Bears on the Block

The blockchain has the potential to revive the use of bearer shares, allowing secrecy conscious jurisdictions to comply with international money laundering norms while guaranteeing the privacy rights of its shareholders.

The leak of confidential documents from Mossack Fonesca, a Panama-based law firm, has exposed how the rich and powerful use tax havens to commit financial crimes. Together with the use of shell companies and offshore accounts, bearer shares have been identified as one of the methods used by criminals to hide their illicit gains.

 

Bearer shares are securities owned by whoever holds the physical stock certificate. They are valued for their privacy and flexibility, but because they are not registered with a central authority, corrupt politicians, narcotraffickers and terrorists have been known to use them to store and transfer wealth. Regulators have long been concerned with the ease with which bearer shareholders can evade taxes on ownership or use them to launder money.

 

In Panama, the British Virgin Islands, Luxembourg and several other jurisdictions, bearer shareholders have to place bearer shares under the custody of a registered trustee, a process known as immobilization. Immobilization doesn’t provide for centralized share registration as sought by the FATF but is widely considered an improvement over traditional regimes. It is an important if imperfect compromise between transparency advocates and bearer share devotees. Critics however argue that, under immobilization regimes, records remain so diffuse that in practice owner identification remains unreasonably time consuming for law enforcement personnel and near impossible for due diligence officers.

 

A share registration regime using blockchain technology could ease these concerns, and protect certain advantages bearer shares provide. It would likely have frustrated many of the financial crimes detailed in the Mossack revelations. NASDAQ is exploring using blockchain as a share registry and to process transfers. This is likely to take quite some time as the technology presents two big challenges. The first is legal: the current stock registration system records ownership while the blockchain records possession. A second concern is that blockchain technology can only handle a few hundred transactions a minute. This makes it unsuitable as a share registry as many widely traded shares are transferred thousands of times a second. A blockchain-based bearer share registry would not however encounter these problems because bearer shares have always only recorded procession, and because this type of share is not traded widely.

 

Currently, following international know-your-customer (KYC) norms, most banks refuse to open an account for a company with bearer shares. With a share registry on the blockchain however, all current and previous shareholders would immediately be known. The banks could demand blockchain reading rights to identify changes of ownership as they occur, helping to fulfill KYC requirements. Moreover, in forgoing the services of a registered trustee in favor of a spot on a distributed ledger, shareholders would save on attorney fees, always a powerful incentive for change. Finally, unlike with physical bearer shares, be they personally held or by a trustee, blockchain-based shares cannot be stolen or have their ownership information leaked.

 

Countries like Panama should shelve their immobilization plans and set up a blockchain-based bearer share registry. Immobilization is a deficient compromise which guarantees neither the transparency sought by the FATF and its allies nor the privacy and transferability sought by its current users. Registration on a standardized, secure, and transparent blockchain registry would be the most effective way to reach transparency goals while protecting the confidentiality and flexibility bearer shares afford.

Pricing Ebola: Risk in an Age of Fear

Fear may end up causing up to 90% of the outbreak’s economic toll, with devastating effects on poverty alleviation and state stability. Markets can help.

A little over a month after the World Health Organization declared that the Ebola virus could produce 10,000 new cases per week, the organization announced that emerging infections in West Africa were declining. An aggressive public health program coupled with massive inflows of international aid and expertise, and the possible development of a vaccine by early 2015 should, in the coming months, work in concert to bring to an end what Margaret Chan, the WHO’s Director General, called “the greatest peacetime challenge the United Nations and its agencies have ever faced.” Despite cause for optimism, fear and hysteria, most of it unfounded and all of it destructive, continue largely unabated and could result in cascading economic and social welfare burdens to an otherwise containable health crisis.

Ebola spread through West Africa not because of its uniquely destructive pathophysiology – across the continent the Ebola death count is (and will likely continue to be) dwarfed by Malaria and diarrheal diseases – but because of failures of governance, economic resiliency, and human fallibility.

Perhaps more than anything, mass distrust and fear have stymied the response, although the lack of health worker training, inadequate resources, and government heavy-handedness certainly haven’t helped the situation. In August, an Ebola treatment facility was ransacked by an angry mob, causing sick patients to flee and discouraging the newly sick from seeking treatment. In September, a three-day lockdown in Sierra Leone hindered contact tracing and disrupted economic activity. These are not isolated incidents, but rather highlight a pattern of crisis response failures with roots in institutional and economic frailty. It is however the psychology of fear, and its effect on all economic actors that most significantly hobbles crisis response and prevention.

Now the damage is coming around. The disease is straining grossly underdeveloped regional healthcare systems, and is weakening already weak states. Sierra Leone and Liberia had just started recovering from protracted civil war and were enjoying relatively strong rates of GDP growth. Unemployment was falling and foreign direct investment (FDI), particularly in the mining industry, was surging in. A sharp reversal of this economic progress now seems all too likely.

With capital fleeing and exchange rates wobbling, cross border trade has drastically slowed. FDI is drying up and the tourism industry is near collapse. The World Bank now expects Liberia’s economy to contract by nearly 5% this year (from a healthy 8% growth rate in 2013) and has slashed expected growth in Sierra Leone from 11% to 2%. Inflation, too, is creeping up, largely a consequence of underemployed factors of production – idle or abandoned farmland, labor stuck at home sick or fearful of becoming so, and capital without an appetite for risk, or unable to price it. Rising food prices (by 150% for cassavas, a staple, in Monrovia), and supermarkets struggling to resupply their shelves, may yet spark violent conflict and social unrest that would parallel, if not exacerbate, the misery brought on by the epidemic.

The World Bank has identified a $290m fiscal hole in West African governments’ budgets. It is essential that in a time of national crisis and declining tax revenues, governments are not forced to cull essential staff. Not only would this adversely affect the running of their states, but it could spark unnecessary public backlash.

The World Bank has promised $500m to support damaged health systems in West Africa, and indeed a lot of international money is going into Ebola treatment and prevention. But more needs to go into shoring up national stability. That is, the international community must ensure that basic government services continue to be rendered, that contracts are enforced through the courts, and that the rule of law does not deteriorate. “The final economic toll of Ebola will not be driven by the direct costs of the disease itself – expensive drugs, sick employees and busy caregivers. It will be driven by how much those who are not infected trust their governments,” writes Marcelo Giugale, Senior Director of the World Bank’s global practice for macroeconomics and fiscal management. This is the price of fear, and Giugale’s Ebola Impact Index predicts it could top $33 billion if government mismanagement of the disease leads to 200,000 cases.

Fear hampers economically efficient decision-making by mispricing risk. Research from Nobel Prize winning behavioral economist Daniel Kahneman tells us that individuals fear losses more than they value corresponding gains. Fear reduces labor force participation by overvaluing the tiny risk of losing one’s health over the economic benefits of work. That is, risk is more often measured by fear, not probability.

That same fear has closed border crossings, led to farmers abandoning their crops, cancelled business events, and halted exports. According to Jim Yong Kim, President of the World Bank, as was the case for both the SARS and H1N1 epidemics, the “tide of fear” triggered by the Ebola outbreak could cause 80% to 90% of the economic impact.

Remedying state fragility and propping up fiscal gaps should be made a priority if the world does not want to see countries that beat Ebola fail shortly thereafter. That would require a lot of money, and incessant public reassurance by all political leaders as to the real, objective probabilities of risk, rather than the perceived risk. Some of our leaders are trying to help: IMF Managing Director Christine Lagarde wasrecently spotted sporting an “isolate Ebola, not countries” badge and warning an audience against terrifying investors away from Africa. Others, like New Jersey Governor Chris Christie, unfortunately seek only toscore political points by stoking public fear against an ill-conceived threat to his constituency.

Likewise, rather than quarantining West Africa through travel bans and other over-zealous mobility impediments such as mandatory 21-day quarantines for asymptomatic persons, the West should actively encourage trade and transit. The media has rightly lauded the heroism and selflessness of healthcare professionals heading into harm’s way to prevent the disease from spreading. A similar international effort is needed to encourage businesspersons, investors, and financiers to shore up West African economies and seek opportunities that bolster growth industries, stimulate commercial interest, and generate broader market participation.

This need not come out of altruistic benevolence; market mechanisms are well placed to encourage such behavior if some Ebola hysteria dissipates and a risk premium can be better modeled. There are economic opportunities in West Africa, long unnoticed or unexploited, which if leveraged, could not only be commercially lucrative, but also politically stabilizing and create a stronger foundation to combat the disease.

Opportunities abound for distressed securities funds to invest in undervalued assets or debt in imminent default. West African governments, corporations, and local subsidiaries of international corporations have a myriad of assets they may want or need to divest themselves of. International investment in those assets would lubricate the domestic economy and put the three nations most at risk of collapse on the path to recovery. Such investments and development opportunities reap social and economic rewards to both investors and host nations.

The Mount Coffee Hydroelectric Plant on the St. Paul River in Liberia is a poignant example of one such opportunity. Having promised to bring cheap and reliable electricity to a nation ravaged by two decades of civil war, its construction site now sits idle. Laborers stay home, fearful of falling sick, and foreign managers have been evacuated. All the while, fixed and financing costs have to be borne, straining the Liberia Electricity Corporation and international contractors Norplan AS and Fichtner GmbH.

Similarly, Sifca Group, an Ivory Coast-based agribusiness, has halted rubber exports from Liberia due to border closures and staff shortages. Its wares now sit idly in expensive Monrovian warehouses. Even in Ebola-free Gambia, hotel bookings are down 60% due to fears of the spread of the virus, severely straining the tourism industry and putting leisure industry companies at risk of bankruptcy. Securities funds willing and able to accurately price risk are well placed to acquire discounted stakes in assets like these with significant potential for returns. Diversifying their investments across the region would help mitigate against the concentration risk in any one sector or country. In doing so, they’ll also be keeping people employed and providing a much needed financial lifeline to governments, companies, and individuals suffering from the economic consequences of fear.

