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Experts See Security Risks in Downturn
Global Financial Crisis May Fuel Instability and Weaken U.S. Defenses

By Joby Warrick
Washington Post Staff Writer
Saturday, November 15, 2008

Intelligence officials are warning that the deepening global financial crisis could weaken fragile governments in the world's most dangerous areas and undermine the ability of the United States and its allies to respond to a new wave of security threats.

U.S. government officials and private analysts say the economic turmoil has heightened the short-term risk of a terrorist attack, as radical groups probe for weakening border protections and new gaps in defenses. A protracted financial crisis could threaten the survival of friendly regimes from Pakistan to the Middle East while forcing Western nations to cut spending on defense, intelligence and foreign aid, the sources said.

The crisis could also accelerate the shift to a more Asia-centric globe, as rising powers such as China gain more leverage over international financial institutions and greater influence in world capitals.

Some of the more troubling and immediate scenarios analysts are weighing involve nuclear-armed Pakistan, which already was being battered by inflation and unemployment before the global financial tsunami hit. Since September, Pakistan has seen its national currency devalued and its hard-currency reserves nearly wiped out.

Analysts also worry about the impact of plummeting crude prices on oil-dependent nations such as Yemen, which has a large population of unemployed youths and a history of support for militant Islamic groups.

The underlying problems and trends -- especially regional instability and the waning influence of the West -- were already well established, but they are now "being accelerated by the current global financial crisis," the nation's top intelligence official, Director of National Intelligence Mike McConnell, said in a recent speech. McConnell is among several top U.S. intelligence officials warning that deep cuts in military and intelligence budgets could undermine the country's ability to anticipate and defend against new threats.

Annual spending for U.S. intelligence operations currently totals $47.5 billion, a figure that does not include expensive satellites that fall under the Pentagon's budget. At a recent gathering of geospatial intelligence officials and contractors in Nashville, the outlook for the coming fiscal cycles was uniformly grim: fewer dollars for buying and maintaining sophisticated spy systems.

"I worry where we'll be five or 10 years from now," Charles Allen, intelligence director for the Department of Homeland Security, said in an interview. "I am deeply worried that we will not have the funding necessary to operate and build the systems already approved."

Intelligence officials say they have no hard evidence of a pending terrorist attack, and CIA Director Michael V. Hayden said in a news conference Thursday that his agency has not detected increased al-Qaeda communications or other signs of an imminent strike.

But many government and private terrorism experts say the financial crisis has given al-Qaeda an opening, and judging from public statements and intercepted communications, senior al-Qaeda leaders are elated by the West's economic troubles, which they regard as a vindication of their efforts and a sign of the superpower's weakness.

"Al-Qaeda's propaganda arm is constantly banging the drum saying that the U.S. economy is on the precipice -- and it's the force of the jihadists that's going to push us over the edge," said Bruce Hoffman, a former scholar-in-residence at the CIA and now a professor at Georgetown University.

Whether terrorist leader Osama bin Laden is technically capable of another Sept. 11-style attack is unclear, but U.S. officials say he has traditionally picked times of transition to launch major strikes. The two major al-Qaeda-linked attacks on U.S. soil -- the World Trade Center bombing in 1993 and the 2001 hijackings -- occurred in the early months of new administrations.

This year, the presidential transition is occurring as American households and financial institutions are under severe economic strain, and political leaders are devoting great time and effort to that crisis. Frances Fragos Townsend, who previously served as Bush's homeland security adviser, told a gathering of terrorism experts last month that the confluence of events is "not lost" on bin Laden.

"We know from prior actions that this is a period of vulnerability," Townsend said.

As bad as economic conditions are in the United States and Europe, where outright recessions are expected next year, they are worse in developing countries such as Pakistan, a state that was already struggling with violent insurgencies and widespread poverty. Some analysts warn that a prolonged economic crisis could trigger a period of widespread unrest that could strengthen the hand of extremists and threaten Pakistan's democratically elected government -- with potentially grave consequences for the region and perhaps the planet.

Pakistanis were hit by soaring food and energy prices earlier in the year, and the country's financial problems have multiplied since late summer. Islamabad's currency reserves have nearly evaporated, forcing the new government to seek new foreign loans or risk defaulting on the country's debt. The national currency, the rupee, has been devalued, and inflation is squeezing Pakistan's poor and middle class alike.

