Category Archive: Interviews

  1. Market Ideologies

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    The Soviet Union’s construction of pipelines across Western Europe granted the superpower access to European markets—and capital. In his new book, The Soviet Union and the Construction of the Global Market, Oscar Sanchez-Sibony demonstrates how this move challenged American dominance of Bretton Woods institutions, ultimately provoking a broader rethinking of state-market relations. 

    The following conversation between Sanchez-Sibony and Jamie Martin unpacks the evolution of global finance, interrogating the making and unmaking of the twentieth-century world order. Sanchez-Sibony is Associate Professor of History at University of Hong Kong. He studies the overlapping infrastructures of global power, placing particular emphasis on how interactions within and between Soviet and Western spheres shaped the modern world. His latest book narrates the dissolution of Bretton Woods institutions through the lens of energy, finance, and great power conflict. Jamie Martin is Assistant Professor of History and of Social Studies at Harvard University. His research scrutinizes the institutional underpinnings of the global political economy, exposing their intricate ties to war, trade, and empire. His most recent book,The Meddlers: Sovereignty, Empire, and the Birth of Global Economic Governance, examines the origins of the World Bank and the International Monetary Fund (IMF). 

    Below, Sanchez-Sibony and Martin reflect on the inadvertent consequences of hegemonic struggle between the US and Soviet Union and the relationship between ideology and interest. They reveal the counterintuitive impacts of capital controls, oil markets, and trade liberalization for the global South and beyond.

    A conversation with Jamie Martin and Oscar Sanchez-Sibony

    Jamie martin: Your new book is quite a bracing and revisionist history of the international political economy of the Cold War from the Soviet point of view. Both here and in your 2014 book, Red Globalization, you offer a distinct view of the Soviet Union as deeply engaged in the world economy. This tells us something key about how the Soviets navigated the global capitalist system, both from within and from without. Your aim seems to be to get us to think anew and more broadly about the nature of the world economy and global capitalism itself.

    oscar sanchez-sibony: Definitely. One continuity between the two books is that I highlight the extent of Soviet integration and the ideologies that encouraged this integration. I try to reconsider the categories that we usually use to understand the Soviet Union, which are largely ideological. When we look at the way the Soviet Union acts in the world, it doesn’t align with the image of the Soviet Union we tend to have—as the advocate for state control over markets. 

    But you are right, the main aim of the new book is to focus specifically on the transformation of the world at the end of Bretton Woods, not so much to ask questions specific to the Soviet Union, but rather: What is the power that is transforming the world? Bringing the Soviet perspective into our understanding of this period is where I hope the book can make a new intervention. I argue that during this period, the Soviet Union—like many other countries on the periphery—was trying to break down the boundaries that kept it from accessing capital. Under Bretton Woods, this capital was tightly controlled by the United States, which was specifically prohibiting access to the Soviet Union.

    In response, the Soviet Union began to trade with European countries that were also trying to break down certain kinds of US monopolies. Through the construction of energy infrastructure, i.e. a series of pipelines, the Soviet Union gained access to capital and promoted the breakdown of all sorts of compartmentalizations that Bretton Woods had imposed. Through pipeline construction, the USSR set up a sort of debt treadmill. 

    Ultimately, the book positions capital as an entity that attracts the Soviet Union and the global South into a particular relationship with the West. That relationship turns out to be hierarchical, but it was not forcefully imposed on them. 

    Jamie, what sort of dialogue do you see here with your own work?

    JM: The Meddlers is both an origin story and a story of continuity. It’s an origin story insofar as it tracks the rise of a new kind of global power: through the emergence of the very first international institutions to exercise muscular powers over economic policymaking concerning the most vital questions of national wealth and security. These were quite distinct from the relatively toothless institutions of international cooperation of the nineteenth century.

    This new kind of global power emerged toward the end of the First World War, a war that was itself waged with quite extraordinary new institutions of economic coordination among the major allied powers. And importantly, this is roughly twenty-five years before the conventional starting point of global economic governance, namely the Bretton Woods Conference.