Liberia, Sierra Leone, and Guinea are going through hell, and to quote Winston Churchill, they’ll have to keep going. Ebola is, however, very much an international crisis requiring a Churchillian effort on the part of NGOs, aid agencies, donor states, individuals, and indeed private capital to prevent the disease from spreading and states from failing. If public action is inadequate, fear will reign – people won’t go to work, businesses will close, economies will collapse, and social order will disintegrate, likely violently. Because fear and its associate, loss-aversion, may come to result in up to 90% of Ebola’s economic toll, it is absolutely paramount that this scourge be contained. The market can help, and opportunities are plentiful for those with a taste for calculated risk. And let us not forget the responsibility of our leaders in steering us away from mass hysteria; it could end up being an even bigger killer than Ebola.

Diplomacy and Governance in the Arctic: Coordinated Bonanza or new Cold War?

The Arctic sits at the intersection of US-Russia relations, the global crisis of climate change, and international trade. How Arctic nations deal with these issues is likely to be one of the defining struggles of international relations in the 21st century

Ever since Robert Peary’s historic voyage to the North Pole in 1909, the world has marveled at its mystery, beauty, and more recently, its vast economic potential. For hundreds of years, mariners risked life and limb plundering the frigid waters of the far north for cod, halibut and whale blubber, but rarely went within a thousand kilometers of the North Pole – a barren wasteland encrusted in impenetrable ice year-round.
The 21st century will bring many changes to the region. Climate change, technological advancements and an insatiable demand for resources may finally unlock the vast economic potential of the circumpolar north. The nations surrounding the pole, which had previously looked south for economic growth, are increasingly asserting territorial claims in the far north as Arctic sea ice hastens its retreat.
As international climate scientists predict polar ice free summers within a decade, regional actors are lining up billions of dollars for investments in fishing, transportation, resource extraction and portentously, military infrastructure.
As the pole thaws and nations move into this pristine territory, the likelihood of conflict is set to rise. Most analysts dismiss the prospects for an armed clash in the Arctic, but predict an arms buildup and fierce competition in the international arena for recognition of expansive territorial claims. If this race is badly managed, the chance of a miscalculation runs unacceptably high.
Is the Arctic being primed for a new Cold War? This essay will examine the issues at stake in the far north. It will look at the interests and positions of the littoral polar nations – the United States, Canada, Denmark (via Greenland), Norway and Russia – to gauge where competition is likely to be most aggressive. It will also look at the role of the United Nations and the Arctic Council in mediating disputes. Moreover, it will explore the concerns of environmentalists and native communities; as one of the world’s last great frontiers, these pressure groups are rightly concerned that exploration and development will spoil a pristine habitat. Finally, this essay will put forward an expansive set of policy prescriptions for managing the development of, and inevitable disputes in, the Arctic.
A New Arctic
The Arctic, about 8% of the world’s surface, is warming twice as fast as the rest of the planet. The summer sea ice nadir has steadily shrunk since 1979, the first year of reliable satellite measurements. According to the UN Intergovernmental Panel on Climate Change (IPCC), the ice cap has retreated over 40% in this period, a trend unmatched in human history. The summer of 2012 saw Arctic sea ice cover just 3.5 million square kilometers, down from an average of 8 million square kilometers in the 1980s. An added worry is that vanishing ice is likely to exacerbate the warming problem; ice reflects much of the sun’s heat back into space while open ocean acts as a heat sink.
A shrinking ice cap opens up a host of economic opportunities. Increasingly temperate temperatures would make the exploitation of marine and mineral resources more economical. The Beaufort Sea off of Alaska and Canada is believed to hold over 90 billion barrels of oil and 44 billion barrels of liquid natural gas according to a report by Ernst and Young.
A policy brief by the Brookings institute estimates that by 2030 unreinforced commercial liners will be able to safely sail through the northern Canadian archipelago (the Northwest Passage) or around Russia (the Northeast Passage) in the summer months. In 1906, Roald Amundsen first navigated the Northwest Passage looking for a shortcut to Asia; the completion of the Panama Canal in 1914 however lessened the need for this precarious route. Now, a hundred years later, strategic planners are once again looking to the North-east and west Passages for a speedy route around the continents.
Territorial Claims
The Arctic is of primary strategic significance to the five littoral Arctic Ocean states – The United States, Canada, Russia, Norway and Denmark. The Council on Foreign Relations, in a policy brief on Arctic disputes, argues that Russia is the most dominant player in the Arctic, investing billions of dollars in its northern infrastructure. Its main naval bases are arranged in a crescent around the pole.
That said, all Arctic nations are set to invest profusely in the region in the coming decades. New shipping lanes, oil fields, trawling basins and even tourism opportunities will affect the economic and security welfare of all littoral states. Non-Arctic nations such as China and the European Union countries would also benefit; shorter trade routes through the arctic would be a boon for export driven nations, and increased drilling for oil and gas could lower global prices.
Although each nation state has sovereignty over its tranche of the Arctic, bilateral and international agreements address certain areas of cooperation. The Arctic Council is the preeminent forum for regional collaboration and dispute resolution while the 1982 United Nation Convention on the Laws of the Sea (UNCLOS) serves as an overarching legal framework for the governance of the world’s oceans.
UNCLOS is significant in that it sets territorial sea boundaries to 12 miles offshore and allows for a 200 mile exclusive economic zone (EEZ). Under specific rules and through a UN commission, a country can petition to have its continental shelf rights extended up to 350 miles offshore. All Arctic nations have done just this despite the fact that most of the Arctic Ocean lays within the five EEZs; the 1.1 square miles of open ocean at the very north of the planet, sometimes referred to as the “donut hole”, is considered high seas and thus outside any national jurisdiction.
The five nations affirmed their commitment to UNCLOS (the United States has not ratified the treaty but abides by its provisions) with the Ilulissat Declaration of 2008. They agreed to a basic formulation for sovereignty in the Arctic region and on addressing the effects of climate change. That said, two minor territorial disputes persist – between Canada and the United States in the Beaufort Sea and between Canada and Denmark over a small island in the Nares Strait. These are not very contentious and the parties are likely to split the differences amicably.
Of greater contention is the status of the Northwest Passage. Canada asserts that it is an inland waterway over which it maintains exclusive jurisdiction. The United States and others maintain that it is an international strait with free navigation rights. Russia similarly claims that parts of the Northeast Passage are within its internal waters.
The issue first erupted with the undeclared passage of the USS Manhattan, an ice-strengthened oil tanker, though the Northwest Passage in 1969. At one point, local Inuit stood on the sea ice in front of the ship, refusing to move until the captain asked for transit permission. He did, and permission was duly granted. This has been the custom since, but it has not stopped Canadian politicians from raising the issue to shore up nationalist credentials. Unable to stand up to America militarily but needing to do something about the controversy, the Canadian Parliament passed the Arctic Waters Pollution Prevention Act in 1970 to strengthen de jure control over the passage.
The passage issue came to the fore again in 1985 with the Polar Sea controversy. The USCGC Polar Sea planned to navigate through the Northwest Passage to Alaska from Greenland without formal Canadian government authorization. Viewing the passage as an international strait with full freedom of navigation, the vessel, cognizant of the diplomatic implications, sought only to notify Canada rather than ask for permission. The Canadian public, and conservatives chiefly, were enraged at the disregard of sovereignty, even though the plan provided for Canadian observers aboard the ship.
Adding fuel to the fire, the Soviets spoke in support of the nationalist outcry, stating that it believed in Canada’s right to sovereignty in the Northwest Passage just as the Soviets believed in their sovereignty over the Northeast Passage. Bowing to nationalist pressure, the Mulroney government decided to take action – straight territorial baselines were set around the outer perimeter of the country and the Polar 8 Project, the proposed construction of a new class of icebreakers, was approved.
These aggressive moves bore fruit. Although the US position on the passage had not changed, overarching security interests and legal constraints forced it to capitulate somewhat. The US could not challenge Canada’s territorial baseline change at the United Nations because it had not ratified UNCLOS. Most significantly however, the rising concern over a new generation of Soviet nuclear submarines, along with Canada’s stated intention of interfering with a US presence in the Arctic, prompted a quick resolution. According to Philip J. Briggs, an Arctic military scholar, it was the Pentagon’s view that an increased assertion of Canadian sovereignty in the north would compromise its ability to deploy forces in the defense of Europe.
A simple 2 page agreement, reached in 1988 between Joe Clark of Canada and George P. Shultz of the United States, provided that the Americans would always ask for permission for navigation in the waters claimed by Canada. What was not written, but was widely acknowledged as the Canadian counterpoint, was that Canada would always grant permission. Canada could never admit this due to domestic political considerations, but diplomacy often works best in these grey areas, when diplomats understand and trust each other. The agreement still stands, and the two nations are currently conducting joint geological surveys to determine continental shelf delimitations.
Today, a voyage from Shanghai to Hamburg through the Northeast Passage shaves roughly 30 percent of the distance off a similar trip though the crowded Suez Canal. 71 vessels made such trips last year, but this is tiny compared to the 17,000 ships which passed through Suez in 2013. Last year, the Danish bulk carrier Nordic Orion traversed the Northwest Passage rather than passing through the Panama Canal, reportedly saving $80,000 in fuel costs. “I want to stress the importance of the Northern Sea Route as an international transport artery that will rival traditional trade lanes” noted Vladimir Putin in 2011.
It will take at least a decade though for traffic in the Arctic to dent circulation in traditional shipping lanes. On both routes the shipping season remains very short, expensive icebreaker escorts often have to be hired and insurance is hard to obtain due to uncertainty. The industry is waiting for more warming.
New Cold War?
The issue which has undoubtedly gotten the most press attention however is Russia’s claim to a continental shelf extension based on the Lomonosov ridge, an undersea mountain range bisecting the Arctic Ocean. In 2007, the Russian submarine Arkitka boldly planted the flag of the Russian Federation on the seabed of the North Pole. This sparked a diplomatic incident, with Peter McCay, the Canadian Foreign Minister at the time, pronouncing:
“[The Russians] are fooling themselves if they think dropping a flag on the ocean floor is going to change anything. There is no question over Canadian sovereignty in the Arctic. We’ve made that very clear. We’ve established – a long time ago – that these are Canadian waters and this is Canadian property. You can’t go around the world these days dropping a flag somewhere. This isn’t the 14th or 15th century.”
Sergei Lavrov, the Russian foreign minister, retorted that the flag planting was little more than a legal fact finding mission, responding:
“We from the outset said that this expedition was part of the big work being carried out under the UN Convention on the Law of the Sea, within the international authority where Russia’s claim to submerged ridges which we believe to be an extension of our shelf is being considered. We know that this has to be proved. The ground samples that were taken will serve the work to prepare that evidence.”
This posturing is significant because both nations have submitted claims to the UNCLOS commission charged with defining continental shelf extensions.
In mid-March, as the world watched Russia annex Crimea, Russian officials quietly announced another territorial coup, this one to the East. The “Peanut Hole”, a 52,000 square kilometer basin in the Sea of Okhotsk believed to be rich in oil and gas, was recognized as Russia’s by the United Nations Commission on the Law of the Seas.
Almost 15 years ago, Russia submitted a continental shelf extension claim to the UN; it was finally approved in March. Their minister of natural resources and environment proudly announced that this most recent decision would only advance their other causes. The Lomonosov claim is pending, and is the most significant as a win would open up gigantic oil and gas fields for exploration and exploitation in contested seas.
“Few countries have been as keen to invest in the Arctic as Russia, whose economy and federal budget rely heavily on hydrocarbons,” CFR writes. “Of the nearly sixty large oil and natural-gas fields discovered in the Arctic, there are forty-three in Russia, eleven in Canada, six in Alaska, and one in Norway, according to a 2009 U.S. Department of Energy report.”
“Russia, the only non-NATO littoral Arctic state, has made a military buildup in the Arctic a strategic priority, restoring Soviet-era airfields and ports and marshaling naval assets,” CFR adds. “In late 2013, President Vladimir Putin instructed his military leadership to pay particular attention to the Arctic, saying Russia needed ‘every lever for the protection of its security and national interests there.’ He also ordered the creation of a new strategic military command in the Russian Arctic by the end of 2014.”
The crisis in Ukraine should not affect Arctic cooperation. In early April, the eight members of the Arctic Council went ahead, as planned, with a summit in Canada. “The Russians have been quite cooperative in the Arctic during the past decade, probably because they realize how expensive it would be to take another approach, especially one involving militarization” noted international-law professor Michael Byers on CBC, a Canadian news outfit.
Diplomacy has indeed taken center stage in Arctic disputes. In 2010, Norway and Russia resolved a decades old maritime boundary dispute in the Barents Sea, equally dividing 67,600 square miles of contested waters. It is a model of Arctic cooperation that all nations should take note of.
Policy Prescriptions
The Arctic Council, established in 1996, develops policies focused on environmental protection, maritime security and sustainable development. Every nation but the United States appoints an ambassador-level diplomat to represent their interests. The US should follow suit and, according to the Brookings Institution, establish a Regional Bureau for Polar Affairs in the Department of State. It should also ratify UNCLOS, if not to settle disputes then at least to have a say in the regulations that govern the world’s oceans.
This is particularly important as Arctic politics are no longer under Arctic state monopoly; southerly economic powers like China, Japan and India have interests in the region, and are increasingly willing to fork out vast sums to secure them. China considers itself a “near-arctic state” and has increased funding for polar research to $60 million annually. Japan has a fleet of whalers serving national culinary interests, to much international criticism. India, like the other two countries, has an interest in new trade routes in the far north. These three countries, plus the UK, Netherlands, Poland, Spain, Germany, France, Singapore, Italy and South Korea are Arctic Council observer states.
The Arctic Council will have to go further though if it wishes to remain relevant. It currently bans discussion of military matters. This is a mistake; the leaders should be encouraged to strengthen military cooperation, including marine surveillance and search and rescue. It should also encourage further integration of national regulatory regimes in the Arctic. The EU has already done much to harmonize environmental and fishing rules within its borders; the Arctic Council should aim for something similar in its region.
Except for Russia, all Arctic council members are either in NATO or in the EU. To avoid a dangerous arms race or other forms of military escalation, Russia cannot be left feeling cornered or bullied. Such exclusion and distrust will encourage her to assert national interests outside the established international system. Russia has thus far, in the Arctic at least, played by international rules because she views them as impartial and necessary. It would be a tragedy for the 7 other members to force Russia to revise that calculation.
Melting polar ice caps are sure to spur further energy development. In 2013, the Arctic Council members signed a maritime oil-pollution preparedness and response agreement aimed at improving crisis response coordination. Energy development regulations are however still left to individual states. According to Russia’s own Ministry of Economic Development, over 3.5 million barrels of oil are spilled into the Arctic by substandard Russian infrastructure every year. By comparison, the Deepwater Horizon oil spill, the largest oil spill in history, released 4.9 million barrels. The Pew Research Center recommends standardizing spill response equipment, imposing limits on winter drilling and installing redundant systems.
Climate change will exacerbate these existing infrastructure deficits. As permafrost melts and soils sink, much existing infrastructure will be damaged, burdening locals with substantial costs. Building code best practices should be shared, and national governments should pledge funds to help the northern communities most affected by climate change mitigate its effects. Most importantly, existing ports and pipelines need to be renovated and stabilized now to minimize costs when permafrost melts en masse, predicted by midcentury.
It is perhaps ironic that the burning of fossil fuels, which through greenhouse gas emissions is opening up the Arctic to drilling, will lead to further carbon emissions and a warmer planet. Climatologists believe that nations should be cutting back on fossil fuels and move towards renewable sources of energy if we are to be spared the worst effects of climate change. The prisoner’s dilemma that is international greenhouse-gas controls does not however make altruistic drilling moratoriums very rewarding. Greenpeace however proposes just that; it believes that the environmental risks associated with Arctic drilling are too high and propose an outright ban. In 2013, 30 Greenpeace activists were arrested in Russia for harassing Gazprom’s Prirazlomnaya platform in the Pechora Sea, a key element of Russia’s plans to develop the Arctic. It is Russia’s first offshore field in the Arctic.
With regards to shipping guidelines, the Arctic Council encouraged member states to support the UN’s International Maritime Organization (IMO) in harmonizing ship design, crew training and marine safety. The Arctic Council also agreed to a draft “mandatory polar code” on shipping practices. CFR recommends that it go further, implementing restrictions on the use of heavy fuel oil and emissions of black carbon, both big contributors to global warming.
Conclusion
The Arctic is the final frontier; in many respects we know more about the moon than the northernmost reaches of our planet. Climate scientists do however universally agree that the Arctic is warming – its sea ice is melting, opening up countless opportunities for the exploration and exploitation of resources which had previously been locked away. The rate of change is frantic, and is having profound geopolitical repercussions. The Arctic sits at the intersection of US-Russia relations, the global crisis of climate change, and international trade. These forces are transformative and, if poorly managed, risk sparking a geo-economic contest reminiscent of the Cold War. The United States cannot sit back; it needs to strongly assert itself as an arctic nation. UNCLOS and the Arctic Council are useful arbiters in this arena, but they need to be fortified and have their scopes expanded. The Arctic isn’t in a crisis today; its stakeholders are largely cooperative and engaged. In the long term however, the potential benefits Arctic exploration – energy, shipping, tourism, fishing – need to be balanced against environmental and strategic concerns. Whatever Arctic nations decide, billions of dollars will have to be spent. They should coordinate their efforts.

