It continues to be a fascinating exercise to read the Financial Times each day to see the ongoing machinations and maneuvering around the fate and future of the Eurozone currency union. Some say it will be held together; others say Greece and a few others will leave the currency union and things will be fine; there are a few who insist that a Greek exit means that the currency union will collapse altogether. I have myself added to this lengthy debate with several posts, such as What would a rump Eurozone look like? and The Economic Future of Europe.

Euro area Member States
Non-euro area Member States
Member States with an opt-out

I have suggested that with the departure of marginal economies (nation-states that never were peer-competitors to the core Eurozone economies) will leave the Euro stronger than before, and with prospects for a distant futurity. The proof of this is that, while the Euro is down on international currency markets, it has not been aggressively bid down in a scenario such as would be the case if currency traders expected the Euro to be circling the drain. In comparison to other major world currencies, the Euro remains today in a stronger position than when it was first issued.

Which countries have adopted the euro – and when?

However, some of the recent arguments I have read suggesting that the Eurozone cannot continue to exist in its current form post-Greek departure have in them a hard kernel of truth. Some of this is semantics: if we say that the Euro cannot continue in its current form, all we are saying is that it could continue in an altered form. Read a little deeper in the context, though, and it becomes apparent that there rather more pessimism about the Euro than is captured by a mere semantic shift from the Euro based in the current Eurozone and a Euro based in a Eurozone minus Greece, Portugal, Spain, Italy, and Ireland.

One of the reasons that the Euro is not being aggressively bid down on international currency markets is that the core Eurozone economies have strong fundamentals, and these fundamentals are not going to disappear in a puff of smoke even if the Euro evaporates. Germany and France will continue to do business in some currency or other, and while their economies would take a major hit from the demise of the currency union, their fundamentals will ensure that they will recover and eventually resume economic expansion.

What I would like to suggest is that the Eurozone adopt a policy of economic shock therapy and take the bad news all at once, on the principle that a ratcheting downward of the Eurozone would create economic chaos and uncertainly each time a nation-state departed the currency union (a consequence of European leaders’ failure to see far enough down the road to make institutional provisions for both entry into and exit from the Eurozone). Europe could conceivably perpetuate the crisis of the Eurozone for a decade if marginal member nation-states fell away once every year or two. This would be a worst-case scenario that would set back the whole of the European economy for more than a decade as ongoing adjustments are made in the wake of further departures.

However, such a radical shock therapy need not mean the abandonment of some kind of currency union in Europe. I have suggested previously that the nation-states of Northern Europe that are on a more-or-less equal economic footing, and with more-or-less comparable social institutions and expectations, can work together well within a currency union in which tough economic standards are expected, enforced, and adhered to. Such a currency union of Northern Europe would roughly correspond to the extent of the Hanseatic League, which was a medieval trading group that flourish in the later middle ages and the early modern period — an international trading corporation before there was any such legal entity as a corporation or any such political entity as a nation-state (and therefore no sense of “internationalism” as we think of it today).

The Extent of the Hanseatic League in the late Middle Ages and Early Modern period.

A currency union in Northern Europe that roughly approximated the geographical region that once comprised the Hanseatic League would, I think, not only be sustainable, but would be a benefit to its members in the same way that being part of the Hanseatic League was a benefit to these late medieval and early modern merchants with their trading depots around the Baltic Sea. Rather than being dragged backward by non-compliant members, a union of economic peers would serve to pull each other forward. Strong provisions in any treaty governing such a union could ensure this not only by having a clearly defined legal process for departure from the union, but also, and as importantly, a clearly defined legal process to eject non-compliant members from the union.

In the map of Europe that I have colored below I have identified in a bright (Euro!) blue those nation-states that could probably cooperate in a strong Northern European currency union. This union could be “strong” in terms of its exclusivity and its willingness to exclude members that failed to maintain acceptable macro-economic targets. Membership would be a privilege, not a right; in the initial enthusiasm for the Euro, the sense of exclusivity was lost, which sentiment standing in for enforceable macro-economic standards. This Northern European currency union could be called, in deference to history, the Hansazone, and the currency could be called the “Hansa.” If the Swedes and the English could be persuaded to join too, all the better. This would work; the Eurozone as it is now constituted does not work.

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A “Hansazone” for a currency union in Northern Europe.

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Grand Strategy Annex

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Argentine President Cristina Fernández de Kirchner had a large color photograph on the cover of today’s Financial Times — not, like the last time, when she had just won a landslide reelection victory, but because she is initiating a process of nationalizing (or, rather, re-nationalizing) the largest oil company in Argentina, YPF. The Financial Times reported this as follows:

A visibly angry Ms Fernández made the announcement on live television to a cheering audience at the government palace. Rejecting recent criticism from Spain, Ms Fernández said she would not bow to foreign pressure. “I am a head of state and not a hoodlum,”’ she told business, union and political leaders in the audience.

The visible anger may have been due, according to another story in the FT (Fernández takes her revenge), to the Malvinas/Falkland Islands dispute not having been taken up by the Sixth Summit of the Americas which just concluded in Cartegena. President Fernández left the summit early, and, reportedly, disappointed. While it seems like stretch to me to attribute the re-nationalization of YPF to a desire for revenge over the Malvinas (since it is Spain that is being punished by this, rather than the UK), this FT piece is nevertheless well worth reading for its account of the economic and political vicissitudes experienced by YPF, which apparently had better arrangements with the president’s deceased spouse than with her.

