Saudis Look Beyond Oil to New Economy in Desert
By Faiza Saleh Ambah
Washington Post Foreign Service
Thursday, July 17, 2008; A01

MEDINA, Saudi Arabia -- Clouds of yellow dust swirled in the air as tractors moved back and forth, leveling a huge, barren piece of land dotted with billboards announcing the city that will rise from the sand here.

Over the next few years, Saudi officials say this stretch of desert will be transformed into a buzzing hub of scientific research and development, with cutting-edge universities, hospitals and housing for more than 130,000 people attracted by the idea of living in the city where Islam's prophet Muhammad is buried.

The project, called Knowledge Economic City, represents a first serious step by Saudi Arabia toward building a post-petroleum economy. It is one of six major industrial centers planned to rise over the next 15 years. At a cost of more than $100 billion, the sites are expected to provide housing and jobs for the country's fast-growing population, half of which is younger than 21.

These cities-from-scratch are the most ambitious projects to date launched by a kingdom enriched almost entirely by oil since its disparate regions were unified into a state more than seven decades ago. In beginning to construct an economy to survive the end of its natural resources, the Saudi government is drawing on lessons learned during a previous oil boom when profits were squandered in part by spendthrift princes and short-term planning that emphasized infrastructure over education.

"The ruling dynasty is under pressure to show its population that the oil money is being reinvested for the good of the people. The al-Sauds have suffered from the image of the ruling family as corrupt and spending lavishly," said Rochdi Younsi, an analyst with the Eurasia Group, a consulting firm that provides political risk analysis of countries around the world.

With oil prices peaking above $145 a barrel in recent weeks, the kingdom is reaping an unprecedented windfall from its vast reservoirs of oil, which represent a quarter of the world's proven reserves. Saudi Arabia reported oil income of $200 billion last year and projects $700 billion in revenue over the next two years. The kingdom earned an average of $43 billion annually throughout the 1990s.

But Saudi officials have long feared that too-high oil prices would push the world toward alternative fuels, a concern captured by one former oil minister's tart reminder that "the Stone Age did not end for lack of stone."

To meet rising demand, as well as to slow the world's rush to develop alternative energy sources, Saudi officials have raised oil production by 500,000 barrels a day since May.

Though increased production means the Saudi reserves will be depleted faster, the government is using a burst of additional capital to develop an economy it hopes will eventually be untethered from the price of oil.

The new cities "are part of a broader effort to diversify the economy away from oil and away from its reliance on the public sector. The cities are intended to develop more of a non-oil economy, well before the oil runs out," said Jane Kinninmont, an analyst at the Economist Intelligence Unit, a research and advisory company that provides industry and management analysis of countries around the world.

Based on economic zones around the world, the cities aim to trade Saudi assets -- plentiful and cheap oil and vast open spaces -- for foreign expertise and training. But the cities also have social aims, analysts said, including creating jobs to stave off political unrest.

"When there was money, it was easy to absorb young Saudis into public jobs, but the population kept growing and the local education system did not produce enough candidates for the local job market. That caused resentment and allowed militant groups to launch against the local dynasty," said Younsi, referring to a spate of al-Qaeda-related attacks in 2003.

Saudi Arabia's ambitious economic program calls for the kingdom to be among the world's top 10 economies in terms of ease of doing business by 2010, up from its current rank of 23rd. Getting there will probably force social change in several ways.

Saudi officials said they are working on easing the lifestyle and visa restrictions that have kept foreigners from investing and living in the kingdom. One side effect of that will probably be an easing of rules that ban men and women from mingling in public unless they are close relatives.

"We're not anymore an isolated island. We realize the challenge today in order for us to be more competitive means more transparency and more gender equality," said Abdullah Hameedadin, head of the Economic Cities Agency at the Saudi Arabian General Investment Authority, the government body overseeing the projects.

Hameedadin said that 30 percent of his staff is female and that he expects women to be allowed to drive in the new cities -- which is currently banned in the kingdom. Officials also said they were seeking to attract both male and female investors to the cities.

Partly to bypass the bureaucracy and inefficiency of government ministries, and partly to buffer itself against the volatility of oil prices, the government will oversee the projects but leave the financing and management to the private sector, a mix of Saudi companies and investors from the Gulf region, Japan, Malaysia and China, among others.

