The New Colonialists?

My copy of The Economist arrived yesterday, with a headline proclaiming “The New Colonialists: A 14-Page Special Report on China’s Thirst for Resources.” The Economist’s argument that developing countries like China’s “no-strings attached” style of neo-colonialism is fundamentally flawed. In reality, what the Economist can only recognize as something akin to what was colonialism is actually driven by two related phenomena: a new mercantilism and the constitutional failure of “free-trade” ideology.

A new mercantilism is gripping the globe, and it is not driven by China, but rather by the scarcity of the very resources that fuel economies like China. There is a critical difference between the Economist’s assertion that China’s resource ventures are “no-strings attached” and the mercantilist reality. China’s economy is best where it can leverage its massive labor force, not at venturing into new territory. If it was confident that it could simply buy all the oil or LNG that it wants at market prices, it would be better off sticking to what it does best, and it knows this. The reason it is venturing into energy exploration in Africa and elsewhere, then, is because it recognizes the mercantilist reality of the coming century: there won’t be enough energy (or other raw materials) to fuel continued economic growth around the world, so those who can corner their own share of the market (and improve the odds of continued economic growth in their corner of the world) are doing so. China initially tried to wage what I have called “pipeline mercantilism,” by directing the flow of oil from the Caspian basin East to China, rather than West to Europe and the US. Their efforts here have largely failed—possibly as they tried out the US/European style of soft-colonialism without success, possibly because of a resurgent Russia, or possibly because they lost interest as Caspian oil reserves are turning out to be far smaller than once theorized. Now they are pursuing a home-grown brand of soft-colonialism, primarily in Africa. Here they are finding greater success, for several reasons: they can fully engage in environments and governments that are shunned, at least officially, in the West because of poor human rights records (Sudan, Ethiopia); they enjoy the far-sighted assistance of Chinese aid agencies, where the Chinese government has decided that subsidizing their oil ventures with free aid will pay off in spades over the long-term as Chinese National Oil Companies get lucrative production sharing agreements over Western rivals; and, it must not be overlooked, the Chinese have an advantage over Western rivals in that there is no history of Chinese abuse and colonialism in Africa. This explains why China is venturing, and succeeding, in Africa, but not how they are turning this into a neo-colonial venture (e.g. “with strings attached”) as opposed to a simple, above-board business venture. Some of this is no more than intuition on my part—we have yet to see (and may never see, due to the failing of transparency in these NOC dealings) exactly what form the exploitation will take. In fact, it may not even be exploitation—China’s key need is to enter into long-term supply contracts for resources at a price that is acceptable now and in the much more resource constrained future. China appears to be using precisely this “long-term contract colonialism” approach, whereby it will agree to pay present prices far into the future for the resources it needs. What is not yet clear is how China will prevent “re-negotiation” of these contracts, as is currently happening with Venezuela, when the producing countries realize they are selling off their natural wealth at half, or even a tenth of the then-prevailing market rate. Will China develop some kind of expeditionary military capability to force compliance? Will they leverage their ability to use means that would (for now, at least) be unacceptable to the West and simply threaten to lob ICBMs at whatever small African nation plays the re-negotiation card? Or will they try to re-work the Aid-Loans-Debt addiction already played (quite successfully) by the West from 1950-2000? It will be interesting to watch and see, but one thing seems quite certain: there will be strings attached.

Second, China’s resource plays underscore the constitutional failure of the ideology of free-trade. China built its current red-hot economy by providing cheaper labor alternatives to manufacturing in the rich West—cheaper in terms of actual wages, as well as human rights standards, environmental standards, and the ability to effectively squash unions. Already, however, China is realizing that it is losing these “cheap labor” jobs to even cheaper countries such as Vietnam. China is realizing that it cannot continue to provide the benefits of economic growth to its citizens—something it continues to need to stave off revolution and justify its constitutional structure—with this same old model. What are China’s options? Well, the option suggested by most pundits in the rich West is to develop a highly-skilled, well educated work force and transition to the knowledge and services economy. The West “suggests” this model, while simultaneously hoping that it continues to work for itself. And here is the problem: this free-trade model is intellectually and morally bankrupt. Here’s the crux of the issue: what makes American, or French (or Chinese) workers inherently better, and therefore deserving of a higher wage, than workers elsewhere in the world?

It may have once been education, but that is no longer the case. It’s pure racism or cultural elitism to suggest that one nation is more adept at learning skills than another. America and Europe may have a head start over the likes of Vietnam or India, but they are quickly closing that gap. Certainly what remains of this gap doesn’t justify the 10x multiplier on American wages.

It may have once been freedom of capital, but that is no longer the case. There are probably fewer capital impediments, and certainly there are fewer other regulatory requirements (minor issues like human rights and the environment) in China than there is in America or Europe. This no longer justifies the 10x wage multiplier.

It may have once been infrastructure, both physical and legal in the form of reliable rule of law, a dependable corporate framework, and solid intellectual property protections. These differences still exist to some extent, but they are also eroding, and are increasingly they are irrelevant as multinational corporations are involved globally, preventing them from enjoying the benefits of a single legal framework. Haier appliances (of China) enjoys US legal framework and physical infrastructure at least as much as GE (of America) is hindered by any lack thereof in China. This no longer justifies the 10x wage multiplier.

