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'Neo-Mercantilism' and the Politics of Economic Integration
(gm). In October 2008, Grain, an NGO which ‘promotes the sustainable management and use of agricultural biodiversity’ released a report titled ‘Seized! The 2008 land grab for food and financial security’. The report documents two ominous trends which have the potential to drive food prices up further and spell the end of small-scale farming.
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The report explains that governments of countries which have a shortage of arable land, or with high population growths, are resorting to buying up or leasing farmland abroad in order to secure necessary food production. The report also points towards corporations and private investors who are looking towards investing in foreign farmland as new sources in revenue in the midst of the financial crises, as an alternative to meagre returns on the crumbling paper asset model. The result is fertile agricultural land becoming increasingly privatized and concentrated in fewer hands, which could ‘spell the end of small-scale farming and rural livelihoods’ around the world.
Parallels have been drawn between local real-estate owned by foreign governments or corporations and colonialism. Obviously the difference is that the control of local territory by foreign entities today is sanctioned by the host government and is of a contractual nature with legal provisions, yet the similarities exist, and this has led to the concept of ‘neo-mercantilism’. For example, 15 Saudi Arabian investors operating under the ‘Middle East Foodstuff Consortium’ and headed by the BinLaden Group have been ‘tasked’ by the Saudi Arabian government to deal with the countries long-term food supply problem through overseas ventures. The group signed an US$4.3.bn agreement with Indonesia to develop 500, 000 ha of rice land with the aim of producing produce Basmati for export to Saudi Arabia.
This convergence of commercial and governmental interests is not always the case, however, Morgan Stanley, the giant US investment bank recently purchased 40, 000 ha of farmland in the Ukraine. A Russian investment house has also acquired land in Ukraine, Renaissance Capital has acquired the rights to 300, 000 ha of farmland in ‘the breadbasket of Europe’. Russia in turn has seen some 331, 000 ha of its fertile land in the south bought by Black Earth Farming, a Swedish investment group. The Grain report notes, ‘all of these land acquisitions are to produce grains, oils, meat and dairy for those in the hungry world market...that is, for those who can pay’.
This brings us to the crux of the matter; the failed policies of neo-liberal globalization. With the decline of the welfare-state under neo-liberal policies within ‘western’ nations, purchasing power has been in decline. The privatization of government services and the outsourcing of manufacturing jobs to foreign nations has led to a situation where in people are seeing inflation rising without a corresponding increase in already falling wages. The maintenance of living standards has entailed extensive borrowing on a local and governmental level which has resulted in debt-to-GDP levels of 190% in the US today and similar levels in Europe. The Economist noted in 2002 that “on some estimates, by 2050, government debt could be equivalent to almost 100 percent of national income in America, 150 percent in the EU as a whole, and over 250% in Germany and France”. The loss of purchasing power in the US and the EU following the financial crises originating in the US is having an adverse affect on Asian nation’s economies. Bloomberg Online noted that
“China’s exports shrank last month and industrial-production growth cooled, Fan Gang, an adviser to the People’s Bank of China, said today. “Things are not so good,” Fan said at a forum in Beijing. “November figures will come out soon, and industrial growth will be something around 5 percent and export growth will be negative.”
The government has already unveiled a 4 trillion Yuan ($582 billion) stimulus package and cut interest rates by the most in 11 years as a global recession cuts demand for the nation’s toys, textiles and electronics”.
Economist Michael Pettis wrote that “Korean exports contracted year-on-year in November by 18%, and Taiwanese exports also contracted, by 23%”.
The financial crises serves should be viewed as the background to the ‘neo mercantilism’ being pursued by foreign governments. The decline in Asian exports is leading to lower growth rates, which translates into less wealth circulating amongst the masses and increasing domestic discontent in the countries affected. UN World Food Programme Executive Director, Josette Sheeran told the US Senate on Foreign Relations in May of this year;
“News reports and images from deadly riots in Haiti, triggering the collapse of the government, and in more than 30 nations throughout the globe are stark reminders that food insecurity threatens not only the hungry but peace and stability itself. Some say there are only seven meals between civilization and potential anarchy - at the seventh meal lost people are reduced to fending for their survival - and the survival of their children, fraying the very moorings of society. Ensuring access to adequate, affordable food and nutrition is certainly one of the fundamental roles of government, and, indeed, of civilization itself.”
