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South America: The dark side of commodities

Posted by / 17th March 2014 / Categories: Analysis / Tags: , , , / -

For many, 2013 has been the year of “The Great Deceleration“. Emerging economies worldwide are lowering their expectations. The reasons behind this slow down might be deeper than simply the international economic downturn. The role of raw materials in emerging economies, in combination with short-sighted policy making, made the current situation all but inevitable.

Let’s start with the most obvious example: China. The Middle Empire will be lucky enough if it is currently growing at its official target of 7.5%, which in itself is a far cry from the 10.4% of 2010, and still further away from the 14.2% of 2007. The same is happening to the other BRICS, India (around 5%), Brazil and Russia (around 2.5%) will grow hardly half of what they’ve become used to. Of course, these growth rates might sound miraculous compared to the slothful richer economies, but they represent the slowest speed of the emerging economies in a decade except for the period surrounding the international collapse in 2009. Gone are the days of record-breaking speed in growth rates, and emerging economies’ capacity to play catch-up with their richer counterparts will be limited.

How can this deceleration be explained? If the emerging economies were able to rapidly recover from the financial world crisis of 2009, how is one to understand this relapse? The answer lies precisely in their model of growth. To better understand the height and decline of their boom, it is necessary to consider the role of commodities in some of these economies.

At least, that is definitely the case of South America. According to the Economic Commission for Latin America (ECLAC), South-American economies enjoyed a period of continued rise of commodities prices from the beginning of the century, thanks to demand from other industrializing economies, such as China. These high prices boosted the growth of the region and gave even more incentives to specialize in the export of raw materials. International specialization in commodities can be highly damaging to local economies, both because of South America’s subsequent immersion in globalization, as well as the socio-economic development of these societies.

Starting with the dangers of the dependency on commodity exports, an obvious problem is their volatile price. As extraordinary as they rise, they can collapse just as easily, taking with them the income of the economy that exports them. This makes them a source of instability, reducing their resilience to international economic turbulence. As the demand of raw materials declined, the bubble of their prices bursts This has been the most obvious reason for the deceleration of most commodity-specialized economies.

However, there is more to it than collapsing prices. The focus on commodities endorses a type of structure of national and regional economies that is neither beneficial to their international competitiveness, nor to their internal development.

Firstly, it promotes a weak business chain, with big commodities-exporting companies not incorporating other transformative industries in the process. They do not enhance regional value chains, the key for a beneficial participation in globalization.

Secondly, such specialisation promotes a concentration of large enterprise, crowding-out small-scale companies. At the same time, raw materials business is a low labour-intensive sector compared to other sectors, such as manufacturing. In contrast to other sectors, they are a very limited source of employment. With labour being a key factor in any coherent strategy of economic development, this is a fundamental problem that goes beyond mere export numbers.
Thirdly, it tends to inflate the local currency’s exchange rate, thereby making exports other than the dominant commodities more expensive, and imports cheaper. This “Dutch disease”, as it is known, enhance the concentration on this kind of exports and so the country become finally completely dependent on their primary product exports.

In other words, a commodity-focused exporting economy is not necessarily favourable to socio-economic development. It does not promote significant employment, nor does it guarantee a solid competitive position within the international economy. As a result, it has creates significant weakness, and one that South-American and other emerging countries are suffering from right now.

The verdict would be even more damning if based on other than economic criteria: from a social perspective, commodity focused approaches hurt a wide range of issues such as education, gender equality, and quality of life. For instance, as it requires a qualified labour force, this model will not promote higher education of the workforce; neither high salaries nor good work conditions are encouraged by extractive industries.

It may seem odd, therefore, that political discourse -both from the left and the right- often focus, positively, on the sovereign use of commodities. A topical example is of course Venezuela, i.e. the country with the highest dependence on commodities income, followed by Chile. There are three broad explanations for such destructive political behaviour: short-term economic imperative, political usefulness, and systemic pressures.

Economically, commodities are easily accessible, typically not requiring a highly educated workforce or significant state investments, as financing nowadays can be easily found at an international level. They quickly produce short-term gains, unlike more sophisticated sources for economic growth.

This also explains their political attraction: the boosting of the primary sector often falls neatly into political cycles, offering quick results at the cost of long-term problems. Moreover, the idea of resource independence has historically been an important issue in most societies, and still explains a lot of economically dubious choices governments all over the world make. Natural resources are an easy source of income, especially attractive for “developing” countries. Indeed, they might not require difficult structural adjustments, or large constant investment. Hence, they are often seen as a low cost rapid development.

“Systemic pressures” combines a series of issues related to the allocation of political and economic resources work in practice. These systemic dynamics constitute another dimension of the problem that should not be ignored in the analysis of the actors involved. This includes issues such as corruption –commodities are relatively easily accessed through bribing officials– as well as international network pressures to play the globalisation game.

