike Iran and Pakistan, so the comparison is not quite
fair. Nonetheless, Turkey relied heavily on short-term interbank
borrowings to finance its balance of trade deficit, and the crisis has
pulled the carpet out from under its economy. In August, before the
crisis erupted in force, Turkey had 10% unemployment. It will get much
worse.
Turkish lira and Turkish 1-year interest rate
Turkey was the poster-child for the so-called carry trade, in which
hedge funds and other investors borrowed in low-interest currencies,
for example the Japanese yen, and lent the money in high-interest
currencies, of which Turkey's lira was the highest. The carry trade
was the main source of money for Turkish business. What will Turkey do
now that the credit crisis has made the "carry trade" a painful
memory? The same thing, but without the money.
Pakistan is about to become a failed state, and Iran and Turkey will
be close behind. As I commented to Chan Akya's report of December 2 on
this site (see The hottest place in the world), Pakistan's
military-age population is far greater than those of other Muslim
military powers in the region. With about 20 million men of military
age, Pakistan today has as much manpower as Turkey and Iran combined,
and by 2035 it will have half again as many.
Half the country is illiterate and three-quarters of it subsists on
less than $2 a day, according to the World Bank. That is to say that
Pakistan's young men are more abundant as well as cheaper than in any
other country in the region. Very poor and ignorant young men,
especially if their only education has been in Salafi madrassas, are
very easy to enlist in military adventures.
The West at present is unable to cope with a failed state like
Somalia, with less than a tenth as many military age men as Pakistan,
but which nonetheless constitutes a threat to world shipping and a
likely source of funding for terrorism. How can the West cope with the
humiliation of Pakistan's pro-American president and the inability of
its duly-constituted government to suppress Islamist elements in its
army and intelligence services? For the moment, Washington will do its
best to prop up its creature, Zardari, but to no avail. The
alternatives will require the West to add several zeros to whatever
the prevailing ceiling might be for acceptable collateral damage.
A final note: several readers have asked me to comment on the terror
attack on Mumbai in November. I will do so with great caution, given
the absence of accurate information. I have good reason to believe
that the Indian authorities lied about the attack. India claimed that
10 shooters were involved, because nine were killed and one captured.
The actual number is closer to 30, I am reliably informed, not
counting support personnel in Mumbai who arranged safe houses with
extra ammunition and explosives months in advance of the attack. It
was not a suicide attack at all, but a new kind of urban terror
assault, in which the participants had a reasonable expectation of
survival, and the majority did in fact survive. That is an important
wrinkle, for a better class of combatant can be recruited for missions
in which survival is at least possible.
No analyst I know has answered with confidence the question, cui bono?
To whose benefit was the attack? It has been suggested that al-Qaeda
diverted a Pakistani military intelligence team from Kashmir to
Mumbai, in a demonstration of power against India. But there may be
another dimension. The Mumbai attack has been a test of a different
kind of warfare, the kind that emanates from failed states: the
tactics of the Somali pirates applied to random destruction of
civilian lives.
The lights are going out across the Middle East; states are failing,
and it is not in the power of the West to make them whole again. All
the strategic calculations that busied policy analysts and diplomats
are changing, and the West has a very short time to learn the rules of
a new and terrible game.
Note
1. This appears to be a variant of a joke told in many countries. One
peasant asks another, "How does a telephone work?" The second replies,
"It is like a big dog, with the tail in Isfahan and the head in
Mashdad. You pull the tail in Isfahan and it barks in Mashdad." The
first replies, "But how does a cell phone work?" The second replies,
"The same way, but without the dog."
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