The Importance of 1979 in World History

Posted on November 10, 2015 by fqzhang

When we think of the most important events of the past 100 year, certain years are particularly crucial in determining the course of history. Among the most important are those that marked the end of a period of conflict and the beginning of a new era of peace, namely: 1918/19 (End of WWI, Peace of Versailles), 1945 (End of WWII, beginning of the United Nations), and 1989 (end of the Cold War and the new era of globalization). However, for this blog, I would like to point to one lesser known year that marked not only the end of a period of conflict or start of peace, but also the beginning of a new period of global interactions, which, for better or worse, still shape the world we live in today.

Why 1979?

In the year 1979, several major events occurred around the world. I will list them by geographic region (East Asia, the Americas, and the Greater Middle East, in no particular orders of importance), and then discuss the impact of each of these events.

In East Asia:

The events in East Asia revolved largely around what China had done during that year. Two important event occurred:

China’s economic reform and opening up: In December 1978, during the 3rd Plenary Session of the 11th Central Committee of the Communist Party of China, a national meeting of China’s policy-makers, a new national political and economic policy was implemented. First, the meeting confirmed the role of Deng Xiaoping as the undisputed leader (or “Paramount leader”) of China. Deng had been well known as a reformer who wanted to implement changes to China’s bureaucracy and the way the economy was run. Secondly, in part due to the first, a new national economic policy was set whereby a new model of economic organization was first introduced in the countryside (the Household Responsibility System), and leading to a dramatic increase in agricultural productivity and output. These reforms marked the first stages in the transformation of China from an economic backwater into one of the fastest growing economic entity of the past 35 years.
China and Vietnam fought a brief border war: The Sino-Vietnamese war of 1979 (or the Third Indochina War) was nominally fought over the Vietnamese invasion of Cambodia, whose Khmer Rouge government was supported by China, and at least launched in part by China to test Soviet resolve in defending its Vietnamese ally. However, the real significance of the war was not in the conduct of the war itself, but rather what the war represents. First, the conflict was the last conventional war in East and Southeast Asia. After a series of on-and-off conflict among East Asian nations from 1931 (when Japanese forces first invaded China) to 1979, the nations of East Asia is finally at peace with one another. During this period, the clashes of a variety of ideologies such as militarism, colonialism and anti-colonialism, national and ethnic nationalism, and finally communism all served to fuel a state of continuous conflict in the region. The end of the conflict also marked the beginning of a period of rapid economic growth for not only China, but also for other nations of Southeast Asia. The trajectory of East Asian history was forever altered after 1979.

The Americas:

The role of the United States during this time period cannot be exaggerated. It was the world’s foremost economic power; and by most measures, the world’ leading military power as well. The economic difficulties experienced by the United States during the latter half of the 1970s can be explained as an economy in transition from an export-oriented industrial economy to one based on services and high-tech information, along with a significant rise in imports for manufacturing goods. Nevertheless, the United States faced two difficulties as its economic output continues to grow, all with respect to energy:

The Second Oil Shock: In 1973, the United States experienced what is later termed the First Oil Shock, whereby, due to a confluence of factors such as a tightening of the oil market (where supply is barely keeping up with demand), instability in the oil producing regions, and finally an outright embargo on the part of the OPEC (Organization of Petroleum Exporting Countries) against the United States for its role in supporting Israel, led to a massive increase in the price of oil. However, this Second Shock of 1979 was due to quite different causes. The Iranian Revolution (to be discussed below) led to a sudden increase in the price of oil as several million barrels of oil were removed from the market. This event helped to trigger a recession in the United States, along with significant political fallouts for President Carter and the Democratic Party, and marked the rise of conservative, neoliberal thinkers in economic circles (The Chicago School of Economics, mot vocally represented by Milton Freidman). Moreover, the Oil Shock leads to increasing financial instability in the US and Europe, and helped to make an already fragile economic situation even worse by introducing an element of inflation along with economic stagnation into the economy.
The nuclear meltdown of Three Mile Island: The nuclear accident at Three Mile Island (a partial meltdown) was another significant event in the energy landscape of the United States in 1979. The accident, while not particularly significant in terms of destruction or radioactive materials released, did lead to a change in perceptions in the public eyes on the issues of nuclear power. This event helped to energize the environmental movement on the issue of nuclear power, and eventually this led to a freeze on all new nuclear power plant construction in the United States. Nuclear energy, which had seemed so promising to many Americans as a reliable source of energy, had now been relegated to the fringe. Another consequence of this event is the increasing dependence of the United States on petroleum as an energy source. Increasingly, the United States began to intervene on a larger scale in oil-exporting regions to ensure that a reliable source of energy supply does not become a problem for the United States.

Greater Middle East:

Soviets invaded Afghanistan. The Soviet Union, through the invasion of Afghanistan in support of the Afghan communist government, in effect launched a series of chain reactions that had the most profound consequences today. First and foremost, the Soviets hastened its own collapse by expending an extraordinary amount of resources (something that it cannot afford due to its fragile economic situation), in both manpower and money. In addition, the image of the Soviet Union as offering an alternative to the “imperialism” of the United States was destroyed, and its influence in the world stage declined drastically. More importantly for the trajectory of world history, the conflict generated a huge response across the Islamic World, in both fighters and money, in support of the “holy war” conducted by the resistance fighters (known as the mujahedeen) to the Soviet Union. Over time, the conflict takes on an increasingly religious nature, where it is seen by many Muslims as a conflict to end the oppression of the Afghan people. Thus, Political Islam in its modern form was born. Another event also took place during the latter half of the conflict which have strong ramifications today. Among the thousands of young foreign Jihadists was a young man by the name of Osama Bin Laden. Indeed, it is in Afghanistan that Al-Qaeda first started. It is important to note the name Al-Qaeda translates as “The Base”, the base by which Islamists in Afghanistan organized themselves and fought against Soviet aggression.
Islamic extremists took control of the Grand Mosque of Mecca: In late 1979, religious militants took over the Grand Mosque of Mecca and openly challenged the Saudi family’s religious authority. (The Sauds have claimed in their title that they the “Custodian of the Two Holy Mosques.) Later, Saudi security forces moved in and forcibly cleared out the insurgents, resulting in hundreds of causalities. The event, played out on televisions in the Arab World, shocked many who watched it. At the time, many in the Islamic world, from Philippines to Turkey to Pakistan, blamed the United States and Israel for this attack, which in turn led to massive demonstrations, including the burning of US embassy in Pakistan and Libya. The perpetrators were dealt with harshly, and all 68 rebels were captured and beheaded. However, what is truly significant about this event was that the role of religious authority in Saudi Arabia did not diminish after this attack. Instead, the religious conservatives were given more power. In order to appease the religious scholars and social conservatives, the Saudi government turned toward religion to uphold their own legitimacy. Religious schools became more prevalent; the social roles of women were cut back, and in some cases were removed from public altogether. After 1979, Saudi Arabia increasingly became a religious theocracy, with profound influence on the rise of Political Islam.
Iran’s Islamic Revolution: The final event in the Middle East that is crucial to our understanding of the year 1979 was the conservative Islamic revolution in Iran. By the end of 1978, the government of the Shah of Iran was in its last throbs. The question facing many Iranians was not whether or not the Shah should go, but rather, what sort of government should replace it. The solutions were far ranging, from the Tudeh Party (Communist Party of Iran) to religious ultra-conservatives. While the average Iranian was debating and fighting among those alternatives, the Shah suddenly left the country and left a large power vacuum in a country where the heavy hand of the state had been ever present. Into this power vacuum, an exiled religious teacher – Ayatollah Ruhollah Khomeini – made a landing in Iran. The masses suddenly found a leader that they can unite themselves around, and within weeks, a religious theocracy, as though something coming out of the Middle Ages, was born. The Ayatollah possessed hatreds towards many groups around the world – communists (both inside and outside the country), Israel and the Zionists, and above all, the “Great Satan” in the form of the United States. This hatred only increased over time as he gained more political power. The impact of the Revolution can be seen immediately, from the Iranian Hostage Crisis with the United States to the inauguration of the decade long war with Iraq, all stemming from this watershed event of the Middle East.

