Can the Communist Party overcome China’s Water Crisis?

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Science writer David Ball has written an excellent book on the role of water in Chinese society: The Water Kingdom – A Secret History of China. The book provides an illuminating history of Chinese society’s unique and often turbulent relationship with water, from ancient times to the immense water challenges China is facing today.

Of course water has played a fundamental role in all human life throughout history, But fundamental geographical differences mean that water has not only played a different role in the development of Chinese compared to Western civilisation, but also that water as a concept is viewed through a different lense altogether.

Some of the key geographic differences are that:

  • While ancient European civilisation was concentrated along the coastal strips circling an enclosed sea (the Mediterranean), the ancient (as well as contemporary) Chinese civilisation had a more central than peripheral location – hence the Middle Kingdom – circled by the open ocean and barbarian lands.
  • Europe’s coastline is fragmented and indented, making navigation easy, guided by landmarks. Ships could travel long distances by hugging the coastline, and even if land was not visible ships would never be that far from a shore. In contrast China has a comparatively featureless east coast pointing out towards the trackless Pacific – making oceanic enterprises a less attractive business proposition (the ocean-going voyages of Admiral Zheng He in the early 15th century being a notable exception).
  • Thus, while Europe (stated in slightly simplified terms) developed as an oceanic civilisation (first the Mediterranean, then the Atlantic), China developed as a river-based civilisation. Its relationship to water was not primarily with the ocean, but its two great rivers; the Yellow river and the Yangtze.

The two great rivers have defined Chinese civilisation. They have served as sources for national myths, inspiration for philosophy and art, theatres of war, communication channels, transport routes – particularly for shipments of grain tribute from the regions to the capital, territorial barriers, purveyors of natural disasters, and of course as water sources for China’s agriculture, industry and cities.

The Yellow river has traditionally been designated as the cradle of the Chinese civilisation. “When the Yellow River is at peace, the nation is at peace,” runs an old saying attributed to the ancient leader the Great Yü, famed for his introduction of flood controls late in the third millenium BC. What the saying reveals is that the relationship between river and nation has often been a turbulent one.

The Yellow River has both provided the Chinese people with their livelihood, and often swiftly taking it away again. Although most large rivers are prone to flood, the extremity of the two great Chinese rivers are of a scale unlike anything known in Europe. The Yellow River has its name for a reason. Its waters are rich in China’s famous “yellow earth” from the Mongolian deserts, giving its water a higher density of solids than in almost all rivers in the world – as much as 300 grams of sediment per kilogram of water. As the river flows east, some of the sediment settles onto the riverbed and gradually raises it higher. When flood season arrives the waters are prone to overrun the banks. Since time immemorial the Chinese people have combated the flooding threat by constructing dykes of mud and rocks. However, as the riverbed rose so did the dykes, until the river itself was running like an aqueduct up to 15 meters above the surrounding landscape. When a breach eventually occured, the inevitable flood was all the more catastrophic. Yet, despite these obvious dangers it was precisely because of the river’s fertile sediments that the floodplain was so alluring to farmers.

In big floods millions of people could perish, and the river would often subsequently permanently alter its course by up to several hundred kilometres. That explains why the Yellow River is also often referred to as China’s Sorrow. 

Hydraulic Despotism 

China’s quest to conquer nature and mend the great rivers to man’s needs took on new proportions with the advent of scientific communism. But this was not a new phenomenon. As Ball’s account details both the Yellow River and the Yangtze had to a large extent been artificial ecosystems since the time of the Great Yü, created by nature but altered by man. Main portions of the Grand Canal (2350 kilometres in all) were already completed by 611 CE. 5,5 million workers were conscripted for the gargantuan construction task.

Ball has an interesting discussion on the idea of hydraulic despotism – a fusion of the terms Oriental despotism and hydraulic civilisation. The term oriental despotism was first coined by Nicolas Boulanger in his 1763 book on The Origin and Progress of Despotism. He asserted that revolutions of nature such as floods both destroyed nations and subsequently became the legislators of renewed society. Max Weber argued that rivers were the essential component of political power throughout Asia and the Middle East: “The water question conditioned the existence of the bureaucracy, the compulsory service of the dependent classes, and the dependence of the subject classes upon the functioning of the bureaucracy of the king.” German-American Sinologist and Marxist historian Karl Wittfogel built further on these ideas in the 1950s, with his theory that oriental despotism was founded on hydraulic civilisation. He argued that, “it was the task imposed by a precarious water situation that stimulated man to develop hydraulic methods of social control.” Whereas European empires were built by acquiring land, in China control of the rivers and mobilization of vast manpower was paramount to make the land productive. Karl Marx argued that only a centralizing power of government could manage this task in China.

