A new scramble for Africa is underway. What is different this time around is that African countries are playing a role. Currently South Africa, Angola, and several East African States are developing infrastructure to allow for the export of Central African Minerals. For geographic regions the East African States are particularly well situated to profit from exports to East Asian and South Asian Markets. This reality is having an impact on regional monetary policy which will influence the extraction of natural resources as well as the region’s transformation into a manufacturing center and the further development Kenya’s technology sector.
On November 30th Kenya, Tanzania, Uganda, Rwanda and Burundi signed a monetary union which sets the stage for a common East African currency. Such a currency could facilitate intraregional trade and promote investment in an area that is beginning to see significant economic development. A larger currency bloc could also aid the development of an East African financial center to rival Johannesburg’s status in Southern Africa. Presumably, Nairobi would fill this position due to its status as the gateway to East Africa. Such a development would also localize startup capital for Kenya’s burgeoning technology industry and serve as a channel for investment into East Africa’s rapidly expanding infrastructure and the development of manufacturing hubs in areas such a Mombassa, Bagamoyo, and potentially Lamu. Though it has historically taken decades for a city to establish itself as a financial center we must note that the rapid development of cities like Dubai combined with advances in communication technology serve as indication that this process can be expedited. This is an important factor to take into account when looking at potential investments in East Africa. Despite these positive signs we must pay attention to potential instability in Uganda and its implications for the development of East Africa.
Uganda occupies a unique geographic role in the region, as a great deal of minerals extracted from the Eastern Congo would pass through its territory. This reality is impacting investment in the country. On December 4th the Bank of Uganda sold 40.67 billion shillings ($16.1 million) of the 80 billion shillings worth of 15-year bonds. Despite the relative success of the issuance the Ugandan Election of 2016 could result in instability which could undermine investment in the country. Such instability would impact the whole of East Africa. After all it is a challenge to transport raw materials through a conflict zone. It has been speculated that President Yoweri Museveni’s son Muhoozi Kainerugaba is being groomed to succeed him. This rumor has caused a great deal of discontent. Even if Kainerugaba does not run for president his promotion to the status of brigadier in 2012 and the fact that he is in charge of the Special Forces Group, which oversees oil security, has caused resentment amongst officers in his age range who feel that his promotion was not based upon merit. In addition to this, many of the older members of the armed forces, who are loyal to Museveni, are retiring while the younger officers are not necessarily loyal to either Museveni or Kainerugaba. An erosion of this power base could set the stage for conflict. That said, the fact that Kainerugaba is in charge over oil security could give him the ability to expand his patronage network thus allowing him to purchase some modicum of stability.
Another reason to be concerned about the stability of Uganda is the passage of the Public Order Management Act (POMA) which Museveni signed into law in September. The law imposes restrictions on public meetings and affords the police powers to regulate them. The nature of this act heightens the possibility of a conflict which could escalate. Despite the resentment that POMA and the succession have generated it must be noted that the opposition Forum for Democratic Change is having their own internal disputes which weakens them. That said, common grievances could breed solidarity. This dynamic could help the Forum for Democratic Change overcome its internal divisions and form a united front with other concerned interests which would increase tensions in the country and undermine confidence in the region.
Events in Uganda in the coming years will have a significant impact on the continuing development of East Africa. Despite the challenges that Uganda faces we must note that Kenya’s recent elections went relatively smoothly. Part of this stems from investment in the country. When money is coming in political opponents can have an incentive to play nice. Hopefully, this will be the case with Uganda.
Friday, December 13, 2013
Friday, December 6, 2013
The Influence of East Asian Demographic Shifts and North Korean Power Struggles on the Establishment of China’s ADIZ
The apparent removal of Kim Jong Un’s Uncle Chang Song-taek from his position of vice-chairman of the National Defense Commission indicates that Pyongyang is facing an internal crisis. This dismissal supports recent analyses that the regime of Kim Jong Un is in trouble. If there is regime change in North Korea, China’s geographic proximity and strong relations with both North and South Korea will make Beijing a key player in promoting stability on the Korean Peninsula and facilitating a potential process of reunification. The ability to perform a role which might remove one of the biggest regional threats could give Beijing greater leverage when dealing with other regional players. Beijing's establishment of an Air Defense Identification Zone (ADIZ) should be seen in this context. As we shall see future demographic challenges and the need to appeal to nationalistic sentiment also appear to be playing roles in the establishment of the ADIZ.
Despite the tensions that China’s Air Defense Identification Zone has caused it must be noted that an ADIZ is a less risky way to stake a claim to a territory when compared to other courses of action. Certainly, if China were to set up settlements on the Senkaku/Diaoyu Islands the consequences could be far graver. It is also important to note that although many military aircraft have ignored the ADIZ most governments have requested that their civilian aircraft respect the Air Defense Identification Zone. This could be viewed as tacit acceptance of China's claim to the territory. If Beijing is able to gain enough recognition of the ADIZ it will cater to nationalist sentiment. This is important as China will have to make some tough economic reforms in the future thus any action that can boost support for the new government is important. Success in establishing an Air Defense Identification Zone in the East China Sea would also set the stage for an ADIZ in the South China Sea which would increase China's claims to the Spratly and Parcel Islands.
Shifting demographics could also be playing a role in Beijing’s establishment of the ADIZ. Japan, China and South Korea all have declining populations and rising dependency ratios (the ratio of dependents - people younger than 15 or older than 64 - to the working-age population). In the coming decades all these countries are likely to suffer some economic difficulties in supporting their aging populations. The difference is that South Korea and Japan are rich (though Japan does have notable debt problems), have more developed infrastructure, and are backed by the US. As things stand now Japan and South Korea are better equipped to deal with this potential period of instability. China must know that this time of relative weakness could allow other parties, such as the United States, to increase their presence in the Western Pacific. Clearly, this goes against Beijing's interests. The fact that Japan will likely have a stronger military in the future is an additional concern. For these reasons Beijing likely feels that trying to force territorial resolutions while China is in a period of relative strength is a strategic imperative. The establishment of the Air Defense Identification Zone could be the first step in such a process.
Despite the tensions that China’s Air Defense Identification Zone has caused it must be noted that an ADIZ is a less risky way to stake a claim to a territory when compared to other courses of action. Certainly, if China were to set up settlements on the Senkaku/Diaoyu Islands the consequences could be far graver. It is also important to note that although many military aircraft have ignored the ADIZ most governments have requested that their civilian aircraft respect the Air Defense Identification Zone. This could be viewed as tacit acceptance of China's claim to the territory. If Beijing is able to gain enough recognition of the ADIZ it will cater to nationalist sentiment. This is important as China will have to make some tough economic reforms in the future thus any action that can boost support for the new government is important. Success in establishing an Air Defense Identification Zone in the East China Sea would also set the stage for an ADIZ in the South China Sea which would increase China's claims to the Spratly and Parcel Islands.
Shifting demographics could also be playing a role in Beijing’s establishment of the ADIZ. Japan, China and South Korea all have declining populations and rising dependency ratios (the ratio of dependents - people younger than 15 or older than 64 - to the working-age population). In the coming decades all these countries are likely to suffer some economic difficulties in supporting their aging populations. The difference is that South Korea and Japan are rich (though Japan does have notable debt problems), have more developed infrastructure, and are backed by the US. As things stand now Japan and South Korea are better equipped to deal with this potential period of instability. China must know that this time of relative weakness could allow other parties, such as the United States, to increase their presence in the Western Pacific. Clearly, this goes against Beijing's interests. The fact that Japan will likely have a stronger military in the future is an additional concern. For these reasons Beijing likely feels that trying to force territorial resolutions while China is in a period of relative strength is a strategic imperative. The establishment of the Air Defense Identification Zone could be the first step in such a process.
Friday, November 22, 2013
Brazil as a Testing Ground for Cleantech
Monday’s successful conclusion of the A-3 Energy Auction in which Brazil sold wind development rights worth $1.5bn serves as reminder that Brazil is as a model for sustainable development. Even some failures in the Brazilian renewable energy sector can be seen more as projects whose time have not yet come. For example, the solar energy projects that were up for auction on Monday went unsold due to prices that did not provide an adequate return on investment. Though this might appear as a failure the fact that these projects were included in the auction for the first time indicates that Brazil feels that there is a market for them. It is not unreasonable to think that these projects will sell in the foreseeable future. The emergence of the Sustainability Network (an opposition party that has recently partnered with the Socialist Party and will likely have increased political clout even if they do not win the election in 2014) also indicates that increased support for renewable projects is likely.
The success of Monday's auction is a positive sign when compared to set backs in oil projects. The Pre-Salt (deep-water oilfields) auction on October 21st was a disappointment. Only 11 firms participated compared to 71 firms in the previous auction. In the end the Libra deep-water field was auctioned off to a consortium dominated by state run Petrobras but also representing, Royal Dutch/Shell, Total, China National Petroleum Corp., and China National Offshore Oil Corp. No American energy companies bid. In fact the consortium's bid was the only offer and it only provided Brazil with minimum profits (41.65%). The auction was also met with protest from unions and other stakeholders who resented natural resources being sold to "foreign capital" at "fire sale" prices.
The focus on sustainable development that will come as the Sustainability Network gains political power combined with the foreign investment which Brazil's energy auctions bring in could result in projects that might serve as templates which could be exported. It is important to note that Brazil's diverse ecosystems allow for many different types of projects to be developed and fine tuned. For this reason the country can be viewed as a testing ground where developments in Cleantech should be monitored closely.