Now that we have come to the end of our list of major events of 1979, I would like to make note of a few more things:

First, even though in this article I have treated world events as separate in their geographic scope, in reality, all of these events are intimately connected and one often feeds off the other. For instance, American dependence on foreign oil increased just at the same time as Iran’s Islamic Revolution, which removed several million barrels/day from the world market; the fuel crisis of 1979 was certainly worsened by the conflicts in the Middle East. No event in the world took place in isolation, and each one influenced and shaped the outcome of the other.

Secondly, due the scope of this article, I am unable to discuss many of the important events in detail, but they are often important in their own right. 1979 was a year of many changes, yet it has frequently been ignored by many who are not as familiar with world history. I hope that through this article, I can at least spark some interests among my blog readers in the world around us, and view current events through a historical lens.

Finally, the history of the world since 1979, the fall of the Berlin Wall, the War on Terror since the early 2000s, the economic rise of China and increasingly East Asia as a whole, the challenges and benefits of globalization, all directly or indirectly traced their root to the tumultuous year of 1979. In many ways, the events of 1979 is still influencing the world around us, and we are still living in its shadows.

China’s Future, a demographic perspective

Posted on August 24, 2015August 24, 2015 by fqzhang

Headlines around the world have often captured the economic rise of China in vivid details: its ever-expanding industrial output, its rapid increase in the amount of mega-corporations that threatened to upset the status quo (think of Lenovo, Huawei, and Alibaba), and above all, its mass market of consumers, who are only beginning to consume in quantities not hereto imagined. But in this blog post, I want to focus on another core aspect of its economy that perhaps is more crucial for China’s economy in the long run: its labor force.

Mao had famously said something to effect that the more populous a nation is, the more strength that it has. Initially, what he meant to suggest is that because China is so populous, it is able to survive a nuclear confrontation or any other national catastrophes that could have easily crippled other nations. And for a long time, China’s demographic growth had been remarkable, seeming to heed his words, growing from 543 million in 1950 to 814 million in 1970 (see graphs), wh en the median age in the country is only 20. Of course, many nations have growth much fast than this, but for a nation the size of China, the impacts are quite noticeable. However, simply by adding raw number of people to the economy does not suggest that the economy has been growing as well. In fact, in certain years (see graph 2), the economy contracted quite severely during the Mao era. Overall the pace of growth is only from the duration of the period from to .

This lack of growth during the Mao era can be contrasted to the beginning of the Deng Xiaoping era, where following a series of liberalizations, the economy had become more robust and dynamic, growing at over 9% percent each year for the period from 1979-2014. The implementation of economic reforms in the form of special economic zones, etc, helped to propel the economy into new economic heights. Another factor that propels this growth that is often neglected is the so called “demographic dividends”.

The past 35 years had witnessed what is often termed as a demographic dividend, whereby the nation have both low old-age population and low younger generation. This period in a nation’s history (particularly in the case of East Asia, where this effect is the most pronounced) is characterized by high economic growth. For instance, look at the demographic pyramid for 2012. The majority of the population is of working age and contributing to national economic output, at the same time, less economic resources are required to take care the elderly (in the form of healthcare, etc), and less is needed to take care of the young (in the form of education, etc). This saving of resources freed up more capital and labor for the economy, and enabled the phenomenal economic growth that we came to associate with the East Asian countries.

However, one can readily see that there is a catch to this scenario. Population all eventually age and the working population today is the retirees of tomorrow. With a rising share of the elderly, the demographic boom will quickly turn into a demographic bust. In China’s case, this will become an acute problem (see graph). Decades from now, when 20, 30 or even 40% of the population is over the age of 65, what do we do then? Economically, the burden will be ever greater on the central government to provide for the elderly, increasing tax burdens on already a smaller working age population. If there is a lesson from the Japanese experience for China, it’s that population is at the center of any comprehensive national development strategy. Failure to take into account the demographic factor will have catastrophic consequences.

Good versus Evil: international relations through American eyes

Posted on July 26, 2015 by fqzhang

Recently, I finished reading of the biography of Kissinger by Walter Isaacson. Isaacson is an excellent biographer (he had completed biographies of Benjamin Franklin, Albert Einstein, and more recently, Steve Jobs.), who brought out the best of Kissinger and his brand of diplomacy. But what intrigued me the most is its comment on the way that Americans have historically viewed conflicts between nations; as a battle between Good and Evil. Invariably, the American nation saves the world from fascism, militarism, and during the Cold War, communism. This lens of good versus evil is how many Americans have historically viewed the role of the United States in the world.

This have lead me to think about issues of international relations based on this perspective. What is it like to apply this “Good versus Evil” mentality to the world stage? Does this sort of thing apply today, and is there an “evil ideology” or foreign entity that sought to overturn American democracy?

As mentioned before, Americans have traditionally viewed the world through black and white lenses, nations are either good or bad with scarcely any shade in between. As problematic as this may seem firsthand, in fact throughout America’s history, this has not presented problems for its foreign policies. Historically, American foreign policies have shifted between isolationism (it appears currently, we are in a state of isolationism, after years of conflict in Afghanistan and Iraq), and advent internationalism. In periods of Internationalism, we as Americans tend to think of the world as suffering from an evil that we must save the world from. And throughout much of America’s engagement with the world at large, the enemy does seem evil or capable of inflicting great damage and cruelty; and in the early 20^th century at, does appear to be in great danger. I will list a few examples below:

Spanish American War: Spain’s oppression against the people of Cuba is indeed extreme, and American intervention (whatever the cause or intention) does succeed in removing the brutal Spanish rule
World War I: American involvement in the war can be thought of as to end a genocidal conflict resulting from extreme nationalism. So while it might not be a “War to end all wars”, it did end a bloody one more quickly than it might have been otherwise
World War II: This war is the classic example of the American view of Good versus Evil. Nazism’s evil influence cannot be disregarded or downplayed; without American intervention, it is doubtful that most of Europe and Asia will be free from the tyranny of German or Japanese rule.
Cold War: the menace of the Soviet Union in Europe cannot be exaggerated, even though, of course, no shooting war actually took place. American presence and intervention indeed secured many governments from revolutionary forces who would have had devastating consequences. (As to what the right-wing governments that the American government had done, that is topic for another day.)

Historically, both foreigners and Americans have characterize American role in the world in such terms as well. David Lloyd George, the prime minister of Great Britain who represented that country at the Paris Peace talks after World War I, even refers to Wilson as Jesus Christ. Ronald Reagan, the American president, referred to the conflict with the Soviet Union in Biblical terms, referencing the war od Gog and Magog.

When applying these ideas to the world at large, this meant that Americans intervened in the world stage after it is convinced that the enemy is evil (of course, there are other considerations as well, but the portrait of the enemy as evil is one of the chief reasons for the intervention, at least that’s the public perception of it). Nations could be in ranked in the world on a line of good to evil, and nothing captured this better than the label “Axis of Evil” initially applied to Iran, Iraq and North Korea, applied by president Bush and Secretary Rice during their time at the White House.

The reality of the world is far more complex of course. Many nations are what can be called “Freemies”, not exactly friends, but also not exactly an enemy either. Almost all countries can be fit along those lines in the middle, since in one area, they may be considered to be “friends”, such as security, while in other areas they are direct competitors, i.e. the economic sphere. Many are baffled by this contradiction and how to resolve it using diplomacy.

The American public needs to be convinced that the world does not really operate on a principle of “good” vs “evil”, but in large measures are based on interests. Nations cooperate with one another not really because they are “friends”, which will stand by each other through storm and calm. But rather, they are working together because they have a shared interest in seeing each other succeed and that they can get the most out of the international system through working together. Lord Palmerston, prime minister of the United Kingdom, said it well when he stated: “We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.” These are the governing principles of international relations that most of the world adheres too, and if America as a nation are to adapt to the conditions of international relations as it exists currently, we must adhere to this concept. Of course, that is not too say that we should be a hyper-Realist and see the world only in terms of interests and forget our roots in democracy and freedom, but that simply, we need to recognize that this is how the rest of the world operates and if we are a member of this global community of nations, it is in our best interest to be moderate in our thoughts and actions and to see the world not as a black and white image of good and evil, but rather as a collection and patchwork of interests and ideas that needs to be looked into.

