Monday, September 15, 2008

Colombia: from Magic to Realism (part 2)

As the US presidential campaign is slowly turning into a self-parody of debates focusing on glass and ceilings, pits and bulls or lips and sticks, all too often do we get distracted by the fact that regardless of whether the next inhabitant of the White House will be more or less church-going, more or less gun-totting, and more or less procreating, this nation will also have to elect part of its legislative.

And the Congress has a long shelf of unfinished businesses. Among the homework postponed until after the skiing season, US Congressmen and Congresswomen have been extraordinarily successful dithering over the ratification of Free Trade Agreement (FTA) with Colombia. Protectionism is economically questionable. But when applied to allied nations in the immediate neighborhood, it is a folly.

Colombia is a large open economy. 22% of its GDP is generated by exports. 40% of exports and 32% of imports are exchanged in trade with the United States, with some 51% of the total covered by the Andean Trade Preference and Drug Eradication Act (ATPDEA), a temporary free trade arrangement, introduced in August 2002. Under ATPDEA, over 1’200 products entered the US market duty free, creating 90’000 new jobs in Colombia. Colombia is also among the main importers of US agricultural products.

Colombia has created a successful coffee brand and privatized its coal industry but an unprecedented economic contraction gripped the country early this decade. It only began to recover slowly around 2003, following a competitive depreciation of the currency, good performance of non-traditional exports (textiles, clothing, flowers) and the revival of the construction industry. President Alvaro Uribe hopes that enhanced access to US markets will attract foreign direct investment in labor-intensive industries.

All trade agreements are viewed in terms of domestic political costs, weighed against the benefits preached by economic orthodoxy. And it is the potential for job creation in Colombia that is at the core of the lengthy ratification process in the US. The costs of FTA’s failure seem to be seriously underestimated.

In Colombia, a measure of resigned defeatism always elicits a chuckle. I often heard the locals joke about thir favorite sports – the so-called Colombian triathlon – “aguardiente, rumba y muchacha” (alcohol, dance and girls). But such fatalistic outlook on life is responsible for the lackadaisical attitude not only towards rural poverty and addictions but also AIDS, with little in the way of visible prevention campaigns in the countryside.

The country’s commendable macroeconomic performance has long been contrasted with the entrenched poverty and the social woes, deeply rooted in Colombia’s economic history. The reasons for the recurrent violence in the countryside should be sought in the spontaneous, sometimes chaotic colonization of the new lands. As a Spanish colony, Colombia quickly ran out of precious metals and shifted to agricultural commodities. Sugar and tobacco plantations benefited from costless African and Zambo slave labor. Contraband soon developed to facilitate direct trade between neighboring colonies (intercolony trade was forbidden by the Spanish Crown). And although Criollo-run councils were at the forefront of Colombia’s growing national self-determination, vested interests of the landholding class led to lopsided asset distribution - 2% of the population owning 70% of the land. Poverty and violence in overpopulated centers further pushed colons to the periphery, where they were attracted by the illusion of prosperity. The resulting debt trap further solidified the skewed ownership structure.

The modern structure of land ownership in Colombia is a tangible proof of the uneven land distribution that durably underpinned the convexity of the Lorenz curve. Beyond the land used for successful, modern agricultural production, much of Colombia is divided between traditional latifundia with big haciendas (often a playground of right-wing paramilitaries), areas of historical colonization (the original hotbed of left-wing guerrilleros), regions colonized since the 1970s (later turned into a frequent battleground between the paramilitaries and the guerrillas) and “minifundios” – poor peasant parcels, plagued by a variety of potential claims and counter-claims. In addition, there are indigenous “minifundios” whose landowners are easily manipulated by various political forces in Bogota. Finally, poor outer barrios are predominantly composed of squatters displaced by the civil war.

Much of the original, post-colonial ownership structure persisted largely intact into the 1970’s. By that time, radicalization of peasant movements led to the emergence of massive rural guerrilla activity, fuelled by extensive underground economy.

