Nobel Memorial Prize in economic science, Paul Krugman

The winner of this year’s Nobel Memorial Prize in economic science, Paul Krugman, is at 55 relatively young by Nobel standards. Less than a fifth of the more than 60 awards given thus far in the area have gone to scholars in their 50s. Although the award for economics is almost always controversial, there are enough reasons the Nobel committee can offer to justify its decision to once again depart from its normal practice of recognising older economists for contributions made early in their careers. To start with, though emerging from the mainstream neoclassical tradition, Professor Krugman did not shy away from questioning and dropping many of its ‘ideal’ assumptions, thereby reintroducing an element of realism into a subject many complained was losing touch with reality. Secondly, he used relatively simple models to draw conclusions that went contrary to misplaced mainstream beliefs. His analysis of trade patterns, cited by the prize committee, began from the observation that much of global trade did not take place between countries with dissimilar endowments of factors like capital and labour, as mainstream theory expected; it took place between countries with similar factor endowments and often involved different varieties of products from within the same industry. Professor Krugman explained these features by relaxing the mainstream assumptions of perfect competition and constant returns to scale. Thirdly, his interest in real world trends and issues has encouraged him to engage in policy debates, where too he has challenged many prevailing beliefs among policy makers. Finally, he has sought to educate those outside academic institutions and policy circles about the arguments that underpinned thinking on contemporary economic development and on economic policy, encouraging them to participate in debates over economic policy. This he has done through his books for a popular audience (such as the much-quoted The Age of Diminished Expectations), his column in The New York Times, and his blog. His popular writing has shown that he is not just an economist of standing but also a writer of good and engaging prose and a gifted journalist.

There will no doubt be many who will question the Nobel committee’s wisdom in making this award. Some say that his models are too simple; that his conclusions stretch his analysis too far; and that he is too engaged for an academic. The Nobel committee for economic science, which has a track record of bias in favour of conservatism and the mainstream tradition, chose to ignore such criticism. Possibly because in the middle of a global financial crisis that has challenged the neoliberal tradition that mainstream economics spawned, it is better to err in favour of the heterodox.

The rise (and fall?) of petro-states

Sreeram Chaulia

The landscape of diplomatic battles has been impacted deeply by the rise of petro-states.

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Russia reaped direct dividends of the steep incline in fuel prices

In Venezuela too, oil bonanzas helped spur revolutionary policies

Petro-states cannot ‘fall’ when their rivals are getting battered

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Even before armed hostilities between Russia and Georgia ended in August 2008, the ultranationalist Mayor of Moscow, Yuri Luzhkov, began investing colossal sums on changing the ethnic geography of South Ossetia in favour of Russia. In one public speech to Ossetians, he exuded the confidence and chutzpah that has come to symbolise the Russia of Prime Minister Vladimir Putin and President Dmitry Medvedev. Smug with the knowledge that oil and gas revenues had raised his count ry’s international stature, Luzhkov wooed his Ossetian audience with a startling claim, “Russia needs nothing. It has everything. It is the wealthiest country.”

The Kremlin’s assertiveness and strident defence of national interests in the Putin era is ascribed to the boom in world prices of natural gas and oil, which Russia exports in abundance. Russia reaped direct dividends of the steep incline in fossil fuel prices by accumulating foreign exchange reserves to the tune of $560 billion by mid-2008. Indirectly, possession of the much-coveted strategic minerals enabled Russia to neutralise energy-hungry western European countries, particularly Germany, so that the ‘West’ was divided from taking an anti-Moscow foreign policy line.

Ever since fossil fuel prices inflated from 2004, the Middle East, Latin America and Africa saw their own versions of petro-states that turned into major regional powers to threaten American hegemony. Thanks to steady increases in the price of oil, Iran’s star rose astronomically in the most volatile area of the world. As the second largest producer of oil and natural gas, Iran could build its own web of alliances in Europe and the rest of Asia to counter the impending American and Israeli threats to its territorial integrity.