On Iran’s nuclear program: an alternative view

Posted on March 11, 2015March 24, 2015 by fqzhang

Iranian nuclear program has drawn a significant amount of international attention – and condemnation – since it was uncovered in the early 2000s. While the issue is complex and multifaceted, I believe a few points should be examined. First, why is the Iranian government desirous of a nuclear program? And do the people really want it? Second, how should the rest of the world respond to it? Are the current negotiations with Iran the best way to approach this issue? And lastly, how should we all proceed from here?

The Israeli historian Martin van Creveld once said that “Had the Iranians not tried to build nuclear weapons, they would be crazy.” Although his words may seem extreme, we need to understand what motivated the Iranian leadership to develop nuclear power, even in the face of mounting international oppositions. The Iranians’ own argument is that they need to secure their own energy needs in the form of nuclear power. This argument is hardly plausible: Iran is sitting on the world’s second largest reserves (after Russia) of natural gas. Iran’s South Pars gas field alone is estimated to contain 14×10^12 m3 of gas, around 5.6% of the entire world’s prove gas reserves. Moreover, the country contains the 4^th largest reserves of oil in the world. Iran’s energy needs can largely be satisfied by its oil and natural gas, as can be seen in the chart below. If energy security is not the real reason, then what is? The true reasons for such a program, I believe, includes the following:

Scientific and cultural prestige: Let’s imagine that the Iranians do not in fact want to build a nuclear weapon (a highly unlikely assumption for reasons that I will explain later), the mere fact that Iran is capable of developing advanced technology is something that the Iranian government can be proud of. In Iran, like many other parts of the world, scientific advances symbolizes the greater progress made in a society. The Iranian government sought to legitimize itself by promoting science and technology (much like the Soviet Union spent tremendous efforts in space exploration to legitimize the ideology of Communism). The Iranian people want to see progress being made in a variety of different fields, whether it be a rocket launch or a prospective nuclear power generation plant. Iran is gaining prestige by possessing those technologies. In a sense, scientific prestige is also tied into cultural prestige. We need to remember that Iran is more of a historical civilization than a nation-state in the modern sense of the word. The Iranian people had inhabited the Iranian Plateau for thousands of millenniums, and for much of that period Iran (or Persia, as it is known for most of its history), is a leading force among the world’s nations, and not merely in technology. It is in early modern times that Iran had fallen behind. In a way, many Iranians want to regain that sense of pride which have belonged to them historically. As heirs to a rich cultural heritage, Iranians today no doubt want to relive a part of its ancient glories; developing nuclear powers along the lines of other advanced nations will symbolize a part of this regaining of prestige.
Competition from regional powers: Let’s take a look at how the world appears from the position of Iran, and why its nuclear ambitions will likely lead to nuclear weapons. Geographically, Iran couldn’t be in a more dangerous position. As the map below shows, Iran is surrounded by potential or probable enemies. To its west, Iraq, despite its Shia majority (the majority religion in Iran), is embroiled in a complicated civil war with the radical Islamic State (IS). Further west, we see a similar situation in Syria, where Iran-backed government of Bashar al-Assad is fighting a multi-front war against IS and moderate rebel forces. Each of these governments, if they fall, would produce a serious threat to Iran itself; and these are just the militant organizations. Organized threats by nation-states posed a bigger problem still. In its southwest, across the Persian Gulf, the Kingdom of Saudi Arabia is ferociously anti-Iranian and possesses a powerful modern military and an alliance with the United States; other Sunni Gulf States are no more friendlier. Further to the west, Iran faces the strongest military power in the region in the state of Israel, which had spear-headed efforts to contain the Iranian enrichment program. Further to its north and east, Russia, China, Pakistan, and India are all nuclear powers. In such a dangerous neighborhood, Iran felt that by developing the bomb, it can achieve a sort of parity with the other regional and global powers, at least in part to compensate for its relatively conventional forces.
Security and Geopolitical leverage: In a point related to the second one, we need to be aware of the fact that Iran really has no natural allies. Culturally, it is the product of thousands of years of Persian civilization centered in the plateau of Iran, influenced by the forces of Shia Islam for centuries (today, an absolute majority of the world’s Shia Muslims lives in Iran), and the rise of political Islam in the form of the Iranian Revolution of 1979. For good or bad, few other countries possess such a unique historical experience. While this is a point of pride for many Iranians, at the same time, this also meant that Iran cannot count on any natural allies in the sense that the UK can rely on the US or Kuwait can rely on Saudi Arabia. The allies and friends it does have among governments are less than appealing: Iraq is bogged down in a struggle of a sectarian nature between Shia-dominated government and Sunni militant Islamists; likewise Syria is fighting its seemingly interminable civil war; the militant group Hezbollah in Lebanon is considered an ally and a way for Iran to project power into the eastern Mediterranean, but is categorized as a terrorist group (its military wings at least) by most governments around the world. Strategically, Russia can be considered an ally, but that nation is struggling in the face of western sanctions for its involvement in the Crimea and a falling oil price. (For a discussion of how falling oil prices are influencing foreign policies in Russia and Iran, see here). Iran is looking for new partners in China and India by offering them energy security; but this venture will be unlikely to result in any serious partnerships, especially if this partnership would result in possible international retaliations by the West. Iran is therefore left to defend itself against a myriad of threats. In this case, a nuclearized Iran can protect itself, or so the Iranian leadership believed, from military blackmailing. At the same time, Iran can project its power in what is known as the “Shia Crescent”, an area encompassing Iran, Iraq, Syria, and Lebanon, shaping itself into a regional power. Iran believes that thus nuclear power adds more muscle to its voice in regional and international affairs.

Needless to say, no matter what the reasons are for Iran’s acquisition of nuclear power, the rest of the world cannot be happy about the emergence of another potential nuclear power. However, the present countries that possess nuclear powers are in fact rebuilding their own respective nuclear arsenals even while they are denouncing the Iranian’s attempts to do so. We see that the rest of the world has been upgrading their own nuclear arsenals as well. In a recent article on Business Insider, the dangers of a nuclear war is emphasized more than ever before. However, the difference is that Iran is widely seen as an irresponsible government, and weapons in the hands of such a state is a worrying fact. But how should the rest of the world respond to it? Along the lines of journalist Fareed Zakaria, I believe that there are two main ways for the world to respond: 1. Forcing a Regime Change, or 2. Forcing a Policy Change. Let’s briefly define what each option meant and discuss their relative merits later:

Regime Change:

In essence this would involve the fomenting of dissent, support democratic political movements, and with outside help in trying to overthrow the government of Iran in one form or another. Most likely, the United States would be the leader in such an effort. In the meanwhile, the US and other parts of the world should not have anything to do with Iran since it is an illegitimate government in their eyes. In the views many, the only way to properly address the nuclear situation with Iran is wait (or help) the government to change and then deal with them later.

Policy Change:

This would mean that we will actively engage with the present government of Iran, treating them as an equal partner in these discussions, and really accept the fact that the government of Iran, however repulsive, is here to stay for some time to come. The dialogues will be conducted in an open manner and be peaceful in trying to reach a deal with Iran. For supporters of this option, they do not believe that this is a policy of appeasement, but rather, a step-by-step method toward achieving our objective, whatever they may be.