    Many of the powers we associate with global economic governance today—making bailout loans, channeling capital into development projects through international organizations, coordinating among independent central banks, commodity governance a la OPEC—emerged in the wake of the First World War, largely among the victorious allied empires.

    The political problems they faced in innovating this new kind of power were among the most challenging of modernity itself. How could states achieve international coordination over issues of economic stabilization that implicated domestic policymaking concerning tariffs, public spending, taxation, monetary policy, and so on? Furthermore, how could they do so in a manner that was compatible with new political realities in the era of self-determination and mass politics, that by this point had increasingly come to turn on questions of economic policymaking? By the end of the nineteenth century, one of the most robust demonstrations of sovereignty was being able to exercise autonomy over questions of domestic political economy. 

    There were some earlier models for international intervention in such questions, but they were far from ideal. For example, financial stabilization loans made to Central and Eastern European states during the 1920s were modeled after the techniques of semi-colonial debt administrations set up in the nineteenth century by European and US investors and empires in North Africa, the Balkans, and Latin America. There were deep, self evident continuities between these nineteenth century tools of informal financial empire and the new institutions of international economic cooperation established in the interwar period. These continuities persisted through the post-1945 period. It is by focusing on this history that my book retells the coming of Bretton Woods. 

    In the aftermath of the Bretton Woods Conference in 1944, there was a quick reversion to this old style of interventionist banker’s diplomacy. The key difference was that this system of global economic governance was now to be superintended by the United States. The number and the kinds of states afforded any kind of autonomy under the system were quite restricted. And many members of the new Bretton Woods institutions faced institutional arrangements that looked quite similar to those of a much earlier period.

    This is the story of continuity: What looks like the sudden birth of the Washington Consensus-style IMF in the late-twentieth century is actually something else: a moment of expansion for a set of powers latent in an institution already carrying on this older nineteenth-century-style of banker’s diplomacy.

    In short, we both attempt to recast our understanding of the mid-twentieth century and specifically of Bretton Woods. I argue that we shouldn’t see the birth of global economic governance in terms of a triumphalist narrative about the rise of US and New Deal globalism or enlightened liberal internationalism, but rather as a process of institutional ad hoc improvisation. Empires were being forced to improvise rather messy public-private arrangements in the face of new political realities. 

    In a sense, I think I’m giving a new way of understanding the path to Bretton Woods, and you’re giving a new way of understanding the path out of Bretton Woods.  

    oss: That’s one of the things I like most about your book, and I think we also share a sense that solutions are found in practice rather than out of a blueprint. It’s important to communicate that the Soviets were primarily seeking solutions to specific problems, like the Italians wanting to step away from the monopoly Americans had over their oil industry. The Europeans in general were reaching out to the Soviet Union, trying out new ways to relate to the socialist bloc after being suddenly thrown into competition with one another following the 1957 Treaty of Rome and the establishment of the Economic European Community. The Soviets, in turn, were finding ways to work out their problems of access to capital.

    How does your book help us understand neoliberalism as an ideology that long prefigured the 1980s and even the Mont Pelerin society? 

    JM: One of the things that our books share is the notion that ideology and material constraints are not in a zero sum competition. I think neither of us would want to fully dismiss the importance of ideology, but we both focus on what people did just as much as on what they said. One of the striking aspects of your work is to see how these Soviet diplomats effectively acted as quite savvy business people. They had a deep intuitive knowledge of how markets worked and they pressed their capitalist counterparts into being better capitalists. 

    In my book, most of the protagonists were economic internationalists of a liberal orientation, who wanted to rewire international relations to promote a particular kind of cooperation grounded in Wilsonian ideals. I think these ideals mattered in causal terms. But the effects of liberal internationalist ideology in the face of political and material constraints varied from case to case. In practice, a far more pragmatic, hard-nosed decision-making often prevailed that departed from these professed ideals. And at the end of the day, if there are enough departures from an ideology, it starts to look unconvincing. If you say you’re a liberal internationalist, and you do something that looks like empire, ultimately people are just going to think you’re an empire. And they probably will be right. 