Flush with petro-dollars, President Mahmoud Ahmadinejad matched American and Israeli belligerence with a scaled-up defiance that brought back memories of the Islamic Revolution of 1979. The thawing of revolutionary anti-Americanism of the late 1990s when moderate Presidents like Mohammad Khatami were in power also coincided with artificially depressed world oil prices. When crude sold for less than $25 a barrel, Tehran had a scantier resource base on which to strengthen its military and diplomatic fortifications. By the time it peaked to $145 a barrel, Mr. Ahmadinejad could afford to be as hawkish as the Ayatollahs who supervise him.

In Venezuela too, oil bonanzas helped spur revolutionary policies under the leadership of President Hugo Chavez, who took over the mantle of resisting American neo-imperialism from Cuba’s Fidel Castro. By floating the Bolivarian Alternative for the Americas (ALBA), Mr. Chavez opened up possibilities of America’s backyard freeing itself from the clutches of Washington’s foreign aid and military monopoly.

That other South American countries accepted Mr. Chavez’s tutelage and rebuffed U.S. President George W. Bush’s proposed Free Trade Area of the Americas (FTAA) owes to Venezuela’s ability to cough out economic development assistance through ALBA. Instead of the liberal free trade concept of reciprocity, Mr. Chavez invented the notion of unequal responsibilities of rich and poor members of ALBA on the basis of availability and need.

This communitarian form of international regional integration came to gain leverage in South America, thanks to Venezuela’s projected promotion in early 2008 as the richest country, surpassing Chile in per capita income. As the sixth largest exporter of oil whose revenues were amassing, Caracas was a dependable pivot for a regional renaissance to counter the informal American Monroe Doctrine.

In southern Africa, the oil-rich state of Angola has similarly climbed up the ladder of regional power configurations and suddenly posed a major challenge to the stranglehold of the World Bank and the International Monetary Fund (IMF). Impoverished parts of Africa have for decades been the experimental laboratories of neo-liberal western powers and International Financial Institutions.

When Angola emerged from the shadows of internal war and began pumping out its offshore oil wealth, the IMF and the World Bank were unceremoniously shown the door by the government in Luanda. As the sixth largest exporter of petroleum to the United States, Angola had enough traction to avoid being pressurised by the Washington Consensus instruments into submission. The profile of Africa, which had been crushed under the hammer of the neo-liberal aid enterprise, would look radical if the other big oil powerhouse, Nigeria, followed in Angola’s footsteps.

The mainstream discourse in political science about petro-states has been about their internal political repercussions. Through a ‘rentier effect,’ resource-plenty states tend to be plagued with authoritarian regimes in perpetuity due to low or absent taxation levels and consequent lack of dissent in society. In this sense, high oil prices of the last four years were cementing dictatorial forms of domestic politics.

As crude prices skyrocketed and compelled an overflow of dollars from oil consumers to these ‘rentier states,’ former U.S. Secretary of State Henry Kissinger wrote in The Washington Post in September that the world was witnessing “the largest transfer of wealth in human history.” Thomas Friedman, the New York Times columnist went further and coined the term ‘petro-dictatorships,’ which were being funded by oil-guzzling western societies “via the greatest transfer of wealth in the history of the world.”

Hyperbole aside, American coding of countries as democratic or dictatorial is heavily influenced by whether or not the cases are pliable for U.S. foreign policy ends. The ratcheting up of western criticism of Russia’s deteriorating civil liberties and press freedom mirrored the adoption of anti-American foreign policies in Moscow. The same linkage between foreign relations and classification of domestic political regimes applies to Venezuela, which is often derided by the American establishment as an ‘authoritarian’ state.