As a sophomore in college, I may not be in the best position to recommend foreign policy to those in the highest levels of government. But, nevertheless, I believe that here in the US and the rest of the world that does not desire to see a nuclearized Iran, have to decide on an option fast and not to oscillate back and forth between these two options. How can you possibly struck a deal with a government that you have every intention to help overthrow? Personally, I believe that the best option remains to bring Iran back into the international system, which it had been an outcast member since 1979, and to engage with it in more direct dialogue. We need to bring in international partners, which must include China, India and Russia, to discuss options with the Iranians on what to do. We must make Iran as an equal partner in its negotiations and not treat it as a criminal state. We need to recognize Iranian interests and why they sought to nuclearize themselves and to stress our own positions and concerns in why we do not want to see a nuclear program: no, it is not that we desire to encircle Iran on all sides, and no it is not that we desire to see a weakened Iran that is susceptible to invasions at any given moment. There are too much distrust and misconceptions between Iran and the West at the moment, each is mistrusting the other’s intentions. Therefore, if we can build an international coalition on resolving the issue, we can legitimize our intentions and make the Iranians understand that it is in the interest of the rest of world for them to denuclearize.

Current policies in delaying Iran’s nuclear programs have many merits to them. Firstly, the alternative, that of calling Iran to immediately destroy their nuclear facilities, will only strengthen their resolves in continuing to build them. If not in open, then in secret. Therefore, delaying what Iran has been attempting to do, by years (a very possible prospect), leaves the rest of the world with more options in dealing with the government. But more importantly, it buys the rest of the world time. The structure of government itself may likely change with the passage of years. I do not necessarily mean a revolution, but rather a gradual process of liberalization that will see a new generation of Iranian leaders that do not want to confront the world and or is filled with xenophobia, but rather sought peaceful coexistence. Younger generations of Iranian do not have the fervors of religious fanaticism that may have characterized some of their parents; in fact, I believe that many young Iranians today want to embrace the international system and be a part of modern society. I believe that will the passage of time, Iran can be a more responsible stakeholder in the international system and we can work with Iran toward this issue. However, in order to do this, we must first talk openly with Iran.

The importance of continuing dialogue with Iran cannot be overstated. If left isolated, Iran will retreat into itself and develop and deepen a paranoia of the rest of the world and perhaps the unthinkable will happen: a nuclearized Iran ready to use its weapons on its neighbors and beyond. As a historical analogy, imagine what if Henry Kissinger had never traveled to China to open up dialogue with that secluded nation, China today would possibly have been another North Korea: a government that is isolated and clung to an outdated ideology with a belligerent attitude toward the rest of the world. But to the credit of the US government (both the executive and the State department), rather than seeing this happen, the US government actively engaged with Chinese leadership and brought China into the international community of nations; a community that China has a stake in. In a similar line, I believe that by keeping the dialogue option open with Iran, we can hope to make some progress. Of course, this can only happen with Iranian commitment as well, and it needs to tone down the rhetoric against its neighbors and their allies, most notably Israel and the United States; it needs to show real commitment in following through with its promises; but above all, Iran needs to see that it is to its own security and benefit that it becomes a part of the international system rather than a challenger to it. Perhaps, eventually, Iran will be able to develop its own peaceful nuclear program, much as how Japan and South Korea has developed them, without feeling the need to weaponize it. All of these will likely take an enormous amount of time, likely decades; but I believe that in the end, the path of continued negotiations and dialogues with Iran will be preferable to any other alternative.

For related topics see:

Resource dependency, oil price decline, and the reshaping of the international order

Oil companies and the ethics of overseas investment

Resource dependency, oil price decline, and the reshaping of the international order

Posted on February 16, 2015February 23, 2015 by fqzhang

In today’s economy the need for a diversification of the economy is more important than ever. In particular, at the time this post is written (February 13^th, 2015), oil prices are its lowest prices in years as a result of the proliferation in supplies and sluggish global demands. All nations, whether they are a net importer or a net exporter, are feeling this squeeze on their national income.

The impact of this fall in oil prices are wide and cuts deep on those countries that depend on this resource. Witness the current crisis that Russia is facing: an economy that that facing sanctions on its key pillars: defense, which is a legacy of the Cold War era competition; energy and mining, both of which are resource based and depends on the global commodities market, and financials, which are in large part the results of capital inflows as a result of the sales of natural resources). And now, with the decline in the price of oil, Russia is finding less and less takers for its petroleum and natural gas reserves, while at the same time, Europe is moving away from the Russian gasman by investing more in green energy and meeting their energy needs through other needs, such as natural gas imports from America. As a result of this, investors have been pulling money out of Russia, resulting in a steep fall in the value of the ruble, a fall of around 50% at its lowest point. While the fall of the Ruble had stabilized recently, the impacts have been far reaching and severe, and it may take years for Russia to come back from this deep crisis. (on oil and national corruptions, click here.)

And Russia is not alone in facing such a challenge to its state coffers as the country tries to balance its budget moving forward to 2015. Iran, whose economy is even more dependent on the selling of natural resources, has been even harder hit. The stagnating national economy can only be expected to be getting worse in the coming years. Likewise, Venezuela, a nation that stylized itself as an example of 21^st century socialism, is in fact heavily dependent on oil to fund many of the social programs that the country is currently undertaking. A fall in its chief exports is likely to cause price rises on a variety of goods, such as food and fuel, which are heavily subsidized using state oil revenues. Moreover, it will likely increase the populace’s discontent with the national government, challenging the government’s very own legitimacy.

The overdependence on natural resource is what is often termed a “resource curse” or the “Dutch disease”, based on the supposingly devastating effects of the discovery of natural gas off the coast of the Netherlands on the Dutch domestic industry during the 1970s. In short, the theory suggests that with an increase in oil revenue, which are in essence easy money that does not take much investment, the government and society as a whole will move away from other sectors of the economy such as manufacturing and research and development. There is simply too little incentive to focus on growing the economy long-term when in the short-term, easy cash flows are being generated. The long term determinants of growth, which includes the accumulation of capital and the improvements in technology (according to the Solow model), are ignored in favor of the easy money that the country can easily receive from selling its natural resources. The government may then distribute this oil wealth to the populace to increase its popularity, or to pursue its own political agendas abroad (Iran in the case of interventions in Iraq and Syria, Russia in the case of its Near Abroad of Georgia and Ukraine). Such a huge amount of easy money in good times will give the government tremendous power in international affairs, leading to the state being called an “energy superpower”.

Another important point to note, as no doubt many have already observed, is that resource dependency tends to breed authoritarian forms of governance. In any case, a government that receives 60% or more of its revenue from selling its natural resources tends to be less free than those that are more resource-scarce. There are a couple of reasons for this:

First, remember the slogan of the American Revolution, “No Taxation without Representation”? Have you ever considered how true this is literally? In other words, if a government do not tax its citizens, or at least not tax them as much, does the government still have responsibility to provide its citizens with a representative form of government? In the cases of the oil-rich countries, when the government’s revenue does not depend on the cooperation of its citizens, there is little incentive for them to give rights to their citizens for a form of participatory democracy. Any sort of social benefit provided to the country’s citizens can be thought of as a “gift” to the populace, since it is not with their tax dollars that these programs are funded. The government may not feel like they owe their citizens anything, and thereby giving the government more leeway in pursuing their own goals.

Secondly, as this is a national resource, the ones who will be managing it most closely will likely be government bureaucrats, acting on behalf of the entire population. Obviously, such an arrangement will lead to corruption, cronyism, oligarchies, etc, since so much money and power are concentrated in the hands of so few people. This is simply too tempting for government officials not to abuse their power to enrich themselves in one way or another. Often, governments will sought to protect their own interests by clamping down on those who threatened their monopoly on the national wealth, leading to increasing authoritarianism and undemocratic forms of governance. For further discussion on oil and global corruption see here.

How is all of these going to affect the international arena as we move forward in 2015? It is interesting to note that the three countries we have mentioned thus far – Russia, Iran, and Venezuela – are in one sense or another a geopolitical rival of the United States. As we have previously noted, increased amounts of oil revenue will leads to more undemocratic forms of government, which in turn leads to more irresponsible governments, which are more likely to engage in forms of military adventurism and assertive foreign policies. I would argue that Russian would not have invaded Georgia in the summer of 2008, when the world’s attention has been focused on the Beijing Olympics, if it had not been for the fact that oil prices had been at its historic heights and much of Europe depends on the oil and natural gas provided by Russia. The anti-western rhetoric of Hugo Chavez would not have gained traction had it not been for the fact that Venezuelan oil had given him the economic foundation and confidence to do so.