King Abdullah, who ascended the throne three years ago, has pushed hard to reform the country's economy, speeding the kingdom's entry into the World Trade Organization months after he became king. One of the cities, planned to rise along the Red Sea with canals running between high-rise apartment buildings, is named for him.

"With this second oil boom, we want to build the soft infrastructure to help the business environment prosper. We want to learn from the mistakes of the '70s," Hameedadin said.

An oil bonanza in the 1970s that poured billions of dollars into government coffers turned the kingdom into a rich nation and helped modernize its infrastructure with eight-lane highways, hospitals, malls, universities and desalination plants.

Despite the decades of oil wealth, the Saudi education system is ranked as one of the worst worldwide, tens of thousands of university graduates are unemployed, and the country manufactures and produces very little. Saudi Arabia consumes locally only 2 percent of the oil it produces.

Oil accounts for 90 percent of Saudi Arabia's income. And until oil prices slumped in the 1990s, officials faced little pressure to diversify the economy.

"This is what some people call 'the curse of oil.' You don't need to train people, you don't need to work so hard," said Kinninmont, the economist. Change has come about "partly because of the experience of the '90s," she said. "Lots of political and economic problems still haunt the policymakers."

One-third of last year's budget surplus was earmarked to reduce government debt of $176 billion in 2003, incurred during years of low oil prices.

Enter the economic cities. In colorful slide shows, and on intricately detailed mock-ups that fill entire rooms, avatars of Saudi men and women sip coffee with foreigners in ancient Arabian-style souks as yachts float by in the warm sea and gleaming futuristic skyscrapers rise up from the sky behind them.

When the six cities are complete, about 2020, they will house nearly 5 million people and provide more than 1 million jobs, planners say.

The cities provide regional balance by creating jobs and industries in some of the most underdeveloped regions and cities in the kingdom, said Saudi economist Abdel Aziz Abu Hamad Aluwaisheg. "But the government has to increase investment in building roads and infrastructure in those cities to make those projects more attractive and profitable for private businesses," Aluwaisheg said.

One of the cities is planned for the southern backwater province of Jizan, where the unemployment rate for men is almost double the official 13 percent figure. Some economists believe actual unemployment in the country to be as high as 25 percent. The economic city there is expected to become a center for heavy industry, and several Chinese firms have already signed up to start aluminum smelters there, according to Saudi officials.

"Our carrot to global companies that rely on intensive energy for production is cheaper oil and plenty of land," said Hameedadin, the official in charge of the economic cities. "Instead of them buying the oil and manufacturing in their countries, we entice them here by providing them with tax breaks and cheaper crude, and we get know-how and jobs."

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"My Pentagon Years"

A briefing by Douglas J. Feith
May 8, 2008
http://www.meforum.org/article/1934 (includes an audio recording of this talk)
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Douglas J. Feith was undersecretary of defense for policy in the Bush administration (2001-05), and is a professor of national security policy at Georgetown University. He previously served in several capacities in the Reagan administration. His articles on foreign and defense affairs have appeared in the Middle East Quarterly as well as The Wall Street Journal, The New York Times, The Washington Post, and Commentary. He was educated at Georgetown University and Harvard College.

The Middle East Forum presented Douglas J. Feith in a discussion of his new book, War and Decision: Inside the Pentagon at the Dawn of the War on Terrorism (HarperCollins), a chronicle of his experiences as undersecretary of defense for policy in the Bush administration between 2001 and 2005. In this position, he formulated policy through critical stages of the wars in Iraq and against radical Islam.

Feith began by articulating some of the thoughts developed by policymakers in the immediate aftermath of the 9-11 attack. "In my book, I'm looking at the development of a strategy for the war on terrorism, and if one is going to understand that it is useful to go back and capture the frame of mind that we had as a country, and specifically that the policy makers had within the administration right after the attack."

Feith pointed out that President Bush's description of the situation right after 9-11 as a "war" was a significant break with previous U.S. policy. The standard response, for decades, was to have the FBI arrest the perpetrators, prosecute, and punish them. In his book, Feith chronicles how the administration crafted a strategy to fight a war against an amorphous enemy that was not only hard to locate, but hard to define. His thesis is that the U.S. "developed a proper apprehension of the threat and a good strategy," and that "the administration has done a better job of conceiving the strategy and executing it than talking about it." Indeed, the administration's failure was in explaining and justifying this strategy to the U.S. and the world, which is one of several major criticisms of the administration Feith makes in his book.