Without question, the landscape of diplomatic battles has been impacted deeply by the rise of petro-states in the context of ballooning oil prices. The question now arises whether this was just another bubble that would be pricked by the sharp recent fall in petroleum prices. Already, western media outlets are gloating that the heydays of Russia, Iran and Venezuela are over as oil prices plummet in response to decreased world demand. There are doomsday predictions that the healthy foreign exchange reserves built up by the petro-states are dwindling and that the next logical step would be a reversal of their policies of confrontation with the U.S.

The just-announced coordinated cut in oil production by the Organisation of Petroleum Exporting Countries (OPEC) might not stem the continuous downward spiral of crude prices because of demand-side shrinkage. Global financial woes have derailed manufacturing in many oil-importing countries and this is indeed bad news for petro-states.

However, announcing the ‘fall’ of Russia, Iran and Venezuela as a result of the about-turn in oil prices would be naïve. A state’s power in world politics is not absolute but relative to the power of other states. If petro-states are on the back foot on account of the plunging value of their chief export, then the oil importing nations of the west are stuck in an even deeper hole. The relative political power of the U.S. and other western states has taken a massive dip as a result of unregulated financial fiction. At the end of the day, petro-states cannot ‘fall’ when their rivals are getting battered.

(Sreeram Chaulia is a researcher on international affairs at the Maxwell School of Citizenship and Public Affairs in Syracuse, New York.)

IR ONLY

What is happening in South Africa?

The situation mirrors the frustration among the vast majority of poor black South Africans. They assume that local jobs which are exclusively theirs are being “stolen” by illegal and cheap labour mostly from Zimbabwe, Lesotho, Swaziland, and Ethiopia.

South Africa, the rainbow nation, recently experienced troubling times, described as xenophobia. Just before mid-May, violence erupted in some of the townships around Johannesburg when sections of black people attacked other blacks. Very quickly, the violence escalated and by end May, about 100,000 people were displaced, hundreds badly beaten and close to 60 died. For the first time since the end of the apartheid in 1994, the Army had to be called in to assist the police in restoring order.

Most of the affected were immigrants from Zimbabwe, some from Mozambique, Malawi, Ethiopia, Swaziland, Lesotho and even Nigeria. There was extensive loss of property which the immigrants had acquired over years of hard work and often constituted the savings of a lifetime. The media were critical of the handling of the post-violence situation by the security personnel. The victims could not complain as most of them were undocumented residents in South Africa. Calling it “destructive divisiveness,” former President Nelson Mandela reminded his people of the timely help extended by South Africa’s neighbours during the apartheid regime’s excesses. Nobel Laureate Bishop Tutu also urged his countrymen to refrain from violence as all Africans are their brothers’ keepers, especially in difficult times.

However, the situation mirrors the frustration among the vast majority of poor black South Africans. They assume that local jobs which are exclusively theirs are being “stolen” by illegal and cheap labour mostly from Zimbabwe, Lesotho, Swaziland, and Ethiopia. They are unwilling to accept that migration of labour from the rest of Africa into South Africa is due to slow growth in total employment in the rest of Africa in the last decade. Herein lay the explanation for the xenophobia. In fact, as early as 1997, the South African Human Rights Commission had identified massive migration into South Africa as a major cause for xenophobia with consequences for democracy and human security.

On paper, there is amity among the multi-racial, multi-cultural people of South Africa, reinforced largely by the charismatic Nelson Mandela. Several measures were instituted to integrate all sections of society. Most important of these was the Black Economic Empowerment (BEE) programme as the best and sustainable approach to the development of the country. The BEE has been a signature programme which emphasises that the financial services industry be expanded to include the black majority. It entails not merely their participation in development and management of skills but also in the transfer of ownership. This has resulted in the emergence of a new booming black middle class referred to as “black diamonds” who often flaunt their status.

Then there are the outsiders, often referred to as “foreigners,” who have successfully made South Africa their abode taking advantage of the high pace of its growth. The country is the wealthiest in the 14-member Southern African Development Community. South Africa’s mineral wealth has given handsome financial returns while agriculture’s performance has been fairly good and physical infrastructure largely in place. GDP per head according to the IMF in South Africa is $3827, the highest in Sub-Saharan Africa. Growth has averaged over five per cent in the last three years.