But with the dramatic decline in oil prices since the middle of last year, all of these geopolitical conditions are bound to change. The large net oil exporters, not only Iran, Russia, and Venezuela, but also US allies such as Saudi Arabia, are going to see a drastic decline in their influence, which will require them to adjust their respective foreign policies accordingly. Let’s go through the three main powers we talked about here one at a time:

Russia: The current involvement of Russia in the Ukraine started when the oil prices were still relatively high, and when American natural gas exports to Europe are only starting. But now, a year later, Russia simply no longer have the sort of leverage to keep the European Union from fighting back against Russia designs, whatever it may be. My prediction for the current conflict would likely be for Russia and the separatists to drag things out a little longer to maximize their gains and to destabilize the situation in the Ukraine further and then to come up with a peace treaty with greater autonomy for the east of Ukraine in mind. In the end, Russia’s geostrategic goal is not necessity annex the region as it did with Crimea, but rather to influence it in such a degree that Ukraine’s foreign policies would still have to take Russia into consideration.
Iran: Without a sufficient source of oil revenue, the Iranian backing of Assad’s regime in Syria and the ongoing fight against the Islamic State will be in jeopardy. This compounded with the continuous international actions against Iran will seriously hurt the Iranian nation. Therefore, it is likely that we will see an Iran that is more willing to compromise on many key issues, from Syria to its nuclear program, diminishing somewhat its power in the Middle East.
Venezuela: The populist government of President is already under tremendous economic and political strain from before the fall in the prices of oil. And now, if oil decline continues, we may see increasing pressures for political reforms in Venezuela.

And to talk about it briefly, we may also expect to see the relative increase in power among the net oil importers, which includes large sections of East and Southeast Asia, and non-oil producing South America. Although, this increase in power for the net importers may be less than the decrease in power of the oil exporters, in part because there simply more oil importers than exporters.

Significantly, countries that are energy poor but are growing through economic means, such as Turkey and China, may become stronger than before. Their freedom to maneuver will likely increase, and they may become more assertive in their respective neighborhood. The impacts of their rise will remain yet to be seen. In political relations, we speak of both “hard” and “soft” powers, with “hard power” defined in military means, while soft power is described as cultural influences. Country’s national power is no longer measured by what they can produce or how they can impose their wills on the world. Some countries, particularly in Europe and East Asia, may see themselves benefitting from the oil decline as beneficiaries of tourism and places of interest for the entertainment industry. Whatever the shift in geopolitics may be, we may be guaranteed that we will see a shift in the international order in the coming years (assuming oil prices remained low), where countries that have obtained enormous power through using energy as a chess piece will see a decline in their influence and more power will be shifted toward nations with strong economic performances and a more solid source for their power, whether they be strong economic performers like China or Turkey, or strong “cultural powers” like Korea or the UK.

On China’s Anti-Corruption Drive

Posted on December 29, 2014February 23, 2015 by fqzhang

In China, ever since president Xi Jinping launched his promise to crack down on corruption both high and low (or to use his phrase, “striking tigers and flies at the same time “), a dark cloud seemed to have engulfed Chinese politics. The corruption drives seemed to have consumed absolutely everyone, and has been the talk both within China and abroad. Hardly a day seemed to go by without some “high ranking official” getting sacked for alleged embezzlement, misconduct, or plain neglect of official duties. Yet, despite all the fanfare, how much of an impact is the crackdown really making?

First, it needed to be said, this official drive against corruption has been popular with the Chinese people. Official corruption has long been a source of anger among most Chinese and they resent the way that government officials are able to use their given authorities to further their own ends. To many Chinese, the direct actions from the Central Government in Beijing are the only ways for which corruptions can be combated, since the national government are the only ones able to protect the defenseless people from the greedy and vicious local officials.

President Xi’s role as a corruption buster would hardly be the first in the long history of China, although it is arguably the largest such drives since the Communist victory in 1949. Throughout China’s imperial history, corruption has always been present in China’s vast bureaucracy. Therefore, it is the duty of the imperial court and the emperor to periodically send out officials from the capital to the provinces to inspect local officials and to hand out punishment to those officials found to be corrupt. One of the key reasons for the Communist victory of 1949 is the ability of the Communist leadership to present an image of themselves as the “incorruptibles”, and portraying their opponents, the Nationalists, as a group of corrupt bandits.

Now fast-forward to 2014, and we see that if we substitute the imperial bureaucracy with the Party bureaucracy; the imperial court with the Central Government in Beijing; the traveling officials of the court with the Central Commission for Discipline Inspection (a branch of the Central Government); and the emperor, dare I suggest, with the General Secretary of the Communist Party, Xi Jinping himself; and we then see a parallel system of combating corruption. Namely, by arresting those responsible and seize their ill-gotten assets. However, if we look at this method of combating corruption, we see that it is neglecting the true causes that enabled these corruptions to happen in the first place. Arresting officials may be easy to do in the short run and may discourage corrupt practices briefly. Eventually, the energy of a government get tired out and it would declare the corruption drives a success and wrap it up. This sort of solution could not be sustainable in the long run and is merely a stop-gap measure. Or to use our historic analogy, one key reason why every dynasty falls in China is its inability to handle reforms and had to rely on temporary measures to stop these failures in governance; eventually, only a popular uprising and revolution is able to change the status quo.

I’m sure this point is not lost upon the officials who instigated this sort of investigations in the first place. The question we must ask ourselves then is why this corruption drive if everyone knows it is destined to fail? I can divide up the reasons as follows: first, the desire to appear responsible and to gain popularity among the people, and gain credibility and praise for its leaders, most important of which is Xi Jinping himself; second, more importantly, to use this opportunity to eliminate domestic rivals and challenges to the ruling group’s rule through the process of arrest and public humiliation via a media campaign; and thirdly, as an explanation to the method of anti-corruption drives, to preserve the legitimacy of the party and to root out some of its abuses without actually loosening the ruling party’s hold on power.

The Chinese public, like publics everywhere, are eager for sensational news (how much funds he embezzled, how many apartments has he gotten, how many mistresses are being supported by him), and is willing to let the sensational take over the need for true substance, which is the need for institutionalized reform. For those in the highest levels of government right now, this ability to satisfy a public that is eager to combat corruption and see the downfall of corrupt officials makes the corruption drives worth the effort. Boosting its image among the public and gaining their support, the government is able to have a freer hand in dealing with other domestic issues such as the problems relating to environmental degradation; or in the international arena, such as the island disputes in the East and South China Seas. President Xi himself, by seeming to remain aloof from charges of corruption (while in reality his family assets are no less questionable), can gain the credibility needed to implement his political agendas.

In the opaque environment of Chinese politics, power is never as secure as it looks to the outsiders. There exists numerous factions with the Party itself, jousting for influence with one another. President Xi had gained power over the years by outmaneuvering his political opponents, most important of whom is Bo Xilai, a disgraced former Party regional leader who had been a key contender for national leadership and who was now found guilty of murder and numerous corruption charges. Now, as a part of his official anti-corruption campaign, Xi is moving against some of his other opponents such as Zhou Yongkang, an ex-security chief arrested for corruption and leaking state secrets. Indeed, the corruption drive, despite its wide scope, has targeted very specific individuals and groups that have opposed Xi in the past and are threatening his own power base. Arguably, partly as a result of the anti-corruption campaign, which rendered his opponents either in a state of confinement or politically powerless, Xi is now arguably the most powerful Chinese leader since the death of Mao Zedong, the founder of the People’s Republic.