The need for governments to secure food supplies independent of the ‘global marketplace’ is leading to efforts to acquire equity stakes in food production sources worldwide. ‘They see this as an innovative long-term strategy to feed their people at a good price and with far greater security that hitherto’, the report notes, adding that ‘Saudi Arabia, Japan, China, India, Korea, Libya and Egypt all fall into this basket. High level officials from many of these nations have been on the road since March 2008 in a diplomatic treasure hunt for fertile farmland in places like Uganda, Brazil, Cambodia, Sudan and Pakistan’.
This is the first aspect of this ‘neo-mercantilism’, the second involves private investment firms seeking high and secure returns on their investment; and what product is guaranteed to sell but food?
The report notes that since the financial crises, ‘investment houses that manage workers pensions, private equity funds looking for a fast turnover, hedge funds driven off the now collapsed derivatives market, grain traders seeking new strategies for growth-are turning to land, for both food and fuel production, as a new source of profit’. Getting a return on a stable investment like land involves raising the productive capacities of the land, and with food and energy prices high, the potential for great profits exists, not least in the production of bio-fuels. In a strange twist to the story, the report explains that in both of the above mentioned interest groups, it is ‘the private sector that will be in control’. This is because in many cases, as the BinLaden Group deal above illustrates, private corporations are given the mandate to seek out lucrative deals on behalf of the government they represent. South Korea which recently acquired an enormous 1 200 000 ha of land in Madagascar, is represented by Daewoo Logistics, a shipping and natural resource development company from Korea.
London’s Guardian Newspaper recently reported that, “Rising food prices have already set off a second "scramble for Africa". This week, the South Korean firm Daewoo Logistics announced plans to buy a 99-year lease on a million hectares in Madagascar. Its aim is to grow 5m tonnes of corn a year by 2023, and produce palm oil from a further lease of 120,000 hectares (296,000 acres), relying on a largely South African workforce. Production would be mainly earmarked for South Korea, which wants to lessen dependence on imports.
"These deals can be purely commercial ventures on one level, but sitting behind it is often a food security imperative backed by a government," said Carl Atkin, a consultant at Bidwells Agribusiness, a Cambridge firm helping to arrange some of the big international land deals.”
The head of the UN Food and Agriculture Organisation, Jacques Diouf, has warned that the controversial rise in land deals could create a form of "neo-colonialism", with poor states producing food for the rich at the expense of their own hungry people.
Countries and Companies
No country illustrates this more than China, whose Ministry of Agriculture has reportedly drafted a central government policy on outsourcing food production, placing food alongside minerals and energy in terms of strategic importance. The Grain report notes that the Chinese governments promotion of the “Go Abroad” outward investment strategy has led to no fewer than 30 agricultural cooperation deals being signed with willing countries, often with the added benefit of Chinese ‘technologies, training and infrastructure development funds’. The process involves Chinese companies ‘leasing or buying up land, setting up large farms, flying in farmers, scientists and extension workers’ and then producing crops. ‘Most of China’s offshore farming is dedicated to the cultivation of rice, soya beans and maize, along with bio-fuel crops like sugar cane, cassava or sorghum’.
The Gulf states-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates face similar food insecurity issues. For them the problem lies in their ability to grow food due to the lack of sufficient water resources in the area. These states have compensated for this in the past through the importing of food, made possible by their petrodollar wealth, which has been dubbed ‘virtual water’, or the acquisition of foodstuff’s from other countries instead of relying on local water sources which would cause shortages for domestic consumption. The Grain report notes an interesting financial predicament for the Gulf States; by pegging their currencies to the US dollar, some of the countries have imported a lot of ‘extra inflation’ due to food prices rising alongside a devaluation in the strength of the dollar. The report cites food import figures as ballooning from US$8bn to US$20bn in the last five years, which is a potentially destabilizing factor since a large percent of the Gulf States population are low-wage migrant workers who cannot necessarily afford higher costs.
