Monday, 23 September 2013

A fish supper: How to make a Somali pirate

"For if you suffer your people to be ill-educated, and their manners to be corrupted from their infancy, and then punish them for those crimes to which their first education disposed them, what else is to be concluded from this, but that you first make thieves and then punish them." 
Remembering this quote the other day, it vividly brought to mind what I had been reading about Somali piracy - an intractable problem which costs the global economy $18 billion annually according the World Bank. In 2011, a piracy attack occurred every 31 hours and currently 120 sailors are being held hostage. A reduction in piracy attacks has occurred recently, falling by two-thirds, due in part to the increased weaponisation and defence surrounding ships. However, this is merely the stemming of an interminable symptom as opposed to addressing the root cause. In the words of John Clancey, chairman of Maersk shipping; "Arming merchant sailors may result in the acquiring of even more lethal weapons and tactics by the pirates, a race the merchant sailors cannot win". And they are not only the only losers in this battle. It’s hurting Somalia and its neighbours too.  Pirates often attack ships bringing goods to the region and the cost of these strikes is being passed on to African consumers in the form of increased prices for staple items like rice and flour. What to do? Perhaps the recipe for Somali pirates also holds the solution.
Ingredients 
  •    Somali government breakdown
  •    Illegal international activity on the Somali coast 
    •         Illegal dumping of toxic waste
    •         Illegal trawling 
  •    Willingness of shipping lines to pay ransom 

Our first and most fundamental ingredient in this recipe will be the breakdown of the Somali government. This ingredient has been maturing for a while, at least since the fall of General Muhammad Siad Barre in 1991. Since his departure Somali has had but a semblance of a central authority and various states in the North have taken this opportunity to attempt to breakaway, most notably Puntland in the North East where the majority of pirates have made their base.

However even before the fall of Barre, Somalia was a difficult nation to govern owing to its strong clan system. When Barre left, Somali became effectively controlled by the twelve strongest clans in the region, all battling for supremacy or independence. Twenty-two years later, the clan system still dominates Somali political culture, making top down government and authority very difficult to impose. Yet, the greatest opposition to the formation of the government has not come from one particular clan but from the extreme Islamist group Al Shabaab. This group was so powerful that by 2012, they controlled much of the South of Somalia. However, since then they have been driven back by a concerted military push from Somali and African Union forces. 

The government in Mogadishu now controls 80% of Somalia but the central government is still very weak and has little mandate in much of the country. With historical fragility and without an effective central authority to impose the rule of law, Somalia's stability has crumbled. This weakness has allowed piracy to flourish along Somalia's coast. The lack of any effective police force or coast guard has meant that they have an almost free reign over Somalia's 2,000 miles of coastline. With no coast guard to check their behaviour they have become de facto rulers of the waves. Indeed there is evidence that authorities, far from checking piracy are actually profiting. The breakdown of Somalia's institutions has meant that corruption is rampant (Somalia comes at the very bottom of Transparency International's Corruption Perception Index, in174th place) and there is plenty of evidence of pirates paying off public officials. We can see an almost direct correlation between the strength of the state and piracy; levels of piracy fell significantly in the South after Al Shabbab lost power there.

Yet weak government does not only provide the opportunity for piracy to occur. It also provides incentives. Without a central authority and functioning institutions, the private sector has not been able to flourish in Somalia. As a result many Somali’s work in agriculture, often operating on a subsistence basis. With the absence of business or a strong public sector there are few other employment opportunities in Somalia. This has kept the majority in Somalia underemployed and living on less than $2 a day. With few jobs available and no state safety net, it is unsurprising that many young men have turned to piracy. The annual income in Somalia is $650 a year whereas a single act of piracy can yield $10,000 for an individual. This gives pirate captains a ready crew of desperate young men. Poverty and unemployment, the result of Somalia’s fragility, is one of the driving forces behind piracy. In fact, piracy really began to flourish, in 2005, when attempts to more firmly establish the government in Somalia collapsed, leading to a rise in extreme poverty.

Yet the lack of employment does not stem solely from government breakdown, it requires two further ingredients. Many on Somalia’s coasts, where the majority of pirate crews hail from, could earn a basic living as fishermen. Yet this is no longer the case. What needs to be added to explain this phenomenon is an equal pinch of both the illegal dumping of toxic material and illegal trawling for fish. One of the knock on effects of the collapse in the rule of law in Somalia has been the country's inability to protect its coastline from international predators. Since the 1991 down fall, Somalia’s waters have fallen prey to the illegal dumping of toxic waste and illegal fishing, in a situation the UN described in 2006 as a "free for all". The result has been the destruction of livelihoods and a ready incentive to turn to piracy. 

It can cost up to $1000 a tonne to dump toxic waste in Europe, where it is suspected much of the material comes from, but costs only $2.50 a tonne to dispose of toxic materials in Somali waters. There is therefore an incentive for less reputable firms to look for cheaper ways to get rid of toxic materials and the defenceless Somali coastline has suffered as a result. These materials have devastating environmental consequences particularly on fish stocks which has in turn harmed the local fishing industry. To add physical injury to this assault on livelihoods, the UN reported in 2005 that the illegal dumping of radioactive uranium and other hazardous material was causing respiratory diseases, haemorrhages and skin ailments in Somali villages on the coast, diseases consistent with radiation sickness.

However, it isn't only illegal dumping which is harming Somali fishermen. Illegal fishing trawlers, primarily from Spain, South Korea and Japan, have preyed on Somalia's fragile coast line, often under the flags of friendly governments such as Belize or Bahrain, snapping up tuna, red snapper and barracuda. The low-tech Somali fishing boats are no match for the high tech trawlers. The trawlers use banned fishing equipment such as nets with very small mesh sizes and sophisticated underwater lighting systems. As a result Somali fishermen have lost $300 million a year in sea food. In a country where most live on less than $650 a year, this is a loss to many families. On top of this, Somali fisherman report shots being fired at them from illegal trawlers or being sprayed with boiling water from on-board water cannons. 

