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

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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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The Politico-Economic Crisis of Lebanon

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Dubbed as a failed state. The Middle Eastern country, also known as the ‘Lebanese Republic’, is already leading towards a humanitarian crisis. The country is witnessing the worst financial crisis since the 1975-90 civil war. The financial catastrophe has done most of the damage as the country currently stands as one of the top 10 worst economic disasters witnessed over the past 150 years. If the economists are put true to their word, it means that Lebanon rates as the most dismal economic crash since the 19th century. As the state of Lebanon undergoes a significant political shift since last year, the social and economic fissures are subsequently broadening. A fragile democracy (for namesake) and a constant disequilibrium in the parliamentary stratosphere, have led to an economic depression that is rapidly expanding as the country fails to adopt a unified political stance and adhere to corrective measures to hold the toppling economy from a collapse.

More than half of the Lebanese population has slumped below the poverty line as escalating inflation continues to reel the populace. The main cause underpinning such brutal inflation is the hyper-devaluation of the Lebanese pound. The currency was originally pegged at a fixed rate of 1500 Lebanese pounds to the US dollar. However, over the past three decades, the economic crunch has crippled the economic nucleus of Lebanon. According to World Bank estimates, the Lebanese pound has devalued by 95% and currently trades at 22000 Lebanese pounds to the US dollar in the black market – roughly 15 times above the official rate. The resultant inflation has driven the government to push the prices to unfathomable levels – even pushing necessities beyond the reach of an average citizen. The fact could be witnessed by the rapid increase in the price of bread – which was hiked by another 5% last month to value at 4000 Lebanese pounds per loaf.

The dire social crisis could be gauged by the fact that an average Lebanese family requires a spending worth five times the minimum wage mandated by the government just to afford basic food requirements. Most of the families can’t suffice to consume utilities such as medicine, gas, or electricity. Astounding research revealed that even hospitals dealing with the Covid outbreak are not afforded gas and electricity which has led to a hike in petroleum consumption due to heavy usage of generators. The resulting shortage of petroleum has driven rage across the country as businesses fail to thrive while multiple wings of the airports are rendered powerless. The recent World Bank report signified that the food prices have inflated by roughly 700% over the past two years – a swell of 50% in just under a month. The regional countries have shown concern as Lebanon is heading towards a health crisis with a strengthening Delta variant in the Middle East and no room for recovery.

The main cause of such a debilitating situation is primarily the rampant corruption in the echelons of the government followed by the instability that ensued last year. Following the catastrophic blast in Beirut’s port that claimed an estimated 200 lives, the government resigned in the aftermath of virulent protests across Lebanon. The political vacuum, however, further pushed the state into despair. The caretaker government, led by the former Prime Minister, Saad Hariri, failed to consolidate a government as ideological differences between the President and the Prime Minister continued to displace the essential debates of the country. The contention between President Michel Aon, a stout supporter of the Shite militant group Hezbollah, and Prime Minister Saad al-Hariri, a Sunni Centrist, caused the efforts to falter as the country continued to plunge into crisis without an elected government to handle the office.

Hariri drove the narrative that due to President’s strong ties with the Hezbollah, which is arguably supported by Iran, Lebanon has suffered a shuffle of power to entrust financial support to the militant group. The narrative caused institutions like IMF and the World Bank to hesitate in injecting desperately needed social stimulus into the country despite continual warnings of an impending humanitarian crisis by France and the United States. A political vacuum coupled with the destruction caused last year along with the prudence of global financial institutions to pivot the country have ultimately resulted in the chaos that describes the landscape of Lebanon today.

However, Hariri resigned last month after failing to form a government even after nine months. The resulting political thaw helped President Aon to appoint Najib Mikati, a lucrative businessman, and former prime minister, as an interim Prime Minister entrusted to form a mandated government in Lebanon.