The success of Monday's auction is a positive sign when compared to set backs in oil projects. The Pre-Salt (deep-water oilfields) auction on October 21st was a disappointment. Only 11 firms participated compared to 71 firms in the previous auction. In the end the Libra deep-water field was auctioned off to a consortium dominated by state run Petrobras but also representing, Royal Dutch/Shell, Total, China National Petroleum Corp., and China National Offshore Oil Corp. No American energy companies bid. In fact the consortium's bid was the only offer and it only provided Brazil with minimum profits (41.65%). The auction was also met with protest from unions and other stakeholders who resented natural resources being sold to "foreign capital" at "fire sale" prices.
The focus on sustainable development that will come as the Sustainability Network gains political power combined with the foreign investment which Brazil's energy auctions bring in could result in projects that might serve as templates which could be exported. It is important to note that Brazil's diverse ecosystems allow for many different types of projects to be developed and fine tuned. For this reason the country can be viewed as a testing ground where developments in Cleantech should be monitored closely.
Friday, November 15, 2013
Can The Silicon Valley Model Be Replicated in Kenya?
Kenya’s Kenya Vision 2030 Plan (a scheme to transform Kenya into an industrialized, middle income country by 2030) is being made more realistic due to several factors including:
Kenya is ambitious. For example, when discussing the proposed Konza Techno City the Financial Times noted that,
"Rather than echo a smattering of tech parks and business centres starting up on the continent…Kenya envisions a broader city-from-scratch to bring research universities, industry and government together..."
This is the model that has allowed Silicon Valley to thrive (though Silicon Valley was not built from scratch). Clearly, Konza seeks to achieve the same. In addition to providing a home for tech companies the plan also calls for the construction of a university to accommodate 1,500. The idea is that the university and the Central Business District can feed off one another in a manner similar to Stanford and Silicon Valley.
Kenya has a thriving tech community to build upon. Nairobi's Innovation Hub (iHub) provides a meeting place for innovators and investors while organizations, such as Nailab, offer technical and business support services to new tech companies. In addition to this there are a variety of organizations, such as 88 mph, who provide seed money to startups. Clearly, there are mechanisms for the exchange of ideas and the funding to help transform these ideas in viable businesses.
The existence of a burgeoning tech industry and increased investment in East Africa bode well for Kenya’s "Silicon Savannah." Though numerous challenges, such as attracting capital, remain we must note that success often breeds more success. If Konza, or any of the other ambitious plans in East Africa, show promise more funding is probable. It is also important to note that in the short term money invested in one place will not be invested elsewhere but in the long term success in one venture could attract capital to a similar opportunity. Such scenarios tend to improve political stability further aiding the attraction of capital. For this reason a delay in funding today does not necessarily deter Kenya's long-term ambitions. Kenya has already attracted 3.5 Billion dollars from the Chinese for railway expansion. It is not unreasonable to think that Nairobi will be able to attract more funding.
- The development of the Konza Techno City
- Investment in East African Infrastructure
- The plans to expand Kenya’s economic base into manufacturing and IT
- The arrival of undersea internet cables which dramatically lowered the cost of the internet
Kenya is ambitious. For example, when discussing the proposed Konza Techno City the Financial Times noted that,
"Rather than echo a smattering of tech parks and business centres starting up on the continent…Kenya envisions a broader city-from-scratch to bring research universities, industry and government together..."
This is the model that has allowed Silicon Valley to thrive (though Silicon Valley was not built from scratch). Clearly, Konza seeks to achieve the same. In addition to providing a home for tech companies the plan also calls for the construction of a university to accommodate 1,500. The idea is that the university and the Central Business District can feed off one another in a manner similar to Stanford and Silicon Valley.
Kenya has a thriving tech community to build upon. Nairobi's Innovation Hub (iHub) provides a meeting place for innovators and investors while organizations, such as Nailab, offer technical and business support services to new tech companies. In addition to this there are a variety of organizations, such as 88 mph, who provide seed money to startups. Clearly, there are mechanisms for the exchange of ideas and the funding to help transform these ideas in viable businesses.
The existence of a burgeoning tech industry and increased investment in East Africa bode well for Kenya’s "Silicon Savannah." Though numerous challenges, such as attracting capital, remain we must note that success often breeds more success. If Konza, or any of the other ambitious plans in East Africa, show promise more funding is probable. It is also important to note that in the short term money invested in one place will not be invested elsewhere but in the long term success in one venture could attract capital to a similar opportunity. Such scenarios tend to improve political stability further aiding the attraction of capital. For this reason a delay in funding today does not necessarily deter Kenya's long-term ambitions. Kenya has already attracted 3.5 Billion dollars from the Chinese for railway expansion. It is not unreasonable to think that Nairobi will be able to attract more funding.
Friday, November 8, 2013
The Shift of the Balance of Power in Northeastern Africa and Its Impact on Hydropolitical Cooperation in the Blue Nile States
On Monday November 4th, 2013 representatives from The Republic of Sudan, Egypt and Ethiopia met in Khartoum to discuss the findings of a report by an International Panel of Experts concerning the development of the Grand Ethiopian Renaissance Dam. Though an agreement to form a supervisory committee for the dam failed it is important to note that this meeting would have been inconceivable three years ago, however, the Arab Spring and the secession of South Sudan have significantly changed the balance of power in Northeastern Africa. Cairo's consent to the meeting and Khartoum's support of the dam testifies to this shift. Though an agreement has not been reached, Egypt’s weakness and Sudan’s support of the dam indicates that a deal could become a reality provided that Cairo’s concerns are mollified. A more thorough examination of the dam's impact could go a long way to addressing these concerns paving the way for an agreement which would increase energy production and agricultural output while reducing political instability between the countries (Egypt’s domestic situation is an entirely different story).
Due to domestic instability Egypt has neither the strength to enforce its will on the Nile nor the resources to go to war, especially as most of its co-riparian countries have common hydropolitical grievances which could unite them. The Republic of Sudan is the only other country whose water rights Cairo formally recognizes. This has historically meant that Egypt and Sudan's interests usually aligned, however, in a recent about-face Khartoum is now in support of the dam. This change in policy is not surprising as the independence of South Sudan has reduced oil revenues for the Republic of Sudan making the revitalization of its agricultural sector an economic imperative. The dam will facilitate this shift. An increase in arable land is essential as Khartoum and Beijing have recently reached an Agricultural Cooperation Agreement.
The Grand Ethiopian Renaissance Dam is scheduled to be completed by 2017. When operational it will facilitate the irrigation of about 500,000ha of new agricultural lands in Sudan. The dam will be based on the Benishangul-Gumuz region of North Eastern Ethiopia, which is about 25 miles from the Sudanese border. This proximity will provide cheap energy to Sudan further helping the country develop. The fact that Ethiopia is paying the dam's projected cost of 4.7 billion USD is also a benefit for Sudan. Naturally, the dam will help Ethiopia meet its own developmental needs. Certainly, the country will benefit from the hydropower and increased agricultural yield. Recent deals with Djibouti, such as the Djibouti-Ethiopia railway line, are also reducing the land locked status that the independence of Eritrea has imposed on Ethiopia. This will help reduce the cost of Ethiopian exports.
Cairo now finds itself in a position where negotiating is preferable to aggression. Khartoum has an affordable way to reorient its economy. And Addis Ababa is in a position to attract investment and build up its economy. All of these changes reflect the regional power shift. Ideally, an increase in agricultural yields will allow the region to feed its growing population while exporting the surplus. That said, the terms and conditions of such deals should be monitored closely as the ideal and the actual do not always overlap. Overly exploitative deals could reduce the stability that an agreement on the dam could bring.
Due to domestic instability Egypt has neither the strength to enforce its will on the Nile nor the resources to go to war, especially as most of its co-riparian countries have common hydropolitical grievances which could unite them. The Republic of Sudan is the only other country whose water rights Cairo formally recognizes. This has historically meant that Egypt and Sudan's interests usually aligned, however, in a recent about-face Khartoum is now in support of the dam. This change in policy is not surprising as the independence of South Sudan has reduced oil revenues for the Republic of Sudan making the revitalization of its agricultural sector an economic imperative. The dam will facilitate this shift. An increase in arable land is essential as Khartoum and Beijing have recently reached an Agricultural Cooperation Agreement.
The Grand Ethiopian Renaissance Dam is scheduled to be completed by 2017. When operational it will facilitate the irrigation of about 500,000ha of new agricultural lands in Sudan. The dam will be based on the Benishangul-Gumuz region of North Eastern Ethiopia, which is about 25 miles from the Sudanese border. This proximity will provide cheap energy to Sudan further helping the country develop. The fact that Ethiopia is paying the dam's projected cost of 4.7 billion USD is also a benefit for Sudan. Naturally, the dam will help Ethiopia meet its own developmental needs. Certainly, the country will benefit from the hydropower and increased agricultural yield. Recent deals with Djibouti, such as the Djibouti-Ethiopia railway line, are also reducing the land locked status that the independence of Eritrea has imposed on Ethiopia. This will help reduce the cost of Ethiopian exports.
Cairo now finds itself in a position where negotiating is preferable to aggression. Khartoum has an affordable way to reorient its economy. And Addis Ababa is in a position to attract investment and build up its economy. All of these changes reflect the regional power shift. Ideally, an increase in agricultural yields will allow the region to feed its growing population while exporting the surplus. That said, the terms and conditions of such deals should be monitored closely as the ideal and the actual do not always overlap. Overly exploitative deals could reduce the stability that an agreement on the dam could bring.
Friday, November 1, 2013
Will November Be a Transformational Month for Myanmar?
November could be an interesting month for Myanmar. This week, representatives from 18 armed, ethnic groups met at the Kachin Independence Organization’s headquarters in the northern town of Laiza to discuss entering into ceasefire negotiations with the government. If peace talks with the government commence, companies that have been wary of investing in the country might reconsider their positions. Signs that an agreement can be reached would be well timed, as they would come during a month when the country is hosting the Myanmar Port Development Forum and the Myanmar Mining Forum. Forums on agribusiness and investing in the country were held in October. Clearly, Naypyidaw is actively courting investors. Though Myanmar has a great deal of mineral wealth, it lacks the infrastructure to exploit it in an efficient manner. A ceasefire agreement combined with the proposed overhaul to the country’s 1994 mining law has the potential to attract investors who are willing to make the long-term commitments necessary to recoup investments in infrastructure.