Not surprisingly, the re-nationalization move has great popular appeal in Argentina, as evidenced by the cheering audience mentioned above. Since the global financial crisis, and indeed since before the crisis, it has become fashionable (especially in Latin America) to fix the blame for all problems on “neo-liberalism,” and it is understood that one of the key features of neo-liberalism is privatization. Thus re-nationalization is seen not only as an intrinsically good thing for the people of Argentina to have control over their resources (what President Cristina Fernández de Kirchner has called, “recovery of sovereignty and control”), but also as a blow for “economic justice” that will reverse the perceived errors and injustices of privatization and neo-liberalism.

Even while the president was being reelected by a landslide there were many articles in the media about the financial difficulties that the president was inheriting from her previous term, and not a little speculation on how exactly she would go about handling it. Well, now we know. After squeezing the country’s once-legendary agricultural industry and nationalizing pension funds in order to get state hands on more resources, the president will now turn to further nationalizations, and with oil prices rising YPF is a very tempting target. Because Argentina has been frozen out of international credit markets since its debt default ten years ago, the Argentinian economy has been forced to operate on a cash basis vis-à-vis the rest of the world. This absence of the irresponsible use of credit has resulted in the economy growing for the past decade, which has in turn resulted in some superficial economists learning the wrong lesson from Argentina’s default (cf. Incommensurable Defaults).

Nationalizing YPF has strong parallels with the policies pursued by Cristina Fernández de Kirchner and, before her, by her husband (since deceased) Néstor Kirchner in regard to agriculture. The FT’s front page article claimed:

Ms Fernández accused Repsol of “emptying” YPF. But analysts and industry executives said the real culprit for Argentina’s loss of energy self-sufficiency and ballooning imports bill was the government’s failed energy policy, which set domestic prices at well below international levels.

Simon Romero and Raphael Minder wrote in Argentina to Seize Control of Oil Company in the New York Times:

Seizing YPF appears to be a popular move in Argentina, where caps on residential energy prices and a growing economy have helped push energy demand to new highs. Argentina’s oil production has declined in the last decade as regulatory uncertainty persisted over price caps and the policies over profit remittances. Many Argentines still resent the privatization of state-owned companies in the 1990s, so taking on YPF gives Mrs. Kirchner the opportunity to go after a symbol of that time.

With Argentina’s formerly profitable agricultural industry, the Kirchner’s kept prices below market rates internally and created high export tariffs. Not surprisingly, agriculture become unprofitable in Argentina, and many Argentinian producers moved their operations to neighboring Uruguay. Now little Uruguay exports more beef than spacious Argentina. Like most populist economic measures, the short-term feel-good benefits come at a very high long-term cost.

President Cristina Fernández de Kirchner has continued populist policies with the oil industry, and with petrochemicals priced below market rates they are being used unsustainably. Now that Spain’s Repsol management has been ousted, and even banned from the YPF building, not merely the prices but the actual operations of YPF will be politicized. The model for this is the politicization of the administration of PDVSA after the failed coup against Hugo Chavez, which latter oil company has declined in efficiency continuously since the ouster of its experienced management.

Given how disastrous this move will likely be for Argentina and its economy in the longer term, and the negative diplomatic fallout that will result, one must ask why the president is doing this. The short answer is Peronist populism, which has been entrenched in the Argentine political system since the middle of the twentieth century. The longer answer would include many factors, including the fact that, while popularly elected (and by a wide margin), Cristina Fernández de Kirchner can appeal to David and Goliath themes. One need not be an unelected tyrant in order to make a show of one’s defiance and claim to represent the underdog.

Argentina’s century-long decline will not be arrested by populism or re-nationalizations. People may cheer in the short term, but the Argentine economy will stagnate in comparison to other economies in the region — especially in comparison to Brazil, Chile, and Peru, which are experiencing robust growth on sustainable foundations. And in this context I do not necessarily mean “stagnation” as a complete absence of growth, as it is more likely that Argentina will experience unsustainable growth followed by repeated crashes when reality catches up with the market. This has the effect not only of immiserating the people, but also of creating an unstable and unpredictable business climate.

Argentina’s decline will not be dramatically visible over a year or two, just as steady but small economic growth is not obvious over a year or two, but over a decade or two these things add up. And in addition to not being immediately evident, one must compare the reality with the counter-factual conditional of what the Argentinian economy might have been if more sustainable economic management had been practiced. Since human beings have short and imperfect memories, and cannot usually grasp what is counter-intuitive, there is very little penalty paid by a political regime for its foolishness, especially when a given regime is out of office by the time the consequences of its actions must be paid for. While all systems of popular sovereignty suffer from this weakness, the effect is exacerbated by irresponsibility.

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Grand Strategy Annex

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In yesterday’s Addendum on Neo-Agriculturalism I made a distinction between political ideas (with which, to use Sartre’s formulation, essence precedes existence) and historical ideas (with which existence precedes essence). Political ideas are formulated as ideas and are packaged and promoted as ideologies to be politically implemented. Historical ideas are driving forces of historical change that are only recognized and explicitly formulated as ideas ex post facto. At least, that was my general idea, though I recognize that a more subtle and sophisticated account is necessary that will take account of shadings of each into the other, and acknowledging all manner of exceptions. But I start out (being the theoretician of history that I am) in the abstract, with the idea of the distinction to be further elaborated in the light of evidence and experience.

Also in yesterday’s post I suggested that this distinction between political and historical ideas can be applied to communism, extraterrestrialization, pastoralization, singularization, and neo-agriculturalism. Thinking about this further as I was drifting off to sleep last night (actually, this morning as I was drifting off to sleep after staying awake all night, as is my habit) I realized that this distinction can shed some light on the diverse ways that the term “globalization” is used. In short, globalization can be a political idea or an historical idea.