    Neoliberalism matters as an ideology and it obviously matters in the realm of politics. But my intervention in these debates is twofold. One is, as you said, to point out how the practices we associate with the IMF did not appear overnight in the late twentieth century. You didn’t need an ideological shift to get financial actors to seek clearances for what they wanted to do. If we look not at intellectuals or technocratic policymakers, but at actors trying to turn profits and guarantee market share, we find a different periodization and a different causal story about the rise of neoliberalism. Much of what we associate with neoliberalism emerged out of an earlier milieu of private entities acting in the world and navigating their relationships with states, breaking down barriers to their freedom, removing economic decision making from democratic contestation, turning questions of governance into issues to be solved by prices and markets, and so on. One of the things that neoliberalism offered was a new intellectual framing and legitimation for older practices. In a sense, the abeyance of these practices after the Great Depression is just as interesting a story as their return. 

    My second intervention is to say that the much-discussed turn away from neoliberalism in an intellectual capacity today doesn’t necessarily imply a transformation in how institutions actually act in the world. Today, we have an ideological shift, but the IMF still basically does what it’s always done. So if we’ve entered a post-neoliberal era, it remains to be seen what this will actually mean for, say, the politics of global debt. Is China a neoliberal lender? Probably not, but will it be a less demanding creditor among low income and emerging market economies? 

    What is neoliberalism in your book? One possible misreading might say that the Soviets wanted something that looked like a neoliberal world order, but I understand you to be saying that this was an unintended consequence of the constraints faced by a Soviet Union starved for dollars. 

    What is the power of ideology in your story? At what point does the ideology of the actors you narrate become unconvincing to them or to others in the Soviet policymaking apparatus?

    OSS: One of the things I try to do is work out which ideas were relevant to Soviet action—outside the spectrum of left and right, Marxist and non-Marxist, which becomes a bit useless in practice. In my work, ideas about markets are very important. The use of a market discourse became a very important tool for the Soviets to maneuver and find purchase in the world economy. They were going to different entities—bankers, state officials, corporate heads—and telling them: if you don’t sell this to me, I will get it in another country. 

    The reason they did this is because international markets were not institutionalized at this moment of Bretton Woods. For example, while in the early 1930s the West was organizing the production and control of tin, in 1928 the heads of different oil corporations (the so-called Big Sisters) formed a cartel to forestall the market and make oil profitable. That’s a prelude to what OPEC will do thirty years later. I conceive of markets and capitalist practices as arenas of power, with different entities trying to develop forms of power and influence to achieve specific aims, rather than, say, ideological aims. 

    When it comes to Soviet ideology, what I see is an abiding respect for market discourse and for markets themselves. The Soviets didn’t really think they could control markets, but they did want to participate in them and use them as a tool in their own policymaking. They engaged in practices similar to countries everywhere in a capitalist system. This forces us out of the binary between a command economy and free markets. In practice, you find the opposite of that binary; Soviet ideology is not antithetical to markets and in fact, Soviets sought to generate markets, and US practice very often forestalled them. That this respect for the authority of markets appeared across the political spectrum is the element of neoliberalism we need to contend with. It wasn’t just imposed by figures like Thatcher and Reagan—the Soviet Union’s attraction to it is testament to its practical and ideological pull. 

    JM: One way to think about it would be to say that few people really want markets for their own sake. The use of pro-market discourse was often quite useful for achieving particular aims. But this discourse could be discarded when it was no longer useful. Energy and primary commodities demonstrate this clearly—these businesses were often very eager to disrupt market logic completely in order to guarantee profits and market share. Planning wasn’t just the preserve of the left. 