Under Myanmar’s current mining law the Ministry of Mines serves as a non-equity partner yet it demands approximately 30% of minerals extracted as well as income tax and royalties. In addition to these terms, mining companies are currently responsible for compensating the occupiers of land despite the reality that there is no guide as to what the compensation should be. If reforms to the mining laws are passed and a guideline for compensation is established then the incentive to invest will increase, especially if political instability in the country decreases due to a ceasefire agreement. It is important to note that compensation for land is a difficult subject and it is likely that many people will not receive the compensation that they feel they are owed. This is unfortunate on a humanitarian level and it could contribute to instability in the country on a political and economic level. That said, disturbances from unarmed or poorly armed groups are not nearly as disruptive as the potential for violence posed by heavily armed ethnic militias.
Myanmar is not poor due to a lack of resources or geographic reasons such as being landlocked. The country is underdeveloped due to the decades of political oppression that is now beginning to dissipate. Myanmar has the resources to attract investors and an advantageous, geographic location that can help it to develop quickly. Reforms in the country will see it attain the level of development that its geographic location and resource base affords it. The question is how long this process will take. Trust needs to be built between a variety of factions. This takes time. That said, the process has begun. If a credible ceasefire agreement is reached and if the 1994 mining law is overhauled we could see a great deal of activity in Myanmar which would have a significant effect on trade in the Indian Ocean and economic development in the Asia Pacific region. November has the potential to be the start of this shift.
Under Myanmar’s current mining law the Ministry of Mines serves as a non-equity partner yet it demands approximately 30% of minerals extracted as well as income tax and royalties. In addition to these terms, mining companies are currently responsible for compensating the occupiers of land despite the reality that there is no guide as to what the compensation should be. If reforms to the mining laws are passed and a guideline for compensation is established then the incentive to invest will increase, especially if political instability in the country decreases due to a ceasefire agreement. It is important to note that compensation for land is a difficult subject and it is likely that many people will not receive the compensation that they feel they are owed. This is unfortunate on a humanitarian level and it could contribute to instability in the country on a political and economic level. That said, disturbances from unarmed or poorly armed groups are not nearly as disruptive as the potential for violence posed by heavily armed ethnic militias.
Myanmar is not poor due to a lack of resources or geographic reasons such as being landlocked. The country is underdeveloped due to the decades of political oppression that is now beginning to dissipate. Myanmar has the resources to attract investors and an advantageous, geographic location that can help it to develop quickly. Reforms in the country will see it attain the level of development that its geographic location and resource base affords it. The question is how long this process will take. Trust needs to be built between a variety of factions. This takes time. That said, the process has begun. If a credible ceasefire agreement is reached and if the 1994 mining law is overhauled we could see a great deal of activity in Myanmar which would have a significant effect on trade in the Indian Ocean and economic development in the Asia Pacific region. November has the potential to be the start of this shift.
Friday, October 25, 2013
The Malagasy Election and its Potential Impact on Land Deals in Subsaharan Africa
Madagascar goes to the polls today for the first time since the coup of 2009. Though there were multiple reasons for Andry Rajoelina’s overthrow of the government of Marc Ravalomanana it must be noted that Ravalomanana’s plan to lease approximately half of Madagascar’s arable land to Daewoo Logistics for 99 years served as a major rallying point for Rajoelina’s supporters. In the aftermath of the coup foreign aid, which provided approximately 40% of Madagascar’s 2008 budget, plummeted while malnutrition, sex tourism and deforestation increased. Legitimate tourism, an important component of the Malagasy economy, also fell as did school enrollments. Clearly, the coup did a great deal of damage to Madagascar.
Given the state of the Malagasy economy it is not surprising that economic recovery is central to the platforms of the two main contenders Hery Martial Rakotoarimanana Rajaonarimampianina and Richard Jean-Louis Robinson. If economic recovery is to occur foreign investment is going to have to increase. As a result of the Daewoo deal, potential investors will presumably be paying close attention to land tenure in Madagascar. For this reason potential agricultural and mining deals should be monitored closely as their completion could indicate that some of the concerns about "Land Grabs" in Africa have been addressed. Companies are unlikely to make significant investments in Madagascar if they feel that a repeat of 2009 will occur. To ensure stability it is not impossible that greater transparency could play a role in future land negotiations. Commitments to ensuring the food security and access to potable water of the local populations could also be components of future agreements. I am not saying that a perfect model for land deals will result. I am merely stating that future investment in Madagascar will likely indicate that conditions have improved to the point that businesses do not fear losing profitability due to delays, sabotage or forced withdrawal. The terms of the sale or lease of land and the feedback of the local population will be key indicators as to how stable agricultural and mining investments will be in the future.
The United Nations defines Land Tenure as "…the relationship, whether legally or customarily defined, among people, as individuals or groups, with respect to land." It is important to note that "customarily defined" indicates that land rights that are not legally codified are still recognized as valid. This needs to be taken into account when looking at property rights in many emerging markets, as a lack of a written deed does not necessarily mean that a group of people does not have a right to the land in question. For this reason it is not impossible that a company could buy or lease land, invest heavily in it, and at some point down the line find that they have no legal right to be there. This is essential like receiving stolen property without knowing that it is stolen. On one hand the recipient might not have done anything wrong. On the other they will likely have to return the property. Another important factor to note is that many developing countries do not have adequate dispute resolution mechanisms thus people who feel that their land is under threat are more likely to take the law into their own hands. This breeds distrust and ultimately means that deals, which in theory could be mutually beneficial, will not become a reality.
Madagascar and the Daweoo Deal is an important example of what can go wrong for countries and businesses when deals are not arranged appropriately. The reality is that Antananarivo needs investors and that Madagascar does have resources that could attract them. Finding a way to balance the needs of the Malagasy people with the expectation of investors is not impossible. Given the events of 2009 such a balance could be an essential component of future land deals within the country. After all, every party has incentives to come to a mutually beneficial agreement. If they are successful such a model could be exported. The reality is that buying and leasing land in Subsaharan Africa is increasingly becoming a means for developed countries to ensure food security. This trend is likely to continue. In theory it could be an important source of revenue for developing countries which, provided their own agricultural needs are met, could promote social stability. In practice this trend has often had the opposite effect. Any precedents that could improve this process should be watched closely. Madagascar is one place where a positive precedent could occur.
Given the state of the Malagasy economy it is not surprising that economic recovery is central to the platforms of the two main contenders Hery Martial Rakotoarimanana Rajaonarimampianina and Richard Jean-Louis Robinson. If economic recovery is to occur foreign investment is going to have to increase. As a result of the Daewoo deal, potential investors will presumably be paying close attention to land tenure in Madagascar. For this reason potential agricultural and mining deals should be monitored closely as their completion could indicate that some of the concerns about "Land Grabs" in Africa have been addressed. Companies are unlikely to make significant investments in Madagascar if they feel that a repeat of 2009 will occur. To ensure stability it is not impossible that greater transparency could play a role in future land negotiations. Commitments to ensuring the food security and access to potable water of the local populations could also be components of future agreements. I am not saying that a perfect model for land deals will result. I am merely stating that future investment in Madagascar will likely indicate that conditions have improved to the point that businesses do not fear losing profitability due to delays, sabotage or forced withdrawal. The terms of the sale or lease of land and the feedback of the local population will be key indicators as to how stable agricultural and mining investments will be in the future.
The United Nations defines Land Tenure as "…the relationship, whether legally or customarily defined, among people, as individuals or groups, with respect to land." It is important to note that "customarily defined" indicates that land rights that are not legally codified are still recognized as valid. This needs to be taken into account when looking at property rights in many emerging markets, as a lack of a written deed does not necessarily mean that a group of people does not have a right to the land in question. For this reason it is not impossible that a company could buy or lease land, invest heavily in it, and at some point down the line find that they have no legal right to be there. This is essential like receiving stolen property without knowing that it is stolen. On one hand the recipient might not have done anything wrong. On the other they will likely have to return the property. Another important factor to note is that many developing countries do not have adequate dispute resolution mechanisms thus people who feel that their land is under threat are more likely to take the law into their own hands. This breeds distrust and ultimately means that deals, which in theory could be mutually beneficial, will not become a reality.
Madagascar and the Daweoo Deal is an important example of what can go wrong for countries and businesses when deals are not arranged appropriately. The reality is that Antananarivo needs investors and that Madagascar does have resources that could attract them. Finding a way to balance the needs of the Malagasy people with the expectation of investors is not impossible. Given the events of 2009 such a balance could be an essential component of future land deals within the country. After all, every party has incentives to come to a mutually beneficial agreement. If they are successful such a model could be exported. The reality is that buying and leasing land in Subsaharan Africa is increasingly becoming a means for developed countries to ensure food security. This trend is likely to continue. In theory it could be an important source of revenue for developing countries which, provided their own agricultural needs are met, could promote social stability. In practice this trend has often had the opposite effect. Any precedents that could improve this process should be watched closely. Madagascar is one place where a positive precedent could occur.
Friday, October 18, 2013
The Impact of China’s Territorial Claims to the South China Sea on Sino-Filipino Relations and Long-Term Stability within the Asia Pacific Region
In January of this year the Philippines requested arbitration against China under the United Nations Convention on the Law of the Sea (UNCLOS). The request was due to China’s increasingly aggressive territorial ambitions in the South China Sea. In the long term this suit has the potential to increase conflict in the Asia Pacific region. Though the case is likely to take years to be settled and could be difficult to enforce its progress should be monitored as its influence could impact regional stability and the global economy.