I have primarily used “globalization” as an historical idea. I have argued from many different perspectives and in regard to different sets of facts and details, that globalization is nothing other than the unfolding of the Industrial Revolution in those parts of the world where the Industrial Revolution had not yet transformed the life of the people, many of whom until recently, and many of whom still today, live in an essentially agricultural civilization and according to the institutions of agricultural civilization. While is the true that industrialization is sometimes consciously pursued as a political policy (though the earliest appearances of industrialization was completely innocent of any design), politicized industrialization is almost always a failure. Or, the least we can say is that politicized industrialization usually results in unintended consequences outrunning intended consequences. Industrialization happens when it happens when a people is historically prepared to make the transition from agricultural civilization to industrialized civilization. This is not a policy that has been implemented, but a response both to internal social pressures and external influences.

In this sense of globalization as the industrialization of the global economies and all the peoples of the world, globalization is not and cannot be planned, is not the result of a policy, and in fact almost any attempt to implement globalization is likely to be counter-productive and result in the antithesis of the intended result (with the same dreary inevitability that utopian dreams issue in dystopian nightmares).

However, this is not the only sense in which “globalization” is used, and in fact I suspect that “globalization” is invoked more often in the popular media as a name for a political idea, not an historical idea. Globalization as a political idea is globalization consciously and intentionally pursued as a matter of policy. It is this sense of globalization that is protested in the streets, found wanting in a thousand newspaper editorials, and occasionally touted by think tanks.

Considering the distinction between political ideas and historical ideas in relation to globalization, I was reminded of something I wrote a few months back in 100 Year Starship Study Symposium Day 2:

If you hold that history can be accurately predicted (at least reasonably accurately) a very different conception of the scope of human moral action must be accepted as compared to a conception of history that assumes (as I do) what we are mostly blindsided by history.

A conception of history dominated by the idea that things mostly happen to us that we cannot prevent (and mostly can’t change) is what I have previously called the cataclysmic conception of history. The antithetical position is that in which the future can be predicted because agents are able to realize their projects. This is different in a subtle and an important way from either fatalism or determinism since this conception of predictability assumes human agency. This is what I have elsewhere called the political conception of history.

What I have observed here in relation to futurist prediction holds also in the case of commentary on current events: if one supposes that everything, or almost everything, happens according to a grand design, then it follows that someone or some institution is responsible for current events. Therefore there is someone to blame.

Of course, the world is more complicated and subtle than this, but we only need acknowledge one exception to an unrealistically picayune political conception of history in order to provide a counter-example that demonstrates not all things happen according to a grand design. Any sophisticated political conception of history will recognize that some things happen according to plan, other things just happen and are not part of any plan, while the vast majority of human action is an attempt, only partly successful, to steer the things that happen into courses preferred by conscious agents. If, then, this is the sophisticated political conception of history, what I just called the “unrealistically picayune political conception of history” may be understood as the vulgar political conception of history (analogous to “vulgar Marxism.” Vulgar politicism is political determinism.

This analysis in turn suggests a distinction between vulgar catastrophism, which maintains dogmatically that everything “merely happens,” that chance and accident rules the world without exception, and that there is no rhyme or reason, no planning or design whatsoever, in the world. From this it follows that human agency is illusory. A sophisticated catastrophism would recognize that things largely happen out of our control, but that we do possess authentic agency and are sometimes able to affect historical outcomes — sometimes, but not always or dependably or inevitably.

In so far as globalization is global industrialization, it is and has been happening to the world and began as a completely unplanned development. Since the advent of industrialization, its global extrapolation has mostly followed from the same principles as its unplanned beginnings, but has occasionally been pursued as a matter of policy. On the whole, the industrialization of the world’s economy today is a development that proceeds apace, and which we can sometimes (although not always) influence in small and subtle ways even while the main contours are beyond direct control. Thus globalization begins as a purely historical idea, and as it develops gradually takes on some features of a political idea. This pattern of development, too, is probably repeated in regard to other historical phenomena.

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Grand Strategy Annex

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Ica to Lima

24 January 2012


A sign pointing the way to Lima along the Panamericana.

Even a brief look at Peru reveals a society, which though burdened by a great disparity of rich and poor as is commonplace throughout Latin America, nevertheless shows clear signs of increasingly distributed prosperity — it would not be going too far to call this process of increasingly distributed prosperity economic democratization.

The day's drive began at the wonderful El Carmelo Hotel and Hacienda in Ica, a former pisco distillery.

The highways in Peru are my Exhibit “A” for economic democratization — the roads themselves are well maintained and well traveled, but more importantly there is the dependable police presence and the regular weigh stations along the Panamericana, which are signs of the kind of rule of law that touches on the ordinary business of life (in Marshall’s famous phrase), i.e., commerce. It must be emphasized that this manifestation of the rule of law is the antithesis of that sense of the law mordantly expressed by Anatole France: “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”

The Peruvian desert as seen from the Panamericana -- a photograph cannot do it justice, nor communicate the surprise and passing a gray and barren dune and suddenly coming upon a green and fertile valley.

Rule of law can be an excuse for the powerful to exploit the powerless (thus exemplifying the infrastructure/superstructure dichotomy), as in the Anatole France quote, but rule of law at its best provides a level playing field in which all enjoy equality of opportunity, not equality of exploitation. Also regularly visible along the Panamericana are billboards advertising consumer goods of every familiar kind, which suggests that consumers have disposable income and a choice in how to spend it. It may sound perverse to praise the emergence of a consumerist economy as a virtue, but in comparison to the quasi-feudal economy that preceded it, this represents remarkable progress.

Panamericana: Pacific Ocean on the left, sand dunes of the desert on the right.