Sources:

Intergovernmental Panel on Climate Change, ‘Working Group 13: The Physical Science Basis’ (2013)

Dale Nijoka et al, ‘Arctic Oil and Gas’ Ernst and Young (2013)

Ebinger, Schackmann and Banks, ‘Offshore Oil and Gas Governance in the Arctic: A Leadership Role for the U.S.’ Brookings Institution Energy Security Initiative (March 2014) Policy Brief 14-01

Brigham, Byers, Conley and Laruelle, ‘Emerging Arctic’ Council on Foreign Relations (2014)

The Ilulissat Declaration, Arctic Ocean Conference (Ilulissat, Greenland, 27 – 29 May 2008 )

Philip J. Briggs, ‘The Polar Sea Voyage and the Northwest Passage Dispute’ Armed Forces & Society (Spring 1990) vol. 16 no. 3 437-452

‘Canada and United States of America: Agreement on Arctic Cooperation’ Signed at Ottawa on 11 January 1988

Gleb Bryanksi, ‘Russia’s Putin says Arctic trade route to rival Suez’ Reuters (22 September 2011)

Paul Reynolds, ‘Trying to head off an Arctic Gold Rush’ BBC (29 May 2008)

Ministry of Foreign Affairs of the Russian Federation,Transcript of Remarks and Replies to Media Questions by Russian Minister of Foreign Affairs Sergey Lavrov at Joint Press Conference with Philippine Foreign Affairs Secretary Alberto Romulo, Manila, August 3, 2007’ (2007)

Uri Friedman, ‘The Arctic: Where the U.S. and Russia Could Square off Next’ The Atlantic (28 March 2014)

Far East bonanza: Resource-rich Sea of Okhotsk all Russian, UN confirms’ Russia Today (15 March 2014)

Arctic Council ‘Agreement on maritime oil-pollution preparedness and response in the Arctic’ (2013)

Nataliya Vasilyeva, ‘In Russia’s northern oil fields, an environmental tragedy drip by drip’ AP Enterprise (20 December 2011)

Brandon MacGillis ‘Arctic Standards: Recommendations on Oil Spill Prevention, Response, and Safety’ The Pew Charitable Trusts (23 September 2013)

Dmitri Sharomov, ‘Russia drops charges against Greenpeace activists’ Reuters (25 December 2013)

On ASEAN and Alignments

ASEAN nations have pursued what John Ciorciari calls “limited alignments” – arrangements that “steer between strict neutrality and formal alliances to obtain the fruits of security cooperation without the perils of undue dependency.”[1] It certainly is less negative than “hedging”, which requires an adversary. Limited alignments limits risks (to sovereignty, on dependency, from nationalism, by abandonment) and maximizes rewards (to trade, by aid, and from security) when dealing with competing great powers.

