Sharing the World’s Resources

Another area where mediators may be required is in the burgeoning dispute area of who should control the world’s resources.

Up to the present time, the rules of ownership have followed international laws and conventions, but  a number of developments over the last decade signal that this may not be followed in future: China indicated some time ago that it would not follow any emission control  laws which got in the way of its development plans. Various countries in South America ( led by Venezuela ) have expropriated companies without complying with any market driven compensation…For that matter ,who owns the Arctic…

A new development in the last number of years has enlightened people around the globe to the discrepancy in the distribution of wealth ( access to resources) and that is the arrival of the internet. The profusion of low cost access to the internet has opened people’s eyes as to how the developed countries’ populations live their lives in contrast to their own. This has been quite a revelation and no doubt raises issues about the fairness of the situation. A recent study from the OECD (Organization for Economic Co-operation and Development) indicates that lower developed countries’ economies are starting to accrue more of the world’s economic resources:


But is the situation changing quickly enough? On a per capita basis, the non OECD member countries are still way behind.

If a mediator was trying to help the developed countries and developing countries reach a resolution as to how to share the world’s resources going forward ,he/she would likely hear many different  arguments from both sides around these general themes:

Developing countries:

The developed countries control a much higher ratio of the world’s resources per capita than do the developing countries and have for centuries so their accumulated wealth is enormous. Now developing countries are starting to demand  sufficient resources to try to improve their economic conditions. A global tax on economic activity might be one source of financing to fund this. This would forestall a “grab” of resources which OECD countries would view as illegal and disruptive.

Developed countries:

The developed countries have worked hard  over virtually the centuries to improve their standards of living and have done so in a legally sanctioned manner. They have also contributed both directly and through the United Nations to the improvement of the standards of living of developing countries around the world.

How can a resolution to this issue ,even if developed countries would be amenable ,be achieved at a time when the  developed countries are  struggling with huge budget deficits and their electorates are in no mood to fund the development of other countries. Despite these challengs,do the developed countries have any choice, but to move in this direction ? The building momentum is that the developing countries will impose their own rules on their resource development and they will likely not respect the conventions to which we have become accustomed. A good mediator would put all coherent options on the table and try to put together a plan to move toward a mediated resolution. An agreement to move to a system whereby the world’s resources are more equitably shared is surely better than having disadvantaged countries grab resources outside any legal framework…

Chinese “Capitalism” in Perspective

China’s development as a major player in the world economy has been swift and efficient. This is due to a combination of embracing capitalistic business models with the strategic direction of a firm-handed government.

Let me recount a concrete example of Chinese capitalism on the move…

Newsprint Industry: Some twenty years ago, North American newsprint companies working on their strategic plans recognized that: (1) newsprint demand would decrease in North America as more people got their news from TV (CNN, etc.) and the internet; and (2) newsprint demand would increase substantially in the emerging countries (China, India, Russia, Brazil…) as literacy rates and incomes rose there. The conclusion was that overall world consumption of newsprint would hold up reasonably well and North American suppliers would just have to shift their geographic sales focus to these emerging markets.

Well, the industry got the first couple of premises right, but did not foresee (in fact, it was not even contemplated as a possibility as far as I am aware) that certain emerging countries, and notably China, would have access to huge amounts of capital to build their own paper machines. The result is that huge quantities of different grades of paper are now being produced in China (and in many cases exported from there). The further result of this case has been very clear, as the largest newsprint producer in North America, Abitibi-Bowater, has, in recent times, come out of bankruptcy proceedings.

By lessening its grip at the operating level on its economy, the Chinese government has unleashed pent-up entrepreneurial energy and consumer appetite and, in so doing, made China a hot bed of economic activity. As press reports seem to confirm each week, the results have been huge trade surpluses with the rest of the world and major investments throughout the globe in strategically important resource deposits or companies owning such deposits.

So while China has yet to make significant moves towards a more democratic form of government as it still has a very firm hand on the nation’s economic levers, there can be little doubt that it is embracing its own form of capitalism.

Government Intervention in the International Economy

If we, for a moment, can visualize a spectrum with a high level of “Government Intervention” on one side and, on the other end, a high level of “Pure Capitalism” (defined for this article as “free markets”), China is moving down the Government Intervention spectrum to more of an acceptance of capitalistic practices. We saw this very directly in the newsprint industry where Chinese buyers would enter the market when prices were particularly low and they would be virtually absent when prices were abnormally high. As well, Chinese companies are now using their low costs of capital to invest huge sums of money as mentioned above.

In order to respond to the new China, it is important, I believe, to understand where developed countries lie on this spectrum and where they will need to go from there in order to compete.

I would argue that all developed countries have moved very significantly away from the pure capitalism side of the spectrum quite some time ago (at least as far back as World War II). Along the way, transportation systems, mail services, water services, etc., have either been owned or received financing from governments. Certain activities such as agriculture and the military supply industries have received outright government subsidies while others (those in research and development, oil and gas exploration, etc.) have been heavily favored through tax credits and the like.