My Exhibit “B” for economic democratization in Peru is the city of Ica. Ica is not well known to tourists, and I did not see another tourist while I was there. If you stay on the Panamericana and breezed through Ica it might strike you as just another dusty town in the desert, and not much different from Nazca. But Nazca, which appears to live almost exclusively off the tourist trade, is quite small, and really appears to be a dusty desert town, whose streets are filled with watering holes for tourists. In Ica, on the other hand, where tourists are not in evidence, the downtown core (some distance from the unattractive aspect presented on the Panamericana) is busy and bustling with locals patronizing all manner of local businesses. While many of the historical buildings in Ica have not been repaired since the last severe earthquake, some traditional facades and arcades are filled with small businesses, attractively placing contemporary commerce in a traditional setting.

My anecdotal account of the Peruvian economy would be no surprise to those who follow statistics and know that Peru’s economy has been growing steadily for many years. When I was last in Peru, in 1994, it had not yet been long that “Presidente Gonzalo” (Manuel Rubén Abimael Guzmán Reynoso) had been captured and Sendero Luminoso demoted from an existential threat to the state to being an occasionally deadly irritant. Fujimori was still in power at that time, but since then several popularly elected presidents have both served their terms in office and have then peacefully handed their power of that office to their successors. There were some worries in the business community when Ollanta Humala was elected, on account of things he said in the past and his political friendships with leftist leaders, but his term so far has brought no destabilizing changes or radical initiatives and the Financial Times has had good things to say about him.

All of this can be gotten from statistics and newspapers; what cannot be gotten from statistics and newspapers is the temper of the people and tone of life. Well, in Peruvian cities the tone of life is loud. Everyone in traffic honks all the time. If you go straight, people honk; if you go right, people honk; if you go left, people honk. Speed up, honk; slow down, honk; stop, honk. You get the idea. But beyond this nerve-wracking clamor, people were spontaneously helpful. Several times, without being asked and without expecting a tip, bystanders helped me to pull out of a tight spot, to maneuver in traffic, and get where I was going when I was not at all certain as to how to do this. There are many cities in the US where you would not encounter this.

In fact, not long ago (in What’s with the attitude?) I wrote about the increasing rudeness of traffic confrontations in Portland. Now, I cannot imagine Peruvian drivers lining up neatly as drivers sometimes do in Portland when there is an obvious traffic queue due to construction or an accident, but I certainly can imagine Peruvian drivers demonstrating spontaneous acts of generosity in the midst of a non-queue. Neither social custom is superior; each simply reveals a distinct manner of acknowledging the humanity of The Other, and this is necessary to a healthy society. Elsewhere I have called this Social Gift Exchange.

I almost forgot... there is an oasis very near Ica, set in the midst of towering dunes of sand.

Perhaps you think that I have gone on rather too long about in too great detail about roads and traffic, and that this reveals more about myself than about Peru. Perhaps so. Perhaps not. But I will defend my discussion on objective grounds. The model of development that prevails in the Western Hemisphere is predicated upon intermodal transport disproportionately relying on truck transport across highways. Trains are important, but trains will never have the tradition or the economic centrality that they have had in the Old World. In the New World, the truck and the highway are the economic ties that bind.

More than a little tired on the plane ride back to Oregon.

Elsewhere I have defined (what I call) a Stage 1 civilization as a civilization in which transportation has been globalized so that persons, goods, and services move throughout the world without respect to the geographical obstacles that defined the character of Stage 0 civilizations — when the human diaspora resulted in isolated pockets of civilization, each ignorant of the other. Today, a functioning transportation infrastructure is the price for participating fully — not merely peripherally — in global industrial-technological civilization.

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I had some great views of the inter-mountain west on the flight home.

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While I am posting this a couple of days after the fact, this entire account was written in longhand on the day here described.

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Grand Strategy Annex

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Just a few days ago in Axioms and Postulates of Strategy I wrote the following:

“Emphatically, facts do not speak for themselves. Perhaps it would be better for formulate it like this: facts cannot be counted upon to consistently and univocally speak for themselves. In some contexts and situations, facts sometimes speak for themselves, but this is a function of the conditions under which the facts are manifested. All other things being equal — i.e., when the conditions under which a fact is manifested cannot be controlled or limited — facts do no speak for themselves. This is what Nietzsche meant when he wrote that there are no facts, only interpretations. The modern quest to attain insight through accumulation of and immersion in a mass of detail is more likely to overwhelm than to enlighten.”

It follows from the fact that facts do not speak for themselves, and many (or at least several) different constructions can be erected on the same set of facts. This is the source of incommensurability. Two incommensurable bodies of knowledge — two incommensurable sciences, or even two incommensurable economies — can be raised on a single set of facts.

In the complex world of the social sciences, which involve not only the ambiguities of the world and its facts, but also the ambivalence of human agents whose motivations and purposes are present throughout every claim and counter-claim, the possibilities of incommensurability are raised to a higher order of magnitude. And so it is with economics, which is perhaps the most mathematized of the social sciences, or I could say that it is the most social of the “hard” sciences. Incommensurable economic doctrines flourish, and so the intellectual world is awash with economic claims and counter-claims, both of which seem to be supported by “hard data” (as the contemporary idiom has it), but which also seem to be mutually inconsistent, if not to describe entirely different worlds.

This incommunsurability, the ability to raise plausible but mutually incompatible constructions upon what would appear to be a single state of affairs, was on display in a page-long article by Jude Webber on Argentina’s debt default in the Financial Times for Tuesday 19 July 2011. The article was billed on the front page as “Wise or Lucky: Argentina’s model default,” while on the inside page it was called “Argentina: A high-risk recovery.”