ASEAN as an institution however wants to be friends with everyone. As a region with no obvious military rival, member states have generally tasked ASEAN with growing their economies and protecting their political systems. To these ends, ASEAN has concentrated more on regional economic integration than intra-, and also inter-, regional security pacts.

Can a limited security alignment be disentangled from a broader policy alignment, such as on economic matters? Ciorciari, a realist scholar, doesn’t believe that it can; a nation which aligns itself with China over the US for security reasons will invariably distance itself away from the US on economic matters too.[2]

While there may be a correlation, I would argue that any decrease in trade with countries which align with China over the United States is as much, if not more, due to the consequences of US non-alignment than it is to do with a change in that government’s trade policy. Taking Burma before its recent democratic transition as an example, US sanctions on the regime and the overt discouraging of Western firms from investing there isolated Burma and drove it further into China’s sphere of influence than it otherwise might have been inclined to. Obviously, promoting trade isn’t everything; the US was right to severely sanction a country that was so egregiously violating human rights.

Fortunately, ASEAN the institution is engaging both great powers; it is neutral. That said, the realist school tells us that nation states are first and foremost interested in furthering their own selfish self-interests. Neighboring states may join forces to balance against a regional hegemon, and indeed ASEAN is seen by some as a bulwark against a rising China.[3] Institutions, argue the realists, do not change interests and identities but rather facilitate cooperation only in so far as it in the interests of members to do so.

I disagree with the ASEAN balancing China thesis; ASEAN the institution doesn’t set policy, it is an amalgamation of different ideas and interests. As every member state has slightly different goals and aspirations, the association cannot present a clear and concise position on balancing or bandwagoning with a great power. It thus stays neutral.

Individual states do however have the freedom to follow their own bilateral interests. The Philippines for example is closely aligned with the United States, and now particularly so thanks to the significant assistance provided in the wake of the devastating typhoon Haiyan last year.

I would argue that this freedom to align is a testament to ASEAN’s maturity. It does not seek to constrain its members from branching out and forming all sorts of relations with non-member nations as long as it respects the overarching ASEAN norms. That isn’t to say this flexibility isn’t risky; the association’s survival depends on how it reacts to the myriad challenges local and global forces throw in its way. How members align is a major part of this.

A major change in the international system, such as America relinquishing its traditional role as the world’s security guarantor, would severely destabilize the region and could unravel the association. New security threats would emerge, and correspondingly would prompt new alignments with out-group actors which could prove threatening to in-group members.[4] Already, Cambodia and Laos have chosen to bandwagon with China, to the suspicion of other member nations.

Such alignments with outside powers are not new but have been discouraged by the ASEAN norms of regional autonomy and self-defense, and that of avoiding military pacts. ASEAN saw that most of the regions’ biggest wars had come from outside and wanted to prevent the great powers (then the United States and the Soviet Union, now replaced by China) from using the region as a pawn in their rivalry. These norms are also strongly tied to their collectively negative history with colonialism.

It is widely believed that the Southeast Asia Treaty Organization (SEATO), an America led security organization founded to counter communist influence in the region, collapsed because local leaders didn’t buy into its western alignment posture.[5] SEATO ran against the regional norms of non-alignment, the avoidance of military pacts and of sovereignty. ASEAN is mindful of this and has avoided taking sides in great power rivalries, going so far as to avoid commenting on polarized international issues, China’s new ADIZ being the most recent example.

I will conclude by arguing that limited alignments are sufficient to protecting US interests so long as the countries of Southeast Asia follow the five ASEAN norms and their shared commitment to liberal economics and free trade. ASEAN is institutionalizing those last two points with the implementation of the ASEAN Economic Community in 2015. America’s interests in the region – trade, security, respect for international law, and human rights – are better served by ASEAN’s gradual professionalization, a process which will over time trickle down to member states. Indeed it can be argued that ASEAN, leading by example, opened up Burma, Vietnam and Cambodia to international markets in the way bilateral US pressure never could.

Lastly, ASEAN is socializing China. By taking a neutral position in the great power rivalry, it is becoming the go-to to institution in Southeast Asia, both boosting its credibility on the international stage and pressuring China to abide by some its norms, again in a way US pressure could never do. This all takes time however, and the United States tends to get a little skittish when change is piecemeal. It should place a little more faith in ASEAN.

[1] John D. Ciorciari, The Limits of Alignment, Georgetown University Press, Washington D.C. 2010

[2] ibid

[3] Ross, ‘Balance of Power Politics and the Rise of China: Accommodation and Balancing in East Asia’, Security Studies, (2006) vol. 15, no. 3 pp. 355 — 395

[4]Walt, The Origins of Alliances (Cornell University Press, Ithaca 1987)

[5] A. Acharya, Constructing a Security Community in Southeast Asia (2nd edn., Routledge, New York 2009) p.63

Reforming Mexico’s Energy Sector

Mexico’s oil reserves in the easy-to-access shallow waters of the Gulf of Mexico are running low. Although North America is seeing a boom in energy production, Mexico is lagging, with crude output down half a million barrels a day since the 2009 peak. The lethargic state oil monopoly Pemex is unable to raise the necessary finance or muster up the expertise needed to address Mexico’s energy challenges and opportunities. For these reasons, last December, under the leadership of President Enrique Peña Nieto, Mexico passed constitutional reforms to allow for private investment in the energy sector.

Secondary legislation implementing the constitutional amendment, expected to have passed in late June 2014, has stalled in the Chamber of Deputies as the PRE, PAN and PRD, political parties, fight over the appropriate regulatory approach to energy sector liberalization. Economic nationalists wield significant political influence in this debate, with The Economist comparing Mexican ideals on the state ownership of oil reserves akin to America’s tradition of gun ownership. Still, panelists at a CSIS event on Mexico’s energy reforms believed the bills would be passed by September 17th and the legal and regulatory framework for environmental issues settled by December 21st, although other implementation challenges are sure to remain.

Pemex is at the center of this debate. As the dominant energy player in Mexico, the twenty-one proposed laws which make up the reform’s secondary legislation touch it profoundly. According to Fluvio Ruíz Alarcón, a Pemex board member, Pemex paid $69 billion in taxes and other duties to the Mexican government in 2012, funding 33.7% of the federal budget. As Mexico’s largest company, it also contributed 7.6% of Mexico’s GDP. After taxes and other transfers, Pemex has operated at a loss for 10 out of the past 12 years.

The secondary legislation will lower Pemex’s government transfers by some $5 billion, helping it meet its financial targets somewhat. More significantly, it will loosen the iron grip of the state on Pemex’s investment decisions. In 2013 for example, the Mexican Treasury cut Pemex’s operating budget by $2.5 billion and subjected the spending plan to a vote in the Mexican Congress. Pemex directors would like to see the transfers dealt with by the taxation agency rather than the treasury as this would help ensure Pemex’s operational independence. Despite this request for independence, Pemex has asked to retain monopoly licenses, or “Asignaciones”, on 31% of prospective resources – 82% of onshore reserves and 63% in shallow water. 

The reforms largely eliminate Pemex’s contractual and licencing exclusivity – it will be able to partner and compete with international actors for domestic contracts. Significantly, they will allow private parties to book oil reserves or the expected revenue-streams from them, for financial reporting purposes. The reforms also touch energy generation and transmission; the national energy utility, CFE, will be allowed freedom of contract.

Reform is essential, according to Jeffrey Eppink, President of Enegis LLC, because Mexico hosts over 160 bbl of oil, most of it inaccessible by Pemex’s technologically limited extraction arm. Mexico is also endowed with over 141 tcf of natural gas – the fourth largest unconventional reserve in the world. According to Marcelo Mereles, a partner at the energy research firm EnergeA, the secondary legislation should increase energy production to 3mbl/d by 2018 and 3.5mbl/d by 2025. Mexico has produced 2.5mb/d since 2009. 

North American energy interdependence is being hampered by Mexico’s protected and underdeveloped energy sector; the new constitutional amendments present a unique game changing opportunity to remedy this.

Several things need to be done concurrently to meet these ambitious goals. Regulating institutions need to implement all the new bills professionally and impartially; Pemex cannot be given special permitting preference. The proposed reforms call for upstream development to be contracted out on behalf of the state while downstream investment will be regulated through a system of permits. Regulators need to make these two schemes globally competitive in order to attract the best multinational oil firms. With midterm elections due in July of 2015, the government should push forward on a first round of open bidding by December 2014.