China claims 80% of the South China Sea as Chinese territory through a demarcation line called the Nine-Dash Line. The intent of the case is to prove that the Nine-Dash Line claim is invalid under UNCLOS. The Filipinos seek to clarify their territorial claims and to confirm that shoals, such as Scarborough, legally fall within the Philippines 200-nautical-mile exclusive economic zone. Suffice it to say this legal challenge has angered Beijing and the Chinese are arguing that the case is not valid. Though China ratified UNCLOS in 1996 it filed a statement in 2006 which essentiality stated that China will follow the parts of UNCLOS which suit its interests while ignoring the parts that do not. (Interestingly enough the parts of UNCLOS that work against China in its dispute with the Philippines work to Beijing’s advantage in its conflict with Tokyo over Japan’s occupation of the Senkaku/Diaoyu Islands in the East China Sea).
China has been increasingly aggressive in staking its claim to the South China Sea. Earlier this year Sinomaps Press (China’s mapping authority) published a map officially claiming the area within the Nine-Dash Line as Chinese territory rather than territory that Beijing felt it had a historic claim to. Not surprisingly the map has been met with alarm by China’s neighbors. Controlling the South China Sea is an imperative in terms of access to energy as there are potentially significant reserves of oil and natural gas in the region. These resources are essential to meeting the rapidly rising energy needs of the regional countries. Even if the energy sources are overstated control of the territory conveys a strategic advantage as about half of the world’s shipping tonnage is shipped through the South China Sea. Suffice it to say no country in the region wants to relinquish its claim to the territory.
Beijing has taken action that has gone beyond redrawing maps. Currently, China is occupying Scarborough Shoal. The concern is that this action could lead to its permanent annexation. There is a precedent here. In 1994 China occupied Mischief Reef which is about 130 miles from the Filipino Province of Palawan. Over the next nineteen years the reef has evolved into a military base. In September it was reported that 75 concrete blocks were spotted near the entrance to Scarborough Shoal. There is speculation that this could be the start of military fortification. Not surprisingly, Manila does not want the Chinese to be so close to Filipino territory. The lawsuit is a peaceful way for the Philippines to challenge China’s actions.
The Philippines have made a stand. If they are successful in their suit other powers will monitor China’s response. If China disregards the case's findings some form of action will need to be taken. The nature of the action can of course vary, however, we must note that it would set a negative precedent if the countries of the Asia Pacific region remained passive while Beijing continues annexing and fortifying various reefs and shoals when international law says the territory in question does not belong to China. If China continues with this policy after UNCLOS has ruled against it this action could force regional countries to band together. This would increase regional tensions as well as the potential for an event that could trigger a conflict. Such a situation would have severe security and economic consequences. Certainly, the impact on shipping lands would have a significant impact on the trade thus impacting commodity prices and access to energy sources. We can hope that a peaceful resolution can be found, however, if Beijing continues with its current policy of symbolically and literally annexing territory while delaying discussions to resolve this issue the hope of a peaceful resolution is lessened.
China claims 80% of the South China Sea as Chinese territory through a demarcation line called the Nine-Dash Line. The intent of the case is to prove that the Nine-Dash Line claim is invalid under UNCLOS. The Filipinos seek to clarify their territorial claims and to confirm that shoals, such as Scarborough, legally fall within the Philippines 200-nautical-mile exclusive economic zone. Suffice it to say this legal challenge has angered Beijing and the Chinese are arguing that the case is not valid. Though China ratified UNCLOS in 1996 it filed a statement in 2006 which essentiality stated that China will follow the parts of UNCLOS which suit its interests while ignoring the parts that do not. (Interestingly enough the parts of UNCLOS that work against China in its dispute with the Philippines work to Beijing’s advantage in its conflict with Tokyo over Japan’s occupation of the Senkaku/Diaoyu Islands in the East China Sea).
China has been increasingly aggressive in staking its claim to the South China Sea. Earlier this year Sinomaps Press (China’s mapping authority) published a map officially claiming the area within the Nine-Dash Line as Chinese territory rather than territory that Beijing felt it had a historic claim to. Not surprisingly the map has been met with alarm by China’s neighbors. Controlling the South China Sea is an imperative in terms of access to energy as there are potentially significant reserves of oil and natural gas in the region. These resources are essential to meeting the rapidly rising energy needs of the regional countries. Even if the energy sources are overstated control of the territory conveys a strategic advantage as about half of the world’s shipping tonnage is shipped through the South China Sea. Suffice it to say no country in the region wants to relinquish its claim to the territory.
Beijing has taken action that has gone beyond redrawing maps. Currently, China is occupying Scarborough Shoal. The concern is that this action could lead to its permanent annexation. There is a precedent here. In 1994 China occupied Mischief Reef which is about 130 miles from the Filipino Province of Palawan. Over the next nineteen years the reef has evolved into a military base. In September it was reported that 75 concrete blocks were spotted near the entrance to Scarborough Shoal. There is speculation that this could be the start of military fortification. Not surprisingly, Manila does not want the Chinese to be so close to Filipino territory. The lawsuit is a peaceful way for the Philippines to challenge China’s actions.
The Philippines have made a stand. If they are successful in their suit other powers will monitor China’s response. If China disregards the case's findings some form of action will need to be taken. The nature of the action can of course vary, however, we must note that it would set a negative precedent if the countries of the Asia Pacific region remained passive while Beijing continues annexing and fortifying various reefs and shoals when international law says the territory in question does not belong to China. If China continues with this policy after UNCLOS has ruled against it this action could force regional countries to band together. This would increase regional tensions as well as the potential for an event that could trigger a conflict. Such a situation would have severe security and economic consequences. Certainly, the impact on shipping lands would have a significant impact on the trade thus impacting commodity prices and access to energy sources. We can hope that a peaceful resolution can be found, however, if Beijing continues with its current policy of symbolically and literally annexing territory while delaying discussions to resolve this issue the hope of a peaceful resolution is lessened.
Friday, October 11, 2013
The Implications of Korean Reunification Part 3: Military Alliances and Competition for Resources in the Event of a North Korean Collapse
Summary:
A recent RAND Corporation report provides evidence that the regime of Kim Jong Un could collapse within the coming years. Such an occurrence could set the stage for the reunification of the Korean Peninsula. Though we must note that regime change does not necessarily mean reunification (in fact it could set the stage for a conflict between China and the US/South Korea), it is still important to forecast how the reunification of the Korean Peninsula might impact the Asia Pacific region and the global economy.
When we look at international relations amongst the countries of the Asia Pacific region we must recognize that these states seek to use the United States and China to counterbalance one another. By playing Beijing and Washington off each other the countries of the Asia Pacific region seek to ensure access to shipping lanes and natural resources while managing their security needs. For these reasons the terms and conditions of the security and trade agreements that these countries reach with the United States, China and amongst themselves serve as a barometer as to how the various actors view the present and future stability of the region. If the Koreas reunited it would likely result in a major change in regional military alliances which would have a significant impact on regional security agreements and the global economy. Such an occurrence could also force regional countries to choose between the United States and China in terms of which country best serves their interests. This could cause further instability.
The US Military in the Asia Pacific Region:
The United States has maintained a military presence in South Korea since the signing of the 1953 The Korean War Armistice Agreement. Currently, there are approximately 28,500 American military personnel based in South Korea. The potential of resumed hostilities between the Koreas has been the justification for an American military presence. If the potential for conflict was removed, via reunification or some other means, it would be more challenging to justify the deployment of so many US soldiers on the Korean Peninsula.
Currently, we are seeing the redeployment and proposed redeployment of US military personnel within the Asia Pacific region. Reasons for this shift include budget cuts and domestic pressure on the governments of military allies from citizens who resent a large concentration of US military personnel within certain areas of their territory. We are also witnessing the greater use of military rotation. Allowing the US military to be temporarily based in a country is a good way for countries to bolster their security and their relationship with the United States. Though China is not keen on a continued US military presence in the region Beijing likely sees temporary access to bases as superior to permanent bases thus relations between these countries and China function as well as can be expected. For the time being this balancing act appears to be working. However, is this course of action sustainable? A reduction of permanent bases could reduce the ability of the United States to protect its regional interests if some of Washington’s current allies decided at some point in the future to prevent the US military from rotating through their territory. Clearly, this is not in the interest of the United States.
If the US were to reduce the number of troops in the Korean Peninsula it is likely that we would see American forces spread amongst the Philippines, Japan, Australia and Singapore. It is important to note that a desire by the US to station troops in any of these countries is not guaranteed to become a reality. Allowing the US military to pass through one’s territory is one thing. Allowing the United States to set up bases there is a different matter entirely. As we shall see there is a great deal of opposition to a US military presence in the Philippines (the US had to withdraw in 1992 due to public pressure), and the presence of US forces in Okinawa has generated a great deal of resentment in Japan. In the coming posts we will look at how several key regional powers view their economic, security and energy needs and how this perception could influence their relations with the US and China.
A recent RAND Corporation report provides evidence that the regime of Kim Jong Un could collapse within the coming years. Such an occurrence could set the stage for the reunification of the Korean Peninsula. Though we must note that regime change does not necessarily mean reunification (in fact it could set the stage for a conflict between China and the US/South Korea), it is still important to forecast how the reunification of the Korean Peninsula might impact the Asia Pacific region and the global economy.