Shahid Javed Burki, a native Pakistani and former World Bank official, said job cuts and higher food costs are behind much of the anger and desperation he witnessed during a recent trip. "I'm especially worried about the large urban centers," said Burki, author of several books on Pakistan's economy. "If they are badly hurt, it creates incentives for people to look to the extremists to make things better. It's a very dicey situation."

U.S. officials are following developments with particular concern because of Pakistan's critical role in the campaign against terrorism, as well as the country's arsenal of dozens of nuclear weapons. Al-Qaeda has appealed directly to Pakistanis to overthrow their government, and its Taliban allies have launched multiple suicide bombings, some aimed at economic targets such as the posh Marriott hotel in Islamabad, hit in September.

Economic and social unrest has helped drive recruiting for militant groups that cross into Afghanistan to attack U.S. troops.

The Bush administration has counterpunched by striking unilaterally at al-Qaeda-allied militants in the autonomous tribal region along the Afghan border.

More than 15 such strikes, using unmanned Predator aircraft piloted remotely by the CIA, have killed dozens of suspected insurgents since late August.

The financial crisis has also prompted security concerns about China, though experts are divided over how the country will fare if the recession is long and deep. Already, China's export-driven economy has suffered a major jolt, prompting Beijing to announce an economic stimulus package worth hundreds of billions of dollars. Job losses and shuttered factories have spurred social unrest, prompting some China-watchers to predict a reduction in spending on its armed forces and space programs as the nation turns its focus inward.

In the past month, factory closings have sparked protests and highlighted the growing gap between social classes.

China turned down a request by Pakistan for a $4 billion loan, and its economic stumbles have dampened hopes that it might, by itself, pull the global economy out of its slump.

"We had 30 years of a Chinese success story, but we're now entering uncharted waters," said Adam Segal, a senior fellow at the Council on Foreign Relations.

Yet many China scholars also see great opportunity for the communist giant. Even as the global recession cuts into its export markets, the country continues to experience robust growth at home, thanks to the consumption habits of its rapidly growing middle class. A hefty economic stimulus will ensure continued, if modest, growth, even if exports flat line, said Albert Keidel, a former economist for the World Bank and the Treasury Department and now an East Asia expert at the Carnegie Endowment for International Peace.

China already was on track to surpass the United States as the world's largest economy, perhaps as early as 2030. Now, many experts believe the global recession could help it do so faster.

The implications are enormous for the global economy and for international security, Keidel said.

"If we have a long recession and China catapults itself forward with double-digit growth, those timelines move forward," he said.

China could quickly outpace the United States to become the world's influential economy, while also competing in other areas long dominated by Americans. Even if China chooses to keep its military growth on a modest pace, the country will become a significant competitor in key areas such as space exploration, several experts said.

"It's not about China moving up the ladder as much as it's about us tripping and falling down the ladder," said Derek Scissors, an Asia specialist at the Heritage Foundation, a Washington think tank.

Will the United States be able to retain its edge at a time when its own military spending is threatened with cuts? In recent interviews, several intelligence officials said they anticipate smaller budgets for military hardware and surveillance aircraft because of the economic strain.

"They are expensive programs and some are hard to understand, but they are absolutely invaluable," Allen, the Homeland Security intelligence chief, said of the surveillance systems used in Iraq and along the Afghan-Pakistani border. "The advances we have made are tremendous, but I see a slowing of our technology edge, and that concerns me."

James R. Clapper Jr., the Pentagon's undersecretary of defense for intelligence, said his aides are already looking at ways to consolidate and cut. Since the Sept. 11 attacks, counterterrorism programs have had "a lot of money -- we've been awash in it, frankly," he told the gathering of intelligence officials and defense contractors in Nashville. But in leaner times, intelligence officials will have to make tough choices.

"I always think of the apocryphal statement attributed to the chancellor of the exchequer in the United Kingdom in 1927: 'We are running out of money, so we must begin to think,' " Clapper said. "I think we are going to be in another era like that."

Staff researcher Julie Tate contributed to this report.

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