Is there anything left to justify the 10x wage multiplier between the US and China—or to justify the desired future wage multiplier between China and the future “cheap labor pool” economy? And, perhaps more importantly, if there is, for now, some justification for such a multiplier, how is that not also subject to the forces of globalization? I can think of one justification that remains to some degree in America—we still seem to be better than anyone else in the world at combining just the right mix of structure and freedom, discipline and creativity, conformity and rebellion to create the kind of synergy that drives business innovation. That, too, seems to be changing, but for now I think it still justifies some kind of multiplier—but this mix is also subject to the forces of globalization. This is the crux of the problem: globalization is, in the end, the process of treating the human element as nothing more than another factor for optimization. It cannot be the sustainable constitutional basis for a Nation or a State. And if the onset of a neo-mercantilism shows anything, it is the dawning realization of just that on the parts of these new mercantilist states. The future presents two valid constitutional platforms for Nation-States: exploitative mercantilism or sustainable self-sufficiency. While I think that only the latter is actually viable over the long term, the former allows for the illusion of maintaining the present “Western” way of life in the form of growing material consumption. For that reason, Nation-States will make the short-sighted choice and choose mercantilism, and that is quite likely to get messy.

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The Tata Nano Strikes Back--Does Jevons' Paradox Apply to Productivity, Too?

Can improvements in energy efficiency “save” modern civilization as we face declines in world oil production? While the efficiency revolution may let us drive on half the gas, the productivity revolution may make it affordable to twice as many--or more...

One argument against the efficacy of improving energy efficiency is called Jevons’ Paradox. This suggests that, when we improve our energy efficiency, we also reduce our demand for energy from that same use. That decreased demand in relation to supply makes energy cheaper, which in turn makes us use more of it. It has been suggested that this “rebound effect” only accounts for 5-20% of efficiency gains, but I have written previously about the potential for a “shadow” rebound effect that potentially accounts for nearly the entire efficiency gain.

The Tata Nano: While the efficiency revolution may let us drive on half the gas, the productivity revolution may make it affordable to twice as many--or more.

Often, I find it difficult to apply the very theoretical Jevons’ Paradox to pragmatic thinking about our energy future. The recent launch of the Tata Nano, however, stands as an example of Jevons’ Paradox in action. Possibly of much greater importance, however, are two related issues: the feedback effect between increased economic productivity and increasing energy consumption, and the aspirations of an emerging global middle class.

On January 10th, Tata Motors introduced its new, $2500 “Nano.” The launch was well covered on The Oil Drum and many other sites: roughly 50 miles per gallon, four doors, and one windshield wiper. And the potential for the Nano to bring millions of new drivers to a world already trying to conserve energy and reduce carbon emissions was covered as well. And if you dig deep enough, there was even one blogger who raised the nexus between Jevons’ Paradox and the Nano. What I hope to do is to raise that issue here, and to expand the analysis to cover what I consider to be the even more pressing nexus between the Nano, productivity improvement, and world oil consumption.

“But I’ve heard that today’s economy is far more productive per barrel of oil consumed than our economy was in the past—won’t a continuation of this trend decrease demand for energy?”

The Tata Nano isn’t the world’s most fuel efficient car, and therefore it doesn’t suddenly brings the automobile within reach of potentially billions of new drivers purely because of fuel efficiency. Rather, the Nano is revolutionary because it is representative of another trend in the modern economy—our ability to produce more for the same amount of energy consumed, and it’s broader corollary, our ability to produce most everything more efficiently and cheaply. If you track economic statistics with much interest, you have probably noticed that the statistics covering “productivity” show a virtually permanent increase over the past few decades. The Nano is a prime example of exactly that trend—in real dollars (and accounting for subsidies), it is probably the least expensive four-door car every built by a considerable margin. Some of that comes from economy of scale, some from the ability to leverage processes and materials developed elsewhere, and some is simply the result of designing with precisely that goal in mind. But the result is the same: a car for less money means a car that more people can afford to buy. To the extent that we are dealing with energy-consuming products, greater efficiency of production seems effect energy consumption via a process similar to that described by Jeavons for energy efficiency. The more people who can afford to consume oil in their own car, the more that will. The larger issue is that increasing productivity—of exactly the type that led to the Nano—is a critical requirement for the growth that drives our economy. Economic growth id driven by three things: increasing population, increasing energy availability, and increasing productivity. It has long been assumed, here and elsewhere, that a focus on productivity is the only realistic way to maintain economic growth if we are to control population and deal with plateauing or declining energy supplies. Does the Nano throw a wrench in that analysis? Even if this unanticipated consequence of increasing productivity only serves to negate our gains in energy efficiency, this is enough to cast serious doubt in my mind over our ability to maintain economic growth going forward.

The Tata Nano is also emblematic of another trend—the rapid emergence of a massive, global middle-class. This middle class may not have the same standard of living or net worth of the “middle class” in the West, but it is significant none-the-less. Today, tens or even hundreds of millions of Chinese, Indians, South East Asians, and Latin Americans can comfortably and confidently provide for the basic necessities for themselves and their families with money left over. They’re spending—and (yes, America) saving—this surplus toward aspirational goals, one of which is to own a car. Car culture in China is thriving, and with the launch of the Nano it seems that industrialists are betting on it thriving in India as well. Can the world, its oil supply and environment, accommodate another 100 million cars? What about another two billion cars? The danger of an economy that seems adept at squeezing ever more productivity out of each hour of labor and barrel of oil is that this same trend that could help the West soften the impact of Peak Oil seems poised to exacerbate the global energy supply crunch by making energy consuming cars affordable to an ever greater portion of the world’s population. This development seems to carry with it the significant moral hazard (already a hot debate topic within the world of carbon emissions) in the possible “solution” of denying these efficiency gains, or their products, to the world’s poor. Where is the cut-off? Do we cap the “middle class” at one billion? Two billion? The possibility and morality of such a move are highly suspect. We may be stuck between the rock of 2+ billion new middle class consumers over the next few decades and the possibly much harder class and geopolitical situation of those 2+ billion aspirants realizing they will never become “middle class” because of the decisions and prior consumption of the 1 billion in the “West.”

What next, will these people want air conditioning, too?

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