All of this has rendered fish stocks too low for Somali fisherman to remain commercially viable. Deprived of financial security but with their boats remaining, it is easy to imagine why many would turn to piracy, especially when their original prey was those depriving them of their living. Yet the shift into piracy may have been an even more direct response to illegal trawling. In the words of Peter Lehr, lecturer in terrorism studies at the University of St. Andrews "the first pirate gangs emerged in the '90s to protect against foreign trawlers". International disregard for Somalia's maritime sovereignty caused the creation of vigilante groups formed to drive off trawlers and many of these gangs became the pirates which plague international waters today. The names of existing pirate fleets, the National Coast Guard of Somalia or Somali Marines, indicate these groups initial motivations. In fact, illegal trawling and dumping gave pirate fleets a nationalist rhetoric which they claimed with some success, justified their activities. The trawlers, who were anxious to avoid attracting attention to their activities, almost always, paid the pirates ransom. 

This neatly brings me to the final ingredient needed to fully explain Somali piracy; to the current recipe one must add in a hefty dose of willingness by ship owners to pay the ransoms demanded. On the ship owners part this is an entirely logical calculation. Quite apart from illegal trawlers, merchant ships and their cargo are often worth upward of $20 million. Paying even a tenth of that sum to a pirate crew makes good business sense. And yet, what is rational for one individual is not rational for the group, an example of what economists call the tragedy of the commons. By continually agreeing to pay ransoms at the individual level, shipping firms are incentivising pirates to continue to take their ships hostage and are also giving them the capital to do so, inadvertently financing better pirate vessels and weaponry.

So there you have a very simple recipe. Just combine a broken state, illegal fishing and dumping and a willingness to pay huge ransoms and you've got your very own Somali pirate. I hope you will, as I did, get a very different image of the Somali pirates from this recipe. An image quite different to their portrayal on the news and in the media. They become less the perpetrators of heinous crimes and more the victim of desperate circumstances. When the international community allows Somali's to live in a broken state, damages coastal livelihoods by illegally fishing and throwing toxic waste into their water and then incentivising crime through almost guaranteed ransom payment "what else is to be concluded from this, but that you first make thieves and then punish them." ?

I'm not saying that Somali’s are entirely blameless. Many ordinary Somali’s eke out a living on coastal towns, not committing crime, and are horrified by the activities of their compatriots. Yet with the different perspective this recipe grants us, we can perhaps see a more human and indeed rational side to their actions. Indeed Somali pirates are not famed for their cruelty. They tend to treat hostages well and behave in a business-like manner, at least according to a Colin Freeman, a journalist at the Telegraph who was taken hostage by pirates in 2008.
The fact is that until the international community steps up to the plate, piracy will continue. In the word of Roger Middleton, from Chatham House ; "There are ways that navies from around the world can patch over the problems of Somalia but as long as a state with grinding poverty, hunger, no law enforcement and no effective government sits beside a rich trading route, piracy will continue". The international community is therefore compelled to act, not just for moral or humanitarian reasons, but also in simple self-interest. Guilt and hand wringing over the situation we’ve helped create will get us nowhere.
The international community are already taking some steps.  It was widely reported in May that David Cameron attended a major conference on the rebuilding of Somalia, speaking of the importance of supporting Somalia’s new but fragile government. At the same conference, £50m ($77m) was committed in aid to the new government from countries including China, the US and South Africa. But more must be done. The international community must focus on state-building in Somalia. Without a strong central state, any other solutions will be merely “patches”. And patches belong on the clothes of children dressing up as pirates at Halloween this year, not international policy.


Thursday, 18 July 2013

The Arab Spring: The Devil’s-food-cake-you-know vs. the Devil’s-food-cake-you-don’t

It's been over 2 years since the Arab Spring first kicked off and you would be forgiven for asking'What for?'  Over 100,000 Syrians have been killed in the attempt to unseat Bashar al-Assad in Syria, Egypt’s democracy has been rudely interrupted by a coup d'état and American diplomats in Libya, who had supported the deposing of Muammar Qaddafi, were murdered in September 2012. To many, the revolutionary Arab Spring now seems like a damp squib. Has it been worth it? Would the region have been better off without it? Through two cakes I'm going to untangle which is better; the devil's-food-cake-you-know? Or the devil's-food-cake-you-don't. 

Both of these cakes start with the same base and it’s only to the second recipe that I'll add some catalysing ingredients, to give it a bit of a revolutionary kick.

Ingredients - Base

  • High Unemployment 
  • De-legitimisation 
  • Inflation 
  • Social Media 
You need to begin with an autocratic regime, the fundamental ingredient. Without this, the  recipe with simply will not work. It could be in the form of a royal family, or perhaps a dictator who came to power in a coup. Basically they need to be the sole source of power and to have little legitimacy with their own people. For an example you need only think of Egypt's Hosni Mubarak, who had been in power since 1981 or Ben Ali who had run Tunisia since 1987. However it is Colonel Muammar Qaddafi who takes (or should I say took?) the cake,with 42 years in control of Libya. Each of these exerted their own version of autocracy. Mubarak deployed pretend legitimacy, winning office four times but in three of elections no other candidate was allowed to stand. Qaddafi on the other hand, came to power in a revolutionary coup, overthrowing the ruling monarchy. While he allowed a form of symbolic direct-democracy to take place, the General People's Committees, these were largely a sham and he came to rule by decree. 

To autocracy you now must pour in a healthy dose of oppression. This ingredient is another key element of the recipe and is indeed often found in recipes where an autocracy is the base ingredient; they are natural bedfellows. Oppression is how an autocrat keeps his regime stable, suppressing any tendency in the batter to rise or revolt. On one end of the scale there is repression like Ben Ali's, of Tunisia. His government tightly restricted free expression and attempted to stifle online dissent through hacking and hijacking Facebook and email accounts. On the other end, we had Qaddafi who, in the name of a 'permanent revolution', banned all private ownership and retail trade, eradicated the free press and subverted the civil service and military service. Quite apart from the crippling lack of expression the  populace suffered, this oppression could have some quite nasty side-effects. In Syria, anyone who expressed dissent or an opinion differing from that of Assad, would often find themselves in the hands of the Mukharabat, the regime's secret police. This most often meant torture for the dissident and sometimes death.  