While many Americans feel that the United States has less government involvement in the lives of its citizens than governments of other developed countries do in theirs, this is open for debate. While it is true that virtually all other “western” countries finance universal health plans (which the USA does not), most of these countries (other than the Netherlands, Sweden and Switzerland) do not subsidize house ownership through mortgage interest deductibility for tax purposes (a recent US Government Commission estimated that this costs the US Treasury approximately $130 billion a year in foregone revenues). So, in balance, all developed countries would be placed a significant way down the spectrum from pure capitalism.

Why does this matter? Well, I believe that China has essentially shaken up the old economic theory of “Factors of Production” through its guidance of its domestic economy and its emergence in the international sphere as a major player. In order to respond to this, the developed countries will have to create an environment in which its corporations can compete effectively. I would argue that this will require further government involvement in these countries’ economies, not less…

Let’s take a look at how China has moved the goal posts in terms of factors of production.

Factors of Production

Factors of production refer to the resources that are needed to generate goods and services: land (including natural resources), labor (Including human resources of all kinds), capital (that is, equipment, buildings and, for our present purposes, access to financial capital [cash and other financing]), and entrepreneurial resources (management) which bring all of the above-mentioned factors to bear to produce a good or service.

China has been able to support strong economic growth and resulting huge trade surpluses by increasing its access to these factors of production not only domestically, but externally as well. (its solidifying its external sources of supply is a challenge to all other economies…).

In terms of land (and natural resources) and labor, China is particularly blessed as its land mass is very similar to that of the USA (3.6 million square miles) and its population is over 1.3 billion (versus 300 million for the USA). So, China has great potential. The challenge is to attain this potential for its ever-expanding population and their needs. One fact emphasizes this challenge: the Gross Domestic Product for China in 2009 was approximately $5 trillion (International Monetary Fund figures for 2009), while that for the USA was over $14 trillion for a population less than ¼ the size.

In terms of access to capital and entrepreneurial resources, China has made tremendous strides. Centuries ago, many countries (England, France, Spain, etc.) colonized other countries to access natural resources. China with its huge financial reserves (one estimate has it at the $2.85 trillion US level) has been very successful at expanding its access to all forms of factors of production beyond its borders through the purchase of companies involved in natural resources (particularly oil and gas and minerals), others having large capital infrastructure and, generally, enterprises having world-class management and technological expertise. These investments have vaulted China from a developing country only 20-30 years ago to a country on the verge of taking a pre-eminent place in the world’s economy.

This is coupled with its continuing internal drive to modernize its economy. Their State Council, in early 2011, announced its intention to invest $1.5 trillion US in 7 strategic industries (including alternative energy, biotechnology, information technology, etc.) over the next 5 years…

Competitive Advantage

Whether looking at the Chinese internal or external initiative to source all its factors of production, we find one common theme…access to abundant and low-cost financing capital. The huge surpluses in its balance of accounts have allowed China to “fund” the kinds of initiatives discussed above. I would also argue that these surpluses, as they have funded developed countries’ balance of payments deficits, immunize China to a very large degree from any serious challenge to its economic policies. China is now a leading banker to the world (as recently witnessed by its purchase of European debt instruments) and will continue to accrue significant competitive advantages from this status. For example, it is likely to get trade concessions from Europe following the above-mentioned investments.

In my view, the developed countries must put together a concerted joint effort to respond to this disadvantage. One idea might be to allow significant tax credits for a wide range of domestic corporate investments to spur economic growth on a permanent basis. Unlike other tax credits, this one could be designed as a repayable loan from the respective country’s government, repayable in, say, a 5-year cycle.

In Summary

In summary, developed countries’ governments have long been extensively involved in their economies. They will need to become more involved, in a creative way, so that their businesses are in a position to access low-cost funds to compete with Chinese players. Doing anything less will allow China to position their companies where they will be able to “corral” large quantities of the world’s resources, both physical and intellectual, to the exclusion of others.

The fundamental point is, I believe, that the playing field has shifted quite dramatically and the international economic community is in no position to dictate rules to the Chinese…We need to recognize this quickly, acknowledge it as a long-term challenge and implement a rational response.

Mediation Approach to USA/China Disputes

A number of disputes exist between the USA and China on economic issues: the level of China’s currency, China’s adhering to international patent protection rules, etc. concern the USA; China would like the USA to get its debt issues under control among other irritants… There is little evidence in the media that each side fully understands where the other side is coming from.

An impartial mediator could be very effective in bringing both points of view to the table; he /she would likely examine the file keeping the points raised in the following article in mind:

Economic Policy Choice: Austerity or Growth?

With both southern Europe and the USA laboring under slow economic growth and growing budget deficits, what policies are open to these countries? From news reports, you would think that the path is either austerity (to get deficits under control) or growth (to get the economy growing faster with all its attractions: lower unemployment and higher tax revenues…).The reality is that both policies could be followed together and an independent mediator could bring both sides together by analyzing how various countries attacked similar challenges in the past.