    Energy is really important to your story. The deepening European dependence on Russian oil during this period is, in a certain sense, what facilitates the Soviet strategy. I think you convincingly argue that this should force us to rethink Soviet economics. 

    oss: Any study of the postwar capitalist economy and the evolution of global finance needs to integrate energy. Matthew Huber wrote an incredible article in which he argues that the organization of the oil industry is a precondition for the evolution of Fordism in the rich world. That settlement took place through a violent process of cartelization. In the 1930s, the world’s largest oil producer was the United States. The Texas Railroad Commission was set up to manage pricing and distribution domestically. This was done with a fair bit of violence against oil workers across Arkansas and Texas. That built the solid ground to contain inflation, upon which the Bretton Woods era was constructed: the Marshall Plan, the IMF, and the World Bank. The disruption to pricing and global distribution ultimately brought down the Bretton Woods system in the early seventies. 

    The second piece of the puzzle, especially concerning the Soviet Union, is the Marshall plan. The dominant story of the Plan is that it was a general kind of development aid to reconstruct the European economy in a new, more cooperative way. That’s a great story. But David Painter’s work shows us that a significant portion of the Marshall Plan was actually about building the infrastructure for an oil economy in Europe. So much so that 10 percent of the Marshall Plan just comes right back to the US in the form of oil purchases. 

    The petrochemical industry in Italy became very important because it was the fulcrum that opened up a new relationship with the Soviet Union for all Europeans. The entire Italian petrochemical industry was built with Marshall Plan money, and the Italians innovated the oil for pipe exchange, which became a vector for opening up capital markets for the Soviets.

    The US government built the oil economy in Europe that in time would have the effect of inviting the Soviets into Europe. The contradictions posed by these arrangements generated the instabilities of the 1960s and eventually brought into question the foundations of Bretton Woods, including capital controls. The Soviet Union wasn’t interested in dismantling Bretton Woods as a whole—they were specifically opposed to the capital controls that prevented them from engaging in liberalized trade in Western Europe.

    JM: Your book is an excellent demonstration of the power of capital controls under the Bretton Woods system. What’s so fascinating about your story, though, is that it wasn’t just Wall Street fighting against capital controls but also Soviet diplomats. In our effort to demythologize Bretton Woods, it’s worth thinking about the extent to which it mattered as an international structuring system. Could we go so far as to say that Bretton Woods mattered for a brief period of time mostly insofar as it instantiated a broad acceptance of the use of capital controls?

    oss: What’s interesting in thinking about the Soviet trajectory through Bretton Woods is the extent to which the Soviets really just wanted to get back where they seemed to be getting to by the late 1920s. In the aftermath of World War One, there was no capital, the Soviets had just been invaded by three different Western powers, and then they were ostracized for refusing to pay the tsarist debt. They were desperate for capital, and it’s only after the Dawes Plan began to circulate capital around Western Europe that the Soviets were able to find deals. 

    Germany offered a major loan. This made the Americans mad as hell, because the US just gave the Germans loans that the Germans then offered to the Soviets. But by the early 1930s, the US got on board because the Soviet Union was the one country still constructing things. In 1933 under Roosevelt, the US opened up diplomatic relations. But then of course the Great Depression happened, and capital circulation died. One way to think of Bretton Woods is as a managed recovery of liberalization, capital liberalization being an outcome that a lot of different social groups and national leaderships favored.

    It’s interesting to look at small countries like Austria. Austria did not desire liberalization. There’s a moment in the book where the Soviets are arguing that both they and the IMF are asking the Austrians to liberalize. Of course, Austria didn’t want to liberalize, because, as is, they could exchange shoes for oil. If they traded in marks or dollars, the Soviets could take their money and buy things in Germany. What do you think, how should we think of Bretton Woods?

    jm: One of the things I argued in my book was that the idea of embedded liberalism, as an actual organizing principle of the world economy, figured very little into many of the decisions of the Bretton Woods institutions.

    There was never a period of time in which South American states, for example, weren’t faced with pressure to adjust from Bretton Woods institutions in order to access resources. By the end of the 1940s and early 1950s, Latin American states were effectively told to pursue anti-inflationary policies and fiscal discipline if they wanted to draw on IMF resources. There’s not much evidence to say that the IMF was guided by some Keynesian or New Deal respect for autonomy, when it came to all of its member states.