Into this mix we add a hearty glug of kleptocracy and a sprinkling of corruption, other   complementary ingredients. In an autocracy, with no civil society to contain the actions of the ruling class, those in power are free to plunder a country's wealth and resources. Back to Colonel Qaddafi, while his people starved he quite literally sat on a golden sofa in the shape of a mermaid. (I'm not even kidding. The wealth of nation does not buy taste apparently.) He and his family used Libya's huge oil resources to fund a life of luxury and as a result of Libya's corruption (and the ban on private enterprise) the economy stagnated. Similar, less extreme, situations existed in Egypt and Tunisia. Both created a type of crony capitalism which benefited only the ruling class and their friends, and not the majority of the population. In Egypt, this created a privileged elite, while the majority of the rest of the population lived on less than $2 a day. To compound this financial hardship, supposedly cheap public services, such as education or even obtaining a driving licence, became increasingly expensive due to corrupt off-the book-payments. The situation was similar in Tunisia where no investment deal could happen without a kick-back to the ruling family. Ben Ali's network of relations garnered the rather Mafioso title of 'the Family' while he was in power and with good reason - over half of Tunisia's business elite were personally related to Ben Ali. 

Our final ingredient will be a demographic boom. The population of Arab nations doubled between 1975 and 2005, creating a large number of young people in the Middle East. Indeed, two-thirds of the population in Egypt is under 30. In other, more liberal nations this might prove to provide a boost to growth, but in a corrupt economy it results in rising rates of unemployment

The resulting mixture creates a weak and stagnant economy, no matter how much of a demographic boom you add. Where autocracy allows corruption and kleptocracy, the private sector cannot flourish and subsidies handed out by autocratic regimes weaken industry still further. National "champions" owned by friends of the ruling family are mismanaged and not subject to the competition which could have strengthened them and allowed them to expand globally. The Devil’s-food-cake-you know results in a predictable tragedy; squandered natural resources, high unemployment, the wasted potential of a population, instead oppressed and silenced by an elite unwilling to sacrifice their luxurious lifestyle. For many this recipe bore much worse; poverty, starvation and torture. Could it really be that's this Devil’s-food-cake-you-know is better than a Devil's-food-cake-you-don't?

To see if this is true I'm now going to describe how to you turn this uninspiring but predictable recipe into something very different...

Ingredients - Catalysts for the Devil's-food-cake-you-don't
·         High unemployment 
·         De-legitimisation 
·         Inflation 
·         Social media

We are now going to focus on the last ingredient we added to the mix; demography. Over time, this creates unemployment, particularly youth unemployment, and it becomes a highly reactive ingredient. Prior to the Arab Spring, the youth unemployment rate was 25% across the Middle East, the highest in regional unemployment rate in the world. Thousands of young people, angry about the uncertainty of their economic future and with the large amounts of time on their hands, became the basis for the first protests. It was also the spark. Mohammed Bouazizi, a 26 year old Tunisian, had failed to find paid employment despite applying for military draft as well as for many other private and public sector roles. There were just too many other job-seekers. When government officials confiscated the vegetable kiosk he was using to feed his family and pay his sisters university fees, it was the final straw. He set himself on fire in the middle of the street. The angry, young and educated in Tunisia seized on this tragedy, starting demonstrations against the Tunisian government which would spread across the Middle East. 

Now to add another highly reactive ingredient; De-legitimisation. This ingredient is, in part, the result of a reaction between the oppression and corruption experienced by people living under autocratic governments. However, the real driver of de-legitimisation is a lack of economic growth and development. For example, people living in China similarly live without democracy and under an oppressive and to some extents corrupt regime. However, the Chinese government works hard to drive growth and development and has therefore gained legitimacy among the majority if its citizens. The same cannot be said of governments in the Middle East. Ageing leaders, corruption, ineffectual government and failure to provide not just growth but even basic services had de-legitimised them in the eyes of their citizens.

These ingredients alone give the batter enough of an impetus but to speed up the reaction further we'll add a dose of food price inflation. This was prevalent in the period leading up to the Arab Spring and by its peak food price inflation had become a problem all across the Middle East, rising to 18.9% in Egypt just before Mubarak fell. In a place where poverty is so prevalent it is no surprise that the rising price of bread drove people on to the street.

Our final catalyst, the one that is guaranteed to push the batter over the edge, is a couple of spoonfuls of social media. This is the ingredient which allowed the anger, caused by youth unemployment and de-legitimisation, to find a voice and to organise. The first mass protest in Egypt was organised on Facebook and it helped thousands of protesters outwit the police. It also spread revolution across national borders creating copycat protest movements across the region.

And there you have it; the Devil's-food-cake-you-don't. The risk with this recipe is you're never quite sure how it will turn out, no matter how many times you bake it. On the one, oven-gloved hand, you could get a fairly stable result. I'm thinking about Tunisia where Ben Ali left relatively quietly and the Tunisians are working to create a democratic system, albeit still with unimpressive economic data and the odd protest. Far from perfect but a functioning state on (hopefully) the eventual road to development. On the other, you could get, for example, something as traumatic what has happened in Syria. This includes; death, violence, mass migration, the increasing destabilisation of the region, and a total breakdown in the rule of law. Over 100,000 people have been killed in the Syrian conflict and 45.2 million people have been displaced, according to UN estimates, spreading instability across national border.

This brings us back to the question I asked at the beginning of this piece; Has it been worth it? Would the region have been better off without it? It is easy to look at the results above and declare a resounding no. The results seems largely to have been loss of life, economic damage (if not collapse) and political turmoil. None of the countries has transitioned to a fully formed democracy. Tunisia is closest but in Libya functioning democracy seems far away as militants have banning anyone who ever worked with Qadaffi from taking part in government. Thus the most capable reformers and incidentally passionate anti-Qadaffi fighters have been dismissed from government. Egypt recently ousted their democratically elected (but wannabe autocrat) leader, Mohammed Morsi. And in Syria, not just democracy, but any form of functioning government seems years away.

Against this background it almost seems callous to suggest that this suffering and instability were in anyway worth it - that the Devil's-food-cake-you-don't was the wise choice. And yet that is precisely what I am going to argue. I'm going to propose that however hard the transition is, it is, in fact, worth it.

