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Historical aspects of the economic warfare in the interpretation of Christian Harbulot

Gagliano Giuseppe

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Photo by Aaron Mello on Unsplash

Christian Harbulot, director of the Economic Warfare School in Paris, provides an historical reconstruction of the economic balance of power between states. In this study, he demonstrates that the strategies that states put in place in order to increase their economic power – and their impact on the international balance of power – can only be interpreted through the concept of economic warfare.

According to Harbulot, the true goal of these economic clashes has so far been hidden. Therefore, there is no academic discussion or understanding of this topic that is capable of providing an effective reading of international relations. There are many factors that will potentially trigger tensions between states in the future: the crisis of liberal principles promoting a positive view of economic development and globalization as a tool for establishing peace between nations; gradual resource depletion; energy issues; challenges to the Western economic leadership posed by the process of deindustrialization and the development ambitions of emerging economies.

This perspective sheds light on the importance of recognizing the legitimacy of the concept of economic warfare and lay the theoretical foundations to analyze the economic strategies states adopt to increase their power. In Harbulot’s opinion, the principles of economic warfare can be historically retraced in the fight for survival and for the control of resources and territories. The first example of economic warfare in history is the incursions of the nomad populations aimed at raiding the wealth of sedentary populations. In modern times, the economic warfare increased its spatial scope so that maritime and terrestrial commercial routes became the theater of continuous clashes for the control of some specific resources.

At that time, maritime piracy became an effective tool to exert power. In fact, the British pirates – that were attracted by trade routes between Europe, Africa and America, became the ancestors of the British Royal Navy. Both at sea and on the ground, the economic dimension became a key feature in military and diplomatic operations. By the end of the Middle Age, some kings used the economic power in order to support their military actions. An example of this is the war between the French king Louis XI and Charles I of Bourgogne: the French king commanded his fleet to block corn and herrings supplies to the Flanders (in the kingdom of Bourgogne), convinced the bankers to stop funding his rival and encouraged the hosting of fairs in Lyon in order to reduce the money flux to Geneva, which at the time was the trade hub between Bourgogne, Germany, and Italy.

In the 17th century, the newly created states considered the security of their territory (cities and countryside) as a strategic priority. In this time, the Seven United Provinces of the North created the first model of sanctuary area, meaning the securitization of a given territory from any kind of attack from the enemy. A net of fortresses and natural barriers like rivers was meant to protect the Provinces from the attacks coming from Spain. Similarly, Vauban’s France built up fortifications along the frontiers of the newly acquired territories in the north. This defense system led to the concept of “pré-carré” (squared field) that made reference to the geometric shape coming out from the disposition of these fortifications on the map that looked like a garden, divided in different flowerbeds. From then, this term evolved to nowadays’ meaning of “external sphere of influence” from the diplomatic, military and economic point of view.  In order to guarantee their territorial integrity, states also exploited the military capabilities of an allied state in exchange of economic concessions. Portugal, for instance, signed an alliance treaty with the United Kingdom in 1373 in order to get its protection against Spain’s attempt to incorporate it. If at the very beginning this alliance was set up between pairs, later on it became the framework for the establishment of British protectorate over Portugal, so that for centuries the UK offered military protection in return of financial and commercial control over Portugal. Economic warfare has always been a feature of each stage of colonization, from the Roman Empire to the maritime empires established in the 16th century that gradually acquired control of natural resources and trade routes. Human trafficking is the most evident example of how economic interest impacts power relationships. In this regard, the colonization process of North America clearly shows the overlapping of conflicting dynamics of different economic interests.

The exploitation of American settlers in cotton plantations as well as the fiscal policy and the trade restrictions applied, led Great Britain and its colonies to war. Harbulot mentions this historical case to show how the control of trade routes is a key feature of economic clashes between states. In the 16th century, before becoming an Empire built up on its maritime trade power, Great Britain was a poor country with no military power. At that time, Spain and Portugal dominated the sea routes. When the British decided to became a maritime power, they started with piracy actions threatening the superiority of the enemies’ fleets.

Under the reign of Elizabeth I, the British pirates started pillaging Spanish and Portuguese ships carrying precious metals from South America. Afterwards, the British started expanding their trade networks to Turkey, Russia, the Caribbean and Asia. Finally, in 1707 the birth of Great Britain out of the fusion between Reign of Scotland with the Reign of England, led to the creation of one of the greatest free trade area of the time and to the first model of mass consumption in the world. During the 17th century, the British tried to exploit the great trade potential of British territories overseas and established the East India Company that paved the way to the colonization of India.

The colonial aspirations of Great Britain led to a military escalation that was necessary to defeat local sovereigns opposing the British hegemony, and to face the rivalry with other European powers. Great Britain went to war with the Netherlands (1652-1784) to win the control of the main trade routes with their colonies, which was threatened by the dominant position of the Dutch company of East India. Again, the necessity of securing maritime routes, led the British Empire to many other wars like Afghanistan (1839 -1842 and 1878 -1880) in light of contrasting Russia’s expansionism in India; the opium war with Chinese Empire (1839-1842 and 1856-1860) in order to force the Qing dynasty to open up to world trade; the occupation of Egypt in order to control the strategic platform in Cairo; the Boer wars (1880-1881 and 1899-1902) to ensure strategic control over Cape Town. After taking into account the British case as an example of how the ability to control sea routes is a key asset in geostrategic clashes, Harbulot analyzes the overlapping between war and economics that became evident for the first time during the revolutionary and Napoleonic wars (1792 – 1815).