So, was hydraulic despotism inevitable in China? Wittfogel’s theory has gone out of fashion. But it has never gone away completely. Probably because it retains a significant intuitive appeal. As most good theories it is simplified but elegant.

Mao vs Nature

If hydraulic despotism was perhaps not inevitable in China it was certainly possible, as nobody demonstrated with greater effect than Mao Zedong. In 1952 the Great Helmsman announced that “Work on the Yellow River must be done well.” With this banal slogan slogan so typical of Mao, he launched one of the most ambitious projects in the young People’s Republic. A flood control programme that included rebuilding and reinforcement of 1 800 kilometres of dykes along with 46 dams.

Mao held an unlimited belief in Communist Man’s ability to conquer nature. However, the quality of the work did not always match the quantity. Between the 1950s and 1990 more than 80 000 dams were built on China’s rivers. Many were erected hastily and constructed poorly. Still, Ball does not want to characterize the massive hydro-engineering projects of the Mao era as an abject failure. If the practical execution may often have fallen short, Ball argues that the principles behind the dam construction have been largely sound. After all, Mao simply continued, if on a larger scale, an interwar policy programme actively supported by international organisations.

Still, it it is not hard to find individual case studies of Communism at its worst. The Sanmenxia dam is one. The biggest dam on the Yelow River. Construction started in 1957 with the assistance of Soviet engineers. The claim was that the dam would retain silt and thus avoid the old problem of a rising riverbed downstream. It was said that the Yellow River would be yellow no more, and an ancient prophecy was invoked: “When a sage appears, the river will run clear” (which in popular usage had the perhaps more fitting meaning “when hell freezes over”). The claim was absurd. The Soviet technical experts left in 1960 due to the cooling relations between the two Communist powers. What was harder to get rid of was the silt. It could not be magically spelled away, but had to go somewhere. It soon accumulated against the dam wall at an alarming rate, so much so that by 1962 the dam’s capacity was halved. The silt had to be removed from the dam after all. The original goal of silt retention had to be largely abandoned. And so much water had to be allowed to pass directly through the dam wall that the hydroelectric capacity of the dam proved to be barely five percent of original estimates. For this failure, 280 000 peasants had to be forcibly resettled.

In an interesting exhibit of centralized vs local Ball notes that the river management success stories have more often been found in the mundane, low tech but capital-intensive small-scale projects at the local level. But seeing like a state does, the People’s Republic’s ambitions has usually veered towars grandiose prestige projects like Sanmenxia.

Will China run out of water? 

Ball ends his book on a disquieting note. China faces two big water-related problems:

  1. There is not enough water to go round, and
  2. Much of China’s water is often so foul that no one can use it anyway.

Is there a solution? Not necessarily. At least not yet. When the Yellow River stopped 650 kilometres short of the Boai Sea for 226 days in 1997, it served as a grave warning. Ball cites hydrology specialist Alistair Borthwick who says that: “it appears that the Lower Yellow River’s ability to meet its ecosystem and socio-economic requirements is exhausted.” China’s water resources already fall short of the country’s needs by 40 billion tonnes a year, predicted to rise to 58 billion by 2020. China’s Ministry of Water Resources predicts there will be a serious water crisis by 2030.

One big problem is that state guarantees of water supply to rural areas has removed incentives to improve irrigation efficiency. Agriculture accounts for two thirds of China’s water use, and 70 percent of the country’s food relies on irrigation. As the Chinese eat increasingly eat more meat and farmers prefer to grow high-value but water-intensive crops such as fruits and nuts rather than grain and potatoes, the water problem has gotten continuously worse.

The scale of China’s water challenges is illustrated by the gigantic South-North Water Transfer Project. A modern equivalent to the Grand Canal the project aims to transport 45 billion cubic metres of fresh water annually from the Yangtze basin in the south to the North China Plain along three separate channels each over 1 000 kilometres long. The central and eastern routes are now in operation. So far the total cost has surpassed 79 billion dollars, more than twice the cost of the Three Gorges Dam. In what Ball rightly describes as an extraordinary subversion of geography, both the eastern and central routes require the water to be transported through tunnels under(!) the Yellow River. A feat of engineering even Mao would be proud of, but which at the same time reveals the fragility of the system.

The water problem does not only make the infrastructure fragile, but is also a source of fragility for the entire Chinese political system. Ball makes a convincing argument that the Chinese people may be more liable to revolt over a practical question such as lack of water, than a more abstract lack of political rights. Indeed, back in 2005 there was already 1 000 environmental protests every week. The Chinese leadership is well aware of the challenge they are facing. Work on the Yellow River must be done well.

 

 

 

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Can the Communist Party overcome China’s Water Crisis?