For many years, the economy of (urban) Colombian was one of the strongest performers in Latin America, somehow seemed insulated from the surrounding atmosphere of violence, crime and corruption. Rapid economic growth lasted for most of the second half of the 20th century. During Latin America’s debt crisis the 1980s, Colombia was the only country that avoided defaulting on its external debt commitments, and recorded average growth rates of 3.5%, despite having to adjust to swings in the prices of its main commodity exports. However, early this century, the recession reversed that situation with both investor and consumer confidence suffering from the effects of continuing disruption and uncertainty. In 1998, the tight monetary policy designed to maintain the peso peg weakened the economy and exposed it to falling commodity prices. Public deficit reached 6%, financed mostly by the sale of treasuries in the international markets.

Between 1980 and 1997, Colombia’s parallel economy spawned vertically integrated international enterprises specializing in planting, harvesting, processing, trading and marketing illicit drugs, predominantly cocaine, where Colombia accounted for 60% of the world’s cultivation. The trade generated revenue equivalent to 7% of the country’s GDP. Coca was cultivated in areas in the south-eastern part of the country, but also smuggled in from Peru and Bolivia for industrial processing. By the end of the 20th century, Colombia supplied 75% of the world’s cocaine and successfully competed for heroin markets with Burmese and Afghan exports. Its main export target was the US where Colombian exports enjoyed the market share of 90% for cocaine and 65% for heroin products.

Narco-terrorists assassinated three presidential candidates in 1980’s. The death of Pablo Escobar in December 1993 put an end to Medellin Cartel’s dominance. In place, Cali Cartel rose to prominence, bringing down President Samper, accused of receiving electoral funds from the narco-barons. In 1994, Colombia ratified the 1988 UN convention on narcotics, but it was the last Andean country to do so. Between 1993 and 1997 lenient sentences were offered to narco-criminals in exchange for cooperation. However, in response to verbal and economic pressure from Washington, tougher line has been followed since 1997.

The breaking of the Cali cartel in 1997, responsible for the supply of 80% of cocaine to the US, drove industrial production into the hands of smaller operators, often collaborating with the communist insurgents and the paramilitaries. Although ideologically supported by naïve, left-wing NGOs in Western Europe, the guerrillas have, for a number of years, been providing drug cartels with crop protection, production laboratories and airstrips, while some members of the guerrilla groups were believed to be more directly involved in drug-trafficking. Not surprisingly, many paramilitary groups also sought access to the lucrative business, some with considerable success.

In 1999, the government estimated that some $5bn was smuggled into the country for money-laundering operations. By then, the main coca-growing areas were concentrated in the South-West region of Putamayo. The products were exported either through Brazil or over the inhospitable northern corridor between the Caribbean and the Pacific Ocean. It is in this area that large-scale battles opposed the communist guerrillas and right-wing paramilitaries, each vying for the control of this vital region. However, according to a UN study, the coca crop fell 30% in 2002 and another 21% in 2003, pushing the primary crop production across the border to Peru. High-earning crop substitution programs were lacking, making these gains unsustainable.

As recently as 2003, an estimated 35000 people were involved in various armed groupings. If the horizontal social mobility was statistically high in Colombia, then it owed it less to existing attractive opportunities in the urban centers and more to push factors – a spiral of violence and fear. The armed conflict displaced some 2m people, most of whom congregated in outer barrios. The process of demobilization posed a dilemma of durable employment for the former combatants. To this day job creation is the single most acute social issue for the country facing 60% poverty rate and 16% unemployment, an easy prey to the self-regenerating hydra of drug industry and parasitic criminal middlemen.

This is not an issue that the US Congress can easily turn its back on. But it did, again, last spring. The ratification procedure of the trade agreement originally signed in 2006 was delayed on allegedly procedural grounds, as a way to avoid the first defeat of an FTA since fast-track rules had been established three decades earlier. House Democrats’ opposition was misguided. Hiding protectionist agendas beyond the veil of concern for human rights betrays either poor understanding of socio-economic conditions in Colombia, or simply reveals pre-electoral hypocrisy. But relations between Washington and Bogota should be viewed in a broader, strategic sense. Especially now when a deranged caudillo in a neighboring country yelps from the podium: “qué se vayan al diablo, los Yanquis de mierda!”