Let us act as a mediator for a moment and, somewhat superficially I will admit, analyze what Canada did in the early 1990’s as it faced run-away budget deficits and slow economic growth. As I suggest below, if a mediator asked an independent  economist to run an econometric model on what happened in Canada’s remarkable reversal of its fortunes, he would find that government austerity (cuts in expenditures and increase in taxes) were only a relatively small part of the solution. The main trigger for the turnaround was the economic growth in the Canadian economy ,aided by lower interest rates and a lower Canadian $. Austerity, yes, but not to get in the way of growth…

You will see some parallels in Canada’s economic situation in the 1990’s and southern Europe/USA today… In  the early 1990’s, the Wall street Journal ran an article in which it called Canada’s economy as that of a “ Banana Republic’.  At that time, or more precisely in 1993, Canada had a federal fiscal deficit of $39 billion (Cdn.) which  represented 6% of its Gross Domestic Product at that time.

As a comparison of interest to US readers, the projected deficit for the USA fiscal deficit for 2011 is in excess of $1 trillion, representing close to 10% of GDP.

What solace or pain does the Canadian experience suggest is ahead for the US economy?

The good news is that the Canadian deficits of the early 1990’s turned into surpluses by 1997 ($3 billion) and quite significant surpluses by 2001 ($20 billion). The bad news is that these deficits were only slain by a combination of economic growth, tax increases and expenditure cuts. As well, interest rates (which increase the costs of accumulated debt) were on their way down.

The upshot is that a delicate balance of encouraging economic growth, higher taxes on those sectors able to absorb them and expenditure cuts in areas which will not impede growth  are likely required to get the US deficits going in the right direction. Southern Europe and the USA are not Banana Republics, but its leaders must show the country that they have its best long term interests at heart and then move aggressively forward. Get over the politicking …get  trained mediators on the problems and a balanced approach to resolving the economic issues will be in hand…

The Challenge of Public Policy

Let us start with with a straight-forward statement: that public policy positions reflect the opinion of those espousing or implementing them. In almost all situations, however, there is an opposing idea as to the correct policy direction. Let us take a dramatic and current (June, 2012) example: is the right economic policy, to help the Mediterranean European economics recover from their dire economic circumstances, one of spending austerity or stimulation of economic growth? Both sides argue strongly for their position, but is the best one a mixture of both? And how? Bring in a qualified mediatior…

Unfortunately, the common means of resolving divergent policy views has been to let the various political parties duke it out in the political arenas. As lawyers tend to be over represented in these areas, this process usually becomes quite adversarial and not necessarily conducive to finding generally acceptable policies.

This opens the door to a process which is dedicated to merging different opinions into a mutually acceptable policy.

A Mediator’s Perspective on the Israeli-Palestinian Stalemate

December 2011

At this time of year, I would think that people of all faiths would agree with the holiday wish of “Peace and goodwill to all.” And as we think of the challenges in the New Year, one seems to recur year after year: some peaceful resolution to the Israeli-Palestinian question.

The current year is ending on a “one step forward-two steps back” note. While Hamas recently announced a cease-fire, a couple of weeks ago they fired rockets into Israel and this was met with a similar retaliation. As well, Israel released Palestinian prisoners in exchange for an Israeli soldier, but announced more settlements in “contested” territory.

However, the “protest” movement in a number of Arab states is shaking up the old political equilibrium towards Israel, as it is thought that new governments (notably Egyptian) will not look so favourably on benign relations with Israel. At the same time, the uprisings in Syria may have the Palestinian leadership concerned about future support for their cause from this country.

Is it a propitious time, then, for both parties to seriously try to resolve this long-running dispute?

If this is the case, I believe a new approach to a mediated solution should be undertaken. In the past, the mediating party(ies), while well intentioned, were  perceived to favour one side over the other.

A new mediation process must involve: (1) a completely impartial mediator (or mediation team); and (2) a commitment by both sides that they are not only willing to engage in this process, but also have the authority to sign off on an agreement. These pre-conditions to a valid mediation process have not been met in the past and, in my view, resulted in failure.

One component of the above mentioned commitment should be a willingness to fully discuss some very fundamental interests on each side:

  • The Israelis require a recognition of the State of Israel and their right to secure their borders (possibly through some form of UN presence in vulnerable border areas); and
  • The Palestinians require a “viable” territory (if not the pre-1967 boundaries, a comparable territory) and compensation for land taken from Palestinians. (In the case of compensation, the UN could well be expected to fund a good part of this, as it has a “history” in the beginnings of this dispute and a resolution to this dispute will make the world a safer place for all.)

To facilitate an agreement around these issues (and others), I would recommend a mediator from a clearly “neutral” state such as Norway, New Zealand or Finland. As well, some form of UN representation would be very helpful (if not essential).

Will the year 2012 be the year to resolve this intractable dispute? All people of goodwill can only hope so.

Mediation and Public Policy?

Currently, public policy differences are not being bridged by use of a mediation process. What could be the reason(s)? Is it that those holding these divergent views do not trust an impartial resolution to the issue? Is it that there are too many lawyers in the mix so that there is more of an adversarial rather than resolving attitude to the process? For whatever reason, policy differences are generally not being resolved. I suggest that the mediation process be introduced more and more to resolve these differences and that we need many more mediators to get involved in the public policy area. I hope that the articles that you will find on this blog will support this assertion…