Many are suffering as result of the instability, a fact that is hard to ignore when it makes the nightly news. Yet, even before the Arab Spring people were suffering. Repression's tools are often imprisonment and torture. The number of prisoners suspected to be held by Assad in Syria varies between 10,000 to as many as 120,000. However, the true cost of the Devil's-food-cake-you-know cannot just be measured by present suffering but by the lost potential of generations who had few opportunities to improve their lives under these regimes. The perfect example of this is Libya - a country with minimal education, limited free speech and a stagnating economy left the population in extreme poverty with little opportunity to improve their own lives. 

While some economist still rely on narrow and solely economic data to judge a countries development economists like Amartya Sen and Martha Nussbaum have expanded the approach with less traditional measures such as their capability theory. In this they define development in terms of the opportunities available for the population to flourish instead of by GDP-per-head. If we adopt this view, even in countries with healthy levels of growth, development may still not be achieved and populations can still suffer what they term “capability-deprivation” under repressive regimes. If these regimes are not removed, then it is not only the present generation that suffers but future ones too. 

The path to democracy is rough but instability now needn't mean instability later. And just because a process is prolonged and painful it does not mean it isn’t worth is, as many developed countries have proven. For example, the 1848 Spring of Nations which involved death and the exile of many Europeans. And yet in the long run it was in fact the catalyst for all the changes which led to the European monarchies falling over the next hundred years. Similarly England's glorious revolution in 1688 put it on a very long road to democracy, one which led finally to universal suffrage in 1928. The fact is that, quite frankly, it often can take a long time to make a democracy and it is not without disorder and chaos.

While this sounds demoralising it shouldn't be. The prolonged instability in Tunisia, which some have been predicted as harbinger of doom, is actually a good thing. It shows that Tunisians are unwilling to allow one party rule - they want real democracy and for this constant pressure needs to be applied to those in charge to avoid a hijacking of power. Tunisia’s street protests now will hopefully result in a stable democracy in the future. Of course, one could holdup Egypt as an example where street protest just lead to further instability under a coup d’état. It’s true that the results with the Devil's-food-cake-you-don't are never guaranteed. Since the end of World War II, there have been roughly 50 major revolutions that have either toppled autocratic regimes or led to significant political reform in “flawed” democracies. For those revolutions that have occurred under dictatorships, only about a third have resulted in transitions to democracy. Yet when the alternative is years of stagnation, suffering and missed opportunity the fight is still worth it. 

The devil's-food-cake-you-don't is a risk. Though I've given you the ingredients, I've also given you the odds. Democracies don't spring up over night and to have believed that the overthrow of autocratic regimes in the Middle East would bring about stability and democracy in a couple of years would have been naive. Yet I hope I've shown, through my two recipes, that when the certain results are poverty and the loss of so much potential that the Devil’s-food-cake-you-know is the right, if risky, choice. It's a gamble, but one definitely worth taking. 



Monday, 4 March 2013

Argentina: The country that failed to rise

Having just come back from a 2-week holiday in Argentina, I wanted to do a recipe which demonstrated Argentina’s unique economic situation.
            Its early days but it’s already been a tough 2013 for Argentina. The year had barely started when Argentina heard it had made the top ten ‘miserable nations’, according to the Global Misery Index (a ranking based on a country’s inflation and unemployment rate).  The Argentinean president, Cristina Fernández de Kirchner, has struggled to negotiate price freezes with major supermarkets in an attempt to combat the country’s intense inflation. These are just the latest in a range of failed measures and the inflation rate now stands at 25% according to economists. Yet the government stubbornly insist that the rate is no higher than 10.8%. This refusal to engage with reality has, after many threats, earned Argentina a declaration of censure from the IMF, as well as causing its black market dollar rate to hit an all time high. Not a great start to the year.
            Hopefully this will provide some context to the recipe I picked up in Argentina this January*. Travelling around, the more people I spoke to, the sadder I felt for those living in this beautiful country.  There was very little optimism and widespread dissatisfaction with the de Kirchner government. I wanted to understand how a country which showed so much promise at the turn of the 20th Century, with all the ingredients for success, could fall so flat. To better understand Argentina’s failure to rise, I’m going to compare it to a very successful country with a very similar set of ingredients; the United States. Argentina is traditionally compared to Australia and Canada but I wanted to... (please forgive the cooking pun) mix it up. Let’s take a look at their shared ingredients:
Ingredients
o   An abundance of fertile land
o   High rate of European immigration 
o   A constitutional presidential system
o   Civil War  

          The first shared ingredient is an abundance of fertile land which gives the country a comparative advantage in agriculture. While vast tracts of land were a common enough feature in the America’s, the quality of Argentina’s land was a differentiator. Argentina’s vast pampas covers more than 295,000 square miles and with a mild climate and evenly distributed rainfall, it is ideal for agriculture. So much so that by the 1920’s 99% of Argentina’s exports were agricultural and totalled more than $1billion.The United States had a similar comparative advantage. Indeed they had such a profusion of land that the government issued 160-acre tracts for agriculture virtually free to about 400,000 families under the Homestead Act of 1862. The abundance of land and the temperate climate meant that by the 1920’s the US was exporting agricultural good worth $1.94 billion (although this accounted of only 42% of total exports).

         The abundance of arable land, together with the addition of the second ingredient, labour, was enough to provide a platform for growth. In their initial stages both the United States and Argentina were scarcely populated, relative to their size, and thus relied on immigration to fill and work their productive farmland. Argentina was particularly successful at this; Argentina’s population rose from 4 million in 1895 to 7.9 million in 1914, and to 15.8 million in 1947. This rapid supply of labour created a significant boost to growth when combined with capital and fertile land. The Unites States experienced a similar phenomenon (although immigration had been taking place for a considerably longer period in its case).  It acquired 25 million new citizens over the period 1850 to 1930, again mostly from Europe. The US, like Argentina, relied on immigration to provide the changing demography necessary to take full advantage of its natural resources.