William Pitt – British Prime Minister at the time – tried to preserve Great Britain’s predominant position in international trade. His strategy aimed at controlling the sea routes and establishing an indisputable maritime advantage through the Royal Navy – which was the only British force that could compete with France’s military capacity. The British military fleet was therefore empowered with 105 ships, whereas the French one could count on only 70. While Prussia – Great Britain’s ally – was able to contain France and its allies on the continent, the British fleet weakened France’s economic potential through preventing its access to the sea routes. For the first time in history, the economic warfare became global and delineated two blocks: on the one hand, Great Britain put in place a maritime block against France; on the other hand France locked the access to British exports to Europe.

The original feature of these two blocks consisted in the fact that both states wanted to adopt economic retaliation strategies to win the conflict. For example, Russia’s withdrawal from Napoleon’s continental block triggered Napoleon’s Russian campaign, that had disgraceful consequences for the French Emperor. The overlapping between traditional and economic warfare paved the way to some mechanism for economic warfare that were kept in place even in peacetime. By the end of the 18th century, France’s industry resulted to be significantly weakened by the military efforts carried on during the revolutionary wars. Napoleon then chose the scientist Jean-Antoine Chaptal, to reform the French industry and protect it from Great Britain’s trade threats.

In addition, Napoleon instructed the National Industry Encouragement Society to detect the strength and the weaknesses of the British economy: France was willing to do everything in its power in order to fill the twenty-year gap with the British, even smuggling machineries that were illegally purchased or stolen in Great Britain. In the framework of the continental block imposed by France, Napoleon consolidated this system of economic defense through a militarization of the custom check-points (whose officers in 1815 represented 20% administrative personnel of France besides the army). Despite the costs of the wars with France, Great Britain managed to keep its advantages: the industrial revolution that had started long before compared to the rest of the continent made British products more competitive; British colonies ensured a significant supply of raw materials and British naval supremacy allowed the control of the main sea routes.

It was paramount for London to reduce trade barriers in order to export its products to Europe, therefore the British government adopted the first techniques of economic warfare peacetime. In particular, a commission led by the political economist John Bowring was instructed to negotiate with French authorities for the opening up of trade. What Bowring did in reality, was lobbying for the creation of groups supporting British liberal trade in France and using the local press to influence public opinion that was the main tool to reach this goal. It was only with WWI, though, that the principles of economic warfare were formalized.

Already in 1914, in light of the likely long duration of the conflict, the powers involved elaborated the typical practices of the economic warfare: i.e. reducing the availability of materials for the enemy’s army, and raw materials for its industry – with an extremely negative impact on the population –  blocking trade and finance flows that directly hit the enemy’s food supplies. In addition, over the course of the conflict, some specific structures dedicated to the economic warfare were created. In 1915, the French Ministry of War set up a Control Section responsible for collecting necessary information to support economic warfare. Similarly, Great Britain created an independent organization, the War Trade Intelligence Department, attached to the Ministry of Foreign Affairs. In 1916, Italy set up a special office entrusted with collecting and checking economic news, attached to the Ministry of War.

These structures were coordinated by an Inter-allied office located in Paris. During the conflict, economic warfare actions became more and more targeted against international objectives and supported by military operations, which became more sophisticated thanks to the development of aviation technologies. However, in 1918 there was no general consensus between France, Great Britain and the United States about the goals to reach. Paris wanted to use economic warfare to force Germany to surrender and accept international control on its possession of raw materials, so that France could still have the upper hand. Washington was aware of the leverage the economic warfare could play to stop Germany’s economic expansion and get to a peace treaty, however its main interest was to stress the liberal principles and play a dominant role in international trade; London aligned itself with the United States while keeping its focus on its economic interests. As the conflict ended, the structures dedicated to economic warfare were dismissed but were restored after the break out of WWII. In 1939, Great Britain created an actual Ministry for Economic Warfare, with similar tasks of the dismissed War Trade Intelligence Department.

In June 1940, Prime Minister Winston Churchill set up a new service called Special Operations Executive – that was basically the offensive component of the Ministry of Economic Warfare – and entrusted it to conduct sabotage operations on the continent and fuel uprisings in the territories occupied by the Germans. At this stage, the interaction between war and economy shed light on the problems related to the economic warfare. However, in the second half of the 20th  century, this topic was overshadowed. On the one hand, during the Cold War, Western bloc countries were keen to cover the economic disparities between them and powered their ideological projection against the Soviet bloc. On the other hand, the United States – the new global superpower – elaborated their version of the British strategy of influence and promoted the free trade theories and competition as the main model for the Western world economy.