Finally, the Chinese leadership, in spite of its political agendas, recognized the need to combat corruption on a serious level, as it presents a threat to its legitimacy in the eyes of the Chinese people. However, the most obvious solution, which is implementing reforms to the structure of governance, will invariably involve the loosening the Party’s grip on power. This is unacceptable to all party officials large and small, past and present. Moreover, the political institutions of China or the lack thereof presents serious challenges to be overcome: the lack of an independent judiciary not subject to political pressures, the intimate relationships between officials and heads of state-owned enterprises (SOEs), the pervasive cronyism as a result of the system of political appointees that run from the top down, etc. All of these are serious problems that needs to be addressed. The problem is, the Party is unable and unwilling to address these problems without themselves becoming discredited and falling from its position as the ruling party of China. Therefore, it had to resort to the sort of temporary stop-gap measures that have been the hallmark of central governments since antiquity. (And, likewise, destined to fail with the passage of time)

I recall reading a book a while back about China, which compared China to the bus in the movie “Speed” (1994), which features Keanu Reeves, Dennis Hopper, and Sandra Bullock. In the movie the cops must prevent a bomb from exploding in the city bus, while keeping the bus hurtling through the streets above 50 miles an hour. Any speed below 50 miles an hour and the bus will explode. Needless to say, China is this bus. Now let’s imagine for ourselves that we are the national leaders of China, and we recognized that there is a ticking bomb on this China bus. However, to keep China going, we must keep the Chinese economy growing at over 7% per year, keep the machineries of government working, and to maintain order onboard. All of these while we are navigating through the streets of international relations, and make sure that no one else is affected by our problems. Corruption is that ticking bomb that will likely explode and will be a problem for the national government if left untreated. However, to tackle it, the national leaders must take into considerations the numerous other factors at play. For now at least, it is simply easier to keep China going forward by developing its economy and distracts the people from the problems the nation is facing, than to tackle issue of corruption through institutional reform.

For more on the Chinese housing market, click here. For more on corruption in the oil industry worldwide, click here.

Reflections on India’s hydroelectric project

Posted on November 27, 2014March 24, 2015 by fqzhang

According to a recent article on Reuters, “India approves projects in dash for growth, alarming green groups”, author Tommy Wilkes discussed the Indian government’s approval to build the country’s largest hydroelectric power plant. The construction of this dam will upset the ecological environment of the area considerably by cutting down trees and reducing biodiversity. Therefore, the debate in this case is whether or not the government should allow a plant to be built in the state to promote the economic growth of the area and the nation, or should they look to protect the environment and to help promote the long-term environmental welfare of the region?

While it is easy to simply blame the shortsightedness of greedy industrialists or government officials only interested in tax revenues, we must bear in mind that India is a large developing nation with its own needs. For us here in the United States, which enjoys a high standard of living and free from most material needs, it can be inappropriate to pass judgment upon others that are less fortunate and are behind the American standard of living. Imagine telling the American or British industrial worker of the late 19^th century to leave their jobs behind and their families starving because of concerns for the environment! We can think of society as being in a long series of progress, just the US and Western World had undergone significant environmental degradation in the past, and moved beyond that stage to the present, I believe that the rest of the industrializing world will undergo a similar process, eventually becoming more green-conscious once they had developed to a certain level. For the government of a developing nation that is responsible to the people, protecting the environment should not be on the top of the list at the present.

I know some may find this view extreme, and may offer several counterarguments. For example, they may reason, when the West was industrializing, we do not understand the impacts of pollution on the environment – but now we do, and therefore we need to tell the nations of the developing world to place the environment at the top of their priority. However, recall that Abraham Maslow, the famed psychologist, once came up with the “Hierarchy of Needs” for human beings and I would extend this logic to society as well. When a society still has its “needs” unmet – clean water, reliable source of enegy, etc – they cannot be worrying about things in the “self-actualization stage”, such as environmental justice and minimal carbon footprint.

To use the terms of ethics, we can see that what India is doing by building the dam is to maximize the most amount of benefits for the most amount of people, an utilitarian approach. This approach (first expressed by John Stuart Mill and Jeremy Bentham in the 18th century), despite its many drawbacks, do have the important advantage getting the most amount of benefits for a given limited amount of resources, something that is crucial for developing nations. However, this is not to suggest that we can simply let them off the hook for all environmental degradations, for in the interconnected world today, pollution from developing nations affect the world as much as developed ones. But we cannot judge countries in the same standards because each one has its own historical needs and priorities. As India and the rest of the world close the gap between themselves and the West, we can expect more from these countries and how they can start to make a positive impact toward the environment in the framework of their overall development.

Housing market and its implications for the Chinese economy

Posted on November 16, 2014February 23, 2015 by fqzhang

Currently (as of late October, 2014) the Chinese housing market is at a historic high, yet housing prices have increased only modestly this year. This got me to thinking, could the booming Chinese housing market be at a turning point, and is perhaps already on a road to decline? Recently, I have read that some in China have begun to starting selling their houses, and that those who sells it the most are those with government connections. Perhaps they have some insider information on the Chinese government’s attempts to curb this housing bubble, or that they know something the rest of people in China do not? In terms of policy, I believe the best way to do this is through tightening the credit market, and raising interests rates. Its been well known that the government have been trying to do curb the proliferation of non-performing loans and easy money that is circulating in the country, and if the central bank indeed decided to raise the interest rates, the effects could be extremely profound, not only for the housing market, but for the entire economy. The construction boom occurring in China is fueled by the essentially free-loans that real estate developers have been getting through state-owned banks, many of these using their political connections. And now the housing supply have far outstripped the demand for housing, yet the price remains artificially high, with most of the new buying coming from speculators. In this situation, a crash is inevitable. Many have warned that crash is impending for many years now, yet the market took the warning in stride, perhaps factoring in the risk. Yet investors still believed that the boom is sustainable. In such a situation, even the slightest sell-offs can induce a panic.

Let’s look at a hypothetical situation. Going back to the central government’s actions. If the central bank (People’s Bank of China) had raised interest rates, the money fueling the construction would dry up, speculators would not be able to gain the necessary funding for them to construct new homes and further speculations in the market can no longer be financed. In this case, the housing will tumble investors leave the market en masse. The non-existent demand would not be able to prop up the price or to slow the decline. A fall in housing price will likely mark the beginning of a general slowdown in the Chinese economy for several reasons: firstly, the housing sector and construction is one of the largest sector in Chinese economy and much of the economy is tied to real estate in one way or another. The housing sector stimulated demands for steel, concrete, etc, and provided employment for millions of migrant workers coming into China’s cities each year. A fall in construction would result in overall lower aggregate demand in the economy since it is such a major component. Secondly, many companies uses real estate as asset to back their loans, and with a rise in interest rate as well as a fall in the housing prices, more loans would be much harder to get and the companies will get less of it because of the decline in their property values. As cheap loans have been at the basis of Chinese economic growth for years now, it is reasonable to expect that as this cheap loans dry up, the Chinese economy (which is driven by new investments) would slow as well. Non-performing loans, especially at the provincial and municipal levels in China would inevitably further exacerbate the crisis. Many state-owned-enterprises are burdened by high amounts of loans and a rise interest rates would cause them to become financially insoluble, a risk the Chinese government simply cannot take.

Of course, these risks have passed through the mind of the government officials as well, and especially since many government officials have ties to the commercial world, they would not be likely to push for legislations that would damage their commercial holdings. (On corruptions in China, click here). No one wants the housing market to decline, since everyone has so much tied into it. A decline in housing is not likely, or at least the government will sought to delay it as long as possible. However, the need to curb the wild growth in the market is needed. Once again, as many commentators have stated before, the Chinese economy needs structural reforms in order for it to sustain the levels of growth. The deep and complicated ties between political bodies, regulatory agencies, banks, developers, speculators, etc. causes the rise in property values in the first place, and now it has grown to an unsustainable level. The task before the government is therefore to curb the wild proliferation of loans without damaging the rate of economic growth and find a solution that is acceptable to all parties involved. A herculean task indeed! It remains to be seen how the government will be able to manage this crisis.