Saturday, September 6, 2008


For now, Russian troops continue to occupy northern Georgia, ensuring an extraordinary level of Western unity and resolve, even if differentiated in tone adopted by Brussels and Washington. The unbelievable happened this week: for the first time ever, 27 members of the EU mounted a sharp criticism of Russia. But, the $580bn question remains: does the West have any real leverage over Russia? While Foreign Minister Sergei Lavrov may not be too far off the mark bragging that NATO and Europe need Russia more than Russia needs NATO and Europe, the West is not entirely deprived of non-military tools to awaken Moscow from its delirious neo-tsarism.

If Mr Sarkozy returns empty-handed from Moscow on September 8, a series of more than purely symbolic measures could still be adopted. The loss of a comfy seat at the G8 table would hurt. An estimated 68% of Russians are proud of this high profile recognition of the country’s importance, as recently echoed in Medvedev’s boastful remarks about Russia’s allegedly pivotal role in the “club’s” deliberations. On the other hand, the much-debated accession to WTO does not matter as much to an energy exporter as it does to manufacturers and agricultural exporters. And yet, Russia could be asked to pay restitution for hundreds of millions of dollars of damage inflicted to Georgian economy. If it doesn’t, the costs will be covered by Georgia’s Western allies, hardly a constructive way for Russia to build influence a Tbilissi.

Moscow rulers are not invulnerable either. They maintain large stakes in parastatal and private companies, many of which have publicly quoted securities. The relentless sell-off of anything remotely smelling of Russia has continued this week and certainly could end up testing the resolve of some of the wealthy hardliners in Putin’s entourage. Their private bank accounts in Cyprus and Switzerland could be vetted or blocked. And their overseas assets could be seized. Trade prohibition, travel bans, constraints on international communication could isolate the group that over the last 10 years has accumulated untold wealth on the back of the energy prices and successfully solidified the grab with programmatic spread of informational ignorance among Russia’s population.

Russian bond market is worth mere $60bn and Russian companies, heavily indebted in the West at nearly $500bn, remain dependent on access to foreign capital. The scare has already touched off a liquidity crisis in Moscow and some $21bn left the market since the beginning of the military intervention, eventually forcing the Central Bank to intervene and stave off the catastrophic collapse of the rouble. In a country intent on infusing billions of dollars into its antiquated infrastructure, the cost could be very high indeed. The days when the Russian economy could simply utilize the post-Soviet capital stock with little, if any, incremental investment are now over and further access to capital markets is mandatory.

Yet any punitive measures would prompt a response from Moscow. Russia could dump $100 of Freddie Mac and Fannie Mae securities it holds and it would take a while for the market to digest it this paper. And, as the anti-Ukrainian actions in 2006 showed, the most damaging retaliation would probably come via energy markets. Although Russia could lose some revenues from curbing Lukoil and Transneft’s exports to Europe, it would probably recoup some of the losses through higher prices. Europe remains a hostage to Russia’s use of energy policy as a weapon. EU imports 26% of its oil and nearly 30% of its gas from Russia, with Finland, Slovakia, Bulgaria and Lithuania being the most dependent. Gas constitutes a better weapon to hurt Europe, especially given the seasonality of demand, but it would not affect US, itself a large producer of natural gas. And Russia’s $580bn of foreign reserves may go far, even though the treasury is certainly not bottomless. Ineluctably, new technologies will eventually erode Western dependence on traditional hydrocarbon consumption. Aggressive militarism will do little to decelerate this process.

Indeed, the vision of such ‘hydrocarbon eschatology’ could have prompted the Kremlin to try and turn the clock of history regardless of the upfront costs. So while many Western politicians accuse Russian generals of being encapsulated in 19th century strategic thinking, Moscow’s concerns are very much anchored in the immediate and mediate future and the progressive loss of influence that this fast-depopulating, vast, flat and vulnerable country can exert internationally. Does this mean that the “upfront” costs do not matter? Russia’s behavior over the last month brings back the old Slavic obsession with ‘honorable revenge’, undertaken despite the damage it could inflict to the immediate interest of the perpetrator.