According to Harbulot, an effective analysis of the economic warfare must consider the evolution of the methods states used to conquer territories, increase their trade and power. Over the 19th  century, states preferred to conquer markets (through economic warfare) rather than territories (through traditional warfare) in order to acquire more influence on the international level. Harbulot identifies the cases of Japan and Germany because of the importance these states gave to the seek for a “vital space”, to be conquered through territorial acquisition and trade influence. In 1854 U.S. commodore Matthew Perry forced Japan to open up its ports to Western powers. However, in 1867 Mutsuhito ascended the throne of Japan and decided to reverse the established balance of power. His modernization policies aimed at filling the gap with major Western economies and hinder their leadership.

The Meiji Restoration – whose slogan was “Enrich the country, strengthen the military” – was framed in a policy aimed at acquiring a comprehensive expertise in many fields, following the example of the leading countries in a given sector. Japan also pursued an expansionistic policy through the annexation of Korea and claimed a trade protection on China – that threatened the United States’ interests in developing business ties with the country. Japan’s main goal was to establish a sphere of regional co-prosperity with East Asia countries, occupied by the imperial army. Therefore, the Japanese empire occupied Manchuria and founded the state of Manchukuo, a classic example of the reproduction of military systems invented by the Portuguese and then imitated by the Dutch and the British. The Japanese combined the model of the Company of India with the one of the American railroads to create the Railroad Company of Manchuria. This latter was in charge of the administration of Manchukuo and of the management of the Japanese occupation troops; it possessed its own police forces, a central bank and even a merchant fleet. The State of Manchukuo was test site for the new approach to increase state power through the economy.

The case of Germany is quite different. Over the course of its history, Germany constantly sought to acquire new territories to guarantee food supplies for its population, as German lands were covered with forests and difficult for farming. By the end of the Middle Ages, German settlers started colonizing the lands of East Bavaria. While acquiring new territories was not always a peaceful process because of the resistance of the local population, the expansion via sea was far easier. The creation of the Hanseatic League allowed Germany to peacefully establish its dominion on the Polish shores between 16th and 17th   centuries. The battles conducted by the Hohenzollern family completed the creation of a sphere of influence at the eastern borders of Germany. The debate around the strategic advantages of territorial versus trade expansion was very popular in the politics of the Second Reich. The unification of Germany pursued by Otto von Bismarck allowed the country to acquire more influence on the world stage. However, the increasing in its power at the end of 19th century was not only boosted by the changes brought by the industrial era, but also by the geostrategic competition with the British and French Empire: the German strategic core consisted in the “Konzern” (associations of both vertically and horizontally integrated enterprises), in banks and insurance companies that challenged their European competitors.

The debate on how to handle a hypothetical geo-economic success gained momentum at the end of WWI. As a result, in 1915 Samuel Herzog published in Germany “German economic warfare plan”, which could be considered as a draft handbook of economic warfare.

In his book, Herzog listed the economic tools that States could oppose to the Reich’s enemies. Some of them are helpful to influence or control the exports during the economic warfare; some others could ensure Germany’s success against the passive resistance of defeated countries. According to the author, in order to preserve Germany’s economic assets, it is necessary for the state to exercise its control over industries that have kept the upper hand against foreign countries. In addition, the state should protect private initiative in a way that it does not conflict with national economic interests.

Harbulot focuses then on the dissimulation of economic warfare: firstly, the economic dimension acquired a great prominence in the balance of power among individuals, groups and states; secondly, he underlined the high interdependence between the economic strength and the political and military power. Nevertheless, the historic phenomenon of economic warfare has always been denied, because the political justifications for economic expansions have always been perceived as aggressive and illegal.

The negative perception of the economic war as a consequence of cupidity is grounded on Saint Augustine and Thomas Aquinas’ just war theory. According to this theory, States are pushed to hide their war plans for economic purposes and to proclaim their intention to spread religions, to stimulate growth of developing countries and, more recently, to promote democracy. This dissimulation attitude causes the distortion of the balance of power.

It is worth noticing that international military organisations, such as NATO, have not developed a proper economic warfare doctrine yet, because of conflicting interests among member states.

Some examples of the dissimulation of economic warfare are the domination strategies implemented by colonial empires, as well as recovery strategies of countries aiming at avoiding colonisation or at increasing their power.

Firstly, domination was dissimulated by the pretext to conquer and impose one’s religion to colonised people. Secondly, the doctrine of liberalism and the idea of increasing power through trade expansion stimulated free trade and the opening of new markets. All these factors became the justification to the foundation of new empires.

Any commercial achievement could lead into an economic warfare, which could represent a coercive instrument to use against countries that try to close their market. As to some examples, the United Kingdom implemented its “gunboat diplomacy”, in order to export its products in the Middle East and East Asia markets and in 1840-41 the Royal Navy closed the Alexandrian harbour. Moreover, during the Opium Wars, the Western countries forced an “independent country” to participate in the drug trade.