The subject of default is uppermost in the minds of those in the financial community because of the looming default of Greece, a member of the Eurozone, and the shaky condition of Ireland and Portugal. The financial contagion is spreading through the Eurozone and now is affecting Italy and Spain also, whose borrowing costs have risen dramatically just in the past few days. Comparing Argentina in 2001 to Greece in 2011 is of course a lot like comparing apples and oranges. Nevertheless, comparisons are made, and this FT article made a number of comparisons of this order, both implicit and explicit.

I was surprised at the extent to which the author went easy on the Argentine default, and although the article hedged on any kind of outright declaration that Argentina was a “model” for other insolvent nation-state, given its current economic growth some ten years on after the default, this was clearly the picture that emerged. Part of this is to be put to the fact that a Greek default is now considered inevitable, and no one expects the debt to be paid off in full (investors are said to received a “haircut”), the Europeans are looking to a silver lining to the clouds, trying to convince themselves that default is not disaster and that there is a future after default within the Eurozone.

There was, in the article, no explicit recognition of the fact that, since Argentina’s default, that country has been cut off from international credit markets, and as a result of this has had to budget within its means for the past ten years. At least part of the present performance of Argentina’s economy is due to this forced budgetary discipline. This is not, of course, the only reason for Argentina’s superficially good economic statistics. The article chooses to focus on the ways in which international market conditions have, for the past ten years, converged to Argentina’s benefit, which the explicit proviso made that conditions could change at any time and, which them, the relative fortunes of the country. I do not disagree with this, but it is far short of an adequate picture.

I wrote above of Argentina’s “superficially good” economic statistics, and it is important to look beyond the surface in order to get the fuller picture. It is also important to consider the history of Argentina’s economy. History is always relevant to the interpretation of the present, but in the case of Argentina it is more than relevant, it is poignant, because Argentina was once a wealthy country. While Argentina has recently been admitted to the G20, and seems on the path to recovery, and perhaps even eventual wealth, it seems questionable whether the combination of sovereign debt default and a political balancing act within the Argentinian economy can produce lasting results, or whether the country will slip into a prolonged economic twilight of the sort that most pundits now predict for Greece.

Argentina is a large country, geographically extensive with a temperate climate that favors agricultural production. During the nineteenth century Argentina was among the wealthiest countries in the world due to its agricultural exports. That is to say, Argentina relatively early in its history moved to industrial-scale agricultural and an export-based economy. We all know, from recent financial reportage from east Asia, and especially from China, of the vulnerabilities of an export-driven economy, and the need to build an internal market in order to increase resiliency and decrease vulnerability.

Agriculture has continued to be a mainstay of the Argentine economy throughout the twentieth century up to the present, and it is still synonymous with the production of beef. But the agricultural economy is not the whole story. Set in the midst of Argentina’s vast spaces are many surprisingly large cities. I have previously wrote about how Sarmiento urged the urbanization of Argentina because he considered cities to be a civilizing force. This is one of Sarmiento’s intellectual legacies, and comes across clearly in his Facundo.

In a recent BBC piece, Rise of the Asian megacity, the focus of the article is Asian cities, but I was interested to note that for the statistics in 1990, when only ten megacities were named, while half were in Asia, the other interesting fact, not expressed in the BBC story, was that the other half of the ten cities were all in the western hemisphere, and Buenos Aires was one of these ten largest cities in the world. According to current statistics, Buenos Aires is now larger than Los Angeles, and the only larger cities in the western hemisphere are Sao Paulo, Mexico City, and New York.

When I visited Argentina last year I didn’t travel to Buenos Aires, but I did fly in and out of Cordoba, which is Argentina’s second city, with just over a million in population. I was quite surprised by the size of the cities in the Argentina. On every map a city just looks like a small dot, and the unfamiliar traveler often doesn’t know what to expect. Thus when I arrived in Santiago del Estero, San Miguel de Tucuman, and San Salvador de Jujuy, I was taken aback by the shear size of these cities of which I had no previous knowledge. All were big, bustling urban centers.

To get to these cities, however, one had to pass through mile after mile of open country, and as one passes through the small towns along the highway one sees the legacy of Argentina’s agriculturally-based economy: almost every small town had a John Deere dealership, and the greater part of the heavy truck traffic on the highway consisted of agricultural shipping.

Like many places in the world, Argentina has a divided soul: it is both rural and urban, and both rural and urban traditions have contributed substantially to its cultural heritage. I suggest that Argentina is as profoundly affected by The Rural-Urban Divide as is the US, if not more so. Apart from Sarmiento, the literature of the southern cone is rich in stories of inter-generational alienation between the gaucho tradition and the emergent urbanism the transformed the gaucho from a vital part of the landscape to a romantic literary motif. (This is especially the theme of Uruguayan playwright Florencio Sánchez.)

Argentina’s divided soul (no less than that of the US) has led to divided policies, but whereas the divided souls and policies of the US has resulted in less that optimal economic polices, the increasing marginalization of agricultural as an economic force has limited the impact of these policies. In Argentina, where agriculture is still a major force in the economy, policies that have sought to placate urban populations through the politics of subsidy have been devastating for agriculture, and therefore devastating to the economy on the whole.

The Kirchner-Fernández administration has been actively interventionist in the economy, and has been interventionist in the Peronist populist tradition. But this has been an urban populism that treated the agricultural sector as a producer of wealth that can be expropriated and redistributed. The result has been a series of policy interventions that have penalized the traditional agricultural export model, and has even forced agricultural producers to sell at a loss to the domestic market.