One more explanation of the seemingly irrational escalation lies in the semi-autonomous way in which the Russian military functions. When Medvedev assures his French counterpart that the Russian troops are “withdrawing” from Georgia, the generals may have harbored more ambitious plans. It was no different when the Russian army rushed to occupy the Pristina airport during the 1999 Kosovo crisis. If you had Russian friends back then, recall how proud they were of this “victory”.

The diplomatic damage that Moscow has already inflicted on itself could be thus explained by the combination of these three factors: long-term calculus of waning energy leverage, emotional overdiscounting of short-term cost and nationalist contest by semi-autonomous groups eager to establish faits accomplis on the ground. But the reasons for increased bellicosity could also be searched in the unwieldy realignment of the “siloviki” and “liberal” factions in the wake of Putin’s move to Moscow’s “White House”. The spoils were unevenly divided and some of the eminences grises, such as Igor Sechin, have now assumed unusually visible roles in the government. Although the shifts were preceded by some house-cleaning and high profile falls from grace, it clearly was not possible to arrest or sideline every single opponent throughout the perilous process of installing a merely notional presidency. An external catalyst of unity and cohesion came not a month too late. By unleashing an external thunderstorm and injecting nationalistic war fever, Putin managed to reinstate his symbolic preeminence. Few of Moscow’s apparatchiks would now be duped Medvedev’s faceless mimicking of Putin’s actions, vocabulary, style and, indeed, gait.

When Jaap De Hoop Scheffer in April stated that Georgia’s and Ukraine’s membership was the question of “when” rather than “whether”, he drew a sharp rebuke form Dmitry Peskov, Kremlin’s spokesman. But either these countries are independent, which is the prevailing view of the international community, or they are not. Putin had previously suggested that “Ukraine was not a proper country”. Medvedev’s recent pronouncements on neighbors’ limited strategic options are equally ominous. Russia’s foreign policy is certainly a reflection of its internal, autocratic system. Yet, its political culture, founded on the unchecked power of samoderzhets, clashes with the aspirations of neighbors attracted by the freedoms, not obeisance, self-governance, not feudalization and civil rights rather than unquestioned submission to authority.

In future, it should be Georgians and Ukrainians who decide whether to become members of international alliances. Neither Moscow, nor Washington should determine their future. Yet, this is not a view shared in the Kremlin. When in 1995 the West, belatedly, helped Croatia to liberate Krajina and opened the way to stop daily carnage in Bosnia, Russian generals objected to America’s “entering our part of Europe”. And since Russia sees smaller nations as either its vassals or its enemies, it concludes that the latter group must retain a similarly feudal assignment with the US or with Brussels. As revealed by the recent spat between Poland’s President and the Polish government over the missile defense negotiations with Washington, Moscow’s feudal view of the world is quite removed from the reality of the western alliance. When it comes to the treatment of Russian-speaking minorities in the Baltic countries, Moscow is ready to lecture the governments of Riga or Tallinn, but will not engage in a debate with them as partners. Instead, it appeals directly to Brussels, expecting EU bureaucracy to castigate the Baltic countries as if they were EU protectorates. Similarly, in his increasingly spiteful lingo, Russia’s foreign minister Lavrov dubbed Georgia “a special American project”.

But when Russia smells that the “project” is in a temporary vacuum, as Georgia arguably was after the NATO Summit in Bucharest last April, it intends to infuse it with meaning.

Unfortunately, it is ‘vacuum’, rather than the oft-demonized by Moscow “Western encroachment on its sphere of influence” that has characterized the Western integration in the recent years. When I saw Valéry Giscard d’Estaing in the fall of 2005, he still dreamed of the miscarried European Constitution, today a seemingly ante-diluvian theme. The future of the Lisbon Treaty is also looking precarious. The accession of new members into the EU has been put on ice. And NATO has been bypassed by Washington in key strategic decisions in the post 9/11 world. Thanks to Moscow’s brutish stance, this disintegration may just be reaching its end. Indeed, the potential for counter-Finlandization could have just been pushed a notch further. Finland’s peculiar relationship with Russia, defined by the loss of Karelia and decades of notional non-alignment has been severely tested by Moscow’s renewed belligerence over “near-border” regions and could now predispose Helsinki to consider a NATO membership.