Oil companies and the ethics of overseas investment

Posted on November 16, 2014February 22, 2015 by fqzhang

Corruption is an issue I care about deeply, and this will be one of a series of writings on it. This particular post is focuses on politico-economic corruptions with oil companies, and is written in a documented research format. (For other articles on corruption in China, see here)

Oil companies are constantly seeking new ways to acquire new resources and to expand overseas. Oil companies are no exceptions. In their case, the quest for greater access – in the form of drilling rights to oil and gas fields across the world – to resources has been intense and lead them to deal with governments around the world. However, this also presents an ethical dilemma: many of oil fields are under the ownership of governments that are often perceived as corrupt by international standards (as measured by the Corruption Perception Index[1]), so should big oil and gas companies deal with these inherently inefficient governments? On one side, oil companies have a duty to its shareholders to maximize value and a need to maintain its global competitiveness through investments; on the flip side, businesses should not provide funding to fuel corruption and social inequality, give aid indirectly to groups that threaten American national security, or to further human rights abuses as a result of economic exploitation. To narrow down the scope of this discussion, I would like to focus on the role of the six “Supermajors” in the oil industry: BP, Chevron, ExxonMobil, Royal Dutch Shell, Total SA, and ConocoPhillips, and their interactions with two countries in particular: Nigeria (ranked 144 out 175 based corruption levels, with 175 being the worst) and South Sudan (173 out of 175).

Let’s examine the societal impact that private oil companies have on the people in the countries they operate by presenting some facts. Oil industry is a multi-trillion dollar industry, and they operate in all regions of the earth.[1] In the example of Nigeria, Shell, ExxonMobil, Chevron, and Total all have stakes in Nigeria, with both on and off-shore oil production facilities, concentrated in the Niger River Delta. The companies are partnered with the Nigerian National Petroleum Corporation (NNPC), a state-owned enterprise. Nigeria, as a member of OPEC, maintains at least 51% ownership in all its joint ventures with foreign companies.[2] Foreign expertise in the oil industry is crucial for the development of Nigeria’s offshore drilling platforms, and much of Nigeria’s future earnings from oil likely will come from these areas in the Gulf of Guinea. Currently, oil and gas exports accounts for around 95% of Nigeria’s exports and 76.39% of federal government revenue, pumping hundreds of billions of dollars into the economy.[3]

These numbers all seemed great; and if indeed this is all the things that oil companies had done – creating jobs and helping provide a source of government revenue – then we have nothing to blame the Big Oil for. However, the presence of foreign companies on Nigerian soil is far detrimental than it appears at first sight. As oil increased in importance (from 3.43% of GDP in 1965 to 37.44% in 2009[4]), it fuels increasing corruption by giving an extraordinary amount of power to the government officials in charge of handing out government contracts. Kickbacks and briberies are commonplace and oil companies are unscrupulous in giving out sums of money to officials, in exchange for favorable deals. Government officials are intimately connected to the military and other social elites, giving the oil companies a leverage in influencing the politics of the nation as well. Nigeria underwent a serious of military coups since independence in 1960, and much of it occurred with the knowledge or the tacit approval of foreign oil companies, ensuring that their own interests are protected above all. This fueled an enormous amount of corruption at the very top of society. As an example, former dictator Sani Abacha, who ruled the country from 1993 to 1999, is estimated to have stolen the equivalents of 2-3 % of the nation’s GDP for each year he was president.[5]
As we can see, the presence of oil companies introduced an element of instability to the post-colonial landscape by giving rise to a plutocracy that are self-promoting and cares nothing for the nation. Moreover, oil companies, by interacting with these corrupt countries, are also destabilizing them. It causes social unrest between different groups in the county: oil vs non-oil producing regions, the business interests vs subsistence farmers. The Supermajors are extremely influential in world affairs by virtue of their size and the different areas that they operate. With this great power also comes a great responsibility: to promote the interests of the people living in the areas that they are operating. Energy companies are already under intense criticism for not being responsible, and it is time for oil companies to become more responsible stakeholders in society. From this perspective, oil companies should limit their interactions with corrupt governments such as that of Nigeria’s and restrict their investments to countries that score high on their political transparency. Companies should take into consideration processes of government approval of projects, have a basic idea of where the revenue is going, and refrain from bribery (this last point is somewhat unnecessary since bribery is already illegal under the Foreign Corrupt Practices Act in the US and elsewhere, but stricter enforcements are necessary.) Only through this careful evaluation of government transparency can the “oil majors” ensure that their investments are not only benefiting themselves but also others in the community that they are involved in.

Besides giving rise to further corruption in society, by interacting with corrupt or underdeveloped countries – they are often the same since one often leads to the other – oil companies also indirectly retards the growth of a domestic economy. Nigeria, for example, went from exporting large amounts of agricultural products such as coffee and grain, to becoming a net importer of food, even while millions of acres of its own land lay fallow due to a lack of investment in agriculture.[6] The presence of oil and natural resources shifted the focus of the company away from developing its industrial and agricultural base to becoming dependent on a commodity that fluctuates daily in the international market, a classic example of the resource curse. This causes a lack of diversification for the economy and contributes to volatile economic growth for the region.[7]

Once again, we must consider the role of the oil company as more than simply a profit-generating entity that can neglect its surroundings. Companies exist in their environment, and I believe that people tolerate the existence of corporations because of the possible benefits it brings to society. The vast majority of the people of Nigeria, a nation of over 170 million people, are not deriving any benefits from the black gold beneath their feet and off their shores. They had come to resent the oil companies for being the source of their misery and the ongoing crisis in the Niger delta (political and economic). This resentment is often expressed in the forms of oil stealing, negligence while working, and forms of demonstration. This causes disruptions in oil supplies and greater costs for oil companies to run their operations. Furthermore, tying into the overall theme of corruption, we see a relationship of how economic underdevelopment contributes to corruption: poorer people tends to favor extreme solutions to their problems, causing them to seek “strongman” to rule the country in the hope of solving their problem (or as President Truman once said, “The seeds of totalitarian regimes are nurtured by misery and want”[8]); this in turn causes concentration of power and wealth in the select few, who evolves into self-serving oligarchy; the oligarchy is afraid of losing that power and uses oppression to cement their rule, causing suffering to millions, and eventually a new leader will arise who will promise change, but who in fact only looks out for his own interests; and the cycle begins anew. Throughout this entire cycle, oil and oil companies are the lubricants that makes the machinery of corruption run. Oil companies in a country like Nigeria fosters corruption, increases reasons for oppression, and while at the same time harms the structure of an economy. It is advisable for oil companies to stay out of the market altogether, or at least not to return until conditions have changed and civil society had become stronger.

A final point arguing against the involvement of Big Oil overseas would be the existence of terrorists groups and parties hostile to the US that might benefit from the petrodollar flowing into their economy. In Nigeria, the Islamic terrorist group Boko Haram (whose name meant “Western education forbidden”) is busy stealing oil through breaking pipelines, taking control of oil fields and illegally refine oil [9]. Boko Haram, with links to the international terrorist group Al-Qaeda, presents a security threat to both the people of Nigeria and nations around the world. The group appeals to those Nigerians who felt cheated out of the benefit brought about by the exploding oil wealth in the country. The money gained from the oil refinery has given the group the means to recruit new members and increased its militancy, as demonstrated by the recent kidnapping of over 200 schoolgirls in northern parts of the country.[10] Oil companies can stop all of these by not conducting business in the country where terrorists groups operate, as listed by the US State Department. By not conducting businesses in those countries, we are decreasing the power of terrorist groups to obtain funding and eliminate some of the social inequalities that gives rise to terrorism in the first place.

Now that we have discussed several of the key points against oil companies operating overseas, let’s look at the pro-Big Oil side’s counterarguments.