With a renewed Cabinet support, something that Hariri rarely enjoyed, Mikati is expected to assuage the concerns of the IMF and support economic reforms with the help of states like France. The Paris conference, scheduled on 4th August, is now the focal point as Mikati plans to convince the French diplomats regarding his schemes to pull Lebanon out of the puddle. Prime Minister Mikati recently reflected on his aspirations: “I come from the world of business and finance and I will have a say in all finance-related decisions”. He further stated: “I don’t have a magic wand and can’t perform miracles … but I have studied the situation for a while and have international guarantees”. It is clear that Mikati envisages repairing the economy which is already long overdue.

Under the French plan aiding Mikati’s regime, he would need to enforce significant political reforms to gain international aid. The diplomats, however, envision a far graver reality. It is touted that the IMF would likely focus on two facets before granting any leverage to the Mikati-regime: political-social reforms and progress towards parliamentary elections. However, with grueling Covid cases springing into action, the road to recovery would probably be highly tensile. 

While Mikati doesn’t stem from any particular political bloc unlike his failed predecessors, he was elected primarily by the backing of Hezbollah. A question emerges: would Mikati be able to navigate through the interests of an organization subjected as a terrorist fraction by most of the Western world. An organization that arguably serves as the primary reason why Lebanon stands as one of the highly indebted countries in the world. An organization that could be the decisive factor of whether financial support flows to Lebanon or sanctions cripple the economy further similar to Iran. The question stands: would Mikati refuse the dictation of Hezbollah and what would be the consequences. The situation is highly complex and time is running out. If Mikati fails, much like his predecessors, then not only Lebanon but the proximate region would feel the tremors of a ‘Social Explosion’.

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Bangladesh-Myanmar Economic Ties: Addressing the Next Generation Challenges

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Bangladesh-Myanmar relations have developed through phases of cooperation and conflict. Conflict in this case is not meant in the sense of confrontation, but only in the sense of conflict of interests and resultant diplomatic face-offs. Myanmar is the only other neighbor that Bangladesh has on its border besides India. It is the potential gateway for an alternative land route opening towards China and South-East Asia other than the sea. Historically, these two countries have geographic and cultural linkages. These two bordering countries, located in separate geopolitical regions, have huge possibilities in developing their bilateral economic relations. At the initial phase of their statehood, both countries undertook numerous constructive initiatives to improve their relations. Nevertheless, different bilateral disputes and challenges troubled entire range of cooperation. Subsequent to these challenges, Bangladesh and Myanmar have started negotiation process on key dubious issues. The economic rationales over political tensions in Bangladesh-Myanmar relations prevail with new prospects and opportunities.

Bangladesh-Myanmar relations officially began from 13 January 1972, the date on which Myanmar, as the sixth state, recognized Bangladesh as a sovereign nation. They signed several agreements on trade and business such as general trade agreement in 1973. The two countries later initiated formal trade relations on 05 September 1995. To increase demand for Bangladeshi products in Myanmar, Bangladesh opened trade exhibitions from 1995 to 1996 in Yangon, former capital of Myanmar. However, that pleasant bilateral economic relations did not last for long, rather was soon interrupted mainly by Myanmar’s long term authoritarian rule and isolationist economic policy. In the twenty-first century, Bangladesh-Myanmar relations are expected to move towards greater economic cooperation facilitated by two significant factors. First, the victory of Myanmar’s pro-democratic leader, Aung San Suu Kyi, in 2011 has considerably brought new dimensions in the relations. Although this relation is now at stake since the state power has been taken over by military. Second, the peaceful settlement of Bangladesh-Myanmar maritime dispute in 2012 added new dimension in their economic relations.