He described Secretary of Defense Donald Rumsfeld's approach to problematic issues, which was to ask what major strategic thoughts should guide deliberations on the issue. Feith outlined the five major strategic thoughts that were developed right after 9-11. These thoughts, he pointed out, laid the foundation for American national security policy for the war on terrorism.

The U.S. government had to do something. The immediate instinct of some officials, particularly in the state department and CIA, was to do what had been done in the past: find the people responsible and punish them. President Bush, Vice President Cheney, and Rumsfeld argued that the government's obligation to the American people was not simply retaliation but prevention of the next attack; essentially, a defense strategy.

The enemy in the war is a network, and while the next attack could come from Al-Qaeda, it could also come from other parts of the global jihadist network. The network includes not only the terrorist groups but their state supporters. The different elements of the network, groups and states, maintain various types of connections: financial, ideological, logistical, operational. Thus, severing these connections became part of American strategy.

9-11 was a departure from most previous instances of terrorism, in that "they were not using terrorism as political theater," to garner attention and sympathy for their cause, but to wreak mass destruction. Preventing terrorists from getting weapons of mass destruction became a key part of U.S. strategy. Feith noted how the "leading state supporters are also the leading countries of WMD proliferation concern, and that coincidence was a fact of strategic importance."

The purpose of our national security policy is not simply to protect people and territory but to secure our constitutional system, our civil liberties, and the open nature of our society. Feith discussed how the president, in his first major speech to Congress after 9-11, stated that the stakes in the war on terrorism could not be greater because terrorism threatens our way of life.

The U.S. cannot rely on a defensive strategy, because it would have to curtail civil liberties in the process of trying to protect every possible target at home. Feith explained how this thinking led to an offensive strategy of hitting the terrorists abroad.

Feith talked about how his book contradicts much of the accepted narrative about the administration's decision to go to war in Iraq, such as the notion that President Bush came into office determined to go to war no matter what, and the allegation that the U.S. didn't plan for post-Saddam Iraq.

He discussed his methodology in War and Decision, of using extensive citations, quotations from previously classified documents, and his own notes from meetings of the National Security Council, using only exact quotations of people's remarks. He included 140 pages of references and made documents available at www.WarAndDecision.com to support his challenge to the conventional, but according to Feith, deeply flawed account of the creation of American strategy. His goal was to create an account that is "civil, useful, and accurate," meticulously relying on the contemporaneous written record.

The politicization of intelligence is an important theme in Feith's book. The controversy between the Defense Department and the CIA over the Al-Qaeda-Iraq connection was not a clash in which the former argued for a relationship and the latter against. Rather, "it was an argument about methodology and professionalism." The problem was that the State Department and the CIA leaked information to the press, a tactic to which the Defense Department did not resort. However, Feith notes, "we didn't talk to the press very much, which was foolish," and so the State Department-CIA team shaped the public's conception.

Another of his major topics, said Feith, is the postwar plan for political transition in post-Saddam Iraq, a plan which he presents for "the first time anywhere." The defense department aimed for a short American stay in Iraq, to put Iraqis in control of government. This plan, approved by the president, was built on American experience in Afghanistan, where there was no occupation government and no insurgency as in Iraq. Feith analyzes how the plan was undone. He calls the 14-month occupation government of Iraq by the U.S. a "very costly error," which left a large-scale insurgency in its wake.

When questioned about the future of Iraq, Feith referred to recent positive signs in the war, such as the Sunni tribal leaders' 180-degree switch from supporting Al-Qaeda to allying with the U.S., the ceasefire declared by Shiite leader Muqtada al-Sadr, the substantial improvement in the operations capabilities of the Iraqi army and police, and political developments including power and revenue sharing, as well as some legislative progress.

He criticized the administration's redefinition of the U.S. goal in Iraq, beginning in 2003, from reducing threats to promoting democracy, as a major error which set the standard of success unreasonably high and almost led Congress to pull out of the war in the summer of 2007. The solution in Iraq, according to Feith, is to "contain the magnitude of the problems, and increase the capacity of the Iraqis to manage their own problems."

Summary account by Mimi Stillman.

Sustaining the Medellin Miracle
Colombia Struggles to Hold On To Gains From Globalization

By Anthony Faiola
Washington Post Staff Writer
Friday, July 11, 2008; A01

MEDELLIN, Colombia -- This labyrinthine metropolis transformed over the course of a decade from a battlefield of drug lords, paramilitaries and leftist guerrillas into one of the safest, most dynamic cities in Latin America. Visionary inner-city renewal projects and a push to take back the lawless hillside slums by force deserve credit, but many here hail an unsung hero in Medellin's urban miracle -- globalization.