    If we think of embedded liberalism as a kind of guiding normative ideal, we are primarily talking about Europe and North America. Keynes himself said that Bretton Woods was not going to work as he wanted it to, even in the more limited form that he’d agreed to after his original demands were discarded under American pressure. He died quite unsatisfied with this system, recognizing that it was going to be dominated by the Americans, and more specifically, that given the lack of guardrails over what the IMF could do, that it would be hard to prevent it from evolving into the kind of conditionality machine that it did indeed become.

    Your story shows how powerful capital controls under Bretton Woods were, but also how they didn’t always achieve the kind of normative aims we might associate with them. If embedded liberalism was supposed to afford states a kind of autonomy to experiment with national political economy, the most experimental state of all—the Soviet Union—didn’t want it! The Soviets sought to remove the capital controls that were constraining their ability to achieve certain goals.

    In a certain sense, I think you can combine our stories to say that I see embedded liberalism as something that, if it existed, was quite geographically and temporally constrained. And you see it as something that did exist, but which, at least in this case, had the opposite political effects of what we might assume.

    This brings us back to the beginning of our conversation—capital is not lording over the Soviet Union, but attracting it. I want to offer two misreadings of your argument, and I want to see how you respond to them. One would be to say something like, the Soviet Union learns to use the tools of the capitalist West in a way that is ultimately  designed to augment Soviet power so that it can somehow undo the bounds of capitalism altogether. That is to say, that the Soviets sought to operate within the bounds of the power structure they were trying to undo. Second would be to actually hand your book over to a hardcore Cold Warrior liberal hawk like Francis Fukuyama, who would say that this book is an incredible demonstration of the inevitability of global capitalism’s victory. What is at least conventionally understood to be the greatest challenge to global capitalism in the form of a state itself became very adept at operating according to the logic of capitalism.

    oss: They are both very good misreadings. They go back to what we said earlier about how capitalism develops in practice, and that practice is a struggle for power. I think Fukuyama, liberal that he is, should be very careful, because part of the reason why these very autocratic actors are attracted to these systems of capital circulation and commodity exchange is because they allow for that kind of autocratic power. These systems were attractive not just to the Soviet Union. There is a section of the book in which I document the moment in which certain Latin American countries began, often through British banks, to approach Soviet trade and aid. This included Brazil, which at that time was governed by a Fascist military junta presumably inimical to the Soviets. When the Soviets did enter into relations with Brazil, the Cubans screamed bloody murder. But that didn’t deter the Soviets at all.

    British banking relations in Latin America dating back hundreds of years were displaced by the Americans between the 1930s and the 1950s, leading British banks to team up with the Soviets. What made the Soviet Union slightly different from the global South is that it had things to sell in a competitive way. They weren’t competing in the chemical industry, but they could build a dam as well as anybody else. 

    So that’s what they did in Latin America. They capitalized these kinds of projects and formed a sort of alliance with British bankers. When Brazil entered a debt trap with European banks, that was in part thanks to the Soviets aiding in the financing and construction of the infrastructure for which these loans were issued. With respect to Brazil, Quinn Slobodian has described American bankers lamenting just what you pointed to: It’s the 1970s, and this steep hierarchy that came along with embedded liberalism has disintegrated. In the 1950s, they could tell Brazil what to do; by the 1970s, Brazil could borrow all the money it wanted without following American command. 

    Of course, this criticism comes with all kinds of racist language, that the borrowers in the South are irresponsible children and so on. It’s uncanny the extent to which imperialism and the cultural constructs that come with it just never die. The finance and the culture are of a piece.

  2. The Structure of the US Treasury Market

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    Responding to market instability, US regulators have mandated that Treasury and repo transactions be cleared through clearinghouses. The prevailing understanding attributes this instability to the behavior of alternative investment funds like hedge funds engaging in “basis trades,” framing liquidity as the key issue in the Treasury market.