            These two ingredients created a catalyst for growth in both countries’ economies’, although the effects were more striking in Argentina.  Argentina’s growth between the 1860 to 1930 period was so impressive that it was expected to eventually become the Untied States of South America. GDP per capita rose from 35% of the United States in 1880 to 80% in1905. By 1913 Argentina’s income per head was on par with France or Germany's and far ahead of Spain’s or Italy’s. So where and why do these similar recipes diverge? Why did the promise of Argentina fail? The trouble lies with the final ingredients. Although Argentina managed growth for seven decades, we shall see that the seeds of disaster were already sown and would manifest themselves in the Great Depression of the 1930’s.

            Let’s start with the presidential system, one in which a president is both head of state and head of government. This particular ingredient can be notoriously difficult to work with. While the US’s presidential system has created one of the world’s most stable democracies, the same cannot be said of other countries who have adopted it.  Indeed the presidential system has been referred to as; ‘America’s most dangerous export’. This is because it gives broad powers to the executive branch the power to veto bills, appoint cabinets, and crucially to assume emergency powers. While, this has the advantages in terms of speed and decisiveness it can lend itself to authoritarian government. The US’s well developed system of checks and balances at both federal and state level have helped it avoid these problems. However, Argentina did not have strong legislative and judicial branches or even local government to act as a check on its executive branch. Indeed, Peron, following the first coup in 1930, impeached the Supreme Court, entirely eliminating the judicial branch as a check. The 1949 constitution then destroyed the separation of powers. This sealed the fate of Argentina’s presidential system. Without a history of stability the system could not develop the checks and balances it needed to prevent the political instability Argentina has suffered since the 1930s. 
            This historical instability is the result of a final ingredient; civil war. While both countries endured civil wars during the 19th Century, Argentina’s was considerably more damaging. While the US’s civil war lasted only four years, its resolution ended uncertainty and provided a platform for stability. In Argentina however, the Civil war lasted more than sixty years and seeded political and economic instability which would resurface in the 20th Century. Gross devaluations in currency, over dependence on only British capital and corruption at the heart of the financial system (in the Banco de la Nacion Argentina) were just some economic manifestations of this lack of stability.
            These two final ingredients, a presidential system and instability resulting from years of civil war, come together to create an underlying political instability and institutional weakness. This then became manifest during the Great Depression of the 1930’s when a military junta pushed aside Argentina’s fragile democracy, ending seven decades of constitutional government. Since then Argentina has suffered numerous coups and dictatorships and has fallen into long term decline. Peron, who took power following the coup, cut Argentina off from international trade and adopted a strict policy of import substitution. While many countries became increasingly protectionist during the downturn, for example the US introduction of the Smoot-Hawley tariffs, few cut themselves off to the extent Argentina did. The resultant push towards an industrial economy, created a misallocation of resources and without investment Argentina lost its comparative advantage in agriculture; sales of beef and grain stagnated. Successive governments, trying to placate Argentina’s population intervened to keep prices low while keeping public spending high. This created the conditions for the spiralling inflation which has plagued Argentina for decades. It also led to a huge amount of foreign debt which, by the 1980’s, was the equivalent of 75%of Argentina’s GNP. New, often unelected governments would frequently change and add to Argentina’s legislation and this complex mix served to further dampen economic activity. As a result, by 1969, GDP had fallen to half that of the United States.
            There were attempts to pull Argentina back. It even briefly returned to democracy in 1983. However, Argentina continued to suffer and per capita income continued to decline; by 20% between 1975 and 1990. Corruption and civil unrest during the 1990’s led to a financial crisis in 2001 resulting in massive capital flight and deposit runs. While Argentina has returned to growth due to booming demand for commodities, it is still not growing as fast as its Latin American neighbours and citizens are not benefitting. High import and export tariffs, renationalisation of companies (such as YPF) and government intervention have all worked to discourage investment and fuel inflation. 
            It is strange to think that recipes with such similar ingredients could create such starkly different results. Argentina had a promising start but underlying instability doomed it to fall even before it had risen.  Argentina’s democracy was not strong enough to withstand the pressures of an increasingly competitive global economy. It then entered a downward spiral of institutional weakness, a trap from which it was difficult to escape. The United States, with its background of stability, avoided this. Is there a recipe for Argentina’s rescue? If anyone has any ideas for an Argentina raising agent, I would love to know!
*An economist’s travel tip: If you are planning to travel to Argentine, convert you travel money to dollars first. They are widely accepted and it could save you a lot in terms of the conversion rate!

Sunday, 21 October 2012

A bad moon rising: Chinese growth and baking

This blog post is posted in celebration of the Chinese Mid-Autumn festival (I am a couple of weeks late, I know).  Below I put my own take on the now predominant view that China’s growth story will continue unabated.

Nb. This post and its comments were removed for a while so I have posted the comments at the bottom of the blog

Ingredients

For the skin (exclusive institutions): 
  •  An authoritarian government 
  •  State controlled enterprise
  •  A weak judicial system
  • A good sprinkling of corruption 
For the filling (demography):
  • A one child policy
For the glaze (rote education):

  • An overarching centralised education system
  • A history of standardized tests and rote learning
  • Plenty of rising demand for university places
                The Chinese moon cake is a specialty given to friends and relatives at the time of the Mid-Autumn festival. This celebration commemorates Chang’e and Houyi who were forced by fate to inhabit the Moon and the Earth respectively. On the night of the mid-Autumn festival however, Houyi is able to visit his wife, and it is for that reason that the moon looks so very beautiful that evening.  A glowing orb that rises from the East might be a perfect analogy for the predictions about China’s long run growth. From the Economist maintaining that China might overtake the US economy by 2020 to the Leftist academic Martin Jacques predicting that China’s economy would be double that of the US’s by 2050, there has been an endless stream of projections based on China’s unbridled growth. However, for me there are at least three factors, much like the three parts of moon cake recipe, which when combined have the potential to spell economic malaise.   

                To begin with there is the skin, exclusive institutions, which hinder Chinese growth.  This requires the mixing together of an authoritarian regime with state controlled enterprise. Together these factors work to deter potential entrepreneurs without state backing; if you have no assurance that the state won’t punish your success at the expense of a state backed company, you will have little incentive to start or grow a successful enterprise. To this you add in a weak judicial system, one which fails to protect property rights. This further acts as deterrent to growth as businesses and individuals are reluctant to invest where their investment may be confiscated by the government.