Bangladesh and Myanmar don’t share a substantial volume of trade and neither is in the list of largest trading partners. Bangladesh’s total export and import with Myanmar is trifling compared to the total export and import and so do Myanmar’s. But gradually the trades between the countries are increasing and the trend is for the last 5 to 6 year is upward especially for Bangladesh; although Bangladesh is facing a negative trend in Balance of Payment. In 2018-2019 fiscal year, Bangladesh’s total export to Myanmar was $25.11 million which is more than double from that of the export in 2011-12. Bangladesh imported $90.91 million worth goods and services from Myanmar resulting in $65 Million deficit in Balance of Payment in 2018-2019 fiscal year. For the last six or seven years, Bangladesh’s Balance of Payment was continuously in deficit in case of trade with Myanmar. The outbreak of COVID-19, closure of border for eight months and recent coup in Myanmar have a negative impact on the trade between the countries. 

Bangladesh mainly imports livestock, vegetable products including onion, prepared foodstuffs, beverages, tobacco, plastics, raw hides and skin, leather, wood and articles of woods, footwear, textiles and artificial human hair from Myanmar. Recently, due to India’s ban on cattle export, Myanmar has emerged as a new exporter of live animals to Bangladesh especially during the Eid ul-Adha with a cheaper rate than India. On the hand, Bangladesh exports frozen foods, chemicals, leather, agro-products, jute products, knitwear, fish, timber and woven garments to Myanmar.

Unresolved Rohingya crisis, Myanmar’s highly unpredictable political landscape, lack of bilateral connectivity, shadow economy created from illegal activities, distrust created due to different insurgent groups, maritime boundary dispute, illegal drugs and arms smuggling in border areas, skeptic mindset of the people in both fronts and alleged cross border movement of insurgents are acting as stumbling block in bolstering economic relations between Bangladesh and Myanmar.

Bangladesh-Myanmar relations are yet to blossom in full swing. The agreement signed by Sheikh Hasina in 2011 to establish a Joint Commission for Bilateral Cooperation is definitely a proactive step for enhancing trade. People to people contact can be increased for building mutual confidence and trust. Frequent visit by business, civil society, military and civil administration delegates may be organized for better understanding and communication. Both countries may explore economic potential and address common interest for enhancing economic co-operation. In order to augment trade, both countries may ease visa restrictions, deregulate currency restrictions and establish smooth channel of financial transactions. Coastal shipping (especially cargo vessels between Chittagong and Sittwe), air and road connectivity may be developed to inflate trade and tourism. Bangladesh and Myanmar may establish “Point of Contact” to facilitate first-hand information exchange for greater openness. Initiative may be taken to sign Preferential Trade Agreement (PTA) within the ambit of which potential export items from both countries would be allowed to enter duty free. In recent year, Bangladesh was badly affected by many unilateral decisions of India such as onion crisis. Myanmar can serve as an alternative import source of crops and animals for Bangladesh to lessen dependence upon India.

Myanmar’s currency is highly devaluated for a long time due to its political turmoil and sanctions by the west. Myanmar can strengthen its currency value by escalating trade volume with Bangladesh. These two countries can fortify their local economy in boarder areas by establishing border haats. Cooperation between these two countries on “Blue Economy” may be source of strategic advantages mainly by exporting marine goods and service. Last but not the least, the peaceful settlement of maritime boundary disputes between Bangladesh and Myanmar in 2012 may be capitalized to add new dimension in their bilateral economic relations. Both nations can expand trade and investment by utilizing the Memorandum of Understanding on the establishment of a Joint Business Council (JBC) between the Republic of the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI) and the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI).

With the start of a new phase in Bangladesh-Myanmar relations, which has put the bilateral relations on an upswing, it is only natural that both sides should try to give a boost to bilateral trade. Bilateral trade is not challenge free but the issue is far easier to resolve than others. At the same time, closer economic ties could also help in resolving other bilateral disputes. For Myanmar, as it is facing currency devaluation and losing market, increased trade volume will make their economy vibrant. For Bangladesh, it is a good opportunity to use the momentum to minimize trade deficits and reduce dependency on any specific country.