With the Opium Wars, the strategy of “economic aggression” became evident. As a result, countries such as Japan were forced to modify their plan and to implement a significant economic penetration policy (represented by the above-mentioned slogan “enrich the country, strengthen the military”) with the aim of reducing disparities with Western countries. When, a century later, at the end of ‘80s, Japan became the world’s second largest economy, the USA and Europe denounced its expansionism, as well as its economic trade’s strategy. The Central Intelligence Agency (CIA) even published a report on the “Japanese propaganda” aiming at hiding the protectionist measures taken by the US against other market economies, in violation of the principles of economic liberalism.

As for the recovery strategies, they focus on basic objectives and are strongly linked to geographic and cultural background. Due to its geographical morphology, Japan developed a solid maritime infrastructure, along with an industrial economy and became a model for South Korea, India, Brazil and China. In particular, South Korea opted for shipbuilding and for the creation of large private industrial conglomerates.

On the contrary, India chose to become a world leader in IT sector and pursued an education reform in order to improve science teaching. Moreover, the city of Bangalore, thanks to its favourable weather conditions, was transformed into a high-tech capital.

Brazil instead based its recovery strategy on the energetic sector, with the aim of becoming the regional leader in this field. Besides, Brazil used its soft power to claim the role of world’s sustainable development power due to its wide-scale production of electric power.

Finally, the Chinese recovery strategy was grounded on market opening, with the creation of special economic zones and the implementation of measures to attract foreign investments.

However China, as Japan did, developed an aggressive plan of foreign markets’ penetration, with the strong opposition of the United States. This triggered a debate around economic warfare in the Western world. In particular, China was deemed to become member of “normative” international organisation only in order to impose its own rules. As a matter of fact, reactions caused to a sceptic attitude against China could be considered as economic conflicts. This is true for protectionist measures on photovoltaic technologies taken by the Obama administration, as well as for the decision of the Australian government to refuse the participation of the Chinese company Minmetal in the Australian firm Oz Metal.

The paradigm of economic warfare changed after the Second World War, when the USA became the world geo-political, military and trade leader. Along with coercive methods of colonial empires, the USA expressed their economic power by pursuing a new strategy. In particular, in order to prevail over an allied country in the economic and cultural field, the United States established themselves as a superpower and managed to hold a stronger position in the hierarchy of the values, rules and arbitrages of market economy. As a result, the US imposed in peacetime to Western countries a “silent practice” of economic warfare.

Nevertheless, the availability of new markets after the collapse of the Soviet Union and the aggressive recovery strategies implemented by emerging economies modified the current stability of international economic relations. Furthermore, a growing competition, stemming from the two above-mentioned factors, pushed the USA to take into account the need of a “real” economic war. Asia’s increasing power and the EU internal market, actually undermined the supremacy that the USA had acquired by the end of WWII.

These changes in the balance of power highlight the new paradigm of the economic warfare: the relationship between ally and enemy is replaced by a direct or indirect conflict between two enemies.

Despite the fact that economic warfare was usually characterised by direct conflicts, globalisation has modified the world economic framework, both for emerging economies and developed countries.

States’ strategic interests diverge and become more and more complex. Therefore, a military or geo-political concern could be in contrast with an economic one, and vice versa. As a result, two countries could conclude a military alliance and fight for economic reasons at the same time.

Therefore, these new balances of power among States, where competition and cooperation co-exist, show that the current economic relationships are weaker than in the past. However, these changes do not reduce conflicts among states. During the ‘90s, the USA, as world leader, implemented a policy of economic security, started in the ‘70s with the introduction of Section 301 of the 1974 Trade Act (that enabled the country to oppose trade barriers penalizing its exports) and Section 301 of the 1988 Omnibus Trade and Competitiveness Act (that enabled the country to denounce unfair practices and protect American companies from intellectual property violations).

With the aim of fighting unfair competition, the USA decided to tighten their position on trade. Despite the objections of several states, these unilateral measures are still in force and are used as leverage against the Dispute Settlement Body of the World Trade Organisation. Torricelli’s (1992), Helms-Burton’s (1996) and D’Amato’s (2001) laws implemented these measures and forbade thee WTO membership to the countries that were hostile to the United States.  Among the countries affected by these provisions (with the exception of Cuba, covered by a US embargo since 1962), Iraq, Libya, Iran and Nigeria were rich in oil reserves. Moreover, the appointment by the Clinton administration of the National Economic Council in 1993, working jointly with the National Security Council, proved the paramount importance of the national economic security.

The USA represented a model for several countries: France, for instance, appointed a Committee for Competitive Economic Security chaired by the Prime Minister in 1995; over the course of his first mandate. President Putin strengthened the role of some State bodies on the protection of the economic resources in Russia. The economic weakness of Western countries and the increasing power of the emerging ones will probably reinvigorate tensions between developing and industrialized countries, which dominate the world economy. While developing countries are eager to increase their power through massively expanding their trades to foreign markets, Western countries tend to separate power strategies based on military and diplomatic means, from those based on economic warfare.

Moreover, the Western policy of deregulation emphasises this paradox. While European advantages decrease, in fact, emerging countries increase their competitiveness with the financial support from bank authorities, which are directly or indirectly controlled by the state.