    In the following interview, Mohsen Fahmi questions this assumption. Fahmi is a veteran multi-asset fund manager with extensive experience managing global portfolios. He was the lead manager for all of Pimco’s enhanced equity portfolios (StocksPlus) as well as a member of its Dynamic Bond team. He was also a member of Pimco’s investment committee, which sets parameters and risk targets for the entire firm’s portfolios. He recently retired from Pimco—one of the world’s largest fixed-income investment firms with assets totaling $2 trillion— after a career in trading and investment management that spanned thirty-five years. Previously, Fahmi spent eleven years at Moore Capital Management and held positions at Salomon Brothers, Goldman Sachs, and J.P. Morgan. He currently serves as one of the nine Board of Guardians for the Sarawak Sovereign Wealth Future Fund.

    Below, Fahmi and Elham Saeidinezhad discuss the structure of the US Treasury market—the largest segment of the fixed-income market. This interview accompanies Saeidinezhad’s investigation of the US Treasury market, part of her ongoing series studying market microstructures.

    An interview with Mohsen Fahmi

    ELHAM Saeidinezhad: Let’s start with your perceptions on the evolution of the fixed-income market since you began managing it in 1986.

    mohsen fahmi: I can primarily comment on the Treasury market, the most critical component. Nothing else in fixed income can work without a well-functioning, liquid, deep Treasury market. Any market brings together actors with varying objectives, capital requirements, risk tolerance, and constraints. When designing a market structure, regulators must account for these sometimes-competing interests and continue to adapt and correct imperfections over time. The market is so dynamic and changing that even if [regulators] believe they have designed a well functioning market, they should still learn from the market’s evolution over time.

    Es: What is the most critical change in the Treasuries market structure?

    MF: When we look at Treasury markets, one obvious fact is that Treasury debt has exploded in recent years. In the early 1960s, the amount of Treasury debt held by the public—excluding government entities—was about $260 billion.

    Es: Who was holding those debts at the time?

    MF: It was held through pension funds, banks, and mutual funds, as well as individuals. Today, that same measure is $26 trillion.  So, there’s 100 times more debt in public hands today compared to sixty years ago (even if we look at the ratio of debt-to-GDP, the numbers remain impressive).

    Es: This raises a question about market structure. Who are the most important players?

    MF: Primary dealers are essential in this ecosystem. In the US, “primary dealers” like banks and securities firms are authorized to deal directly with the Fed in bidding for auctions and buying and selling securities. Back in the 60s, the number of primary dealers was eighteen. By 1988, the number of primary dealers peaked at forty-six. Since then, the number has declined due to mergers or bankruptcy (think Lehman Brothers or Merrill Lynch). As a result of these tendencies, the number of primary dealers fell back to seventeen in 2008 and has stabilized at twenty-four since. 

    Es: From a financial stability perspective, how should we interpret this change involving primary dealers?

    MF: One of the critical issues in the Treasury market today is that the size of the debt has exploded one hundred times, while the number of dealers has mostly stayed the same. This is true of any market: if I told you that the demand for meat or vegetables has grown by one hundred fold, but we have the same number of supermarkets, you would sense that something doesn’t add up. We are set up for friction and market dysfunction. 

    Es: This is extremely important. In financial theories, these so-called “sunspots” or market frictions are considered bugs, not features, of the system. However, we acknowledge that the mismatch between the growth rate of Treasury debt and the number of primary dealers has been a fixture of the system and, indeed, a financial friction.

    MF: In the aftermath of 2008, Congress and the public wanted to ensure that a collapse of that nature would never happen again. We got 500 pages of regulations intended to protect the banks from themselves and thereby protect the government and the public from incurring losses to bail them out. But as with anything in life, there were unintended consequences.  

    Es: Could you elaborate on the role of the Dodd-Frank Act in this context? This is crucial, especially given the SEC’s recent efforts to further regulate the Treasury market. It is essential to learn from the lessons of Dodd-Frank during this pivotal moment for the Treasury market structure.