Not surprisingly, some major Argentinian agri-businesses have been moving assets to neighboring Uruguay, and indeed the Financial Times article mentions in passing the problem of capital flight. There can be perhaps no more dramatic illustration of this than the fact that Uruguay has now bypassed Argentina as an exporter of beef. I urge the reader to look at a map and compare the relative geographic sizes of Argentina and Uruguay. Even the reader who is unfamiliar with Argentina’s tradition of producing beef for export will immediately see that something is a little strange when diminutive Uruguay can export more beef than Argentina. (Take a look at Uruguay forecasts beef exports will total 1.4 billion USD in 2011.)

In other sectors of agriculture, Uruguay’s exports of fruit have increased sharply. For example, blueberry exports have doubled (mostly going to the European Union), while overall fruit exports have exceeded US$100 million for the first time in its history. Uruguay’s fruit exports are still dwarfed by those of Argentina, but we see a broadly based increase in Uruguay’s agricultural production and export. Thus while Argentina’s economy has been growing at 6 percent per year since the initial contraction following the default, its agricultural industry has been lagging while neighbors pick up the slack. The traditional engine of industrial development and national wealth in Argentina has been marginalized by political intervention, and this puts the sustainability of Argentina’s present financial model in question.

While it is easy to say that policies can be changed and the agricultural industry can resume its role, there will be an inevitable loss of market share and perhaps lost decades of national wealth. Unlike, for example, the mineral wealth of the DPRK or the petroleum reserves of the US held in ANWR, which are essentially resources banked in the ground, and which can be extracted more efficiently and more profitably in the future with improved industrial technologies, the loss from missed agricultural opportunities is a loss that cannot be made up at a later date. If you don’t sell fruit or beef this year, someone else will sell it, and the purchaser will likely consume it this year. You may sell to them next year, but you missed your chance to profit from this year.

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Grand Strategy Annex

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The European Union is a unique economic and political partnership between 27 European countries.  It has delivered half a century of peace, stability, and prosperity, helped raise living standards, launched a single European currency, and is progressively building a single Europe-wide market in which people, goods, services, and capital move among Member States as freely as within one country.

The European Union (EU) is a political and economic community of twenty-seven countries, established in 1993 by the Maastricht Treaty. The European Union presently consists of 27 countries and has a total population of nearly 500 million citizens (497,198,740).

The idea of collective security can be traced back at least to Kant, whose short and widely influential work Perpetual Peace is as clear and as easy to understand as the Critique of Pure Reason is opaque and difficult to understand. There are many visionary ideas in Kant’s essay, all of which were ahead of his time, and most of which still remain ahead of our time. Here is Kant’s formulation of collective security:

“Peoples, as states, like individuals, may be judged to injure one another merely by their coexistence in the state of nature (i.e., while independent of external laws). Each of then, may and should for the sake of its own security demand that the others enter with it into a constitution similar to the civil constitution, for under such a constitution each can be secure in his right. This would be a league of nations, but it would not have to be a state consisting of nations. That would be contradictory, since a state implies the relation of a superior (legislating) to an inferior (obeying), i.e., the people, and many nations in one state would then constitute only one nation. This contradicts the presupposition, for here we have to weigh the rights of nations against each other so far as they are distinct states and not amalgamated into one.”


After considering the vicissitudes of “lawless freedom” and the perversity of war, Kant continues:

“…there must be a league of a particular kind, which can be called a league of peace (foedus pacificum), and which would be distinguished from a treaty of peace (pactum pacis) by the fact that the latter terminates only one war, while the former seeks to make an end of all wars forever. This league does not tend to any dominion over the power of the state but only to the maintenance and security of the freedom of the state itself and of other states in league with it, without there being any need for them to submit to civil laws and their compulsion, as men in a state of nature must submit.”

While Kant is known as an “idealist” philosopher in the technical sense of idealism, which is to say that Kant sees the world as ultimately constructed out of ideas, this essay of Kant reveals Kant as an idealist as the term is commonly used in conversation. In fact, Kant deserves to be called an idealist in both senses. It is hard to believe that Kant believed in the practicality of his proposals in his Perpetual Peace essay, but I don’t think that there is any question that he did so believe. Kant also wrote a wonderful little essay, which I have quoted on several occasions, in which he argues quite explicitly against those who maintain the impracticality of theoretical ideals.

Surprisingly, perhaps even shockingly, the world has tried to put some of Kant’s ideas into practice. While the League of Nations didn’t work out so well, we still have the United Nations, and though it can’t accomplish much, it is at least a nod in the direction that Kant visualized. The idea of collective security, then, in familiar to all, and can be intuitively summarized in phrases such as there being strength in numbers, all for one and one for all, and the like.

I would like to suggest that beyond collective security in the familiar sense that there is also the possibility of collective economic security, and I would argue that the European Union constitutes an attempt to realize collective economic security. I can easily imagine how others might disagree with me on this. I recall some time ago I was reading a Stratfor analysis in which the writer (probably George Friedman) argued that the rationale behind the European Union was ultimately security, and that the unification of the European economy was only a means to the end of getting Europe to work together abandon its militaristic ways so there wouldn’t be any more blood-lettings like the world wars of the twentieth century.

That Europe is and has been a deeply fractured place was recently reiterated on Stratfor by Marko Papic in The Divided States of Europe:

“Europe has the largest concentration of independent nation-states per square foot than any other continent. While Africa is larger and has more countries, no continent has as many rich and relatively powerful countries as Europe does. This is because, geographically, the Continent is riddled with features that prevent the formation of a single political entity. Mountain ranges, peninsulas and islands limit the ability of large powers to dominate or conquer the smaller ones. No single river forms a unifying river valley that can dominate the rest of the Continent. The Danube comes close, but it drains into the practically landlocked Black Sea, the only exit from which is another practically landlocked sea, the Mediterranean. This limits Europe’s ability to produce an independent entity capable of global power projection.”