When we look at international relations amongst the countries of the Asia Pacific region we must recognize that these states seek to use the United States and China to counterbalance one another. By playing Beijing and Washington off each other the countries of the Asia Pacific region seek to ensure access to shipping lanes and natural resources while managing their security needs. For these reasons the terms and conditions of the security and trade agreements that these countries reach with the United States, China and amongst themselves serve as a barometer as to how the various actors view the present and future stability of the region. If the Koreas reunited it would likely result in a major change in regional military alliances which would have a significant impact on regional security agreements and the global economy. Such an occurrence could also force regional countries to choose between the United States and China in terms of which country best serves their interests. This could cause further instability.
The US Military in the Asia Pacific Region:
The United States has maintained a military presence in South Korea since the signing of the 1953 The Korean War Armistice Agreement. Currently, there are approximately 28,500 American military personnel based in South Korea. The potential of resumed hostilities between the Koreas has been the justification for an American military presence. If the potential for conflict was removed, via reunification or some other means, it would be more challenging to justify the deployment of so many US soldiers on the Korean Peninsula.
Currently, we are seeing the redeployment and proposed redeployment of US military personnel within the Asia Pacific region. Reasons for this shift include budget cuts and domestic pressure on the governments of military allies from citizens who resent a large concentration of US military personnel within certain areas of their territory. We are also witnessing the greater use of military rotation. Allowing the US military to be temporarily based in a country is a good way for countries to bolster their security and their relationship with the United States. Though China is not keen on a continued US military presence in the region Beijing likely sees temporary access to bases as superior to permanent bases thus relations between these countries and China function as well as can be expected. For the time being this balancing act appears to be working. However, is this course of action sustainable? A reduction of permanent bases could reduce the ability of the United States to protect its regional interests if some of Washington’s current allies decided at some point in the future to prevent the US military from rotating through their territory. Clearly, this is not in the interest of the United States.
If the US were to reduce the number of troops in the Korean Peninsula it is likely that we would see American forces spread amongst the Philippines, Japan, Australia and Singapore. It is important to note that a desire by the US to station troops in any of these countries is not guaranteed to become a reality. Allowing the US military to pass through one’s territory is one thing. Allowing the United States to set up bases there is a different matter entirely. As we shall see there is a great deal of opposition to a US military presence in the Philippines (the US had to withdraw in 1992 due to public pressure), and the presence of US forces in Okinawa has generated a great deal of resentment in Japan. In the coming posts we will look at how several key regional powers view their economic, security and energy needs and how this perception could influence their relations with the US and China.
Friday, October 4, 2013
The Potential Impact on Sino-Korean Relations of a Delay of the Transfer of OPCOM
The Implications of Korean Reunification Part 2:
This is the second part of an analysis of the changes that we could expect to see in the event of the reunification of the Korean Peninsula. Please note that I am not arguing that reunification will occur. I am merely outling the likely outcomes of reunification and their implication on regional security and the global economy.
The Potential Impact on Sino-Korean Relations of a Delay of the Transfer of OPCOM:
A recent RAND report has argued that there are signs that North Korea could be close to collapse. The report cites numerous concerns such as evidence that there is a greater recognition amongst the North Korea population that the citizens of the Republic of Korea (ROK) do not have a lower standard of living. This recognition has the potential to lead to social instability at a time when North Korea’s Chinese benefactor is showing signs that it is losing patience with Pyongyang’s rhetoric. All of this is occurring while the South Koreans are adjusting their military strategy to contend with any nuclear weapons that the North can develop, and seeking to delay the transfer of military power from Washington to Seoul. Though we cannot say for certain whether or not North Korea will implode, we must be prepared for such an event.
Kim Jong Un’s rhetoric has raised concerns amongst certain segments of the Chinese population that Pyongyang might cross a line that forces South Korea and the United States to become involved in North Korea. Such an action would likely force a confrontation between the US and China that neither party wants. Within the past week South Korean President Park Geun-hye has stressed that South Korea will build strong defenses to destroy any nuclear weapons that North Korea develops. On October 1st President Park stated, "Only when we are backed by strong national defense that does not allow provocations can we bring North Korea onto a genuine path of change." This statement was issued the same week that the US and the ROK endorsed a deterrence strategy that includes the use of the United State’s conventional strike and missile defense capabilities. A Kill Chain System (a system to detect signs of incoming missile or nuclear attacks and launch pre-emptive strikes in the event of such attacks) is also part of the plan. These actions indicate that Seoul is concerned that Pyongyang might be changing the tactic of escalating regional tensions in order to draw China, the US, Japan, the ROK and Russia to the bargaining table where Pyongyang has historically extracted concessions in exchange for backing down. Such a tactical shift would have a profound impact on the stability of the region.
The ROK also wishes to delay the transfer of OPCON (Operational Control). In other words the Koreans have said that they want to delay taking control over military operations in their country. Currently, the U.S. Forces Korea commander is in charge of both American and Korean troops. A Korean four-star general would serve as deputy commander in the event of hostilities. As things stand now the transfer of OPCON is set for December 2015, however, it has been delayed in the past due to North Korean belligerence. Another delay is not impossible. Due to low birth rates in South Korea it is also probable that the number of Korean Military personnel will be smaller in the future which means that Seoul might need additional military support in the future. A delay in transferring OPCON combined with a smaller South Korean military and the continuation of US interests in East Asia means that the United States could be in charge indefinitely if South Korea were attacked.
Encouraging the reunification of the Korean Peninsula could potentially afford China and the United States (along with the Koreans and other regional powers) the opportunity to preemptively address regional security concerns thus reducing the risk of hostilities that no one wants. The Chinese could also position themselves to benefit economically from such a deal as well as convincing the United States to withdraw much of its military operations from the Korean Peninsula (please note that a total US withdrawal from the Asia Pacific Region is HIGHLY unlikely). Though reunification would result in China losing a buffer state that has historically been of strategic importance such an action could see Beijing gaining some economic advantage and international prestige while having some of China’s more pressing security concern addressed. In the next posts of this series I will explain how, and under what circumstances, such events could unfold.
Friday, September 27, 2013
The Potential Implications of US-Iranian Rapprochement on Caspian Energy Policy
Washington and Tehran's relationship appears to be thawing. President Rouhani has taken a conciliatory tone proclaiming:
"Nuclear weapons and other weapons of mass destruction have no place in Iran's security and defense doctrine, and contradict our fundamental religious and ethical convictions. Our national interests make it imperative that we remove any and all reasonable concerns about Iran's peaceful nuclear program."
He has also stated that he wants a resolution on Iran’s nuclear program reached within the next three to six months.
President Obama has stated:
"We are not seeking regime change, and we respect the right of the Iranian people to access peaceful nuclear energy."
At the moment we are looking at rhetoric. However, both countries have interests in rapprochement. Certainly Iran needs to see economic sanctions lifted or at least lessened. Though there are still issues to resolve, specifically Iran's nuclear program, the climate for discussions is favorable and both sides have incentives for pursuing détente. It is true that significant obstacles exist. Internal opposition in both countries must be overcome and US allies, such as Israel and Saudi Arabia, will not want to see closer ties between Washington and Tehran. Though the rapprochement is anything but guaranteed, an improvement in Iranian-American relations is a very real possibility and investigating some of the implications of détente is a worthwhile exercise. Despite the reality that the re-establishment of full diplomatic relations will likely take time, other forms of cooperation could occur more quickly. The transfer of oil and natural gas from the Caspian Sea is one such area.
In addition to the potential economic and security benefits that could result from improved relations with Iran, the Obama administration has an incentive to try and erode some of the gains that Russia has made since Putin came to power. When we look at international relations we constantly see situations in which one country tries to weaken another country whose interests run counter to theirs. Though the US and Russia are not enemies in the sense that they were during the Cold War, the reality is that the United States has little interest in allowing Moscow to regain the power that it had in Soviet times as Russian and American interests often do not align. One way to limit Moscow’s influence is by allowing countries such as Azerbaijan and Turkmenistan to export oil and natural gas through Iran.
Iran's geographic location makes it an ideal location for linking oil and natural gas pipelines from the Caspian Sea to the Persian Gulf. In fact oil companies such as Exxon lobbied for the construction of such infrastructure in the 1990s. These proposals never became a reality as US sanctions on Iran prevented such actions. Instead a variety of pipelines were built. Some, such as the Baku–Tbilisi–Ceyhan (BTC) pipeline bypass Russian Territory. The intent of such pipelines was to weaken Russia’s control over its former republics. Despite the efforts to undermine Russian interests Moscow still retained enough power to ensure that some lines, which passed through Russian territory, were also constructed. This afforded Moscow a great deal of control over the access to energy in its Near Abroad. The ability to control energy supplies in many of parts of the former Soviet Union has allowed Moscow to re-establish much of the influence that was lost in the 1990s. This reality has been augmented by the United States involvement in Afghanistan and Iraq which reduced Washington’s ability to counter Russia's re-emergence, a fact made clear when the US stood idly by when Russia invaded Georgia in 2008 as a response to the West supporting the independence of Kosovo (There were of course other reasons for the invasion). The message was loud and clear, "Western promises mean nothing." The development of a Customs Union composed of Belarus, Kazakhstan, and Russia (with Armenia scheduled to join) that for all intents of purpose is led by Russia indicate that the Near Abroad is listening.
Putin has demonstrated that he is not afraid to turn off energy supplies to countries whose actions displease Moscow. Ukraine, Belarus, and Georgia can attest to this. The problem is that pipelines do not end in these countries. Cutting off energy supplies to transit countries has impacted European customers which has caused concern over the reliability of Russian Energy. The Nabucco Pipeline (which was supposed to stretch from Turkey to Austria) was to bypass Russia thus addressing some of these concerns. However, the Romanians have pulled out of the proposed project, which casts a great deal of doubt as to its future. This gives Russia some breathing room and the opportunity to promote the South Stream Pipeline (the alternative to Nabucco). That said, the ability to access new energy sources, which would allow more leverage when dealing with Moscow, is a still a concern in many European capitals. The fact that we are seeing a Pro-Russian shift in Georgian leadership could in theory also impact the BTC pipeline, making an alternative route through Iran even more desirable. If the US and Iran improve relations, pipelines and related infrastructure, such as LNG facilities, could become a reality within the coming years.