    MF: Dodd-Frank said that banks and dealers should not take proprietary risk but only facilitate customer transactions. That was meant to smooth the market so that it doesn’t fluctuate dramatically between good and bad days. 

    Es: In other words, regulators aimed to increase market liquidity by changing dealers’ behavior. The idea was that if dealers focused on customer trades rather than proprietary trading, it would lead to a deeper market.

    MF: The unintended consequences of Dodd-Frank were that those banks no longer smooth out the price action in the market. Therefore, you have air pockets in which the banks step back and effectively stop selling or buying, leaving investors who wanted to trade unable to readjust their risk exposure or hedge themselves. This has impacted market liquidity. No one can buy or sell if the Treasury market freezes and stops trading.  

    Es: Another vital shift in Treasury market structure.

    MF: These are indeed two significant shifts in the structure of the Treasury Market—a fewer number of dealers and less ability to take risks.

    Es: How should we solve that?

    MF: One way would be for the Fed and the Treasury to intervene as the buyer and seller of last resort. When the markets stopped functioning in March 2020 during the Covid pandemic, the Fed came through with temporary measures to introduce liquidity to the market. But for most Western countries there are better solutions than this. You want the government to refrain from intervening, whether temporarily or permanently, to fix the most important price in the market, which is the price of money.

    Es: To reiterate what you mentioned, the Fed acting as the dealer of last resort, which has become standard, should not be considered a preferable approach in advanced capital markets and economies.

    MF: A preferable solution would be to allow and encourage nonbanks or non-primary dealers to take that risk—welcoming hedge fund participation or even private individuals. If we don’t want the public sector to absorb the risk, and we don’t want the banks to take that risk, then it has to be someone other than the banks. 

    Es: This is very interesting, and I agree: we need more hedge funds and private funds present, rather than less, in the Treasury market. This is especially important given that one of the critical drivers of the current wave of Treasury market regulations is to curb hedge fund presence.

    MF: There is also a third option, which is to move away from the intermediaries. With new technology, we can connect buyers and sellers directly. So if PIMCO is buying and BlackRock is selling, why do we need Morgan Stanley, JP Morgan, or Goldman Sachs to be an intermediary and absorb the risks? This hasn’t happened yet because of information discovery, privacy or competition concerns, and protection against the credit quality of counterparty risk. All of this can be handled by financial technology. 

    Es: Would we transfer this role from a financial institution to tech companies in this case?

    MF: The line of demarcation between financial and tech is blurry and arbitrary. Apple has Apple Pay, and banks have massive investments in technology. 

    Es:  I want to connect this point (the third solution) to the first (the public solution). Some people might prefer the Fed as a key player rather than Silicon Valley in the US Treasury market. Please elaborate on why you think the first option is still less appealing compared to the third option.

    MF: After 2008, the Fed, along with most other central banks, cut interest rates to zero (in the case of Europe and Japan, they were negative). That wasn’t enough, so they did quantitative easing by buying billions and billions of securities from the market to drive down long rates (for mortgages, corporations, and so on). When they saw that even this wasn’t enough, they came up with the idea of “forward guidance,” which promises  low rates for a given period in the future. 

    This is problematic because no one knows what the future will bring. Nonetheless, market participants generally believed those authorities. But sooner or later, the fundamentals changed: we had one or two percent inflation that subsequently exploded in a very short period of time, peaking at nine or ten percent. And I think many of these institutions are now regretting their decisions.

     US mortgage rates have gone from 2.5 percent to 7. 5 percent. I think that is disastrous, and it could have been prevented if forward guidance hadn’t superficially pegged rates to 2.5 percent in the first place. They might have been 4 percent because the market needed to build a risk premium against the future. If you allow market forces to work, the process may be noisy in the short run, but that’s not bad. In the medium to long run, it will be smoother.

    ES: Let us now connect this dynamic, which essentially involves how yield curves are shaped, to the role of fixed-income portfolio managers. Fixed-income portfolio managers play a fundamental role in the financial system, yet there needs to be more familiarity with their role. How do these interventions impact your role as a portfolio manager?