Exports surged in the 1990s as the United States granted temporary trade preferences to Colombia, allowing many of its products to enter the world's largest market duty-free. They really took off after 2002, when Washington expanded that agreement to include Colombia's all-important textile sector. Humming assembly lines making Ralph Lauren socks and Levi's jeans sprang up across this picturesque Andean valley, creating tens of thousands of jobs and turning Medellin into a model of the curative power of liberalized trade.

Yet the renaissance of a city best known outside Colombia for years as the base of Pablo Escobar and the Medellin cartel is entering a period of uncertainty that illustrates just how fragile such gains can be. The city's export industry has begun to slip backward, officials here say. It happens as Colombia and many developing nations are struggling to maintain their edge in the increasingly competitive world of global trade.

Inside the three sprawling factories of Crystal, a major textile maker here, the workforce doubled to 11,000 between 2001 to 2006 as the company's U.S. sales surged. But following several local apparel makers, it has eliminated hundreds of jobs as contracts have dried up over the past 18 months.

The weakening dollar, which has shed almost 40 percent of its value against the Colombian peso in two years, has made it even harder to compete with cheaper production costs in China, where officials in Beijing are managing the exchange rate, cushioning the dollar's fall to help Chinese exporters. Since 2005, Colombia's textile and apparel exports to the United States dived 30.8 percent while China's soared by 44.3 percent.

Colombia is also up against a resurgent global backlash to free trade -- including in the United States, the country that had spent the past two decades cajoling Latin America to open its markets. An election-year debate has politicians in Washington blaming globalization for the loss of U.S. jobs, holding up a vote in Congress on a free trade agreement with Colombia. That bill would make the current trade preferences permanent while allowing most U.S. products to enter Colombia duty-free.

Colombia remains a vocal proponent of free trade at a time when the loudest voices in the region are against it. In neighboring Venezuela, Colombia's second-largest trading partner, President Hugo Chávez is shifting the country toward socialism, nationalizing industries and barring the doors to free trade. He has signaled Venezuela's intent to pull out of a regional trading bloc that includes Colombia and has sharply reduced quotas on Colombian-made cars. In recent months, that decision has forced Sofasa, a leading automaker in Medellin, to reduce shifts and lay off 600 workers.

Companies say doubts about Colombia's future trading relationship with the United States have been a factor in a recent flow of jobs from Medellin into Central America, where a bloc of nations sealed a free trade agreement with the United States in 2006.

"If my client is wondering if a pair of socks made in Medellin will make it to the U.S. duty-free this time next year, they will just go to Central America," said Luis Fernando Restrepo Echavarría, Crystal's president. "That's exactly what they're doing."
A Flower Revolution

On the eastern outskirts of Medellin, the emerald foothills of the Andes give way to acres of blinding color. Expansive greenhouses filled with blooming purple pompons, yellow chrysanthemums and white lilies carpet the dark earth. This is how Colombia's export revolution began -- with flowers.

In 1991, with Medellin's ghettos convulsing in cocaine wars and leftist guerrillas infiltrating the city, the U.S. government extended a lifeline to Colombia and other Andean countries plagued by drug violence. It granted them renewable "trade preferences," providing local manufacturers the right to sell their wares in the United States without paying tariffs. It gave Colombian flower exporters the competitive edge they needed to dominate the U.S. market. Today, Colombian flowers make up roughly 90 percent of all those sold in the United States.

Here, it created jobs -- jobs that some analysts argue are the kind that U.S. workers should be willing to give up in the era of globalization. These labor intensive and minimum wage jobs in the United States are often filled by undocumented immigrants, but in this region, they provide a lifeline for rural people. Many of the U.S. companies in California and Texas that once grew flowers adapted and evolved into suppliers and distributors of flowers grown here, where a single stem can be planted, irrigated, trimmed, cut and packaged for about $1.

"It is one of the effects of globalization," said Juan María Cock, president of Uniflor, one of the region's biggest flower exporters. He is also an economist and former adviser at the International Monetary Fund. "We have the advantages of labor and a tropical climate with lots of light and sun. There was no way you could compete with us or any good reason why you should want to."