The water situation is particularly severe, as a result of the shortages and high prices over the last two years, Saudi Arabia decided that ‘given impending water shortages, it would make sense to stop producing wheat, their main food item, by 2016’ and instead opt for food production in foreign countries, on land that was under Saudi control. Saudi Arabia now controls approximately 1 600 000 ha of land in Indonesia which it utilizes for crop production. This drive towards securing food production in foreign countries was addressed by the Gulf Cooperation Council (GCC) where the idea of ‘a collective strategy of outsourcing food production’ was formulated, namely with neighbouring Muslim countries such as Pakistan and Sudan, where the UAE and Saudi Arabia collectively own around 1 400 000 ha of land. Countries on south-east Asia, Turkey, Kazakhstan, Cambodia, the Philippines, Uganda, Ukraine, Georgia and Brazil are also being ‘targeted’.
An important aspect of these economic relationships lies in the effects it has on the politics of the countries involved, for example, the UAE now has an interest in the political stability of Pakistan to protect and guarantee the efficiency of its investments. Deeper economic integration might well translate into stronger political relationships.
South Korea and Japan, which both import around 60% of their foodstuffs, are also big players in this ‘scramble for land’. South Korea, which ‘owns’ 2 300 000 ha of land, more than any other country, announced in early 2008 that it was ‘formulating a national plan to facilitate land acquisitions abroad for Korean food production, with the private sector anointed as the main player’. Korean companies are even buying up land in Mongolia and eastern Russia to facilitate this goal.
Japanese corporations are not allowed to own farmland in Japan, which protects family farms. On the other hand, most food imports into Japan are done by private corporations. Japanese firms already own 12 000 000 ha of farmland around the world, much of it in China, while land ‘run’ by the government totals around 325 000 ha.
Investment Opportunities
“The single best recession hedge of the next 10 or 15 years is an investment in farmland” -Reza Vishkai, head of alternatives at Insight Investment, July 2008-12-10
Investors consider two things when looking for a place to put their money; returns and security. In many cases security outweighs the risk of making potential losses on speculative investments. Government bonds are known to be risk-free. There is, however, ample evidence suggesting that the world’s biggest debtor might not be able to pay back all its loans, US Treasury bond holders might be hard pressed to put their future earnings in more paper assets, preferring to hold tangible assets instead, and this is where land ownership becomes attractive.
The report notes a diabolical aspect of corporate takeover; the opportunistic moves to exploit ‘tight markets, high prices’ as a result of climate change, soil destruction, and the loss of water supplies. These corporate entities,’ with great help from agencies like the World Bank, its International Finance Corporation and the European Bank for Reconstruction and Development’ that are ‘persuading’ governments to change land ownership laws, are in the process driving up land values in the respective areas, making it more difficult for local people’s to acquire land. The report notes that Deutsche Bank and Goldman Sachs are buying up chunks of China’s livestock industry. New York-based BlackRock Inc, ‘one of the world’s largest money managers with nearly US$1.5 trillion on its books, has just set up a massive US$200 m agricultural hedge fund’. As mentioned above, Russia’s Renaissance Capital has acquired rights to 300 000 ha of farmland in the Ukraine.
The returns on these investments are positive and depending on the political climate of the countries concerned, of a low-risk nature. Expected returns on investment in European agricultural production lies between 10-40% over a ten year period, while return on African investments could be as high as 400% over the same period, the report notes. This move towards ‘harvesting money’ has suddenly gained momentum during what is known as the ‘financial crises’, and as mentioned before, the significance lies in investing in tangible assets connected to crucial commodities. The logical conclusion of this process, the large-scale privatization of food production, is in the privatization of water extraction and distribution, a commodity that will never be subject to demand slump...
The report indicates that ‘governments have lost faith’ in markets and that ‘local communities will inevitably lose access to land for local food production’, and concludes by asking the question;
“What happens over the long term when you grant control over your country’s farmland to foreign nations and investors?”
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