The six Supermajors, whether they are the French company Total or Exxon of the US, exists in the structure of a corporation. A corporation is a separate entity distinct from its owners, but at the same time having many of the same rights as people, as the Supreme Court decision “Citizens United v. FEC” reaffirmed and expanded in 2010. Rights are necessary because companies need to be able to enter and enforce contacts with different parties with limited outside interference. These rights, as applied to businesses, essentially meant that they should be free to select who they would like to do business with without their home government come in and meddling with their decisions. From this point of view, even though governments that own the oil fields may be corrupt, this should not prevent companies from trying to enter their markets in its search for natural resources. Political goals and even human rights and global development should not be the main concerns of these businesses, and governments should not limit business operations based on these non-business goals. Corporations have a fiduciary duty to their shareholders and oil companies believe that as free entities, they should be able to pursue their interests in foreign countries. As many of the oil companies are struggling to remain competitive amid high costs, they are looking to get access to as much raw materials as possible at the lowest possible price. Furthermore, in regards to their social responsibilities, Big Oil lobbyists argue that by producing oil in foreign countries, they will eventually help the citizens of those countries by providing them with revenues for them to develop, while at the same time people in the developed world benefits by having access to cheaper fuel prices.

Another key point oil lobbyists make is that the Big Six are facing new challenges from a number of sources. Most significantly, many national oil companies (NOCs) have emerged as important players around the world. These enterprises are often state-owned, working on oil fields at home while at the same time expanding in underdeveloped areas in Africa and elsewhere. The largest among these include Rosneft and Gazprom in Russia, Petronas of Malaysia, China National Petroleum Corporation and other Middle Eastern and Indian oil concerns. In the past, the Supermajors are able to fend off these challenges because they possess the skills and technologies to outdo these competitors. But today, developing nations are catching up to the skills needed to be successful. In order to respond to these challengers, the pro-oil side argues that the oil companies must expand more overseas to markets that have been previously overlooked. However, often this is impossible because the US government has placed sanctions on certain countries, due to a variety of political reasons.

One example is South Sudan, where prior to its independence from the Republic of Sudan, US companies are not allowed to do business with due to the prevalence of state-sponsored terrorism. In 2011, Southern Sudan became an independent nation and US companies are eager to get in on this new market. However, they are still prevented from doing so; this is because South Sudan lack the proper infrastructure for transporting oil and requires pipelines through the Sudan, which is on the sanctions list by the State Department. South Sudan has also been considered to be a major violator of human rights due to the ongoing civil wars in the country. Despite these concerns, oil lobbyists pointed out that other Asian companies are not bound by these restrictions and are gobbling up oil fields in large tracts, and providing 98% of government revenue for South Sudan in the meantime.[11]

Why should Asian NOCs be allowed to invest in a corrupt government while Western companies are not? Oil lobbyists argue that this is unfair for American/European companies since they are being placed at a disadvantage by for political reasons. They argued that by staying out, we are not helping solve the human rights issue since other companies will simply step into the void, while at the same time, Western companies are missing out on a valuable opportunity to grow.

All of the arguments made in favor of oil investments in corrupt governments overseas all have good merits and deserve our considerations. However, each one also have its faults, and I will address each one individually.

Firstly, oil companies pointed out the divide between politics and business and urged governments not to interfere in the economic sphere. This division simply do not exist in real life; if anything, the natural resource extraction business depends on the protection and promotion of governments more than any other industry. Since the 19^th century, oil and gas companies have often been the instigators of legislations and works closely with governments: the help the British governments provided to Anglo-Persian Oil Company (later BP) when faced with a possible nationalization in Iran[12], the substantial tax cuts of the Bush Administration on the oil industry are all some of the examples of businesses working with governments to secure their interests[13]. The hypocrisy is evident: even though the oil and gas industry actively lobbies the governments to help them, at the same time they continue to resist any form of government regulation. In this sense, we see that the oil company’s freedoms are not really affected, but rather, Big Oil have entered a sort of contract with national governments whereby oil company will get their interest promoted in exchange for some regulations, such as not doing business in countries with poor human rights records. This arrangement, in my view is fair, and Big Oil are not getting their rights violated, as they have often claimed.

Secondly, oil companies argues that if the West did not invest in African oil, then other Asian countries will simply step in. However, we need to remember that many of these Asian countries, such as China and Malaysia, also have human rights violations of their own, from cracking down on journalists to prohibiting the freedom of assembly. Can the United States and other western nations, areas with decades if not centuries of respect for human dignity, be held to the same standard as these countries? Oil and gas companies are our nation’s representative overseas, and what they do or don’t do reflect back on their country of origin, either enhancing or endangering the moral power of the United States and the West as a symbol of freedom in international relations. From another view, as countries in the developing world democratize and cast off their legacy of oppression, would the governments and people of those countries want to deal with companies that had fostered their oppression in the first place? Probably not. The developing nations also represents the biggest emerging market (Nigeria’s population are expected to more than double to 440 million by 2050[14], even exceeding that of the United States at the time), an area that oil companies simply cannot ignore. Oil companies need to consider this in the future, and good relations with these nations is crucial for Big Oil’s long term vision and success.

Finally, Big Oil companies argued that they need to bring benefits to all stakeholders. However, I would like to argue that not all stakeholders are of equal importance. It might be true that shareholders in the company can get some extra dividends through an investment, and certain government officials can become rich. But what about the millions in Nigeria or South Sudan that are living on less than $1 a day, and who are trapped in a cycle of poverty? Indeed, oil companies are neglecting the single most important stakeholder in oil development projects, which is the people who are living in the area affected the activities of oil companies. Imagine this: if a company comes by and decide to occupy large amounts of land without due compensation, pollutes the land and rivers with refinery wastes, and do not bring any job opportunities to the displaced peasants, would you support the company moving in? I would imagine not, and yet this is precisely what is happening in the Niger River Delta.[15] Can a company be said to be a responsible member of society if it brings nothing but misery to the area where it is present, no matter how much wealthier they are making executives back at home? In this situation, it is only ethical for companies to limit its investment or not invest at all.

To sum up, I believe that it is inherently unethical for Western oil companies to invest in overseas asset in corrupt/underdeveloped countries. As my examples have shown, the presence of oil companies in these regions will likely lead to economic underdevelopment, further human rights abuses and exacerbate political corruptions. In order for oil companies to be considered responsible corporate citizens, it is imperative for them to refrain from doing businesses in these regions.

[1] http://www.aei.org/publication/energy-fact-of-the-week-as-a-separate-country-the-us-oil-and-gas-industry-would-be-the-16th-largest-economy-in-the-world/

[2] http://www.nnpcgroup.com/NNPCBusiness/BusinessInformation/OilGasinNigeria/IndustryHistory.aspx

[3] http://www.ceicdata.com/en/blog/oil-dependence-hindering-nigeria%E2%80%99s-emerging-economy

[4] http://www.ccsenet.org/journal/index.php/jsd/article/viewFile/14891/10727

[5] http://www.unodc.org/unodc/en/frontpage/nigerias-corruption-busters.html

[6] http://www.ccsenet.org/journal/index.php/jsd/article/viewFile/14891/10727

[7]ITracy_l_moodledata_temp_turnitintool_793995179._60_1384335874_2108.pdf

[8] http://www.digitalhistory.uh.edu/disp_textbook.cfm?smtID=3&psid=1235

[9] http://www.trackingterrorism.org/article/new-financing-options-boko-haram/oil-theft

[10] http://www.huffingtonpost.com/2014/11/01/boko-haram-kidnapped-girls-married_n_6086420.html

[11] ITracy_l_moodledata_temp_turnitintool_793995179._60_1384335874_2108.pdf

[12] http://www.sjsu.edu/faculty/watkins/mossadeq.htm

[13] http://www.pbs.org/now/shows/347/oil-politics.html

[14] http://www.pewresearch.org/fact-tank/2014/02/03/10-projections-for-the-global-population-in-2050/

[15] http://epu.ac.at/fileadmin/downloads/research/rp_0707.pdf

[1] http://www.transparency.org/cpi2013/results

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fqzhang

Hello everyone, this is a blog where I comment on issues I care about, ranging from international relations to technology. Enjoy!

Category: International affairs

The Importance of 1979 in World History

China’s Future, a demographic perspective

Good versus Evil: international relations through American eyes

On Iran’s nuclear program: an alternative view

Resource dependency, oil price decline, and the reshaping of the international order

On China’s Anti-Corruption Drive

Reflections on India’s hydroelectric project

Housing market and its implications for the Chinese economy

Oil companies and the ethics of overseas investment