The thousands of new jobs in the flower sector provided economic refuge for many Colombians escaping the violence of a drug-fueled civil war. Inside one of Uniflor's vast greenhouses, Luz Dari García, 20, waters flowers for a living. Her father was killed in 2002 in their village 50 miles north, caught in the crossfire of left-wing guerrillas and right-wing paramilitaries. She fled with her mother and elder brother to the suburban belts of Medellin "because we knew there were jobs here."

Her older brother landed work early tending flower fields. She began similar work last year, earning the minimum wage of about $250 a month. By no means a princely sum -- even in Colombia -- it is far more than the family earned raising fruit and vegetables in their village. "We were able to build a life because there was work," she said.
Transforming a City

In the steep hillsides of Medellin, warring drug gangs long ruled the dense western ghetto where Lina Marcela Zapata resides in a two-room cement-block home. The 26-year-old single mother recalls huddling with her small son in the corner during shootouts, fearing a stray bullet such as the one that killed a neighbor's daughter. More horrific, she said, was the time drug gangs sought to teach locals a lesson, cutting off the legs of a 9-year-old girl and flinging her body off the highest cliff. "We could not sleep because of all the gunfire," she said, closing her eyes and shaking her head as she remembered.

The guns have quieted in Medellin. In 1991, the annual murder rate was 381 per 100,000 people -- a virtual war zone. In 2001, it was 174 per 100,000. Last year, it fell to 26 per 100,000, or lower than the District.

A combination of factors produced that change. President Alvaro Uribe, Medellin's native son, came to power in 2002, shifting from Andres Pastrana's policy of dialogue to one of force. The Colombian military and local police stormed the most violent barrios of Medellin in armored vehicles and helicopters. In other neighborhoods, calm came as the drug gang headed by the notorious paramilitary leader Diego Fernando Murillo finally overpowered its rivals. Murillo was extradited to the United States with 12 other paramilitary chiefs in May.

Around the same time, Sergio Fajardo, a mathematician with Bee Gees hair, became Medellin's mayor and launched his own campaign to renew the city. He rolled out social programs while building schools, police stations and "library parks" celebrated for their architecture. Two cable cars systems were constructed, linking some of Medellin's toughest and most isolated slums with the city's expanding metro system.

If those efforts became the bricks of Medellin's house of change, globalization was the mortar that helped keep them together, officials say.

Exports to the United States from the state of Antioquia, with Medellin as its core, went from $268 million in 1991 to $1.18 billion in 2005, creating an estimated 360,000 jobs and helping halve the unemployment rate to 10 percent, according to government statistics and Colombian export associations. The windfall in taxes became a critical source of revenue to fund the projects that transformed the city. "You could say that export growth helped us help ourselves," Fajardo said.
The Cost of Uncertainty

Some of those gains are slipping away.

Over the past two years, Ralph Lauren closed a regional office in Medellin and one major jeans factory shut its doors, dismissing 2,500 workers. Crystal has shed 1,000 jobs -- or 10 percent of its workforce. Other textile makers have been forced to do the same, with the industry losing an estimated 10,000 jobs in total.

As in many developing countries with manufacturing-based export industries, one huge problem is China. Colombia's average textile wage of $1.42 an hour is about double similar wages in China. Many here argue that the United States and Europe must pressure China more to revalue its currency, something Beijing has resisted. They are also pressing for a formal free trade agreement with the United States .

An agreement would make permanent the duty-free access for most Colombian exports to the United States , while also granting U.S. products reciprocal status in Colombia t for the first time. The current preference agreement is subject to regular reviews and renewals by Congress. A vote in March approved those preferences through December, when a new vote will be required to extend them. The uncertainty, officials here say, is costing jobs and money.

Crystal, for instance, recently lost a $10 million contract with Footlocker to produce T-shirts as the U.S. company shifted sourcing to Honduras, which executives here say has an unfair advantage over Colombia in that it has a free trade agreement. Other U.S. clients, such as Russell , owners of the Spalding and Huffy Sports brands, are hedging their bets, shifting half their sourcing to Honduras.

Although strongly backed by the Bush administration, an a free-trade pact with Colombia -- as well as other pending agreements with South Korea and Panama -- have been blocked by Democrats. Some are calling for a review of all future free trade agreements to assess their impact on U.S. workers.

Given the relatively small Colombian economy, opposition to the pact has focused less on the potential loss of U.S. jobs and more on the plight of Colombian unionists.