Nevertheless, I think that there is a certain segment of people who see strength in numbers economically, in way that that is not tied to security. Sometimes bigger is better, and especially so when one is attempting to deal with the consequences of mass society engendered by industrialization. It could be argued — in fact, I would argue — that the economic success of the US was due in no small part to is large (ultimately continental) contiguous land area under a single political regime. If North America had been political divided like South America, it is unlikely that its economic development would have taken the particular path that it did take.

I have mentioned in some previous posts that Gaddafi has argued on many occasions for a “United States of Africa,” and while this is perhaps impossibly visionary, if it could be made to work it would have great economic benefits for the continent. Similarly, the European Union is sometimes characterized as a “United States of Europe,” and with hope and the aspiration that its collective economic and technological clout might rival that of the US. So even though the term “collective economic security” is not used, the idea is out there, and has been the basis of practical policy objectives.

The Wikipedia article on collective security quotes A.F.K. Organski on five (5) basic assumptions of collective security:

In an armed conflict, member nation-states will be able to agree on which nation is the aggressor.
All member nation-states are equally committed to contain and constrain the aggression, irrespective of its source or origin.
All member nation-states have identical freedom of action and ability to join in proceedings against the aggressor.
The cumulative power of the cooperating members of the alliance for collective security will be adequate and sufficient to overpower the might of the aggressor.
In the light of the threat posed by the collective might of the nations of a collective security coalition, the aggressor nation will modify its policies, or if unwilling to do so, will be defeated.

This is formulated in terms of security from military attack, but it could be reformulated, mutatis mutandis, to address collective security from an economic standpoint. Economically, the threat to economic security comes not primarily from a military assault but from an economic crisis. This should seem pretty intuitive to most people these days, since the global economy is only now pulling out of what is being called the “Great Recession,” which was triggered by the subprime mortgage crisis — a genuine financial crisis if there ever way one — and even more recently the Eurozone was been faced with major crises as Portugal, Ireland, and Greece have come close to defaulting on their debt payments. (Most of the today’s Financial Times was about the Greek debt crisis.)

Well, interpreting Organski’s basic assumptions in terms of collective economic security, we see that the idea turns into a disaster:

In an economic crisis, member nation-states will be able to agree on the cause of the crisis.
All member nation-states are equally committed to contain and constrain the crisis, irrespective of its source or origin.
All member nation-states have identical freedom of action and ability to join in containment and de-escalation of the crisis.
The cumulative power of the cooperating members of the alliance for collective economic security will be adequate and sufficient to contain the economic crisis.
In the light of the economic power wielded by the collective might of the nations of a collective economic security coalition, the cause of the crisis will be intimidated into cooperation, or failing to do so, will be contained.

The amusing thing about this is that, while this remains a coherent set of principles when reformulated in terms of economic security, it is even more spectacularly impossible than when formulated (as in the original) in terms of politico-military security. This makes the disaster of these principles particularly interesting, because it shows us that a coherent body of thought can be utterly unworkable despite its coherency.

The reader may well respond to me by saying that I have no basis whatsoever for my claims about collective economic security, and this is not even a fair way to summarize the mission of the EU. I would agree that this is certainly not the be-all and end-all of the European Union, but on the other hand what I did explicitly say about was that the idea of collective economic security is out there.

The idea is out there, but it has not (perhaps, until now, unless I have been anticipated, which is more likely than not) been made fully explicit. What that means in practical terms is that the idea is present implicitly, and the implicit presence of an idea is an idea with deniability. People can and do think in terms of ideas that have not been made explicit, and when they do so they often think in a way that is sloppy, vague, imprecise, and riddled with fallacies.

One of the virtues of making an idea fully explicit is that weaknesses and faults become as obvious as strengths and virtues. When an idea is out in the open and is debated and discussed in explicit terms, its strengths and weaknesses can be compared in a rational and systematic fashion. When an idea remains in the shadows, by contrast, it has a subterranean influence without being critically assessed. This can be unfortunate, since a vaguely appealing implicit idea is not balanced by an explicit consideration of its limitations.

One of the reasons (though certainly not the only reason) that ideas are never made fully explicit is that they are “unthinkable” for some reason or another. It takes a visionary mind to think the unthinkable in explicit terms. Herman Kahn famously did this for nuclear war during the height of the Cold War. I am not suggesting that collective economic security has anything like the unthinkable character of nuclear war, but I am suggesting that we have not had an economist since Malthus who was willing to think through the economically unthinkable.

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Grand Strategy Annex

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Western Europe has brought itself to such a high pitch of development in recent decades following the combined devastating effects of the Great Depression, the Spanish Civil War, the Second World War, and the looming presence of Soviet communism, that we scarcely remember the time when Portugal was the Bolivia of Europe: perpetually poor, politically unstable, and subject to a seemingly endless series of coups d’état.

Portugal’s torpor was more or less the result of the one-two punch of an early modern “resource curse” followed by the 1755 earthquake and tsunami at Lisbon. What I mean by an “early modern ‘resource curse'” was that the Portuguese economy became dependent upon income from colonies in the New World, which in the case of Portugal meant Brazil. Industry declined precipitously in Portugal itself, and the people cultivated a sense of entitlement for generations until they were largely incapable of practical effort in ordinary pursuits. (A situation much like the Persian Gulf oil sheikdoms of today.)

As I noted above, Europe has done rather well for itself, bringing along with it not only the core continental economies of France and Germany, but also economies that had historically been quite marginal: to the west — the Iberian Peninsula — and to the east — the Balkans and Central Europe. The world became so quickly accustomed to this success that the idea of a European economic union, ultimately cemented by the currency union of the Euro, seemed to have about it a certain air of inevitability, as though its success were guaranteed.