For most of the last month, Russia has also been at pains to reassure Belgrade that the “recognition” of independent Abkhazia and South Ossetia does not signify the departure from the pro-Serbian position on Kosovo. In a convoluted argument differentiating the two situations, a Russian diplomat tried to portray Western incoherence regarding self-determination, even though precisely this argument was invalidated by the formalization of Moscow’s support for the independence of the two enclaves. And indeed, the differences between the Balkans and the Caucasus should not be underestimated. Russia’s interests in Kosovo were limited to prestige, with little else at stake. Moscow did not contribute to building viable institutions in Kosovo, nor did it send professional administrators and aid workers to Serbia’s former province. The costs of failure in Kosovo would have affected its neighbors and the European Union, not distant Russia.

Since at least 1981, Kosovars had suffered under increasingly systematic repression. Although initially the reasons of Northern Yugoslav scorn was more economic than ethnic (Kosovo contributed 1% of GDP versus Slovenia’s 30%), marginalization and colonization accelerated after Slobodan Milosevic’s notoriously incendiary speech in 1989. Frustrated and oppressed, the local population resorted to armed uprising in 1998 which was squashed by the Serbian army intent on scoring a symbolic victory after the losses in Slovenia and Croatia. NATO’s intervention and subsequent international peacekeeping efforts brought a modicum of stability to the area. After a decade of fruitless negotiations with Belgrade, the fragmented international community was resigned to recognize the independence of this impoverished sliver of land. But this was done without enthusiasm and with little nationalistic design by any of the neighboring countries. Indeed, one could ask, if Kosovo can emerge as an independent state, then why not Tibet, Kurdistan or other, less mediatized, but equally separate nations in search of statehood?

And even as these doubts continue, the Caucasus situation does appear to be diametrically opposed. Here it was the Georgians who had been “cleansed” from their villages in Abkhazia in the early 1990s. The “peacekeeping” operations were Russian, and not international and rather than disarming the locals and fostering a durable solution, the “peacekeepers” re-armed local militias, illegally distributed foreign passports, filled political posts and prevented any consistently peaceful resolution of the conflict. For all the misgivings about tortuous pace of European diplomacy, this is a far cry from Brussels’ dogged efforts to bring Belgrade and Pristina to a negotiated solution.

The Kosovo precedent does not indicate that Abkhazia should or should not be an independent state. I have never been there, nor have I had a discussion about this issue with ethnic Georgians from Abkhazia or with Abkhazians themselves. I will therefore suspend judgment in this matter. But “independence” brought by Russian tanks does not augur well for sovereign statehood. Just ask Moldavians, Balts, Tatars, Poles and 40 years on, Czechs and Slovaks. If the history of Russia teaches us anything, then the Abkhaz protectorate will not survive much longer. Chechnya certainly cleared any doubts regarding post-Soviet Russia’s approach to self-determination. In Abkhazia, only about a third of the population is ethnically Abkhaz. After a “plebiscite”, a more pro-Russian figure will replace Sergei Bagapsh and turn the region formally into a part of the Russian Federation. In 2005 elections, Bagapsh beat a Russian-backed Khadjimba. But in the wake of the “liberation” of Kodori Gorge, he should remember that Russians consider such an “invitation to help” as permanent. Alas, it was no different in 19th century Bessarabia, or in the “Kingdom of Poland”. Already last week, France’s ambassador to Tbilissi was told that he needed a Russian visa to visit Abkhazia.

As for the independence of 77’000 strong population of South Ossetia, it calls into question the status quo of neighboring North Ossetia, still part of the Russian Federation. The independence of the latter, and the ultimate integration of these lands under one rule would be an intriguing test for Russia’s newly found principle of self-determination. Somehow, I am not holding my breath.

Finally, there is Transdniestria, a rather sad thread of land militarized by Russia, but squeezed between Ukraine and Moldova, which could in future become one more thorn in European security, on a par with the militarized Kaliningrad oblast, an isolated wedge of formerly Prussian and more recently Russian territory sandwiched between NATO members Lithuania and Poland.