The Colombian government, critics argue, adheres to draconian laws that strongly discourage organized labor. "If the deal passes, you would be sending a signal that the U.S. has no regard for the welfare of workers in the countries where you buy your products," said Hector Vásquez, a director of the National Institute of Unions in Medellin.

Some here also say it would be better to stick with the preferences, rather than sign a pact that would create more competition for domestic companies by allowing U.S. products to enter Colombia duty-free.

Yet many Colombian industry leaders seem to think they have more to lose if they don't strike a deal.

"We are afraid of losing what we have built, afraid of what is starting to be a crisis of confidence in Colombia that is leading our clients to move elsewhere," said Luis Fernando González Usuga, Medellin head of the National Export Association. "The U.S. has always talked about why Latin America needs free trade. Well, now we're true believers in Colombia. Why turn us away?"

Slowing Economy Gives Way to Global Role Reversals

By Anthony Faiola and Jill Drew
Washington Post Staff Writers
Thursday, July 17, 2008; D01

The global slowdown stemming in part from the deepening U.S. financial crisis is hitting the world's richest nations the hardest even as emerging nations, some with once-fragile economies, are proving relatively resilient.

Consider, for instance, Britain. A severe housing slump and credit crunch sparked a 63 percent drop in new home mortgages in May compared with May 2007. Mirroring losses in the United States, the average home price in Britain fell to $344,704 in June, down 6.3 percent compared with June 2007, according to the Nationwide Building Society. The stock market in London slipped into bear market territory, joining New York's.

"It affects everybody, and you need not be a home owner, or have credit or be a consumer," said Martin Slaney, head of derivatives at GFT Global Markets in London. "People are getting used to a new terminology; they know all sorts of credit-crunch-related terms. Money can be made now, but generally it's a hugely unfortunate economic time. There's a lot of talk about how bad it is."

Contrast that with oil-fat Russia -- a red-hot emerging market. As in many commodity-driven economies in the developing world, soaring energy revenue has largely insulated Russia, the world's second-largest oil exporter, from the turbulence in global markets. Its gross domestic product is expected to grow 8 percent this year, and consumer spending continues to boom, with a 13 percent increase so far this year, according to Troika Dialog, a Moscow investment house.

"We are overloaded with money, crazy amounts of money from the energy market," said Mikhail Bergen, a professor at Moscow's Higher School of Economics.

It marks a global economic role reversal of sorts. When financial crises hit the Asian markets in the 1990s and Argentina in 2001, the aftershocks spread to other emerging economies, plunging several into recession while wealthy countries went relatively unscathed. Rather than taking its toll largely on residents of developing countries, this economic downturn may cause the greatest damage to those living in the wealthiest countries on earth.

The U.S. economy and financial system are more closely linked to those in other wealthy nations, particularly in Europe, where rising inflation and the weak dollar are adding to growing trouble. The United States and Europe have "similar economies and share the potential problems of industrialized nations in terms of property price fluctuations and financials," said Simon Johnson, chief economist at the International Monetary Fund. "And they find themselves sharing variable degrees of vulnerability."

As global wealth has shifted during the past decade, emerging markets have become not only increasingly stable but they have also been claiming a larger portion of the world's riches than ever before. If Californians are rushing to withdraw money from banks there, the situation in Kenya is just the opposite: People are flocking to banks to open accounts. The Nairobi exchange, which lists mostly Kenyan companies and a handful of multinational firms, posted 10 percent gains in the three months ended in June as local and foreign investors flocked to the initial public offering of the cellphone giant Safaricom.

"I don't think there has been any impact," said Peter Wachira, a manager with AIG Global Investment in Nairobi, referring to the market turmoil. "Where markets in developed countries have been going down, ours has been going up."

That does not mean the emerging world is buffered completely, particularly if both the United States and Europe slip into recession or if the financial crisis in the United States claims more and bigger financial institutions. And without question, sectors of emerging economies are already being stung.

There is growing fear especially in the fastest-growing Indian technology markets, which include outsourcing, back-office operations and call centers. Those sectors are 70 percent dependent on the United States. Several Indian technology companies have slowed their hiring because of the U.S. economy's slowdown. In May, industrial output was up 3.3 percent, half the 6 percent increase in May 2007.

"I will have to lay off more if things don't pick up," said Rajiv Prem, a clothing manufacturer for U.S. retailers, including Anthropologie and Motherworks, who said the drop in orders has meant he had to close two of his three factories outside New Delhi.