Pedro Hass, Director of Advisory Services at Hetco, points out that there exists an asymmetry of attention on production and regulatory reform, with the former sucking up most of the political oxygen. There is still profound uncertainty as to when the regulatory framework will be up and running, and when contracts are to be sent out. These questions are not being addressed by the Mexican political class, nor feature prominently in the county’s broadsheets. The Mexican public is sceptical of the energy reforms, not because they fail to understand the need for efficiency improvements and international competition but because there is widespread fear of corruption and, in the case of Pemex, managerial ineptitude.  Citizens doubt the economy will improve, or will see energy prices decrease. This unfortunately leads to worries about the durability of the reforms; with their economic legitimacy continuously challenged, worries abound that the next government will reverse the progress.

The fundamental conflict of the new regulations is the amount of discretion given to new regulatory entities. A rules-based regulatory framework would likely increase predictability for investors and limit bureaucratic excess but would also increase compliance costs and surely lead to the exploitation of loopholes. Conversely, a principal-based regulatory framework would likely lower compliance costs and cover a broader range of issues but would decrease investor predictability and give regulators broad discretionary powers. A balance needs to be struck. International investors will stream in to Mexico if regulators have a light hand.

Mexico’s oil industry also faces a human resource challenge. The National Hydrocarbon Commission estimates that it will need over 600 engineers to regulate the newly privatized sector but they currently only have about 50. Nationally, Mexico only produces about 150 petroleum engineers each year. Security is likely to be a big challenge, especially in the drug war scarred north, which is incidentally where Mexico’s largest untapped reserves of natural gas lay.

Pemex will be subject to international competition for the first time, and as a result is taking issue with several elements of the proposed secondary legislation. The end of permitting exclusivity will likely hit them hard, as will the inevitable need to cull economically redundant staff. The Mexican Petroleum fund is also likely to suffer, and with it government revenues. The secondary legislation will thus have to address the state’s dependence on oil revenue, Pemex’s operational autonomy, revocable assignments, the new regulatory agencies and corporate governance.

Finally, the reform’s global implications cannot be ignored; continued unrest in Middle East and Russia will lead investors to Mexico, despite formidable cartel violence in the country’s north. By leveraging Canadian and US technological expertise, and increasing corporate interoperability, all three NAFTA countries could see huge production growth. Asia however remains the most important export market. With a 25 mb/d crude deficit, it is hungry for new sources of energy. Pacific basin exports yield highest net backs for Mexican energy.

Only by clearly defining the sector’s goals will Mexico be able to regulate effectively and successfully transition Pemex from state-owned monopoly to regional champion. Inconsistency in the regulatory environment would dampen international interest in Mexico as a secure investment destination. Multinational oil firms will be well placed to invest in Mexico once secondary legislation is enacted and the regulatory environment becomes clearer.

The Cost of Inequality: Distributional Economics and its Impact on Development

Rising Inequality has wide ranging economic costs and casts an ever lengthening shadow on political stability. It is likely to be one of the most pressing politico-economic dilemmas of the 21st century.

May 4th, 2014

The study of the political economy emerged in the late 18th century as an industrializing England and France sought to understand the dramatic economic changes of the day in order to formulate policies to better manage future developments. Thomas Malthus, one of the most preeminent political economists of the era, famously predicted that overpopulation would overwhelm limited factors of production, leading to dangerous political upheaval and inescapably, a correction in the population through starvation, disease or war. Like every political economist since, he provided policy solutions to this imminent threat: that governments cut off assistance to the poor and, if necessary, forcibly limit their reproduction.

Malthus, and later David Ricardo, were wrong to assume productive capital was limited; agricultural productivity gains and the conquest of the Americas meant land was no longer the scarce factor of production the two economists believed would threaten the capitalist system.

That said, in the short run – and economic decisions are usually taken in the short run – limited factors of production can lead to enormous profits for the holders of capital. Such wealth accumulation can, because of political-economic policies, persist through the generations even after technology has made the initially scarce and profitable factor abundant.

Like Karl Marx before him, Thomas Piketty, author of the blockbuster Capital in the Twenty-First Century, attempts to provide an economic theory of everything – an all-encompassing model of the relationship between capital, growth and inequality.[1] To him, distribution, or redistribution rather, is the central issue in economics, and should thus form the backbone of the discipline and of how we think about growth. Where Marx saw capitalism as ultimately flawed because of the “infinite accumulation of capital” by its owners, Mr. Piketty understands capitalism in the 21st century as a product of political decisions largely benefiting the owners of capital at the expense of those trading their labor for wages.

Most importantly, Marx, Malthus and Ricardo failed to anticipate the effects of rapid technological and population change. With regards to inequality, such changes, and the rate of economic growth, are hugely important in reducing the relevance of wealth accumulated by previous generations.

This is why Mr. Piketty’s new book is so groundbreaking: the political-economic decisions governments take to protect wealth accumulation do little to spur economic growth while entrenching inequality. That is, inequality is a political choice, rather than a deterministic consequence of technological progress (skill-biased change) or globalized economic forces (superstar economics, in the industry jargon.) This conclusion is somewhat counter intuitive, and has important consequences for how we view and address the structural causes of inequality.

Mr. Piketty does not however delve into the relationship between inequality and growth, presuming rather ideologically (he is a socialist) that inequality is a problem in itself. He also assumes, rather blithely, that inequality will lead to conflict. This essay will look at the relationship between inequality and growth, and examine whether Mr. Piketty’s recommended redistributive policies would weaken growth. It will also explore the literature on inequality and social conflict, bringing data to Mr. Piketty’s assumptions.

Inequality and Growth

Economists largely agree that some inequality is integral to the effective functioning of a market economy and serves as the incentive needed for economic growth. Entrepreneurship would rarely be worth the risk without the opportunity of financial reward. Arthur Okun, an American economist, famously argued that societies cannot have perfect equality or efficiency, and must choose how much of one to sacrifice for the other.[2] How much to sacrifice one way or another forms the root question of almost all political-economy decisions.

Classical economic thinking has tended to assume that redistribution hurts growth, as higher taxes and regulations discourage work and investment.[3] Private sector losses are likely to be a rising function of the tax rate, given the convexity of deadweight costs; losses from redistribution are minimal when tax rates are low but rise steeply with the tax rate.[4]

More recent literature has recognized that redistributive policies need not inherently be detrimental to growth.  Investments in infrastructure, education and healthcare, paid for through taxes on property, pollution and inheritance for example, provide public goods and help address market imperfections. A redistributive tax code can increase the welfare of the poor, reducing society’s burden of caring for them and fostering entrepreneurship and risk taking.

The right redistributive mix has long been seen as a political question, couched in the language of compassion and morality. “Taxes are the price we pay for a civilized society” argued Oliver Wendell Holmes, a famously progressive US Supreme Court Justice. Barack Obama too, on the campaign trail in 2012, regularly spoke of the rich having to “pay their fair share”. Increasingly however, the question is taking on a purely economic dimension; high levels of inequality can, in the long run, harm the rich as well. Rising inequality worldwide, last as high in the 1920s, is leading to a reevaluation of inequalities’ economic costs.

Poor health and low productivity, correlates of poverty, hamper growth in rich but extremely unequal societies. In the United States for example, 16% of the population is believed to live below the poverty line, according to the US Census Bureau.[5] The poor die younger, have a higher birth rate, commit more crime and are less likely to have health insurance, passing on those and other burdens to society. Inequality may also reflect a lack of access by the poor to financial services, and thus fewer opportunities for them to invest in education or entrepreneurial activity. Redistributive policies which act as a substitute for risky borrowing on education and healthcare will yield positive economic dividends. This is the logic behind universal schooling and healthcare; they act as societal insurance schemes, helping the poor mitigate economic shocks.

Inequality may also have psychological impacts, like threatening public confidence in free trade, genetically modified crops and credit. The voting bloc most opposed to the growth boosting Trans Pacific Partnership, a free trade deal, is the economically disillusioned, formerly unionized middle class.[6] Stiglitz has stressed the role of political economy factors (particularly the influence of the rich) in allowing inequality to rise to dangerous levels.[7]

More worryingly, inequality may sow the seeds of conflict. Raghuram Rajan, now governor of the Reserve Bank of India, has written on governments’ response to inequality by boosting the availability of credit to poor households. When the credit stops flowing, as it inevitably must, the poor suffer foreclosure, penalizing interest payments and lowered living standards.[8] Kumhof and Ranciere have similarly underscored the importance of understanding the complex links between growth, inequality and political crises in light of the Arab Spring.[9]

Two papers by the International Monetary Fund have tried to shed light on the relationship between inequality and growth. Pinning down the relationship is tricky because every country responds to inequality differently. As Mr. Piketty illustrates in his book, the root causes of inequality is political choice, with structural explanations playing a secondary role.

In a 2011 paper Andrew Berg and Jonathan Ostry argue that inequality does not affect economic growth per se, but rather its duration.[10] Because it is much easier to get an economy growing than to keep it growing, this durational consequence of inequality is extremely significant when looking at economic performance. The authors look at 15 developing economies, plotting the relationship between the duration of growth spells and the Gini coefficient (a measure of income concentration ranging from 0, representing perfect equality to 100, where all income flows to a single person).

They find that closing half the inequality gap between Latin America (Gini: 50) and emerging Asia (Gini: 40) would more than double the expected duration of the former’s growth spell. More broadly, they find that a 10 percent decrease in inequality increases the length of a growth spell by 50 percent. There is however little consensus as to at which point further reductions in inequality begin to harm growth spells, or indeed growth itself.

They find three channels through which income inequality affects growth sustainability: credit market imperfection, the political economy and political instability. In the first – credit market imperfection – they argue that the poor may not have the means to finance their education, healthcare and entrepreneurship. That is, a more equal distribution of income would increase investments in human capital and thus fuel growth in the long run. In the political economy channel, they argue that in economically unequal countries, political power is distributed more equally than economic power, resulting in populist, growth damaging calls for tax raises and regulation. In the political instability channel, they argue that income inequality increases political risk, creating uncertainty that reduces investment incentives, impairing growth.