                To all this, I would whack in a healthy dose of corruption which misallocates resources and undermines the competitive market place. A report released last year by the Chinese government found that between 16,000 and 18,000 government officials and employees of state-owned enterprises had smuggled more than $120bn overseas between the mid-1990s and 2008.However, it is not just the cost to government coffers; corrupt behaviour in government changes a citizen’s incentives such that engaging in hitherto profitable economic activity is no longer worthwhile. Simply put corruption raises the price of business and puts a brake on the growth of the private sector.

                At this stage you might find that the mixture reacts. As inequality rises in China, as a result of an uneven playing field, citizens are becoming less tolerant of their economic situation and the government. According to a 2012 poll by the Pew research centre, nearly half (48%) of Chinese respondents reported that wealthy inequality was “a very big problem”. In a country used to the Communist ideals of total equality this will not sit well. Indeed, China’s gini index, now at 0.46, has surpassed the 0.4 level which is a predictor of social disturbance. By exerting pressure on the batter (through the arrests of political dissidents, censorship of the press etc) you can limit the reaction somewhat, but in a country with a growing and increasingly vocal middle class this can only ever be a stop gap measure.

                The second stage in this recipe, preparing the filling, is amazingly easy as it requires only one ingredient; a one-child policy. However, it is important you let this component rest, as its effects manifest themselves slowly over time. Most developed countries are in some way suffering from their ageing demography. The UK, Italy, Japan and many other developed nations are suffering as their elderly, retired populations grow and are supported by a diminishing labour force. Not only does this shrinking labour force directly impact growth it also leads to a decrease in household savings, reducing capital available for investment. However, China won’t face a diminished demography as much as a demographic drop off. The one-child policy has exacerbated the slump in China’s labour force in the coming years. While China’s current median age is 34.5, similar to America’s 37, this is expected to rise to 49 by 2050, far ahead of the expected US median age (40). Its over 65’s will account for 26% of the 2050 population, also ahead of America’s. China’s growth has been in part due to a very large and youthful labour force. When the labour force contracts (by 11% between 2010 and 2050) and this dividend disappears China will be hard pressed to find a comparable economic stimulant. To quote The Economist; “unlike the rest of the developed world, China will grow old before it gets rich”.

                To top it all off you need the glaze, which puts a less optimistic shine on Chinese growth. Despite China’s success in recent PISA tests, education has not been generally celebrated as victory in China. Many in the education sector felt that high verbal and mathematical test results have come at the cost of originality and inventiveness. To quote Xiong Bingqi, an education expert at Shanghai's Jiao Tong University, Chinese students “have huge vocabularies and they do math well. However, the level of their creativity and imagination is low”. This concoction comes together when you pour in an overarching centralised education system and a history of standardized tests and rote learning. The education system is focused on high test results and its rigidity means that teachers have little scope to take students outside the ‘teach-to-test’ model. This is in part maintained by a culture standardized testing and rote learning which dates back to the Emperor Wu (141 -87 BC.) and what became known as the Mandarin examination system. The emphasis of these examinations was on discipline ad rote memorization of classical texts. Not a harbinger of Steve Jobs-esque flare. To this you apply pressure from school students themselves, who are often desperate to obtain a place at oversubscribed universities.

                The by-product of these three ingredients can be damning. China’s growth has up till now been based on the adoption of existing technologies and rapid investment, not Schumpeterian creative destruction. Yet as China completes its catch up and the labour force shrinks, they will have to come to rely on innovation for sustainable growth. If the education system remains unreformed, and young Chinese aren’t taught to think creatively or originally, this will be incredibly difficult
                Thus, this recipe produces a far less buoyant bake than others have proposed yet I feel it is more realistic given the interplay of the current factors. Nonetheless, the economy is not doomed to sink. While the Chinese can do nothing about their demography they could take steps to change their education system and improve the rule of law and accountability across China.
Then you would be baking with a whole different set of ingredients...