Therefore, a competitive imbalance – that is usually strengthened by the substantial role the financial sector plays in the functioning of market economies – weakens industrialized economies. Chinese managers, instead, successfully adapted the Communist dictatorship to the rules of market economy and pursued more ambitious targets than purely making profits.

After the collapse of the Soviet Union – caused by the arms race – China elaborated the idea of “war with no limits”, by combining military and economic instruments. The crisis of colonialism and the growing power of emerging countries undermined the Western notion of ethnocentrism, which the foundation of the theory of Western superiority.

Therefore, in the new global contest, Western countries are weakened by a number of contradictions:

Liberalism and Protectionism  

In the United Kingdom and in the United States economic doctrine, liberalism justified the dismantling of protectionist systems in the countries that were their top export destinations. The goal was to an increase their exports and to minimize the impact of the destination countries on international financial markets.

Delocalization vs. National Interest

In the United States there are two conflicting economic trends: one aims at opening the markets and benefiting from delocalisation, the other stresses the importance of protecting American people’s interests.

The European Union’s inability to react to the challenges posed by economic warfare.

In the aftermath of WWII, during negotiations on Marshall Plan, there has been a considerable discussion in France on some U.S. economic needs, such as the obligation to feed animals with American soya and the distribution in the French market of films coming from Hollywood. General De Gaulle, Prime Minister since 1958, pursued an independent policy against the U.S. interests: he created the oil company Elf Aquitaine with the aim of reducing dependency from the seven Anglo-American oil companies; he limited the settlement of American multinational companies; he started casting doubts on the role of dollar as reserve currency. Nevertheless, his vision was defeated by the liberal idea of markets’ openness. Furthermore, the creation of the EU single market marginalised the discussion on the role of the economy in state power strategies. As a result, France dramatically changed some of its economic structures that had previously provided the country with a significant economic power.

In particular, the Commission Permanente de l’Electronique, which in the ‘60s rose awareness on the need of developing the electronics industry, was abolished. At the beginning of 21st  century, Prime Minister Dominique de Villepin re-launched the debate on the “economic patriotism”, fostered by the drawbacks of emerging countries’ recovery policies. Some of them, in fact, evolved in real “fighter economies”, to fill the development gap with the West. Their offensive strategies integrated the range of techniques already implemented by Western countries in the past: collecting information via Internet, stealing patents, dumping measures, counterfeiting, metal smuggling (especially copper, whose world-wide demand is increasing).

While these unfair measures, which undermine the Western economic leadership, represent an issue for concern in the United States, in the EU they are considered as “exception that proves the rule”. Accordingly, the US adopted coercive instruments against these measures, in order to single hostile countries out. On the contrary, the European Union rarely followed this example. In 1984 the EU adopted a retaliatory measure in accordance with Section 301 of The US Trade Act, even though it was only applied six times in ten years.

In the centralized EU system, since the only competences left for Member States are national defence and public order, the United Kingdom, the Netherlands and Germany integrated the economic war paradigm in their modus operandi. France, instead, lobbied for amending the EU Treaties with the aim of improve its room for manoeuvre, but its attempts were not successful. More generally, the EU Member States proved not to be able to set up a shared strategy on this issue. As a result, the EU did not react to Putin’s measures protecting and promoting Russian industries – through state aids, customs duties benefits, and debt cancellation – and not even to the Russian threat of cutting gas supplies to Europe.

In the current international framework, the pacification process favoured by the leadership of the Western countries is weakened by multipolar geo-economic relationships and growing conflicts with emerging countries. As a result, the European Union – that does not consider economic warfare – cannot do much other than following the lead of the United States. Despite its image of cohesion, the EU is fragmented: Germany leads Northern Europe and is engaged both in increasing its power and promoting itself as a peaceful country in open contrast with its past; Southern Europe tries to solve its infrastructural problems, while post-Soviet countries are still under American, German and Russian influence.

To conclude, the economic warfare paradigm shall be taken into account in current international relations. Harbulot imagines a new political economy based on a consistent combination between state power strategies, trade expansion and territorial development. Nevertheless, these dimensions deal with three divergent interests. Therefore, the definition of short, medium and long-term priorities relies in the hands of the political power.

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Economy

Is Your Neighborhood Store Safe? Amazon and Store Closings

Meena Miriam Yust

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Amazon has reached the far corners of the earth… and the highest elevations.  Delivery men venture 11,562 feet up in the Himalayas to leave a package.  While the company may serve a useful purpose in remote regions, its phenomenal growth also reveals that no town is immune from its less desirable consequences.  The online retailer’s omnipresence has been all too apparent in Chicago, New York, and London in recent months, where stores have been closing in droves.

Treasure Island Foods of Chicago, a family-owned business started by Christ Kamberos in 1963, announced at the end of September that after 55 years it was closing all remaining stores in just two weeks.  Now, the lights are out and the shadows empty shelves are all that remain, with the scent of fresh sourdough and gyros cooking on the spit only in shoppers’ reminiscences as they walk by the darkened windows.