"Nuclear weapons and other weapons of mass destruction have no place in Iran's security and defense doctrine, and contradict our fundamental religious and ethical convictions. Our national interests make it imperative that we remove any and all reasonable concerns about Iran's peaceful nuclear program."
He has also stated that he wants a resolution on Iran’s nuclear program reached within the next three to six months.
President Obama has stated:
"We are not seeking regime change, and we respect the right of the Iranian people to access peaceful nuclear energy."
At the moment we are looking at rhetoric. However, both countries have interests in rapprochement. Certainly Iran needs to see economic sanctions lifted or at least lessened. Though there are still issues to resolve, specifically Iran's nuclear program, the climate for discussions is favorable and both sides have incentives for pursuing détente. It is true that significant obstacles exist. Internal opposition in both countries must be overcome and US allies, such as Israel and Saudi Arabia, will not want to see closer ties between Washington and Tehran. Though the rapprochement is anything but guaranteed, an improvement in Iranian-American relations is a very real possibility and investigating some of the implications of détente is a worthwhile exercise. Despite the reality that the re-establishment of full diplomatic relations will likely take time, other forms of cooperation could occur more quickly. The transfer of oil and natural gas from the Caspian Sea is one such area.
In addition to the potential economic and security benefits that could result from improved relations with Iran, the Obama administration has an incentive to try and erode some of the gains that Russia has made since Putin came to power. When we look at international relations we constantly see situations in which one country tries to weaken another country whose interests run counter to theirs. Though the US and Russia are not enemies in the sense that they were during the Cold War, the reality is that the United States has little interest in allowing Moscow to regain the power that it had in Soviet times as Russian and American interests often do not align. One way to limit Moscow’s influence is by allowing countries such as Azerbaijan and Turkmenistan to export oil and natural gas through Iran.
Iran's geographic location makes it an ideal location for linking oil and natural gas pipelines from the Caspian Sea to the Persian Gulf. In fact oil companies such as Exxon lobbied for the construction of such infrastructure in the 1990s. These proposals never became a reality as US sanctions on Iran prevented such actions. Instead a variety of pipelines were built. Some, such as the Baku–Tbilisi–Ceyhan (BTC) pipeline bypass Russian Territory. The intent of such pipelines was to weaken Russia’s control over its former republics. Despite the efforts to undermine Russian interests Moscow still retained enough power to ensure that some lines, which passed through Russian territory, were also constructed. This afforded Moscow a great deal of control over the access to energy in its Near Abroad. The ability to control energy supplies in many of parts of the former Soviet Union has allowed Moscow to re-establish much of the influence that was lost in the 1990s. This reality has been augmented by the United States involvement in Afghanistan and Iraq which reduced Washington’s ability to counter Russia's re-emergence, a fact made clear when the US stood idly by when Russia invaded Georgia in 2008 as a response to the West supporting the independence of Kosovo (There were of course other reasons for the invasion). The message was loud and clear, "Western promises mean nothing." The development of a Customs Union composed of Belarus, Kazakhstan, and Russia (with Armenia scheduled to join) that for all intents of purpose is led by Russia indicate that the Near Abroad is listening.
Putin has demonstrated that he is not afraid to turn off energy supplies to countries whose actions displease Moscow. Ukraine, Belarus, and Georgia can attest to this. The problem is that pipelines do not end in these countries. Cutting off energy supplies to transit countries has impacted European customers which has caused concern over the reliability of Russian Energy. The Nabucco Pipeline (which was supposed to stretch from Turkey to Austria) was to bypass Russia thus addressing some of these concerns. However, the Romanians have pulled out of the proposed project, which casts a great deal of doubt as to its future. This gives Russia some breathing room and the opportunity to promote the South Stream Pipeline (the alternative to Nabucco). That said, the ability to access new energy sources, which would allow more leverage when dealing with Moscow, is a still a concern in many European capitals. The fact that we are seeing a Pro-Russian shift in Georgian leadership could in theory also impact the BTC pipeline, making an alternative route through Iran even more desirable. If the US and Iran improve relations, pipelines and related infrastructure, such as LNG facilities, could become a reality within the coming years.
Friday, September 20, 2013
The Implications of Korean Reunification Part 1:
This is the first part of an analysis of the changes that we could expect to see in the event of the reunification of the Korean Peninsula. Please note that I am not arguing that reunification will occur. I am merely examining the likely outcomes of reunification and their implication on regional security and the global economy. The focus of this post is on how a united Korea could offset some of the costs of reunification. In future posts I will outline:
Introduction:
The unthinkable can occur quickly. In November 2010 who would have argued that longstanding regimes in Tunisia, Egypt and Libya would fall within the next year? On June 27th, 1914 how many people thought that a war which would set the stage for the end of European global hegemony was imminent? The list of such events goes on and on. History has shown that the impossible can quickly become reality. Though we cannot determine the specific dates and set of circumstances that lead to such changes we can:
Such exercises improve our understanding of how the world is interconnected and better equip us to contend with political changes that impact the security and economic health of a region. Those who have forecasted the implications of potential shifts in international relations have a distinct advantage over those who are still trying to determine what is happening when rapid change is occurring. There are many parts of the world where the political landscape could change quickly impacting economic, political and military relations. The Korean Peninsula is one such example.
Korean Interests: Security concerns between North and South Korea have persisted since the end of the Korean War. In fact both countries are still technically at war. The 1953 armistice merely means that the countries observe an uneasy truce. The potential for intra-Korean hostility has long been in the interest of both countries, the wider region, and the international community. Despite the benefits that a more stable Korean Peninsula would offer, the reality is that reunification, if it were to occur, would incur significant costs as North Korea lags far behind South Korea in terms of economic development and human capital. With that in mind it is important to examine ways in which reunification could be financed.
It has been estimated that North Korea contains up to six trillion dollars worth of mineral wealth including tungsten, magnesite, graphite and zinc. All of these minerals have important industrial applications. South Korea certainly has an interest in improved access to zinc and magnesite, as it is dependent upon imports to service its demands for these minerals. Pyongyang is currently in the process of developing better ways of exporting these resources. For example, the construction of the Jilin-Rason Highspeed Railway will have a major impact on the greater integration of the North Korean economy into China. A reunited Korea would see improved infrastructure on the peninsula as well, which would further link the North to the global economy. That said, the exploitation of these minerals will take time and their value is subject to the volatility of the commodity market. Though these resources will presumably play a crucial role in funding Korean reunification and investing in the future prosperity of the country other ways of accessing capital will likely enter into discussions between Seoul and Pyongyang if they were to pursue reunification.
North Korea’s nuclear program could offer some economic advantage. It is unlikely that North Korea’s nuclear program will be abandoned as a prerequisite for Korean reunification. That said, international pressure would make it difficult for a unified Korea to become a nuclear power. After all a nuclear armed Korea and China would push the Japanese to pursue similar capabilities. Such an action would increase tensions in East Asia which are already heightened due to Japan and China’s conflicting territorial claims to the Diaoyu Islands. This reality and the need to finance reunification would limit Korea’s ability to continue with the program. However, a reunified Korean peninsula could use the nuclear program as a bargaining chip. Essentially, we are looking at a deal that says, "We will give up our nuclear weapons if you (the international community) give us significant funding in order to offset the costs of reunification." Given that Korea could only give up the program once it is likely that the demands would be substantial.
These factors and the increased investment that a unified Korean peninsula would likely see could go a long way towards covering the trillions of dollars needed for the reunification of the peninsula. Despite the economic advantages that a unified Korea would offer, its neighbors will have concerns about such a move. In the next post we will look at some of China’s concerns regarding the Korean peninsula and examine how these concerns might be changing.
- China’s concerns vis-Ã -vis Korean reunification
- Possible scenarios for regime change in North Korea
- How reunification could impact US interests and military deployment.
- How a united Korea will impact the global economy and the interests of other key powers in the Asia Pacific region.
Introduction:
The unthinkable can occur quickly. In November 2010 who would have argued that longstanding regimes in Tunisia, Egypt and Libya would fall within the next year? On June 27th, 1914 how many people thought that a war which would set the stage for the end of European global hegemony was imminent? The list of such events goes on and on. History has shown that the impossible can quickly become reality. Though we cannot determine the specific dates and set of circumstances that lead to such changes we can:
- Identify troubled areas around the world.
- Project how the problems in these regions might be resolved (by force, diplomacy or other means).
- Determine the implications of these resolutions.
Such exercises improve our understanding of how the world is interconnected and better equip us to contend with political changes that impact the security and economic health of a region. Those who have forecasted the implications of potential shifts in international relations have a distinct advantage over those who are still trying to determine what is happening when rapid change is occurring. There are many parts of the world where the political landscape could change quickly impacting economic, political and military relations. The Korean Peninsula is one such example.
Korean Interests: Security concerns between North and South Korea have persisted since the end of the Korean War. In fact both countries are still technically at war. The 1953 armistice merely means that the countries observe an uneasy truce. The potential for intra-Korean hostility has long been in the interest of both countries, the wider region, and the international community. Despite the benefits that a more stable Korean Peninsula would offer, the reality is that reunification, if it were to occur, would incur significant costs as North Korea lags far behind South Korea in terms of economic development and human capital. With that in mind it is important to examine ways in which reunification could be financed.