Competing for scarce resources

It has been South Africa’s ability to do well as compared to the rest of Africa that has served as a magnet for attracting two categories of outsiders to migrate to its cities and peri-urban areas: they are the highly skilled and well trained professionals and the not-so-skilled. The latter, however, are often enterprising, willing to take risks and are prepared to invest small capital in small and medium business ventures such as taxi services and convenience or corner stores where locals are employed. Foreigners also work, often on abysmal wages as miners, farmers, construction workers and household help. Over time, they have been competing with the locals for scarce resources such as housing in the informal settlements, access to primary healthcare and education facilities.

What really triggered the recent violence according to most observers is the fact that most of the houses earmarked especially for South Africa’s disadvantaged under the Reconstruction and Development Programme have been purchased by these “foreigners,” often using unfair means.

Unfortunately for South Africa, the number of poor black South Africans with little or no education, no skills, and no access to capital who were unable to take advantage of the opportunities of an expanding economy has swelled rapidly. Forty per cent of South Africans, according to the Congress of South African Trade Unions, are unemployed. Economic reforms of the post-apartheid years have failed to spread the available gains more evenly. Twenty per cent of South Africa’s population remains illiterate even today.

Life has become tougher for the poor South African black especially now with the escalating food and fuel prices. This acted as a trigger. What the marginalised and frustrated sections of South Africans want immediately are security in terms of jobs, housing, healthcare, affordable education and public transport. They too want to enjoy the fruits of democracy. As Winnie Mandela put it so aptly — the problem in South Africa is “not xenophobia, but a reflection of the conditions in which people live that is very conducive to violence.” In such a situation, outsiders are seen more as intruders and not victims. And clashes could flare up any time. There has also been a phenomenal increase in crimes. Visitors to the main cities of South Africa are therefore warned to be careful and not to venture out once it is dusk even as affluent South Africans themselves live behind barbed wires.

At another level, inter-country migration has taken place with the move of the skilled and better placed South Africans to the developed world in their search for greener pastures — positions which are now being filled by well-trained personnel from within Southern Africa, especially Zimbabwe. Most Zimbabweans move as the Zimbabwean economy is a shambles given the massive and rising inflation, loss of jobs in the manufacturing sector, and failed agriculture owing to the unsound policies of Robert Mugabe.

Fifty per cent of the people seeking work permits in South Africa in recent times have been Zimbabweans with more education and improved skills. Several of these migrants include civil aviation experts, IT professionals, engineers, chartered accountants, geologists, paramedical and medical personnel and teachers of physics, chemistry and mathematics. It is estimated that approximately one million skilled Zimbabweans have voted with their feet into South Africa. It is worth noting that the Mbeki government has announced that it would be recruiting about 2000 foreign teachers between 2008 and 2010.

As the violence spread, some of the governments have made attempts to re-integrate their citizens within their own country. Malawians were the first to be evacuated from South Africa followed by Mozambique. It has been a very traumatic time for Zimbabweans who, even as they feel unsafe in South Africa, dread to return to Zimbabwe in view of the highly fluid and tense political and a fast deteriorating economic situation. This poses a moral dilemma for the South African policymakers as to whether they should promote reverse migration to Zimbabwe: they have to factor in the growing resentment at home given the adverse effects of continued migration. They have to, at the same time, ensure that the colours of the rainbow nation that has prided in non-violence, truth and reconciliation as guiding features are kept intact. This is a challenge requiring South Africa to actively help resolve the Zimbabwean political impasse through mediation. Otherwise, the cost of maintaining internal social harmony could be very high in the near to medium term.

(The author, a retired academic from the Centre for African Studies, University of Mumbai, lives now in Abuja, Nigeria.)