Because sustained economic growth is central to poverty reduction, these data have important policy implications. The authors are quick to point out however that, while increased inequality may shorten growth spells, poorly designed efforts to lower inequality could distort economic incentives, undermining growth and hurting the poor even more. They propose targeted subsides and improved economic opportunities for the poor, such as active labor market interventions to boost employment. Unlike Mr. Piketty, they do not recognize inequality as a problem rooted in wrongheaded political decisions, and indeed that is not the scope of their paper, but they do recommend political-economic interventions to right inequality.

Redistribution may also work to even out the business cycle, according to Barry Cynamon and Steven Fazzari.[11] Rising inequality reduced income growth for the bottom 95 percent of Americans beginning in about 1980, but the group’s consumption did not fall proportionally. To keep up, they borrowed ever more, increasing the fragility of their balance sheets. This was easy in a time of loose credit, and indeed such liquidity helped the economy grow. This fragility however eventually tanked the economy, and with it the consumption to income ratio for the group. The resulting balance sheet inundation, and inability to generate adequate demand, helps explain the prolonged recovery.

A more equal, more redistributive economy would have softened this fall by tempering the rise. For one, the bottom 95 percent would not have had to be as leveraged to ‘keep up with the Jones’” or any other idealistic vision of American prosperity increasingly out of reach to middle class citizens. More importantly however, redistributive government outlays are less cyclical, and may even grow during recessions, helping keep the economy healthy. This is significant when we look at the long term effects of preventable economic malaise, youth unemployment being the most obvious, on the long term growth prospects of an economy.

In another IMF paper, Berg, Ostry and Charalambos write that it may not be inequality itself that harms growth but rather government responses to reduce it that do.[12] “Even if inequality is bad for growth, taxes and transfers may be precisely the wrong remedy” they argue. They use a data set containing Gini coefficients of 173 economies over 50 years to look at the redistributive effects of government policies, like taxing and spending, and how they interact with inequality. The difference in Ginis between market income and net income after taxes and transfers allows the authors to plot the relationship between inequality and redistribution. In America, redistribution cuts the pre-tax and transfer Gini by 10 points; in Sweden, a more egalitarian society, redistribution cuts it by 23 points. Some economies, like that of Germany, are more unequal than that of Britain before redistribution, but less so after.

Interestingly, global median inequality has held steady over the past 50 years. Market inequality however has been rising steadily in OECD countries and falling in developing countries. Net inequality has also been rising in OECD countries over the past several decades as redistribution has not kept pace with rises in market inequality. Finally, the gap between market and net inequality is lower in developed countries, presumably because their redistributive tax and transfer systems are more extensive.

They find that more unequal societies tend to redistribute more, that redistribution appears to be benign in terms of impact on growth, and that lower net inequality is robustly correlated with faster and more durable growth (for a given level of redistribution). That level of redistribution, the authors calculate, is a difference of over 13 points between the net and market Ginis. In much of Western Europe, the gap is greater than this, possibly shortening a typical economic expansion.

Likewise, a high Gini for net income is correlated to slower growth in income per person. Loosening redistributive policies to the tune of 5 Gini points for example would knock half a percentage point off annual economic growth. Keeping redistribution constant, a one point Gini rise increases the risk that a period of economic expansion will end by 6 percent. All this to say, redistribution that reduces inequality will most likely boost growth.

That said, this is a generalization and the authors are quick to point that not all treatments for inequality are equal. Some lead to more equality at the expense of economic efficiency, such as nationalizations, while others promote both efficiency and equality, such as taxing land to fund apprentice schemes, or penalizing excessive risk taking in the financial sector. Infrastructure spending in particular is generally both pro-growth and pro-equality. “The macroeconomic effects of redistributive policies” they conclude “are likely to reflect a balance between different components of the fiscal package, and it would appear to be an empirical question whether redistribution in practice is pro- or anti-growth.”

r>g

Now that we have established that net inequality harms economic growth, and that redistributive policies tend to boost economic performance, it is important to look at the natural economic trends which fuel market inequality. Thomas Piketty’s new book provides some interesting answers to this question.

“If you’re going through hell, keep going” noted Winston Churchill, Britain’s wartime Prime Minister. Wars are hell; they maim, kill, destroy property and halt production. War also eats into a country’s capital stock – land, factories, raw materials and infrastructure – gradually reducing its prosperity and ability to produce. The chaos of the early twentieth century, and the redistributive Keynesian economic policies that followed, wiped out much of the world’s accumulated wealth. It also fueled inflation, reducing the returns rentiers expected from their capital. Out of hell, the post-war period was a great equalizer, and set the stage for decades of broad based economic growth.

Simon Kuznets was one of the first economists to look at the relationship between inequality and growth, concluding that in developed economies, inequality falls as economies grow. This ‘Kuznets Curve’ became the underpinning of modern economics’ approach to inequality and distribution.[13] One of the major arguments of Mr. Piketty’s book is that the curve is flawed – based on a limited post-war period where normal economic processes did not apply. Economies do not show a natural movement towards a more equitable distribution on wealth as they grow, he argues, but rather concentrate wealth in the hands of a few elite owners of capital.

Some forces push do for greater equality – note for example that global income inequality has fallen due to the rise of emerging economies. Piketty calls this spread of ideas and technology from rich areas to poor ones “the principal force of convergence”. This comes with an addendum: the countries which have most successfully caught up to the West have done so on the backs of high domestic savings rates, rather than foreign direct investment. China is the best example of the former, and Africa the latter; he argues that foreign ownership perpetuates institutional weakness because it creates incentives for autocrats to break contracts and expropriate foreign capital. The gains for Africa are mostly down to a transfer of knowledge rather than the economic benefits of industrialization. This analysis is flawed; economic autarky has never been a viable strategy for convergence. Africa’s failed states owe more to factitious ethno-religious infighting than failed nationalizations. Similarly, Africa’s booming states – Ghana, Angola and Nigeria – owe much of their wealth and stability to Chinese FDI and export markets for their goods. Oddly, Mr. Piketty does not seem to appreciate the transformative power of the internet in diffusing information and ideas, empowering the curious poor and bringing transparency to finance. He instead writes that knowledge is under the near monopoly of the state and therefor investment in it, or more likely underinvestment, does not make it a natural force of convergence.

At the same time, even greater forces push the global economy towards less equality, the most important of which is the ability of the rich to secure favorable economic benefits for themselves – a “force of divergence”. We see the consequences of this everywhere – inequality within the American economy is particularly stratospheric. In 2012, the top 1 percent of American earners had real income gains of 32 percent while the bottom 99 gained less than 1 percent.[14] Piketty points to big drops in top marginal tax rates since the 1980s, particularly in Britain and America, writing that “the size of the decrease in the top marginal income tax rate between 1980 and the present is closely related to the size of the increase in the top centile’s share of national income over the same period.” This soaring inequality of labor income, uncorrelated with rising productivity growth, is just one of two dynamics at play.

The second dynamic is the ratio of private wealth in an economy to GDP. It was only a little higher than it is today by the end of the 19th century, tumbling during the first half of the 20th century and rebounding thereafter. Mr. Piketty introduces the “fundamental force for divergence”: r>g where r is the return on capital (rents, profits, dividends, etc.) and g is the rate of economic growth.

If the rates of return on capital are greater than economic growth, and he proves that they generally are, the owners of everything from intellectual property to scarce land, mineral resources to fine wines, are accumulating vast, and Piketty would argue disproportionate to their effort, sums of wealth. By the same token, a slowdown in economic growth leads to greater concentrations of wealth. Mr. Piketty estimates that global growth rates will slow to about 1.2 percent by the end of the century, quite a fall from the 4 percent of the past 60 years. As growth slows, the ratio of wealth to GDP rises.

Between 1700 and 2012, population growth accounted for about half of average GDP growth, Piketty finds. As population growth slows to Victorian era levels, the breakneck change in individual fortunes of the 20th century will slow dramatically. Indeed Japan and Italy, both rapidly aging and low growth economies, have the highest ratios of wealth to GDP in the world.[15] This growth slowdown is important to inequality because of the power of cumulative growth. A stagnant economy, over long periods of time, impedes social change and entrenches class structures. In the centuries leading up to the industrial revolution, where growth rates averaged 0.2 percent, culture, art and technology were practically static. The lengthy shadow of past, inherited wealth suffocated all attempts at economic and political reform. It may be about to do so again.

Inflation

One of the primary ways the owners of capital guarantee that r>g is through the control of inflation. In an inflation free environment, as was much of the 19th century under the gold standard, public debts were managed over the course of several decades by running large budget surpluses. Elite rentiers collected substantial income from their holdings of public debt, paid for by public taxation out of funds which would have otherwise been earmarked for education or healthcare. Public debts of the postwar period by contrast were inflated away rather quickly, with bondholders grudgingly accepting negative yields in exchange for security. Resources once paid out to rentiers were instead diverted to funding the booming welfare state, lowering inequality. To quote Mr. Piketty: “Debt is the vehicle of important internal redistributions when it is repaid as well as when it is not.”

Federal Reserve Chairman Paul Volcker’s inflation targeting in the early 1980s got the financial pendulum swinging back the other way. By the mid-1970s, the ranks of government creditors included plenty of non-rich persons – individual investors, pension funds and savers. As dogged stagflation ate into savings, support for disinflation grew, with creditor interests (preserving the value of money) being put ahead of worker interests. Modern inequality has its roots in this policy shift.

