Monday, March 2, 2015

How the Market can resolve the Iran question

I normally don't comment about politics, but sometimes you see people get caught up in their straitjackets and I can't resist.

There has been much controversy over the upcoming speech by Israeli Prime Minister Netanyahu to Congress. No doubt, he will say that Iran is an existential threat to Israel and that the US must act with further sanctions to curtail the Iranian nuclear program, etc.

Notwithstanding the fact that the thesis has a boy who cried wolf quality because Netanyahu warned Congress about the imminent nuclear threat from Iran all the way back in 1996, let us suppose that we were to accept the premise that the Iranian nuclear program is indeed an existential threat to continuation of the State of Israel. In that case, what would you pay to eliminate an existential threat? Trade sanctions? Bombing? Covert or open warfare? Would you pay any price?

The market based solution
How about an offer to buy the nuclear facilities and research capabilities in Iran? Does that qualify under the category of "any price"? There are lots of details to be worked out. I envisage a deal where Israel, perhaps with US participation, buys up all of the Iranian nuclear IP, research and facilities, in return for some sum and the lifting of trade sanctions.

There are also huge benefits to all parties under such a framework. From the Iranian viewpoint, such a deal would achieve the stated Iranian objective of peaceful nuclear development and it provide a much needed boost to its economy. Moreover, it would most likely mean the elimination of sanctions, open Iranian oil fields to much needed foreign investment and open its borders to the global economy - and who is philosophically opposed to free and open markets?

From the Israeli perspective, it would eliminate the existential tail-risk of Iranian nuclear arms. As well, it could alleviate many of the budgetary strains from military spending. According to Wikipedia, Israel devotes an enormous amount of its budget to defense spending:
During 1950–66, Israel spent an average of 9% of its GDP on defense. Defense expenditures increased dramatically after both the 1967 and 1973 wars. They reached a high of about 24% of GDP in the 1980s, but have since come down significantly, following the signing of peace agreements with Jordan and Egypt.

On 30 September 2009 Defense Minister Ehud Barak, Finance Minister Yuval Steinitz and Prime Minister Benjamin Netanyahu endorsed an additional NIS 1.5 billion for the defense budget to help Israel address problems regarding Iran. The budget changes came two months after Israel had approved its current two-year budget. The defense budget in 2009 stood at NIS 48.6 billion and NIS 53.2 billion for 2010 – the highest amount in Israel's history. The figure constituted 6.3% of expected gross domestic product and 15.1% of the overall budget, even before the planned NIS 1.5 billion addition.

However in 2011, the prime minister Benjamin Netanyahu reversed course and moved to make significant cuts in the defense budget in order to pay for social programs. The General Staff concluded that the proposed cuts endangered the battle readiness of the armed forces. In 2012, Israel spent $15.2 billion on its armed forces, one of the highest ratios of defense spending to GDP among developed countries ($1,900 per person). However, Israel's spending per capita is below that of the USA.
Imagine what could happen to Israelis prosperity if the Iranian nuclear tail-risk were to be taken off the table and it could reduce its defense expenditures. I remember reading a study done in the 1970s of the economic effects of the 1967 and 1973 wars on Israel and the participating Arab countries. During those wars, the Israeli economy crashed, largely because reservists were mobilized and economic activity ground to a halt. By contrast, the GDP of countries like Egypt and Syria actually rose, because those economies were highly inefficient and state driven that the wars provided a Keynesian stimulus and actually boosted employment and productivity.

Sure, it would not eliminate all of the irritants between Israel and Iran. Netanyahu still calls Iran a state sponsor of terrorism, but that is not an existential tail-risk and it can be managed. After all, ISIS is camped on the Golan Heights on the Israeli border and the Israeli government is managing that risk reasonably well.

I offer this as an outside the box market-based solution to a geopolitical problem. Many in government are still in their straitjackets about the kinds of tools that are available to them to solve problems. Government run solutions, like military ones, are not always the answer. Sometimes they should place their trust in the Power of the Market.

No need to thank me. The Nobel Peace Prize committee already has my phone number.


Anonymous said...

Interesting concept, out-of-the-box thinking. i'm sure it has no chance whatsover of being taken seriously, and all you'll hear are myriad reasons why it couldn't work. However, the world, and especially that part of the world, needs more outside-the-box solutions to geo-political problems.

i've thought for some time that if the world would make a dramatic effort towards developing more cost-efficient desalinization so that we could provide drinking water and irrigation in large quantities to the Middle East, and other arid areas, then the anger might start to dissipate some. Pipe dreams, I know.

Anonymous said...

1. Economic sanctions ARE a market based solution and are probably the only reason an accord will eventually be signed.
2. Iran wants the accord to leave them with the appearance of "honor" and achievement, so there is no way they would perceive your solution as providing this, especially if Israel were to buy their nuclear IP, research and facilities. The value of their Nuclear program is not monetary so there is no incentive other than to lift sanctions.
3. Israel's military budget would not be affected-as you point out, they now have a new and more immediate risk with ISIS.
4. Iran is not just a risk to Israel, but to all Western countries and no one wants religious fundamentalists holding nuclear weapons.
5. Israel's issue is that the accord will lift sanctions but still allow it to enrich uranium.

pimaCanyon said...

good idea, but I double either country would go for it. Israel believes Iran sponsors terrorism, but Israel IS a terrorist nation, reigning terror down on Gaza and all non-Jews inside Israel's borders. They steal their homes and land, and then act puzzled when these oppressed people strike back. Israel is the real terrorist of region, and the only country in the region that has nuclear weapons. They are also crazy enough to use them. So I worry about ALL the people of the Middle East, Muslim, Christian, and Jew.

Unknown said...

Similar to how governing solutions require really well-thought out laws and pacts, market-based solutions require really well-thought out incentives.

If you want to kill me, and I buy all your guns and licenses, you will still find a way to kill me.

Here, even perfectly constructed market incentives compete with other overriding incentives, including geopolitical incentives, nationalistic and religious fervor, national pride, revenge, etc. It's not just an economic market in play.