Some semi-valid points. Most of them are however just purely wrong:
1) Generally speaking, I haven't come across ONE prediction suggesting that China's GDP would not exceed USA's GDP in a few decades – or stop growing exponentially any time soon. USA's growth, in turn, is showing substantial signs of saturating behaviour.
2) Relative difference between the salaries of entrepreneurs and non-entrepreneurs in China have been continuously increasing for three decades: Now entrepreneurs make nearly 50% more than non-entrepreneurs. See page 17 for numbers from -95: http://cep.lse.ac.uk/pubs/download/cp253.pdf. Overall, according to various sources, China's transforming industrial policy setting has been increasingly supporting towards entrepreneurs over the past few decades. Here's more on that: http://www.economist.com/node/18330120
3) Why wouldn't state-owned companies facilitate growth? Large domestic monopolies, undervalued currency and increasing export sector combined is a pretty much the best driver of growth you can hope for. This is basic economic/trade theory.
4) The question of property rights is two-sided. Better property rights facilitate incentive for tech development for individual companies, loose control, in turn, facilitates nation-wide implementation of different technologies. Technology diffusion vs. private incentive to develop? Even if there were some welfare losses due to loose iPR, it's hard too see that affecting long-run growth: as said, in addition to the fact that they don't actually account for much of the growth, entrepreneurs are thriving.
5) It's easy to say that authoritarian governments are bad. Communists are always bad, stupid and evil – we know that. It's another think to claim that there was a causal relationship between having an authoritarian government and slowing economic growth.
6) USA's gini index has been more than that of China for 30 years: http://upload.wikimedia.org/wikipedia/commons/thumb/0/01/Gini_since_WWII.svg/720px-Gini_since_WWII.svg.png. Now they're even.
7) Culture-wise, China is one of the last countries where social disturbance would actually contribute negatively to economic growth. Look at UK a few years back or Greece now.
7) $120bn of corruption over 17 years is $7bn per year, which is about 0.1% of China's nominal GDP in 2011. Yeah, how the public sector can take that? Yeah, why should I work anymore since there is corruption? Simply put the welfare losses from corruption are marginal if you look at the big picture.
8) Smart comparing China's age distribution to America's numbers. Try any European country. Furthermore, it is fairly clear that lack of workforce has never been a slightest issue for China. I am really getting frustrated...
9) Education...yawn. Sure the Chinese system lags its Western equivalents. Sure there is an undersupply of study places. What does this has to do with growth prospects? China has a hundred million students. The schools are packed with talent. Every fourth international student is Chinese. Come on now.
It smells as if the writer had just taken Econ101 and heard that Chinese are communists.
Please think again.
1.    Hi,
Thanks for your comment.
I thought I might respond to some your points. As you expressed concerned over my credentials I’ve tried to give examples outside my blog to support my responses.
1)I thought like you might to see the views of two economists, Darron Acemoglu (a professor at MIT and one of the worlds 10 most cited economists) and James Robinson ( a professor at Harvard) , who have predicted that China’s growth will be substantially limited in the long term. http://www.huffingtonpost.com/daron-acemoglu/china-superpower_b_1369424.html
2)Thanks for the stats! I do agree that China has been doing more to support entrepreneurs in recent years and that their policies have been largely successful. However, in my opinion, they can never be completely successful while the rule of law (and by that I mean a strong sense of law outside of party politics) is still weak. When law courts are in some sense still guided by the political will of those in power entrepreneurs can never be completely secure in their activities. See the questionable case of Dai Guofang; http://www.washingtonpost.com/wp-dyn/articles/A55000-2004Aug10.html
3)Theoretically, monopolies in general suffer from a lack of competition, which can allow them to keep prices high, restrict choice and result in productive and allocative inefficiency (Econ 101) . In practice, for China at least, studies have found that if many of China’s SOE’s lost their government grants and subsidies they would actually be losing money. This in turn starves money from small and medium sized businesses trying to operate in China; the Chinese entrepreneurs you championed above. For more information http://www.economist.com/node/21564235
4)I have to disagree with you here. While I do think China an intellectual property rights is a fascinating topic I was thinking more of property rights in the most traditional sense, property rights which protect individuals and business against expropriation by the government. There is very little evidence to support the notion that the government being able to expropriate your property without legal recourse is a positive step for growth, quite apart from being inhumane. The Olympics was only one example; http://www.bbc.co.uk/blogs/thereporters/jamesreynolds/2008/07/olympic_evictions.html
5) I never claimed the Communists were “always, bad stupid and evil”. I would never do so in part because I have friends who are communist. I would also not insinuate that communism and authoritarian government are synonymous. I wasn’t sure what your point was but work by economic historians and institutional economists has shown that authoritarian regimes have never sustained long run growth in part for reasons I have mentioned in the first section of my blog post. That is not to say that authoritarian regimes don’t have some of their own advantages .In fact, as a transitional government I think Chinese government could be very successful if manages to shift from an authoritarian to increasingly democratic government.
6) Yes the Gini coefficient in both China and the US is above what is deemed. Indeed it is even higher in Latin America (see http://data.worldbank.org/indicator/SI.POV.GINI). However, in the US and in Latin American democracies there is a public means of airing grievances around rising wealth inequality. One simply need see the Occupy Wall Street movement. In China there is no such resource as the state does not traditionally take too kindly to those criticising its policies.
7) a) I wasn’t sure I understood your point either. Social disturbance, if it pushed China farther down the road of reform could be a good thing. However, social disturbance by creating uncertainty and discouraging foreign investment could at least in the short term negatively impact on growth. This, I understand, is why the Chinese government worries so much about dissent.
7) b) The £120 billion was only the amount grafted by a group of 16,000 – 18,000 government officials. In 2005 alone, the national audit office reported £35 billion of fraud by government officials (please see http://www.nytimes.com/2009/12/30/world/asia/30fraud.html?_r=0). That’s 1.5% of China’s nominal GDP, a far bigger consideration. And that is only government corruption that has been audited at a the supra-regional level. Corruption exists on a far wider scale on a more local level. Furthermore, local corruption, quite apart from disadvantaging the poorest who are hard pressed to pay bribes, exists has been proven to be damaging to the business environment; http://lnweb90.worldbank.org/eca/eca.nsf/1f3aa35cab9dea4f85256a77004e4ef4/e9ac26bae82d37d685256a940073f4e9?OpenDocument. These are not my views but the World Bank's.
8) Thanks for the compliment but the comparison wasn’t mine it was the Economists (http://www.economist.com/node/21553056).Furthermore I wasn’t saying that China’s labour force was an issue now but that it would be in the future.
9) I’m sorry you got so tired by this point. Might I suggest an injectuon of caffeine? My point wasn’t that the education system lags the Wests entirely, just that it had little focus on creativity or imagination in the workplace which would limit the future work forces ability to innovate. Innovation, as I am sure you will agree, is indeed crucial to growth. This was in no way a slight on Chinese students or teachers who I am certain are super talented. In fact, they are the ones who are being disadvantaged here by rigid Chinese education policy.
Furthermore I have heard there is a Communist regime in China though I didn’t learn that in Econ 101.
Thanks for your feed back :)

Thursday, 28 June 2012

A sweet success? Sanctions in Myanmar

One of the most surprising things about this recipe is how quickly it seemed to come together. Be warned it takes a while to really ‘set’ and won’t necessarily work as well with different ingredients

Ingrediants
  •      Base:
  • A government desperate for financial resources
  • An authority group that’s lost political legitimacy
  • A reliance on ‘ally’ countries with extractive agendas
·         ‘Carrot’:
  • High profile visits and diplomatic relations
  • Debt forgiveness
  • Support and aid from the World Bank and IMF
  • Interest and  investment from foreign companies
  • No involvement of the International Court of Justice at the Hague
·         ‘Stick’ – strict EU, US, Norwegian, Japanese, and Australian sanctions including:
  • Arms embargo,
  • Ban on Burmese goods including timber, mining and gems industry
  • Ban on companies investing and working in the country 
  • No humanitarian aid
  • No visas for army members and junta.