These factors have allowed the resource curse to be repeated over and over again, especially because of exacerbating conditions around the globe. In the specific case of South America, the role of the emerging China has been such a condition.

In the context of “shifting wealth” to Asia, an important part of the industrial production has moved to this region, especially to China. From there, increased demand for raw material emerged and as a result has been one of the main reasons behind the rising prices of commodities in South America. Exports from Latin America to China tripled from 2000 to 2007, simultaneously to China’s direct investment multiplication in the region. Quite representative of this optimistic trade attitude was the forum “Going to Latin America” that was held last month in Guangdong.

Furthermore, business with China has been enhanced by the desire of emancipation from the Western influence. Whether this desire materializes through direct anti-United States discourse (such as the case of Bolivia), or whether this emancipation happens through a pragmatic attitude of diversification of allies, there is a powerful pull away from dependence on Europe and the United States. The result has been the growing presence of China and its commodities demands in South America.

For both left and right oriented governments, China is seen as a pragmatic actor, mainly relevant because of its economic weight. Besides some isolated complaints of interference, South Americans do not tend to see it as a threat. South American governments seem not worried about its global ambitions, and from a political perspective China has indeed treaded lightly thus far.

The main concern in Latin American capitals has been the deceleration of the Chinese economy during this past year, and its direct effects on local economies. However, the real problems lie deeper. China’s role in South American economies commodity dependence has a dark, destructive edge, and should be recognised as such. Treating development as a short term strategy will only have damaging long term consequences.


International Focus Shifting towards the Sahel

Posted by / 1st May 2013 / Categories: Analysis / Tags: , / -

Humanitarian catastrophes, food crisis, hijacking, hostage taking, ethnic conflicts, endemic violence. We hear more and more talk about the Sahel in the media. There is a clear increase in interest in the region, which has become a new central hotspot for International Relations. This is a very new perspective on the Sahel, traditionally very much ignored. It is interesting to try to understand how it has passed from being the forgotten corner of the world to a major zone of problems threatening the “international community”. In this process elements of colonisation, decolonisation and globalisation converge in the scenario of a failed state where causes and consequences overlap in a complex vicious circle.

Difficult to define, the Sahel has traditionally been the ignored part of Africa. From the Arabic Sahil that means shore, the word Sahel referred to the border regions of the Sahara desert. The main (and almost only) factor of unity in the region is the climate, and even this is very relative and changes as the desert keeps on moving forward. It is a region ranging from Senegal to Djibouti that hosts a mosaic of populations with poverty and a growing scarcity of resources being one of the few things that they have in common. Disengagement from local development and the plundering of resources seem to have been the traditional approach of both colonial powers and emerging states. This attitude started to change after 9/11 and the beginning of the war on terror by the US, which started developing a number of military projects to fight terrorism in the region.

From then we have witnessed a clear change of approach to the Sahel by the major international powers. What has changed in the region for it to be argued to be the origin of the modern threats such as terrorism or drugs? Normally the responses evoked are the expansion of dangerous flows and networks (drugs, arms, terrorism). Nevertheless, these dynamics are not new. On the contrary, as a traditionally uncontrolled region, the Sahel has always been characterised by constant flux and trafficking from slaves to cigarettes. Rather, the new phenomenon would be the inclusion of these local dynamics in the flux of globalization, and, more specifically, their insertion into “the grey globalization”. An increasing grey zone, out of law and state control, where criminal networks spread freely.

“The international community” has almost only focused on these dangers of grey zones perceived as modern, but when we analyse these phenomena more carefully, it becomes clear that they are more than a product of globalisation. Let’s analyse for instance the symptomatic case of drug dealing, especially of cocaine. Located between producers (Latin America) and consumers (Europe), the region offers cocaine dealers the appropriate political scenario where many are keen to embrace such a source of money and power. Still, if a weak state represents an advantage to traffickers, a complete disorganisation of the territory becomes dangerous. And the evidence is that current flows move traffickers from Mali to a more stable Niger. This corroborates the idea that the major source of destabilisation in the Sahel is not mainly those by criminal networks.

Without neglecting the impact of external influences and manipulation, the central problems are not drug trafficking, or even terrorism, but their use as an instrument by actors undermining the state. This way, income from cocaine would have become a major political instrument for the army, the Tuaregs, and jihadists, all to fight state power. It is essential to understand the context in which the actors act. That context is in this case a failed state. This collapsed state needs to be understood within a whole economic and political trajectory of the state (where the impact of colonisation and decolonisation has an important role).