Julia Child once described Treasure Island as “America’s Most European Supermarket.”  In my memory, it was unforgettable.  The stores always had treasure troves for every season, from delicious green picholine olives from France, to liver pâté and English Blue Stilton at Christmas, and of course, Marmite.  Not to mention exotic cookies and chocolates from all over the world: marzipan and chocolate from Switzerland and Austria, shortbread from Scotland, and crisp butter wafers from the Netherlands are a few examples.  It was a haven for special gifts during the holidays.

Treasure Island was not alone in the struggle to survive amidst food delivery apps and Amazon.  Not only were customers buying goods online, but Amazon was also shifting into the grocery market by taking over Whole Foods.  Not surprisingly, Chicago’s other local grocery chain Dominick’s closed in 2014.  The city lost one of its most beloved bakeries too in 2017 when the Swedish Bakery closed after 88 years in business.  Gone were the days of mouth-watering rum balls, Princess Torte laden with green marzipan, and toska cake.  In its final days an estimated 500 customers per day flocked in to have one last tasty treat.

Purchasing items online might be convenient but the trend has serious costs for many industries, not only food.  Retail has been hit hard.  Sears recently filed for bankruptcy and is closing 142 stores.  So did Toys R Us, shuttering its outlets last summer.  Luxury goods retailer Henri Bendel announced in September that its stores will be closing too, after 123 years.

What’s more the change is not just in the United States.  In the UK, Marks & Spencer plans to close 100 stores by 2022.  Debenhams and House of Fraser in London are also in trouble.  In March of 2018, Sweden’s H & M reported the lowest first quarter profits in more than a decade, down 62%.  When large international stores are being squeezed, one can understand how local shops are struggling to keep afloat.  A recent Atlantic article observes that Manhattan is becoming a “rich ghost town.”  So many store fronts once filled with interesting items are now empty, a trend that the author predicts will move to other cities.  Will the choices for future shoppers be restricted to chain stores and dark unrented windows?  Local small retailers unable to afford high rents are gradually being nudged out of existence.  They need help.

Could Local Currencies Save Our Neighborhood Stores?

The answer may be introducing local currencies.  Studies have shown that municipal currencies stimulate the local economy.  They serve as shock absorbers and protect in times of recession.

Switzerland has had the WIR since 1934 and Ithaca, New York introduced its own currency known as Ithaca Hours in 1991.  Ithaca Hours started out with 90 individuals who were willing to accept the currency as a payment for their work, and expanded to become one of the largest local currency systems in the U.S.  Ithaca’s example was an inspiration for municipal systems in Madison, Wisconsin, and Corvallis, Oregon.

The UK also has several local currencies including the Bristol Pound.  The former Mayor of Bristol accepted his entire salary in Bristol Pounds, and more than 800 businesses accept the local currency.

Once local currencies are in circulation, consumers can continue using their national currency to purchase from large retailers and from online giants like Amazon.  Their local currency, though, is typically used at local businesses.

As an example, were a Chicago currency implemented, consumers might use their U.S. dollars to purchase goods online but would use their Chicago currency to buy locally.  Legislators and communities could thus lend a helping hand to local gems that remain in our towns.  Lutz Cafe and Pastry Shop, for instance, established in 1948, is unique to Chicago, and creates some of the most delicious cakes in the world.

By 2003, there were over 1,000 local currencies in North America and Europe.  Yet this is a mere fraction of the total number of cities.  If local currencies expanded to a majority of towns, perhaps our beloved neighborhood stores would be able to survive the online onslaught.

The Benefits of Preserving Local Shops

Consumers lose a service every time a small shop shuts down.  A local paint store, for instance, can provide advice on what paint to use for a particular purpose, how to use it, etc.  Nowadays, in many towns, these stores have closed.  Consumers’ options are limited to buying online without input from an expert, or from a large national chain, where they will be lucky to find advice comparable to that from a specialized store.  The same holds true for many kinds of home repair.

Then there is the charm of familiar faces at the corner store.  Growing up near Treasure Island as a child, I could scarcely forget the cherry-cheeked cherub-like server at the deli counter.  After noticing this eight-year-old’s tendency to gorge on free olive samples once a week, he would always laugh heartily with those chubby cheeks and remark with a chuckle that I would end up eating all the olives before reaching the check out line.  Ordering specialty olives online is just not the same.  There may be no checkout line, but also no one to talk or joke with.  The same is true for the automated Amazon Go stores.  The nice deli server today is out of a job after decades of service.

Another hidden cost of online purchases is environmental.  Aside from fossil fuel emissions, delivery of a parcel requires packaging, and often bubble wrap, made of low-density polyethylene, a form of plastic that comprises 20% of global plastic pollution.  Reusable bags and a neighborhood store within walking distance are clearly better for the environment.

Amazon’s reach extends to places like Leh, India, high in the snow-covered Himalayas, where many of its goods may not be available in town.  And one can appreciate and understand the value of online purchases in such rural communities.  In fact that was exactly the original purpose of Sears with its iconic catalogue.

Yet in cities where one can readily buy the same items in stores nearby, we have to try to refrain from the convenience of one-click shopping.  The more we purchase online items, the more we pollute the environment and kill local stores.  Without small businesses, cities will eventually become homogenized with block after block of chain retailers, or dark empty windows, as has started to happen in Manhattan.  The character of a quaint town or a trendy metropolis becomes obsolete.