The Tragedy of Lofoten’s Tourism Commons

Quite a lot of Norway coverage in the FT this weekend.

And an excellent longer read by Nordic correspondent Richard Milne on the “Battle for Norway’s Soul,” over the controversial question if Norway should open up for oil exploration in Lofoten, Vesterålen and Senja (LoVeSe) or leave the hypothetical 1,3 billion barrels of oil untouched under the surface.

The article gives a good summary of the warring viewpoints in what is really a quadripartite conflict putting the interests of the oil industry, the fishing industry and the tourism sector against each other, while all three industries also face stiff resistance from the environmentalist movement.

I will not take sides in the oil question in this post, but only have some brief comments on the tourism question. The tourism sector in Northern Norway suffers from an obvious tragedy of the commons, with already very visible negative effects; high environmental costs yet low economic benefits.

  • There has without a doubt been quite a quality improvement in the Norwegian hospitality sector in recent years, with new accomodation and dining supply offering more than the typical Norwegian bare minimum service. Still, the high end of the Norwegian hospitality sector remains woefully underdeveloped. If Lofoten had been in Sweden and run by Swedes the region’s tourism income would probably have been twice as high, at least.
  • As the 80 year old artist/environmentalist Tor Esaissen sensibly points out Lofoten tourism cannot and should not be a mass market product. Even though it is in some way in conflict with egalitarian Norwegian values, Lofoten must be an expensive high-end tourism product. The product is based on its raw natural beauty. Too large tourist crowds will destroy that appeal.
  • The ideas of a tourist tax, maximum visitor quotas and/or minimum spending requirements are therefore radical but interesting, and worthy of serious consideration.
  • It obviously makes very little sense to have large numbers of camping tourists, who quite literally cover the landscape in shit, while leaving little money behind. The number of visitors allowed to camp in their cars or out in the open for free should be severly limited.
  • Norway must capitalise on the rising trend in avantgarde/explorer/“self realisation” tourism which generates high revenue per tourist while limiting the number of visitors. That is a way more sustainable route than continuing to let in hordes of visitors who spend minimal amounts of money. In order to achieve this there must of course be a product and service offering for visitors to spend money on, from high-end cruise travel, boutique hotels, experiences and exploration activities. In this domain the Norwegian hospitality sector probably still has much to learn from leading destinations, even though there has been a marked improvement in recent years.

 

 

The Tragedy of Lofoten’s Tourism Commons

Macron’s Shipyard Nationalisation

In theory Emmanuel Macron was elected on a pro-business platform including pledges to reform France’s labour market, cut public spending, reduce taxes and turn France into a “startup nation.”

In practice, however, one of the Jupiterian president’s first economic policy actions has been to nationalise a shipyard, STX France, to prevent it from going to Italian hands.

Italy’s state-owned Fincantieri shipyard earlier this year agreed to acquire 2/3 of the French shipyard, after the Korean parent STX collapsed last year. When the Italians balked to accept the offer of a 50/50 ownership split, Macron exercised France’s pre-emption rights to acquire the whole company.

So what does this mean? Is the nationalisation to be viewed as a non-ideological act of Gaullist pragmatism? Or is Macron really a Mitterand disguised in Rothschild clothing?

It seems the French government is trying to downplay the implications of the nationalistation, with economy minister Bruno Le Maire insisting that; “The pre-emption decision is temporary and should give us the time to negotiate in the best conditions.”

Yet at the same time Le Maire stated that the nationalisation had a “single objective”, to “defend France’s strategic interests in shipbuilding.”

We are thus led to believe that the nationalisation is both 1) temporary and 2) strategic, which can sound like a contradiction in terms.

Perhaps the French state already have other potential buyers up their sleeve, and that a sale of the shipyard will indeed find place within a short time frame. If not, the French state’s dirigiste handling of the affair may dissuade other potential acquireres from entering the fray, presuming that they are deemed politically acceptable owners by the French government in the first place.

In the meantime the Macron government has achieved to:

  1. Raise severe questions over the Macron government’s real business agenda.
  2. Hurt Franco-Italian relations
  3. Raise barriers for intra-EU mergers and acquisitions.

At the same time the nationalisation shows that Macron does not hesitate from taking strong and radical actions, that may not lend themselves to easy interpretation within the framework of a left to right political axis.

So far the new French president may be more Mercurial than Jupiterian

Macron’s Shipyard Nationalisation

How to Restructure Venezuelan Debt

Maduro.pngLee C. Buchheit & G. Mitu Gulati (from Cleary Gottlieb Steen & Hamilton (New York) and Duke University Law School, respectively) have written a thorough analysis of Venezuela’s impending day of financial reckoning, concluding that a debt restructuring of some sort is inevitable, as the social costs of continuing debt service while curtailing imports are becoming unbearable.