Now it seems that Portugal is about to slip again into a kind of economic torpor, consigned to a marginal position, along with Greece, in the Balkans, which had its riots and crisis some months ago. In today’s Financial Times, Portugal and Greece were both described as peripheral Eurozone countries. In The Dubious Benebits of the Eurozone I suggested that it was remarkable that there was no built-in mechanism in the formulation of the currency union to address such crises. I still find this remarkable, and it is perhaps the most telling sign of the presumption of the inevitably success of the union that no plans, or insufficient plans, were made for troubled times.

However, I also argued in Shorting the Euro that the value of the Euro is quite high, and even if the currency takes a hit, the Europeans will still be quite well off, and their economies will ultimately be sound. Except, perhaps, for the “periphery.” Marginal Europe is likely to return to its historically marginal status, so that those countries not traditionally part of the core of successful European economies will find that they have not “hitched their wagon to a star” by joining the Eurozone. Those nation-state that have traditionally been part of the core of successful European economies have demonstrated that they will not intervene in a robust manner to keep these marginal and peripheral economies on an equal footing to their own.

At this point in the recovery of the world economy, following the housing crash and the consequent financial meltdown, world economists were no doubt optimistic that growth would be hitting its stride about now. Instead, we have the earthquake and tsunami in Japan, with is attendant nuclear crisis, and social unrest throughout the Arab world, and between these natural and social disturbances expectations of slow, steadily, predictable growth must fall by the wayside.

In Portugal, austerity measures were voted down in a move that may result in an international bailout package — imagine the IMF coming to the rescue of a Eurozone nation-state, while the rest of the Eurozone looks on in complacency. But Portugal is far from isolated in this respect. Attempted austerity measures for the long-term good of the economy are notoriously unpopular, and routinely are the cause of riots and social unrest. The telos of this development is a situation like that in Argentina, when a popularly elected government attempts to practice the politics of mass subsidy — disastrously.

Indeed, the social unrest in the Arab nation-states that has been dominating the news lately has often been triggered by economic grievances. These economies have been moribund not least due to the cronyism of entrenched autocracy, and the legitimate hope is that, with the end of such autocracy and its inevitable cronyism, that there will be a democratizing effect and a spreading of the wealth. Such hopes are justified in the long term, but in the short term — and this is the scale of time represented by triggers for social unrest and revolution — they are unrealistic in the extreme. Russia now, some twenty years after the dissolution of its command economy, is doing well, but it went through some rather difficult times in its transition. The same is to be expected, at least to some degree, in regard to North Africa and the Arabian Peninsula, though greatly complicated by the oil wealth in the region.

In terms of sheer weirdness, perhaps recent moves by Utah to make gold and silver alternative currencies represent a movement of ideologically driven economic policy that, if the idea spreads, could do significant mischief. There is dissatisfaction and unrest among the wealthiest in the world, who may choose to cut off their collective noses to spite their collective faces. There is also dissatisfaction and unrest among the poorest in the world, and with the efforts to remove Muhammad Yunus from the Grameen Bank in Bangladesh that he created, it seems that economic policy is becoming politicized and polarized in ways that may give immediate emotional satisfaction at the expense of long term growth and economic viability.

I am not projecting or predicting worldwide financial disaster — I find apocalyptic scenarios distasteful in the extreme, not least when expressed in the secular terms of economics — but it does seem at the moment that the world economy is teetering on a knife edge, at which point it could fall backward into retrograde and politicized policies of the sort that exacerbated the Great Depression, and from which it might regain its sanity and move forward again by placing rationality and pragmatism of the emotional satisfaction of economic revenge.

In the grumbling hive of Mandeville’s Fable of the Bees, “every Part was full of Vice, Yet the whole Mass a Paradice,” and, “Their Crimes conspired to make ’em Great.” Great economies comprise great crimes; and great wealth means wealth often in undeserving hands. But the alternative — making everyone poor, something Mao pioneered with the Great Leap Forward and the Cultural Revolution — would leave a mark on world history from which we would not soon recover if practiced on a global scale. And this is the danger: the global economy is global, and with potentially global problems. Global efforts are needed to prevent moralistic folly from ruining what hopes we may rationally entertain.

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Note added 29 March 2011: Today on the BBC, in the story Portugal and Greece downgraded on debt worries, it was reported that Standard & Poor’s has downgraded Portuguese and Greek bonds: “The downgrades left Portugal one notch above junk rating and Greece’s creditworthiness below that of Egypt.” It seems we are well on the way to a two-tier Eurozone in which there will be a core of healthy, growing economies that more or less approximate the originally intended policy limits of Euro participation, as well as a periphery of poor cousins that use the Euro but which do not hew to Euro budgetary targets nor uphold Eurozone policies. One can see the participation of the Eurozone periphery as a kind of preemptive Euroization of marginal economies that might have needed rescue (and perhaps Euroization) by the core Eurozone nation-states at some point in time anyway. Why not put them on the Euro now instead of later? This makes northern European tourism to Greece and Portugal all that much easier by avoiding the inconvenience of currency conversion.

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Note added 05 April 2011: A new story today, Portugal downgraded by Moody’s on further debt concerns, notes that Portugal’s bonds have been downgraded again. The above-referenced story said that the previous downgrading, “left Portugal one notch above junk rating,” which means that the current downgrading puts Portuguese bonds firmly in junk bond territory. The Portuguese have receive so little in terms of support from the Eurozone that it invites the counter-factual speculation as to what would have been done in respect to Portugal had the Portuguese not been part of the Eurozone.

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