Exports in China -- the darling of the 21st-century economy -- are also being hammered by slackening demand caused by the global slowdown and rising labor and material costs. Chen Gong, who runs a factory that makes plastic cleaning devices in Ningbo, a manufacturing city near Shanghai in the Yangtze River delta, has seen profits slip partly from the yuan's controlled but steady rise against the dollar. It has slashed profit margins for many mid-size manufacturers from 15 to 3 percent. Many factories in nearby Guangdong province have closed their doors, and thousands of workers have lost their jobs.

"We'll just see who can survive this," Chen said. Experts predict as many as one-third of export manufacturers will close in the next three years.

Chinese exports to the United States have been flat this year and will likely experience a rare, overall decline by year-end, said Arthur Kroeber, managing director at Dragonomics, a research firm in Beijing. Yet experts said that might be exactly what China needs. A global slowdown -- if tempered -- could help China stage a soft landing for its breakneck economic growth.

"In some ways, this is not only welcome but desired by the Chinese," said Vikram Nehru, the World Bank's chief economist for East Asia and the Pacific.

Yet in Europe and Japan, the situation is decidedly more gloomy. In Japan, a new government forecast shows slowing economic growth and rising inflation in the coming year. The Bank of Japan on Tuesday lowered its growth forecast to 1.2 percent through March -- the lowest since 2002. It also forecast an increase in core inflation to 1.8 percent, the highest since 1997. Toyota Motor is cutting its global sales target for 2008 by 3.6 percent, to about 9.5 million vehicles, to reflect a sharp slowdown in the United States, Japanese public broadcaster NHK said yesterday.

In Europe, which analysts once hoped would be a pillar of economic strength in the event of a U.S. recession, analysts are now warning of possible recession. The weakening dollar has made German chemicals and cars exceedingly expensive overseas -- particularly in the United States -- stinging the manufacturing industry in the euro zone's largest economy. Spain, Ireland and Britain are mired in painful housing slumps with their financial institutions squeezed by the U.S.-sparked global credit crunch.

British consumers, in particular, are tightening their belts. Marks & Spencer, a bellwether of Britain's retail sector, has reported declining sales in recent weeks. The latest survey by the British Chambers of Commerce showed confidence among businesses at its lowest since the most recent British recession in the early 1990s.

"The credit crisis, runaway inflation, mind-blowing energy crisis, falling confidence, housing prices -- they have created a perfect storm," said Henk Potts, equity strategist at Barclays Wealth. "It's currently a market for the brave."

Drew reported from Beijing. Correspondents Peter Finn in Moscow, Blaine Harden in Taipei, Emily Wax in New Dehli, Stephanie McCrummen in Nairobi, special correspondent Karla Adam in London and researcher Lui Songjie contributed to this report.

McCain says Obama still wrong on Iraq, Afghanistan

By TOM RAUM, Associated Press Writer 33 minutes ago

Republican Sen. John McCain insisted on Monday that he has been consistently right on both Iraq and Afghanistan while Democratic rival Sen. Barack Obama "has been completely wrong."

As Obama toured the war zones, McCain ridiculed him from afar during a visit with the first President Bush at his summer home on the Atlantic.

"My respect for him knows no bounds," the elder Bush said of McCain. Still, Bush said he wished Obama well on his overseas trip, and said he hoped the Democrat would get an especially warm welcome in Berlin.

McCain told reporters he didn't care if Obama's trip was stealing attention and "doesn't in the slightest undercut" his own message. "It is what it is," he told reporters..

Any withdrawal of troops from Iraq "must be based on conditions on the ground," McCain said.

He disparaged Obama as "someone who has no military experience whatsoever."

"When you win wars, troops come home," McCain said. "He's been completely wrong on the issue. ... I have been steadfast in my position."

On Afghanistan, McCain said, "I've always said it's long and tough and hard."

As to Iraq, "We've succeeded. We're not succeeding, we've succeeded," McCain said later at a fundraiser.

Bush declined to comment on his views on the two wars, saying he would defer to McCain.

"No advice," he said. "I think he's doing great."

Bush said he would not criticize either McCain for advocating drilling on the Outer Continental Shelf nor his son for rescinding his own 1992 presidential order banning such offshore drilling, saying increasing domestic production was important.

Chatting alone with reporters, Bush later said he's looking forward to a final parachute jump from a plane next June 12 when he turns 85.

He said his wife Barbara told him, "One way or the other, this is your final jump."