It is difficult to analyse which is the major source of problems in the Sahel. Quite contrary to this task, what is needed is precisely to admit the complexity of the situation where a huge range of factors are intertwined. Colonial history, decolonalisation, globalisation. These vulnerable states are the outcome of structural weaknesses that promote and exacerbate competition and impact of different actors. This includes both non-state actors (ethnic minorities, jihadists, traders, NGOs) as well as international and regional powers. This is not new in itself, but it is very much accelerated by globalisation. It is a vicious circle of past and present in which the legitimacy and the inability of states to control the territory are structurally undermined. Still, notwithstanding the new evaluation of the region, the majority of the approaches to the problem continue to be very simplistic and focalised on terrorism and drugs. Some analysts speak of a self-fulfilling prophecy. By focalising on terrorism we would have forgotten the polymorphic nature of the problem and precisely create the condition for it to develop.

And the consequences of a bad evaluation of the region extend their roots even further. Indeed, at the origin of those structural weaknesses, characterising the failed states, we find the traditional disengagement of the power states. The process of colonisation and decolonisation has had an undoubted impact on the failed state, from arbitrary frontiers to the absence of social investment. Even nowadays, the specific geopolitical interests in the region shown by the power states still refuse further engagement. The West focus on threats such as drugs and terrorism, the emerging states are mainly interested in raw materials, the Arab states using their religious influence, all to have a piece of the cake of this uncontrolled region.

So, it is by this indifference that the “international community” has created the conditions to make the Sahel a hotspot. It is precisely because it was considered no man’s land that it has become the dangerous zone of problems that it is today. It seems we are still in this situation of misunderstanding the region; a misunderstanding that risks giving surrendering to those heralding a self-fulfilling prophecy of terrorism and local state fragility. And the local population remains mostly forgotten, even if they are the only direct victims.  facebooktwittergoogle_plusredditpinterestlinkedinmail

David Cameron, the European Union and UK Sovereignty

Posted by / 14th December 2011 / Categories: Opinion / Tags: , , / -

“We are never going to join the Euro, we are never going to give up the sort of sovereignty that these countries are having to give up.”

These were the words that U.K. Prime Minister David Cameron announced in referring to the new compromises that the other EU leaders are about to accept. This interpretation of nations’ sovereignty was a clear attempt to justify his veto of a firmer union. Unfortunately, the argument does not stand up to scrutiny, and clearly other reasons were behind his decision.

Indeed, the regionalization of the economy was doomed to failure without, at least, solid coordination of economic policies. Then again, this could be simply a formality; since the start of the crisis, we have all witnessed the daily bread that are controls of national policies by EU. The hands of our national democratic governments are already tied. In this difficult situation, the best option for their political credibility is to say that if they have them tied it is because they have agreed. Trying to face defeat with dignity, as it were. This attitude has the advantage of reinforcing the political leaders’ relationship with their electorates. As the nation’s representatives, they transmit an image of control, reassuring that the reason why the EU rules are a priority is because of the voluntary choices they are making, because it matches their national priorities. This is of course not equivalent to direct consultation with the people, but it create a useful, albeit vague, limbo of the indirect consent.

Certainly accepting the obvious limits to their power might be the wisest option. But even more certain is the truth that these limits are of paradoxical complexity that every single state has to deal with. Since the very beginning of the Westphalian world, the design of a nation mosaic where each nation-state had their own unlimited sovereignty was never wholly accurate. The influence exerted by neighbours has never let the utopian and self-sufficient nation-state enjoy real sovereignty, even if it was theoretically conceived as omnipotent. We could have asked Charles IV of Spain about this, while he was struggling to contain all kind of influences from his revolutionary neighbours in France. Being a human artifact, the Westphalian world was actually fragmenting new independent actors from regions, in which a whole collection of cultural, political, and economic traditions were shared.

Moreover, by continuing the myth of sovereignty up to this very day, the hoax is taken to extremes. In our globalised world, influences flow all over the world almost laughing at the national frontiers. Admittedly, this is a scenario that the Westphalian designers probably never thought about. Multinational companies, supranational governments, word wide social movements, consumer habits, ways life… they all defy the quixotic nation-state. These territorial entities have mostly become merely another actor in a dynamic web in which influences flow without any established hierarchy.

The United Kingdom is not an exception, however much Mr. Cameron would like to have us believe otherwise. The local sovereign in London has had little power to interfere in the constant income of immigrants that determine its demography, or the uncontrollable economic dynamics that are shaking its markets. This is particularly the case of its very own goose that lays golden eggs: the City, its financial hearty and one of the few national champion-industries that London can still boast about.

Therefore, dear Mr. Cameron, I am afraid that regardless of whether the British people like this or not, it’s been a very long time since the UK, without direct consent by its people, surrendered its sovereignty to the complexities of the globalised world. Ironically, this began with all those financial institutions that now are the main reason not to join the new Europeans deals, and whose significant financial revenues the UK fears will be threatened by this supposed infringement of sovereignty.  facebooktwittergoogle_plusredditpinterestlinkedinmail