The authors’ outlook is not very optimistic:

Napoleon’s invasion of Russia in 1812 was a large undertaking.
Restructuring Venezuela’s public sector debt will be a very large undertaking.

Venezuela is on track to be the biggest and messiest sovereign debt restructuring since Argentina’s ~$100 billion default in 2001. It will also be the first case study of what implications the just recently ended 15 year long Argentinian holdout saga will have for future sovereign debt restructrurings – a protracted horror story that Venezuela will seek to avoid at all costs.

In size a Venezuelan restructruring is likely to rival Argentina, even if the precise numbers are hard to come by:

In aggregate, the claims almost certainly exceed $100 billion. Approximately $60 billion of this is bond indebtedness of the Republic of Venezuela and PDVSA (roughly $35 billion owed by the Republic and $25 billion by PDVSA).8 In addition, there are obligations to unpaid suppliers, involuntary owners (like the airlines) of trapped Bolivar deposits, and holders of arbitration awards against the Republic.9 Finally, significant amounts are owed by PDVSA to China and Russia under what have been dubbed oil-for-loans deals

So why couldn’t Venezuela just stop paying the foreign “neo-imperialist” creditors one may ask? The answer it would seem, is that apart from the Bolivarian-Utopian rhetoric, even the Maduro regime is constrained by economic realities:

  1. The Maduro regime needs to keep oil revenues flowing in
  2. Approximately 75% of Venezuela’s oil revenue is reported to come from the US – making the country extremely vulnerable to threat of US sanctions
  3. Most of Venezuela’s/PDVSA’s debts are governed by New York law.

Ergo, the Chavistas will be forced to play by the Imperialists’ rules, or they will financially suffocate themselves. As the authors state:

The current administration’s policy of full debt service appears to be driven by a fear that a default, particularly a default by PDVSA, might entitle creditors to seize Venezuelan oil shipments or intercept payments from buyers of that oil. The prime directive in a restructuring of PDVSA’s external (New York lawgoverned) bonds will therefore be to ensure that any holdout creditors will not be in a position to interfere with PDVSA’s ability to sell oil and receive the cash proceeds from those sales.

Buchheit and Gulati see three key questions:

  1. Will the restructuring cover both debts of the Republic of
    Venezuela and PDVSA, or only one of them?
  2. Will the transaction call for principal haircuts, or only a
    milder “reprofiling” of maturities?
  3. Will the holders of non-debt claims (such as ICSID
    arbitration award holders) be invited to participate?

On top the Argentinian precedent is causing headaches on how to mitigate a holdout drama:

Venezuela will not be able to view the prospect of holdout creditors with the same equanimity that Argentina showed in 2005 at the time of that country’s bond restructuring. The mischief that litigating holdout creditors can cause in Venezuela is considerably greater than Argentina ever faced. The trick will be in finding ways to discourage prospective holdouts from holding out and to defang the legal threat posed by those who persist in declining an offer to restructure.

Complicating the picture is the fact that while most Venezuelan Republic bonds contain Collective Action Clauses (CAC), the PDVSA bonds do not. Still, contrary to consensus, the authors believe that restructuring PDVSA bonds may be easier, and less prone to holdout behavior than Republic bonds.

Crucial to what extent and mix of principal haircuts/maturity extensions/coupon reductions will be required, is the shape and form of the economic adjustment programme the authorities will/or be forced to implement.

A country’s debt capacity is dependent on its economic policies. With better policies a country can carry more debt. But what will be the correct assumptions in the Venezuelan exercise?

It will be difficult at the outset of this restructuring to know what level of public debt Venezuela can reasonably be expected to carry. If the assessment were made right now, the answer would be deeply pessimistic. But “right now” is, one hopes, the nadir of the country’s economic fortunes. It does not make sense to run a debt sustainability analysis with the past two decades of economic mismanagement as the baseline. The question ought to be what level of debt can the country carry assuming a rigorous economic adjustment program and renewed support from the international community.

But how realistic is it that the Maduro regime suddenly will change its ways. Not very. The authors thus quite reasonably conclude that a home-grown economic adjustment programme wil not be credible. That basically leaves only one option: an IMF led adjustment programme, despite Caracas’ acrimonious relationship with the Fund.

It is noteworthy that the authors state that: “As politically unpopular as it may be,
we believe that the next (emphasis mine) administration will need to seek IMF assistance,” which implies that a debt restructuring must/will be accompanied or preceded by a change of government. The important question that leaves on the table is of course when and how the Maduro government will end and what will replace it.

The only thing that is safe to say is that the Venezuelan debt story will not be over any time soon.

How to Restructure Venezuelan Debt