The only way to constrain inflation was to squeeze wage growth, and labor’s share of income. Because in the US labor’s cost as a proportion of business expenses averaged 70 percent, constraining wage growth was seen as the easiest way to rein in inflation. “Any time wages accelerated, central banks tightened monetary policy, pushing up unemployment and squeezing labor’s share” writes Ian Harnett of Absolute Strategy Research.[16] As a corollary, corporate profits have exploded and are now at post-war highs as a percentage of GDP. The rich, who own most corporate shares, have benefited accordingly. They have also exercised their political influence to lower capital gains and inheritance taxes, levies which disproportionality touch the rich.

More inflation won’t by itself reduce inequality. Above target inflation squeezes real wages, and Piketty’s research has shown that the lower-middle class, which tends to keep a small and liquid rainy day fund, is most affected by the inflation tax. Unlike the rich, they cannot use intermediaries like property to shield their wealth because such safety is unaffordable, or they misunderstand the effects of inflation.

Conclusion

Inequality matters; it eats into the duration of economic booms, stymies human progress and creates a host of socioeconomic ills. Unless countered – by war, economic shocks or redistributive polices – inequality will continue to rise. More likely, political leaders’ unconcern over inequality’s rising costs will lead to society’s potentially violent rejection of unjust institutions. Some countries, particularly in Northern Europe, do manage to redistribute effectively. They show that egalitarian economies can grow robustly, and incidentally score the highest on measures of human development.

Inequality however is a global economic phenomenon, and in time will require global solutions. Mr. Piketty recommends a global tax on capital of about 10 percent a year for the biggest estates. A utopian idea he admits, but one which needs to be discussed in light of inequality’s costs and capital’s tendency to grow faster than output. A slightly more realistic proposal, unmentioned in his book, would be a universal basic income – a kind of inheritance for all.

Mr. Piketty concludes that, like at the turn of the 20th century, we find ourselves at an economic juncture. Distributional worries are back, unaided by lackluster economic growth, falling real wages and the prospect of deflation. Few people are unconcerned that the world’s richest 85 people have a combined wealth exceeding the poorest 50% – or 3.5 billion souls. We look back at Malthusian fear-mongering with the smugness of hindsight, forgetting that the early twentieth century saw 100 million war deaths and another 100 million from the Spanish Flu.

Distributional issues are difficult to discuss, principally because until recently neo-liberal assertions that market interventionism constrains growth monopolized almost all policy debate. In the interests of political stability, human development and continued economic growth, this new debate needs to mature into concrete public policy responses.

 

[1] Thomas Piketty Capital in the Twenty-First Century. Belknap Press, 2014.

[2] Free Exchange, ‘Inequality v Growth’ The Economist, March 1st 2014

[3] A. M. Okun, ‘Equality and Efficiency: the Big Trade-Off’ (1975, Brookings Institution Press, Washington D.C.)

[4] Barro, “Government Spending in a Simple Model of Endogeneous Growth” Journal of Political Economy 98(5): 103–25.

[5] DeNavas-Walt, Carmen, Bernadette D. Proctor, and Jessica C. Smith, “Income, Poverty, and Health Insurance Coverage in the United States” U.S. Census Bureau, Current Population reports 2013: 60-245

[6] Thomas B. Edsall, ‘Is the American Middle Class Losing Out to China and India?’ The New York Times April 1, 2014

[7] Stiglitz, The Price of Inequality: How Today’s Divided Society Endangers Our Future. W. W. Norton & Company, 2012.

[8] R. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy. Princeton University Press, 2010.

[9] Kumhof, M., and R. Rancière, “Inequality, Leverage and Crises” IMF Working Paper 2010: 10/268

[10] Berg, A., and Ostry, D., “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” IMF Note 2011: 01/04

[11]Barry Cynamon and Steven Fazzari, “Inequality, the Great Recession, and Slow Recovery” Working Paper. January 2014. Avaliable at SSRN: http://dx.doi.org/10.2139/ssrn.2205524. Accessed on 4.25/2014

[12]Ostry, Berg, Tsangarides. “Redistribution, Inequality and Growth” International Monetary Fund 2014.

[13]Acemoglu, Daron, and James A. Robinson. “The political economy of the Kuznets curve.” Review of Development Economics 6, no. 2 (2002): 183-203.

[14] Buttonwood, ‘Collateral Damage’ The Economist, March 25th 2014

[15] Free Exchange, ‘All Men are Created Unequal’ The Economist, January 4th, 2014

[16] Buttonwood, ‘Collateral Damage’ The Economist, March 25th 2014

Canadian Diplomacy, Keystone XL and the geopolitical implications of North American energy independence

Image

I feel I need a little bit of a challenge so instead of the usual lecture on what poor countries need to do I’m going to call on the United States to get its act together. This post is a little long, so to summarize, I will argue that the Keystone XL pipeline should be built and all US crude export controls be lifted. US domestic politics has thus far gotten in the way; despite being outspent tenfold by the oil lobby, the environmental movement has thus far managed to block the pipeline’s approval. Approval would however give both economies a needed boost, as well as help put North America on a path towards energy independence. By purchasing fossil fuels from a friendly neighbor rather than Middle Eastern autocrats, the United States would yield foreign policy dividends, increase its energy security and give its economy a much needed boost.

The Project

The Keystone XL Pipeline is a proposed 1,179-mile crude oil pipeline beginning in Hardisty, Alberta and extending south across the US-Canada border to Steele City, Nebraska. It would connect the Canadian oil sands to the existing Keystone pipeline network in the United States. It would transport around 830,000 barrels of crude oil a day, most of it from Canada’s oil sands to refineries in Port Arthur, Texas.

Most of the pipeline has already been built; at issue is whether the President of the United States should authorize the 1,179 mile pipeline extension across the border. It proponents claim that it is “a critical infrastructure project for the energy security of the United States and for strengthening the American economy”[1].

The Canadian government, oil companies and union groups have spoken in favor of presidential approval. They argue that it will create construction jobs and ease the import of oil and gas from a friendly neighbor, putting North America on a path towards energy independence. Refineries in Texas are also in favor because they have already spent millions upgrading their plants to refine Canadian crude in anticipation of approval. Furthermore, the Keystone XL Pipeline will support the growth of crude oil production in North Dakota’s Bakken Formation by allowing American oil producers there easier access to refineries along the Gulf Coast.

Environmentalists, ranchers and landowners subject to eminent domain suits are opposed to Keystone XL. They argue that its construction would be a step backwards in the fight against climate change and make the US economy ever more dependent on fossil fuels by retarding investments in renewable sources of energy.[2] Ranchers and landowners also fear the consequences of a possible leak. Some Native American tribes have also voiced objection on religious grounds.[3]

Americans as a whole support the project, by 66% to 23%, according to a recent Pew Research center poll.[4] The US State Department, in an exhaustive impact assessment released in February, estimated that approval would create about 2000 construction jobs, but only 50 permanent jobs, and contribute $3.4 billion to the US economy.[5]

Pipeline Politics

Minutes after the release of the State Department report, Canada’s Conservative government launched an online ad campaign bluntly calling on the US President to “approve Keystone XL now”. Stephen Harper, the Prime Minister of Canada, has also called the approval a “no brainer”, would “not take no for an answer” and threatened to sell the Albertan oil to Asia.[6]

Construction is a priority for Conservative government of Stephen Harper; throughout 2013, the Canadian Prime Minister dispatched bands of ministers to Washington D.C. to lobby their counterparts in Congress and the White House. At the most recent meeting of the G8 in London, Stephen Harper personally brought up the pipeline with Barack Obama.

Mr. Harper has indeed spent a lot of political capital in trying to get the American president to approve the project. He hails from energy rich Alberta, and his electoral prospects are intractably to be tied to the continued growth of Canada’s resource-based economy. Mr. Harper has often referred to Canada as an “energy superpower” and sees the efficacious exploitation of the country’s bountiful mineral wealth as an important component of his Prime Ministerial legacy.[7]

The Canadian government is believed to have spent over $25 million on pipeline related advertisements and lobbying in 2013. Pro-approval ads have sprung up in the Wall Street Journal and Politico, the latter an online journal for political junkies. Earlier this year, bus and metro stops near the Capitol were plastered with advertisements, paid for by the Canadian government, emphasizing Canada’s role as a reliable energy supplier and “world environmental leader” on energy issues.

Government efforts however pale in comparison to spending by industrial groups such as the American Petroleum Institute, who have together quaffed up an estimated $178 million on advertising, lobbying and promotion tours in 2013.[8]

A Bloomberg analysis on corporate lobbying titled “Keystone Pipeline Support Enlists Oil Firms to U.S. Jews” found 48 groups that had lobbied on the proposed pipeline during the first three months of 2013.[9] Thus far their biggest success has been to discourage the use of the phrase “tar sands” while promoting the less dirty sounding “oil sands”.

The absence of concrete results in the face of such torrents of spending can only be explained by the complexities of domestic politics. While America’s carbon emissions have been declining since 2009, Canada’s have been rising. South of the border, shale gas is replacing coal for energy production while ever increasing Canadian oil production is driving emission rises there.[10] Stephen Harper has rejected the opposition Liberal Party’s plans for a price on carbon, and has issued little more than draft regulations for industrial polluters.

This environmental laissez faire, while popular with his Conservative constituents, has significant consequences across the border. In economies as tightly intertwined as that of Canada and the United States, domestic policy is not created in a vacuum. President Obama has always been skeptical of the pipeline, and particularly its approval’s domestic political consequences. Environmentalists are amongst his strongest supporters. In 2008, candidate Barack Obama promised to “free America from the tyranny of oil once and for all”.