It has been estimated that North Korea contains up to six trillion dollars worth of mineral wealth including tungsten, magnesite, graphite and zinc. All of these minerals have important industrial applications. South Korea certainly has an interest in improved access to zinc and magnesite, as it is dependent upon imports to service its demands for these minerals. Pyongyang is currently in the process of developing better ways of exporting these resources. For example, the construction of the Jilin-Rason Highspeed Railway will have a major impact on the greater integration of the North Korean economy into China. A reunited Korea would see improved infrastructure on the peninsula as well, which would further link the North to the global economy. That said, the exploitation of these minerals will take time and their value is subject to the volatility of the commodity market. Though these resources will presumably play a crucial role in funding Korean reunification and investing in the future prosperity of the country other ways of accessing capital will likely enter into discussions between Seoul and Pyongyang if they were to pursue reunification.
North Korea’s nuclear program could offer some economic advantage. It is unlikely that North Korea’s nuclear program will be abandoned as a prerequisite for Korean reunification. That said, international pressure would make it difficult for a unified Korea to become a nuclear power. After all a nuclear armed Korea and China would push the Japanese to pursue similar capabilities. Such an action would increase tensions in East Asia which are already heightened due to Japan and China’s conflicting territorial claims to the Diaoyu Islands. This reality and the need to finance reunification would limit Korea’s ability to continue with the program. However, a reunified Korean peninsula could use the nuclear program as a bargaining chip. Essentially, we are looking at a deal that says, "We will give up our nuclear weapons if you (the international community) give us significant funding in order to offset the costs of reunification." Given that Korea could only give up the program once it is likely that the demands would be substantial.
These factors and the increased investment that a unified Korean peninsula would likely see could go a long way towards covering the trillions of dollars needed for the reunification of the peninsula. Despite the economic advantages that a unified Korea would offer, its neighbors will have concerns about such a move. In the next post we will look at some of China’s concerns regarding the Korean peninsula and examine how these concerns might be changing.
Friday, September 13, 2013
The Geopolitical Consequences Of The Grand Ethiopian Renaissance Dam
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This article was originally posted on Seeking Alpha on Oct 23, 2012.
Background: The construction of the Grand Ethiopian Renaissance Dam on the Blue Nile will likely heighten tensions in East Africa and could also lead to an increase in instability in Southwest Asia. When Egypt became preoccupied with the Arab Spring at the beginning of 2011 the East African States of the Nile River Basin took the opportunity to vocalize their claims to the water resources of the Nile. The 1959 Nile Water Agreement, a colonial era treaty, awards the vast majority of the Nile's waters to Egypt. The co-riparian countries of the Nile have always been against this treaty as the agreement was signed by foreign powers and does not protect the interests of the states in question. Despite this resentment, Egypt's relative economic and military strength and the internal stability issues in some countries made it difficult for East African countries to challenge this treaty. The current situation in Egypt has changed this.
The Nile is divided into the Blue Nile and the White Nile. Ethiopia, North Sudan, South Sudan, Egypt and Eritrea (to a minor degree) all share the water of the Blue Nile with Ethiopia's highlands providing approximately 85% of the river's water supply. In 2010 Ethiopia, Kenya, Uganda, Rwanda and Tanzania increased their efforts to divide the water resources of the River Basin more equitably and revoke Egypt's right to approve any projects on the river, such as the construction of dams, that might impact the flow of the river. Not surprisingly both Cairo opposed these measures. Given that the population in the Nile River Basin is expanding dramatically (it is expected to double by 2050) water use is on the rise, thus any cut in access to the river's resources is perceived as an existential threat. In the realm of hydropolitics violent conflicts tend to occur internally. The Nile River Basin is one the region that could see violence on an international level. Given the geography the region this could impact ships coming through the Suez Canal and stability in Southwest Asia.
For the moment lets look at the challenges that Ethiopia faces in constructing the dam, the options that Egypt has to counter Addis Ababa's actions and the concerns of North and South Sudan.
Ethiopia's Challenges: Building a large dam is neither a cheap or fast proposition. The Grand Ethiopian Renaissance Dam is supposed to be complete by 2017. That said the question of how the estimated price tag for the project of 5 Billion USD is going to be met needs to be answered. Given that the World Bank calculated Ethiopia's 2011 GDP as $31.71 billion we are looking at a project that is roughly one sixth of the countries economic output. Ethiopia started building the dam before they had secured all the necessary funding as Addis Ababa knows that it likely only as a limited time before Egypt can counter the dam's construction. It is likely that one of Cairo's key objectives will be to ensure that Addis Ababa never raises the additional funding. In theory Ethiopia could offset the cost of the project through selling hydropower but it must be noted that a theoretical deal is not a done deal. Questions remain as to how much revenue Ethiopia would be able to gain from the sale. There are also concerns as to how long it will take the reservoir of the dam to fill. There is speculation that it could take several years which would likely reduce downstream flows. In short, the faster Ethiopia wants to raise the reservoir the more down stream flows are going to be cut. That said, this dam is in the highlands which means that less water in lost to evaporation as compared to the water in Lake Nasser so it is possible that damming in Ethiopia and deconstructing the Aswan High Dam (which is contributing to soil salinization in Egypt's fertile Nile Delta) could result in more water and increased food production in the region. Despite this scenario it is unlikely that either Cairo or Khartoum would consent to policy makers in upstream countries controlling their access to the flow of the Nile.
Egypt's Concerns: Approximately 99% of Egypt's 82.54 million people lives in the Nile River Valley in an area about the size of Maryland. This population is utterly dependent upon the Nile's waters. Despite the current instability in Egypt Cairo has several strategies that it can employ:
1. Egypt could use Pakistan as a model and turn a blind eye towards parties in the region whose interests go against those of the United States and other Western powers. Such an act would likely emboldened these groups. Given Egypt's strategic location it could be used as a staging ground to cause disruptions in North Africa and Southwest Asia. Such actions could also put further strains on Egyptian - Israeli relations which would be a further issue that the United States would have to manage. This would distract Washington from other pressing issues in other parts of the world. Though this strategy would strain relations between the United States and Egypt it is unlikely that the Washington would abandoned Cairo outright. Pakistan serves as a precedent here. For these reasons the Egyptians can essentially say, "Side with us in this dispute and we will not make your life more complicated." Such a strategy could be used to ensure that Ethiopia never receives the funds necessary to complete the dam.
2. Egypt could fund rebels and opposition groups in upriver states. A precedent exists here as Egypt supported both the Eritrean People's Liberation Front and Tigrayan People's Liberation Front during the 70's and 80's. Political tensions in Kenya, Uganda and Rwanda are also not exactly closely guarded secrets. Cairo might seek to exploit these divisions if its access to water is threatened. Egypt could also offer financial assistance to some of these countries in an effort to buy their support. The success of such a policy is questionable however given how firmly the upriver states have been pressing their claim to the Nile's water. Thus, it is unlikely that any of these countries would legally limit their access to the Nile's waters for any length of time let alone in perpetuity.
3. Egypt could disrupt shipping in the Suez Canal. This is the least likely scenario as it would have a major impact on the Egyptian economy. The decline in revenues from tourism would also make this approach even more economically damaging. That said access to water is literally a life or death issue. When confronted with such choices states make decisions that would, in other circumstances, be madness. Though this is the least likely scenario it is worth keeping in mind if Egypt gets desperate.
North Sudan's Concerns: Though relations between North and South Sudan have improved of late they are still strained. Khartoum will not want another challenging issue to contend with but, as in Egypt, access to water is an issue that is too big to put on the back burner. Given North Sudan's geographic location and the fact that it has a legal claim to the water resources of the Nile under the 1959 Nile Waters Agreement it tends to side with Egypt on these issues. Thus, it is likely that Khartoum will continue this trend and support Cairo's position.
South Sudan's Concerns: As the world's newest country South Sudan has a variety of concerns. Though water is one of them the country does enjoy enough rainfall to make its agricultural sector not totally dependent on irrigation. That said water is not a resource that one signs away lightly. After all South Sudan needs water for sanitation, irrigation could aid food security and the ability to impact the flow of the Nile into North Sudan and Egypt gives Juba some leverage. For these reasons is unlikely that South Sudan would sign any agreement which would limit their access to the Nile even if such a deal provided them with much needed capital.
Conclusion: Tensions in the Nile River Basin are not going to disappear anytime soon. For the reasons outlined above the region should be monitored as it could result in a humanitarian crisis either in the form of war, chronic food insecurity, inadequate sanitation or a combination of all of the above. Given the proximity of the Horn of Africa to Southwest Asia it is not impossible that instability in Africa could be exported and in turn could impact the regional interests of the United States and put pressure on Washington to intervene in conflicts that would be costly and probably not end in a conclusive manner. Given internal issues in Egypt it is unlikely that these problems will result in a conflict within the next six to twelve months but it is possible that the situation will escalate within the coming five years. An increase in stability in Egypt will have a direct effect on how forcefully Cairo challenges the actions of Ethiopia and the other upriver Nile States.
Friday, September 6, 2013
How Exchanging Water for Access to Oil Infrastructure in the Sudans Could Benefit the Nile River Basin
Update 9/6/13: This article was originally posted on Seeking Alpha on July 7th, 2011. Though there have been tensions between North and South Sudan, full-scale hostilities have not recommenced. It is interesting to note China’s interest in the region. Though China has recently signed deals worth about $5 billion dollar in Kenya it has not provided any funding of significance to the $25.5 billion Lamu Port-South Sudan-Ethiopia Transport (LAPSSET) plan. It appears that Beijing’s preference is the development of similar facilities in Bagamoyo, Tanzania. Though there are many possible causes for this approach it is likely that China does not want to damage relations with North Sudan. In terms of logistics it would be easy for South Sudan to ship its oil out of Lamu, Kenya. This would reduce Juba’s dependency on North Sudanese infrastructure. For this reason the development of LAPSSET goes against Khartoum’s interests. Beijing presumably recognizes that supporting the project would likely interfere with the economic and political relations between China and North Sudan.