Gone will be the unique gift shops and the luxury tailor.  When the British high street becomes indistinguishable from U.S. ghost towns and when the only place to eat is a chain burger joint, the fun of traveling and the adventure of new places will be lost forever.  The vibrant world of new flavors and experiences will be no more.

So please think twice before clicking an online purchase.  You may be signing your local store’s death warrant.

Author’s note: this piece first appeared in CounterPunch.org

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Economy

Azerbaijan: Just-in-time support for the economy

MD Staff

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Over the last two decades, oil has been the defining factor for Azerbaijan; not only for its economic growth but also for its development. During the first ten years of the millennium, Azerbaijan experienced an explosion in wealth. As oil GDP, comprising half of the sectoral share of the economy, grew by an average of 21 percent per year, fueled by global upsurge of oil prices and increased production. Total GDP grew more than tenfold: from US$6 bn to US$66 bn.  This was accompanied by rapid decline in poverty, from 49.6% to 7.6%, increase in real wages, and middle-class growth.

However, after the decline in global oil prices in 2014, nearly by half, the reduction of oil revenue caused a domino effect in the economy. The double devaluation of the Azerbaijani manat in 2015 erased half of the manat’s value against US dollar. and subsequent fiscal adjustment together with ongoing banking sector distress led to a 3.8% contraction in GDP (2016). This was accompanied with the rising of traditionally low levels of government debt (from 8.5% in 2014 to 22% in early 2018) primarily due to devaluation of manat.

On December sixth, 2016, Azerbaijani President Ilham Aliyev has signed a decree approving the “Strategic roadmaps for the national economy and main economic sectors.” The decree for reforms spanned across 11 sectors, from tourism to agriculture, and aimed to decrease the over-reliance to the oil and gas sector.

Azerbaijan – World Bank Partnership

Under very tight deadlines, Azerbaijani ministry of finance started working on a roadmap, that would reform the economy which had been impaired by a number of negative shocks such as lower oil prices, weak regional growth, currency devaluations in Azerbaijan’s main trading partners, and a contraction in hydrocarbon production. As a long-term partner of the World Bank Group (WBG), they reached out for support in developing a public finance strategy for the medium term at the beginning of 2016. To be able to broach such a broad project, different teams within WBG worked together closely to provide just-in-time support and to cover various facets of the macro-fiscal framework. Government Debt and Risk Management (GDRM) Program, a World Bank Treasury initiative targeting middle income countries funded by countries funded by the Swiss State Secretariat for Economic Affairs (SECO) worked on the debt management portion of the issue. The Macroeconomics, Trade and Investment Global Practice advised on macroeconomic and fiscal framework and debt sustainability analysis.

Providing a macro-fiscal outlook, analyzing debt sustainability and proposing debt management reforms

The ministry of finance and WBG joint teams had a thorough review of the macro-fiscal and borrowing conditions and honed in three interlinked issues:

  • The need for sustainable financing: While the level of direct debt was expected to remain modest, the sharp increase in the issuance of public guarantees would lead the public and publicly-guaranteed (PPG) debt trajectory to be higher in the next five years.
  • Fiscal Rules: Azerbaijan was exploring fiscal rules involving the use of the country’s oil assets, based on recommendations from the IMF.
  • The country was facing high exchange-rate and interest-rate risks, due to 98% of the central government debt being in foreign currency and two thirds in variable interest rates.

With that in mind, the teams tested different borrowing strategies to cover the 2017-2021 period under baseline and different shock scenarios, analyzing debt sustainability, and the composition of the public debt portfolio weighing it against the national risk tolerance. They also recommended several measures to better enable the debt management operations: revising and submitting the Debt Management Law to parliament; improving the reporting system; improving the coordination between the ministry of finance; the central bank and the Sovereign Oil Fund; developing a credit risk assessment capacity in the ministry and improving the IT system, and eventually looking at developing a domestic debt market.

Azerbaijan develops the public finance strategy

In December 2017 Azerbaijan ministry of finance shared the debt management strategy, with the President’s office. The proposed strategy comprised a macroeconomic policy framework, a borrowing plan, and associated institutional and legal reforms. In August 2018, President Aliyev enacted and published the “Medium to long term debt management strategy for Azerbaijan Republic’s public debt”. The strategy outlines the main directions of the government borrowing during 2018-2025 based on sound analysis. It puts a limit of 30% of GDP for the public debt in the medium term, with a moderation to 20% of GDP by 2025. The authorities also envisage gradual rise in domestic debt, to develop the local currency government bond market. To reflect the changing macroeconomic outlook and financial conditions, the strategy document will be updated every two years.

“As World Bank, our mission is ending extreme poverty and building shared prosperity,” said Elena Bondarenko, the Macroeconomics and Fiscal Management team member. “It is our privilege to provide just-in-time support to our member countries when they most need it. Especially if we can help build resilience to the economy before further shocks cause major damage.”. “The work doesn’t stop here,” said GDRM Program Task Team Leader Cigdem Aslan. “The GDRM Program will continue its support through the implementation phase of the recommendation and help build capacity for the development of the domestic market for government securities.”