Mr. Harper’s environmental intransigence is unlikely to do much to convince Mr. Obama of the project’s environmental bona fides. On both sides of the border, the Keystone XL pipeline has become a symbol and rallying cry for environmental groups. Tens of thousands have demonstrated against it and thousands more have directly disrupted operations by chaining themselves to equipment and laying across access roads. This is set to continue; over 50,000 activists have signed a pledge to physically resist the construction of the pipeline if approved.[11]

On July 24th 2013, President Obama, in an interview with the New York Times, badgered Canada about its environmental record and chided the project backers’ claim to it being a jobs plan. In diplomatic terms, this amounted to a slap in the face to the Canadian Prime Minister. The Canadian media and diplomatic corps rather stereotypically took it in stride, with only Gary Doer, ambassador to the United States, gutsily pointing to a State Department report that the pipeline would create over 42,000 jobs.

Although no one will readily admit it, the delay has strained an otherwise amicable relationship. Canadian diplomatic behavior has been characterized as docile and malleable throughout this affair but things may be changing. The spending, on advertisements, junkets and conferences by the Canadian government is unprecedented. In the 1950s, a similarly significant infrastructure project, the Saint Lawrence Seaway, was repeatedly held up by the American Senate, to quiet Canadian irritation.

This time, Canada has enlisted the help of American unions, energy companies and, through its American consulate network, regional politicians, to sell the project across America.[12] In January, speaking to the U.S. Chamber of Commerce, Canada’s foreign minister complained that the United States owes Canada a response on the Keystone XL pipeline, stating that “we can’t continue in this state of limbo.”[13] Although approval is ultimately up to the President, the hope is that political expediency and a cacophony of pro-pipeline voices will force him to acquiesce.

Whether this public diplomacy – the communication with foreign publics to establish a dialogue designed to inform and influence – strategy works remains to be seen. In Canadian politics, this is known as a Team Canada Mission. Although led by the Prime Minister, provincial ministers, cabinet secretaries and the diplomatic corps work in unison to promote Canadian business development and long-term trade and investment opportunities.[14]

So far, Mr. Obama seems content on taking his time. Unfortunately, the pipeline has begun to be associated with the Republican Party, which has officially pushed for its construction for over a year. This could make Mr. Obama even more hesitant to approve the project as it would be tantamount to giving the opposition a win – political suicide in an election year.

Adding to Canada’s woes is the American surge in hydraulic fracturing (“fracking”) which has led to some predictions of American energy independence by 2035.[15] Mexico too has begun to liberalize its energy sector, and looms as a potential rival to Canadian oil. Its oil is sweet (it contains less Sulfur than Canadian oil), which is what most American refineries already process, and is less environmentally damaging. Stephen Harper, Republicans, unions and the oil industry must do all they can to secure Keystone’s approval before market forces send interest gushing elsewhere.[16]

The Geopolitics of Keystone

Keystone XL approval would have consequences far beyond North American shores. It would indeed be a boon to America’s allies around the world. Canadian crude shipped through America could, if export controls were lifted, compete with extortionate suppliers like Russia.

In Europe, this could lead to a weaning of the continent off Russian oil and gas and would deal a near fatal blow to the energy-export reliant Russian economy. Mr. Putin could eventually divert Europe bound oil and gas to China but the infrastructure needed to do this in significant quantities is still decades away. A threat by Mr. Obama to lift export controls, which he can do if he deems it in the national interest, would be a potent geopolitical stick in the current spat with Russia over Ukraine.

Lifting export controls could make American energy prices rise slightly, but this would only encourage more drilling, cushioning the upswing. Moving the world away from coal and towards oil and natural gas would also be good for the environment, in that a cleaner fuel is displacing an exceedingly dirty one.

Japan too sources a large share of its energy imports from Russia and is vulnerable to supply disruptions of Middle Eastern energy shipped through the straits of Malacca and Hormuz. Oil and gas from North America would alleviate this strategic vulnerability somewhat and make it harder for China to cut off Japanese energy shipments in a crisis. Furthermore, in Asia natural gas sells for three times its price in North America; in Europe double. Not only are there huge profits to be made from this price spread but it would tighten fraying alliances.

Approval would also lessen future oil shocks by turning America into a swing producer. Coupled with oil and gas from fracking in Texas and North Dakota, the United States could moderate the booms and busts of international energy markets by continuously adjusting domestic output. Canada, America’s closest ally, would readily boost production to stabilize prices in response to a global supply shortage.

Finally, North America would be consuming North American energy, which means money previously finding its way into the coffers of autocrats in the Middle East and South America would now flow into the pension funds of teachers and other shareholders. David Woo of Bank of America/Merrill Lynch notes that America’s petroleum deficit has fallen to 1.7% of GDP while Europe’s has grown to nearly 4%, the consequence of which is a dollar and an economy less sensitive to oil prices.[17]

This newfound energy independence should not however serve as an excuse for increasing American isolationism. A decade of war and bloated government budgets have led to calls on both sides of the political aisle for disengagement from far away conflicts. Why police the Middle East if America can supply its own energy? The newfound fortune should lead to a reevaluation of America’s foreign policy, they argue.

This is not politically, economically or geo-strategically sensible. Firstly, the domestic political argument is intellectually indolent. America’s strength at home is a product of its influence overseas. A step back from international obligations will invariably lead to threatening instability abroad with dangerous consequences at home (note the costs of US disengagement from Afghanistan after the Soviet withdrawal in 1989).

There is also a strong economic case for continued American engagement in international energy affairs. The price of oil depends on global supply and demand; America is not insulated. Middle Eastern and South American oil will affect prices around the world for the foreseeable future. It is thus in America’s interest to keep shipping lanes open and not, say, let the Chinese do the job. For all the Chinese talk of rising peacefully within the international system, only America can guarantee the continued respect of international norms such as the freedom of navigation and trade.

Lastly, American foreign policy should not bow to the temptations of isolationism; such retrenchment invites other powers to fill the security and diplomatic vacuum. China is already doing this in parts of Africa long forgotten by American diplomats, businesspersons and the military. This unchecked expansion of its sphere of influence is adverse to American interests and the US-centric global system. The current crisis in Ukraine was at least partially caused by the allure of subsidized Russian gas. Europe’s unwillingness to stand up to Vladimir Putin’s intimidation rests in no small part to their unfortunate dependence on Russian gas. Arizona Senator John McCain recently called Russia “a gas station masquerading as a country”; unfortunately for Europe, it’s the only gas station, and it has a political agenda.

Saudi Arabia fears that the US, its principal security guarantor against an Iran led ‘Shia crescent’, may be pulling out of the Middle East. It has voiced extreme dissatisfaction with the foreign policy of the administration of Barack Obama, who it accuses of dereliction of duty in the region. American withdrawal from the Middle East due to energy independence would be extremely destabilizing, handing power to regional strongmen and possibly encouraging an arms race between the Gulf States and Iran. The former have recently gone on a military spending binge to ostensibly prepare for a conflict with Iran unchecked by an American security guarantee.[18]

To conclude:

Canada and the United States are on track to becoming the world’s leading petrostates. This has three distinctive advantages. Firstly, if the Keystone XL pipeline is approved and crude export controls are lifted, North American energy could fuel much of the developed world, giving it a reprieve from bullies like Vladimir Putin and Cristina Fernández de Kirchner. Unlike oil from OPEC, a cartel dominated by despotic regimes, Canadian oil doesn’t come with strings attached. Secondly, North America, with its hydraulic fracturing and the exploitation of its oil sands, would set an example for environmentally conscious Europe that could lead to a reevaluation of its failed renewable energy strategy and reliance on Russian gas. Thirdly, a world with America as swing producer would experience fewer oil shocks and a more predictable business environment.

President Obama should approve the Keystone XL pipeline – it is privately built, provides thousands of shovel ready jobs, and yields extremely favorable foreign policy dividends by shifting petroleum power away from the volatile Middle East and an obstinate Russia.


[1] ‘Keystone XL Pipeline Project’ TransCanada, accessed 3/12/2014 <http://www.transcanada.com/keystone.html&gt;

[2] ‘Keystone XL Pipeline’ Friends of the Earth, accessed on 3/12/ 2014 <http://www.foe.org/projects/climate-and-energy/tar-sands/keystone-xl-pipeline&gt;

[3]  Rob Hotakainen “Native Americans vow a last stand to block Keystone XL pipeline” McClatchy DC (Feb 17, 2014)

[4] Juliet Eilperin “The public’s interest in climate change is waning” The Washington Post (April 2, 2013)

[5] ‘New Keystone XL Pipeline Application’ United States State Department, accessed 3/15/2014 <http://www.keystonepipeline-xl.state.gov/&gt;

[6] “A Pipeline Runs Through It” The Economist (Feb 8, 2014)

[7] Jeremy van Loon and Rebecca Penty, “Canada at Crossroads in Bid to Become Energy Superpower” Bloomberg (December 2, 2013)

[8] Yves Engler “Canadian Government Deploys Money, Diplomacy for Keystone XL” Truthout Magazine (June 21, 2013)

[9] Laura Litvan and Jonathan D. Salant, “Keystone Pipeline Support Enlists Oil Firms to U.S. Jews” Bloomberg (April 29, 2013)

[10] “It’s hard to XL” The Economist (July 31, 2013)

[11] Ibid at 7

[12] Ulian Beltrame and Mike Blanchfield “Harper government tells Canadian diplomats to follow the money” The Vancouver Sun (Nov 27, 2013)

[13] Charles Krauthammer, “Stop jerking Canada around” Washington Post (23 January, 2014)

[14] ‘The Canadian Trade Commission Service’ Government of Canada, accessed on 12/3/2014 <http://www.tradecommissioner.gc.ca/eng/trade-missions/previous-missions.jsp&gt;

[15] Rick Ungar “IEA Report: USA Set To Become Number One Oil Producer By 2020-Energy Independent By 2035” Forbes (November 12, 2012)

[16] Ibid at 6

[17] “Saudi America” The Economist (Feb 15, 2014)

[18] Catherine Boyle, “Arms race on again as Middle East and Asia jostle” CNBC (February 7, 2014)