On July 9th South Sudan will become the world’s newest country. As oil provides the majority of Juba’s budget, the ability to sell it is essential to the country’s development. However, disputes between North Sudan and South Sudan over the division of oil revenues has caused Khartoum to publicly threaten to refuse Juba access to Northern Sudanese infrastructure, which is currently the most feasible means to get Southern Sudanese oil to the market. Despite this set back Juba has several important factors working in its advantage that could reduce the likelihood of inter state conflict:
On July 9th South Sudan will become the world’s newest country. As oil provides the majority of Juba’s budget, the ability to sell it is essential to the country’s development. However, disputes between North Sudan and South Sudan over the division of oil revenues has caused Khartoum to publicly threaten to refuse Juba access to Northern Sudanese infrastructure, which is currently the most feasible means to get Southern Sudanese oil to the market. Despite this set back Juba has several important factors working in its advantage that could reduce the likelihood of inter state conflict:
- The other East African States have a vested interest in seeing South Sudan develop.
- Juba has the ability to reduce the supply of the White Nile’s water to North Sudan.
- Egypt, who would also be impacted, is going through a period of instability. This unrest weakens Cairo’s capacity to prevent such an action.
- International agribusiness is buying up large swathes of the Nile River Basin to provide food for much more powerful countries complicating the distribution of water resources.
Clearly, all the countries in the region have a stake in ensuring that South Sudan develops. Effective diplomacy backed by guaranteed access to resources could result in a beneficial compromise rather than a war. Such an agreement would ideally lead to greater regional cooperation in managing the Nile which would ensure more water for all parties. Though violence is still a possibility and historical animosity in the region could derail negotiations, an agreement can still be reached if the aforementioned factors are addressed.
Culturally speaking, Southern Sudan is related to East African countries. Development in South Sudan could provide employment for the large pool of unemployed labor in East Africa. This group includes highly skilled professionals such as teachers and civil servants who lack opportunities at home. Therefore, countries such as Uganda and Kenya have an economic interest in seeing South Sudan thrive as remittances would benefit their economy while fewer unemployed people will reduce social instability. The challenge here is that this development needs to be funded by revenue from oil. Since South Sudan is currently dependent on North Sudanese pipelines Khartoum has the power to devastate the South Sudanese economy. Juba has the ability to counter this threat by reducing North Sudan’s water supply from the White Nile, which provides a significant portion of the Nile’s flow during the dry season. Usually, this option would not be feasible as such an action would impact Egypt’s water supply which is a threat to the country’s national security. As Egypt is far and away the most powerful country in the region and Cairo has threatened violence in the past if its access to water is impacted, Egyptian concerns are usually taken quite seriously. This reality has been weakened as the current domestic unrest has limited Cairo’s capacity to respond leading the upstream Nile States (Ethiopia, Eritrea, Kenya, Uganda, Burundi, Tanzania, Rwanda and the DRC) to challenge the 1929 and 1959 Nile Water Agreements. These treaties gave Egypt and Sudan the rights to the vast majority of the Nile’s water. Though there is no guarantee that Egyptian instability has led many of the upstream Nile Basin Counties to sign the Nile Cooperative Framework Agreement (CFA) which seeks to replace the Nile Water Agreements, the timing is suspect. This action could be perceived as an admission by East African states that they feel that Egypt is too weak to stop them from demanding more water.
The countries of the Nile River Basin are poor and many have problems ensuring that their populations are fed. Complicating this is the fact that agribusinesses from richer states like Saudi Arabia, South Korea and China are buying land in countries such as Ethiopia and South Sudan. Though the sale of this land provides much needed revenue it also diminishes food supplies for the local, rapidly growing, population of the region. Essentially, what is happening is that economic reality is forcing countries that can barely feed themselves to sell off their capacity to produce food to interests who are too powerful to easily doublecross. If these sales are to stop, countries such as South Sudan must develop to the point where such transactions are no longer necessary. For this reason Egypt and Sudan have an interest in allowing South Sudan to develop. Both of these countries, though poor, are far richer than their southern neighbors and, as they are in a very arid region, need to import a significant portion of their food. It is feasible that Egypt and North Sudan could strike a deal with South Sudan whereby they provide developmental assistance and access to their infrastructure in return for long term guaranteed supplies of food at subsidized prices. After all, water security is linked to food security which is a driving reason why Cairo and Khartoum are so intent on preserving their access to the Nile’s waters. If another country could grow food more effectively and sell it to Egypt and North Sudan at a guaranteed price this could go a long way to appeasing the two countries. Since North Sudan would be a direct beneficiary of such a deal, access to North Sudanese roads and Red Sea ports should be relatively easy to negotiate.
The Nile River Basin countries face numerous challenges. Formal peace between states does not equate true peace as inter-ethnic violence due to conflicting interests and historical animosity still is possible. The climate of the region means only certain areas have a sufficient amount of arable land. The populations are rising dramatically while standards of living are not. There is a strong probability that the Nuba in Kordofan could face persecution comparable to Darfur. And, social factors can lead nations to act in a manner contrary to their rational political and economic interests. Despite these challenges, finding a deal which guarantees Juba the right to use Northern Sudanese infrastructure in return for food supplies for North Sudan and Egypt could benefit everyone. South Sudan could develop without being sabotaged by its northern neighbors. Egypt and North Sudan’s food concerns would be addressed. And, the East African States would benefit by securing employment for their large pool of unemployed labor and collecting remittances. Such a deal will be difficult to negotiate but when all parties have interests that can be met, an agreement can be reached. After all, a war is far more costly.
Wednesday, September 4, 2013
Signs of a Construction Boom in Southern Africa
Update 9/4/13: This article was originally posted on Seeking Alpha in January of 2011. Since then the Lobito Refinery (now called SonaRef) is expected to start producing 120,000 barrels per day (b/d) in the first quarter of 2017 and increase production up to 200,000 b/d by the third quarter of 2018. The Angolan state owned Oil Company SONANGOL is the majority owner. SONANGOL has stated that, "This project origin was the need to aggregate value to the acidic heavy crude and from it produce high quality transportation fuel. As well as to reduce import of oil products like gasoline and diesel. The other two purposes of SonaRef are to control 50% of regional market and to increase exportation to international markets." This indicates that a significant amount of petroleum products are earmarked for the regional development of Southern Africa.
A construction boom, far larger and more sustained than the work done during the build up to the World Cup, could be coming to Southern Africa. A major indicator of this boom will be if South Africa makes a significant investment in the oil refinery in Lobito Angola. The reason we should be paying attention to this deal is because the bulk of the refined oil is supposedly going to be reserved for developing Southern Africa, rather than for foreign markets. China was initially planning to fund the project, but pulled out when Angola refused to guarantee that 80% of the refined oil would be reserved exclusively for foreign markets. If it is true that the bulk of the oil is reserved for the region, this deal could be viewed as a first step in a process of shifting from an economy relying solely on primary commodities to one which has a manufacturing base as well. After all, a reliable supply of oil is essential for economic development in Southern Africa. If South Africa partners with Angola on this project it will be more than a business deal. It will be a concrete effort to fundamentally change the regional economy.
A construction boom, far larger and more sustained than the work done during the build up to the World Cup, could be coming to Southern Africa. A major indicator of this boom will be if South Africa makes a significant investment in the oil refinery in Lobito Angola. The reason we should be paying attention to this deal is because the bulk of the refined oil is supposedly going to be reserved for developing Southern Africa, rather than for foreign markets. China was initially planning to fund the project, but pulled out when Angola refused to guarantee that 80% of the refined oil would be reserved exclusively for foreign markets. If it is true that the bulk of the oil is reserved for the region, this deal could be viewed as a first step in a process of shifting from an economy relying solely on primary commodities to one which has a manufacturing base as well. After all, a reliable supply of oil is essential for economic development in Southern Africa. If South Africa partners with Angola on this project it will be more than a business deal. It will be a concrete effort to fundamentally change the regional economy.
Angola needs South Africa, not just as an investor, but also as a distributor. Despite the fact that Lobito is an excellent port, much of Angola’s infrastructure is in poor condition, thus the ability to ship oil to South Africa, which has much better infrastructure both internally and linking it to other countries in Southern Africa, is important. As Southern Africa has a temperate to arid climate there is less strain on infrastructure than one would encounter in tropical environments. The region also lacks barriers, such as the Sahara Desert and the Congo Rainforest, which facilitates construction (admittedly the Kalahari is there but it is far more manageable than its Northern cousin). Expanding roads and railways in the region will create numerous opportunities for engineering and construction firms in the region.
Though the estimated 9 billion dollar price tag is significant the 200,000 barrels per day (BPD) of refined oil that Lobito is projected to produce dwarfs the 40,000 BPD (rough estimate) that Angola’s only mainland refinery currently produces. That oil would be instrumental in stimulating development in the region, however South Africa will not fund such a project unless it is sure that it will get a significant return on investment. Politically and economically speaking, there are factors which indicate that this is indeed the case. Building infrastructure will employ the estimated 54,000 construction workers who lost their jobs after the World Cup and create new manufacturing and transport jobs. As unemployment is one of the major problems in South Africa, President Zuma will likely be inclined to boost his political capital by creating jobs. If South Africa is going to make a significant investment in the refinery, Pretoria will want to see South African companies awarded a significant portion of the contracts. A likely winner is the engineering contractor Murray & Roberts. Internationally, they are best known for helping build the Burj Al Arab Dubai and the Gautrain around Johannesburg. Though the company has taken a hit recently due to the drop in work after the World Cup’s successful conclusion, problems procuring land for Gautrain and from difficulties obtaining payment from clients in Dubai, the company is still well placed to take advantage of the growing interest of investment in Southern Africa. Suffice it to say, the Lobito refinery could be a major indicator of things to come.
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