World Bank

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Economy

Knowledge economy and Human Capital: What is the impact of social investment paradigm on employment?

Gunel Abdullayeva

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Social policy advocates claim the development of the European welfare state model on three phases as follows: traditional welfare state until 1970s; neo-liberal welfare state until the mid-1990s and finally social investment state model afterwards of the mid-1990s.  At the first time, on the European Union level, to bring the social investment policy to the political agendas after the 1990s economic hardship, the European Council adopted the Lisbon Strategy in 2000. In fact, the Lisbon Strategy was successful with respect to the employment. In the latter, the social investment state paradigm has fostered once more in the Europe with the “Social Investment Package: Towards Social Investment for Growth and Cohesion” in 2013 by the European Commission that targeted to “prepare” individuals, families and societies for the competitive knowledge economy by investing in human capital from an early childhood together with increase female participation in the workforce.

Generally, social investment idea emerged as a link between social insurance and activation in employment policies and upgrading human capital. Hemerijck (2014) defined the concept of the social investment state to facilitate the “flow” of labour market transitions, raising the quality of human capital “stock” and upkeeping strong minimum income guarantee as social protection and economic stabilization “buffers”. The underlying idea of the social investment strategy has been argued to modernize the traditional welfare states and guarantee their sustainability in line with the response to the “new social risks” such as skill erosion, flexible market, insufficient social insurance and job insecurity.

Economic aim of social investment paradigm is divided into two types by Ahn& Kim (2014),in the following way:The social democratic approach based on the example of the Nordic countries and the liberal approach of the Anglo-American countries. To make the distinguish more clear, the social democratic approach aims to increase the employment for all working classes and strength human capital. On the other hand, liberal approach applies selective strategy which is more workfare policy oriented and covers vulnerable class. In this regard, cross country analyses show that the Scandinavian countries have been the forerunners of social investment and perform the childcare and vulnerable group targeted policies at their best.

Studies have viewed the social investment state approach as a new form of the welfare state and reshaped social policy objectives that addressed to promote labour market participation for a sustainable employment rather than simply to fight against unemployment. Since the beginning, the social investment strategy directs to protect individuals from social and economic threats by investing in human capital through labour market trainings, female (family – career) and child care policies, provision of universal access to education from the childhood. On doing so, the social investment as a long term strategy aims to reduce the risk of future neediness in contrast to the traditional benefit oriented welfare state that focuses on short term mitigation of risks. Or to put it differently, the social investment “prepares” children and families against to economic and social challenges rather than “repair” their positions in such problems later. In short, social investment policies are characterized as a predictor rather than a recoverer. Mainstream social investment argument is that redesigned welfare state model more focuses on work and care reconciliation policy as strengthening parental employment in the labour market is an important factor to exit poverty and support families especially mothers. On the other hand, human capital measures such as education and trainings improve life course employability, particularly for market outsiders as well as human investment guarantees better job security in today`s more flexible job market.

In reality, an economic development and employment is friendly to each other. Thus, income comes from the market through employment as a paid employment is foundation of household welfare. Likewise, a welfare is purchased in the markets. Arguably, unemployment leads to the poverty and social exclusion in the societies. Hereby, work based policy regarded as a sustainable anti-poverty strategy. The welfare states in order to guarantee households` net income and well-being in the post industrialized labour market have turned to invest in preventive measures such as human capital. The human capital (cognitive development and educational attainments) is a must for the dynamic and competitive knowledge economy. Educational expenditures yield on a dividend because they may/make citizens more productive but we need to push the logic much further (Andersen, 2002). In fact, social investment state by being more female and child care policy oriented predicts an importance of the education for a well-being of society and more developed economy in the future. Thus, employment policies need to link with family policies to be more effective in response to the unemployment, poverty and social exclusion. Social investment state as a new shape of the active employment policies invests in education particularly of women and children to prevent unemployment and poverty from the beginning. One hand, addresses to the ageing problem of European societies social investment strategies aim to mobilize motherhood with an employment. On the other hand, by promoting family polices, social investment strategy directs to reduce child poverty and safeguard child welfare in the line with better social and economic conditions of childhood.

What is certain that, social investment state implies human capital strategy. To increase an employment and long term productivity of individuals, social investment policies interchanged with the provision of social insurance. In other words, the social service policies took over the place of the cash benefit oriented policies. It is probably fair to say, the human capital strategies link social investment policies to employment outcomes. Simply, to see the correlation between the social investment paradigm and employment, human capital policy measures (education and trainings) are needed to be checked as a direct labour market value.  Since they are the most effective activation measures in skill investment to respond to the knowledge economy, more educated and skilled manpower boosts the labour supply in turn results income equality which is a traditional goal of the social democracy.  In this context, social investment state is addressed to reach high quality employment by its human investment orientation. As Andersen, (2002) argues, “We no longer live in a world in which low-skilled workers can support the entire family. The basic requisite for a good life is increasingly strong cognitive skills and professional qualifications”.

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