            Anyone who has spent the last six months watching the political developments in Myanmar unfold could be excused for experiencing some degree of vertigo. The progress of reforms appears to be so rapid the even South East Asian experts failed to predict the military junta’s political u-turn. However, a closer look at Myanmar’s situation reveals a rather interesting recipe; perhaps one which offers for hope for the much disparaged sanctions. These economic restrictions are often derided, especially by those who disapprove of the ‘soft power’ approach. Yet Myanmar’s recent reforms have shown how successful sanctions can be, if done properly and made with the right ingredients.                                                                                                                                                                                                                                                                                               
            For an effective recipe made with sanctions, it is crucial that you have the right base for reform. This shouldn’t be too tricky as sanctions are usually applied to countries with deeply corrupt and extractive institutions that profit a self-serving elite. Over time, the nature of these institutions typically leads to the type of base required; an authority or government that is desperately short of both resources and political legitimacy. Such was the case for Myanmar. The base was improved further by its alienation from other countries, leaving it hopelessly dependent on one country; China. China, like Myanmar’s own military junta had an extractive agenda in the country, and the government eventually found that Chinese business investment was often little more than a snatch and grab, with companies mistreating employees and damaging the local environment. These factors, when combined, make an ideal base for the next step. 
            However, this part of this recipe is probably the trickiest, as it requires a careful culinary balancing act; offsetting the right amount of ‘carrot’ against the right amount of ‘stick’. This balance must be exactly right for reforms and development in a country to ‘set’. In the case of Myanmar it began with the ‘stick’; the harsh sanctions imposed on it by countries as diverse as the US, Norway, Japan and Australia. These took the form of a prohibition on companies investing and working in Myanmar, a ban on exports such as teak and gems, no visa’s for any members of the army or junta and eventually a suspension of humanitarian aid. Over time these sanctions began to bite, and in turn help prepare the base. Once this is ready, you gradually, and I stress gradually, add your ‘carrot’ while slowly taking away the ‘stick’. In the case of Myanmar it began with President Obama promising a visit by Secretary of State Hilary Clinton following the release of Aung San Suu Kyi. Myanmar then freed 650 political prisoners and in turn the US re-established diplomatic ties. This careful removal of ‘stick’ and addition of ‘carrot’ encouraged Myanmar’s reform and on the 1st of April Myanmar held the first free and fair elections since 1990. As a result, the EU is suspending all sanctions (apart from the arms embargo) for one year and multinational companies are clamouring to invest in Myanmar.
            As successful as these reforms have been so far, their speed risks upsetting the careful balance that is required in this recipe. It is essential that other countries give only enough ‘carrot’ to encourage the current reform while still reserving some rewards for future reform. While Myanmar has made impressive progress there are still some fundamental changes which need to be made. Primarily the army’s power needs to be greatly reduced. While Aung San Suu Kyi’s National League picked up 43 out of the 45 seats in the recent election, this comprises only 6% of the 650 seat parliament. In addition to this, the constitution of Myanmar still leaves the army with a significant power. If Myanmar is to become a fully functioning democracy it still has plenty of improvement to make and for the sake of preserving the fragile balance, countries should be careful not to make too many concessions to the regime too quickly. Aung San Suu Kyi put it best when she said “the world loves a happy ending...but there is still a long way to go”. Myanmar’s reforms haven’t quite ‘set’ yet.
            Nevertheless, if this does prove to be a successful recipe using sanctions, could this be applied elsewhere in the world? One obvious thought might be Iran. Another ‘rogue nation’, to use the famous American phrase, is facing its toughest round of sanctions yet. From the 1st of July the EU will halted all imports of Iranian oil and earlier in the year the US government announced that it would penalise any financial institution found to be doing business with Iran’s central bank. Yet, despite the severity of these sanctions, the method of applying them cannot be the same in Iran as in Myanmar. With Iran one is working with an entirely different set of ingredients.
            On the surface the situations appear similar; a hard-line regime, with extractive institutions and mired in corruption. However, their ingredients that comprise the base of the two are subtly different.  To begin with, the Iranians base is not nearly strong enough (i.e. the government is not yet desperate enough) to support a fragile ‘carrot and stick’ manoeuvre. While the government does not enjoy much support (as shown by the Green Revolution in 2009), the theocracy still maintains a powerful ideology and one that many Iranians still support. Secondly, while sanctions are beginning to sink in, Iran is in a financially stronger position than Myanmar. It is more developed than its Asian peer and still has some semblance of a strong middle class remaining. Iran also has enough resources saved up to weather EU sanctions, at least according to the government. Ahmadinejad announced recently that Iran has an oil fund worth some $35 million to tide the country over to 2015, even if they didn’t sell any oil during that period. This is crucial, because in an extractive economy like Iran’s, the government very much relies on handouts for support and their control of citizenry. Iran is also not dependent on one ally, as Myanmar was. Due to its vast resources of oil, it still maintains relationships with countries that have no qualms about its nuclear activities.
            With an entirely different set of ingredients for the base, sanctions will not come together as quickly or as sweetly as they did in Myanmar. Nonetheless, a longer preparation time shouldn’t lead us to write recipe off straight away. Iran’s base may not be ready now there is a chance that sanctions will push it there for the future. As they at last begin to bite, Iran’s economy is stuttering and ordinary Iranians are suffering. Food inflation is running at above 50% and food shortages have been reported. Unemployment is a problem too; 22% of Iranian families have no breadwinner. As this continues the regime will begin to lose whatever remains of its political legitimacy. Despite deeper coffers, the Iranian government are also deeply concerned about their oil flow. Harsh new EU sanctions will cut Iran’s oil exports by at least 25% and this for a government which is dependent on oil for 50% to 70% of their revenues.  The EU and U.S. have also put banking penalties on financial transactions with Iran which have effectively, in the words of Ahmadinejad, shut Iran out of international banking. This lack of finance is aggravated by the fact local investment in Iranian business has slumped. Iranian investors are now investing spare resources in ‘havens’ such a property, gold and even carpets. Finally, as Iran increasingly becomes a pariah state, it will be forced into greater reliance on allies such a China and India. These are countries that are already prepared to push Iran for discounts on oil following the latest t round of sanctions. 

So there it is; a sweet, simple and hopefully successful recipe for reform through sanctions in Myanmar. Whether the long-time frame and varied ingredients prove too much for this recipe in Iran remains to be seen.