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Economy

The Monetary Policy of Pakistan: SBP Maintains the Policy Rate

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The State Bank of Pakistan (SBP) announced its bi-monthly monetary policy yesterday, 27th July 2021. Pakistan’s Central bank retained the benchmark interest rate at 7% after reviewing the national economy in midst of a fourth wave of the coronavirus surging throughout the country. The policy rate is a huge factor that relents the growth and inflationary pressures in an economy. The rate was majorly retained due to the growing consumer and business confidence as the global economy rebounds from the coronavirus. The State Bank had slashed the interest rate by 625 basis points to 7% back in the March-June 2020 in the wake of the covid pandemic wreaking havoc on the struggling industries of Pakistan. In a poll conducted earlier, about 89% of the participants expected this outcome of the session. It was a leap of confidence from the last poll conducted in May when 73% of the participants expected the State Bank to hold the discount rate at this level.

The State Bank Governor, Dr. Raza Baqir, emphasized that the Monetary Policy Committee (MPC) has resorted to holding the 7% discount rate to allow the economy to recover properly. He added that the central bank would not hike the interest rate until the demand shows noticeable growth and becomes sustainable. He echoed the sage economists by reminding them that the State Bank wants to relay a breather to Pakistan’s economy before pushing the brakes. The MPC further asserted that the Real Discount Rate (adjusted for inflation) currently stands at -3% which has significantly cushioned the economy and encouraged smaller industries to grow despite the throes of the pandemic.

Dr. Raza Baqir further went on to discuss the current account deficit staged last month. He added that the 11-month streak of the current account surplus was cut short largely due to the loan payments made in June. The MPC further explained that multiple factors including an impending expiration of the federal budget, concurrent payments due to lenders, and import of vaccines, weighed heavily down on the national exchequer. He further iterated that the State Bank expects a rise in exports along with a sustained recovery in the remittance flow till the end of 2021 to once again upend the current account into surplus. Dr. Raza Baqir assured that the current level of the current account deficit (standing at 3% of the GDP) is stable. The MPC reminded that majority of the developing countries stand with a current account deficit due to growth prospects and import dependency. The claims were backed as Dr. Raza Baqir voiced his optimism regarding the GDP growth extending from 3.9% to 5% by the end of FY21-22. 

Regarding currency depreciation, Dr. Baqir added that the downfall is largely associated with the strengthening greenback in the global market coupled with high volatility in the oil market which disgruntled almost every oil-importing country, including Pakistan. He further remarked, however, that as the global economy is vying stability, the situation would brighten up in the forthcoming months. Mr. Baqir emphasized that the current account deficit stands at the lowest level in the last decade while the remittances have grown by 25% relative to yesteryear. Combined with proceeds from the recently floated Eurobonds and financial assistance from international lenders including the IMF and the World Bank, both the currency and the deficit would eventually recover as the global market corrects in the following months.

Lastly, the Governor State Bank addressed the rampant inflation in the economy. He stated that despite a hyperinflation scenario that clocked 8.9% inflation last month, the discount rates are deliberately kept below. Mr. Baqir added that the inflation rate was largely within the limits of 7-9% inflation gauged by the State Bank earlier this year. However, he further added that the State Bank is making efforts to curb the unrelenting inflation. He remarked that as the peak summer demand is closing with July, the one-way pressure on the rupee would subsequently plummet and would allow relief in prices.

The MPC has retained the discount rate at 7% for the fifth consecutive time. The policy shows that despite a rebound in growth and prosperity, the threat of the delta variant still looms. Karachi, Pakistan’s busiest metropolis and commercial hub, has recently witnessed a considerable surge in infections. The positivity ratio clocked 26% in Karachi as the national figure inched towards 7% positivity. The worrisome situation warrants the decision of the State Bank of Pakistan. Dr. Raza Baqir concluded the session by assuring that despite raging inflation, the State Bank would not resort to a rate hike until the economy fully returns to the pre-pandemic levels of employment and production. He further assuaged the concerns by signifying the future hike in the policy rate would be gradual in nature, contrast to the 2019 hike that shuffled the markets beyond expectation.

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