    MF: When central banks announce lower rates,  as a portfolio manager, you are torn between knowing that the rates will remain low for a while and yet also knowing they will ultimately rise from artificially low levels. And so you want to be careful and use your own fundamental assessment of the appropriate monetary policy. That leads to tension.

    Ideally, for a well-functioning market, you want a balanced market. Balanced means you want some people to be bullish, some to be bearish, some to be long, and some to be short. This requires diversity of opinions and diversity of objectives. The reduction in the number of dealers has also meant a reduction in this diversity. The analysts are also using the same data and models taken from the Fed and analyzing it in the same Excel spreadsheets. So we end up with less diversity of opinion and, therefore, a less balanced market.

    Additionally, over the last twenty years or so, there’s been an explosion in passive money management, using exchange-traded funds (ETFs) and so on. When a substantial percentage of the market is passive, the market size that gets traded is relatively small, destabilizing the market. So all of these factors together result in a less balanced market. That explains why the ten-year Treasury can go from 1 percent a couple of years ago to almost 5 percent.  

    ES: This is amazing. So, the dual function of having fewer dealers and more ETFs is reducing the diversity of opinion, which is a crucial aspect of the price discovery process in the fixed-income market. I haven’t seen anyone else connecting these two points. ​​

    This increases the price risk in the market. The primary type of such risk in the fixed-income market is interest rate risk. Has the derivatives market caught up in providing hedging solutions to protect investors against these new market risks?

    MF: Derivative markets play a vital role. Generally speaking, they are deep enough to provide investors with many ways to hedge and adjust exposures. In general, they’re performing reasonably well. But again, there are unintended consequences. The accounting profession has a sure way to treat hedging. If you don’t show that hedge A is associated with security B, you cannot offset them against each other. Sometimes, this drives investors or even corporate CEOs to avoid hedging because they’re concerned about the accounting consequences. So you get a chasm between the economic consequences of a hedge versus the accounting consequences of a hedge.

    The second piece is that ideally you want a “complete” market—a market in which you can hedge any security against any outcome for any period. Arguably, the treasury market is becoming less complete. In the 1980s and 90s, you could buy and sell options on specific Treasury bonds. That market of Treasury options no longer exists. Instead, options trading has migrated to the futures exchanges. So you can buy options on bond futures but not on specific bonds. Without getting too much into the weeds, a “ten-year” note contract is actually driven by a seven-year treasury bond, which creates anomalies.

    Es: Why has the option and other interest rate hedging market segments disappeared, and why is there no option for a ten-year future?

    MF: The concept is the cheapest to deliver for any future contract. If I sell you corn to be delivered in Kansas City, we may need to know exactly what variety of corn I can provide. There’s a conversion matrix that assigns a price for each possible variety. But because these are not set in stone, the seller of a futures contract always delivers the lowest quality per dollar. So it happens that the ten-year contract when it was created was a ten-year contract. However, because  rates have been declining for the last forty years, delivering the shortest possible bond within the maturity bucket was always advantageous. That caused the ten-year note contract to effectively shrink to seven years. The Chicago exchanges tried to invent a ten-year contract, but it kind of fizzled. That’s because everyone is familiar with the seven-year contract, and it isn’t easy to get people to switch. 

    Es: Why did the options on the cash Treasuries disappear again?

    MF: If an investor buys a put option on the ten-year Treasury and I’m working as an options trader at JP Morgan, I will sell them that option but hedge myself by going short on that security. Since I’m carrying two sides of the trade, and it requires me to be able to borrow, the repo market needs to be well functioning. And when you do a repo, you’re taking counterparty risk. In addition, the balance sheet gets bloated with both sides of the trade. So, over the years, that market has essentially disappeared.

    Es: Would you elaborate on this point? Can we say that the push for counterparties is a factor in the disappearance of the options market and that the push for standardization might have the sort of adverse impact you’re describing?

    MF: Yes. Standardization is good, but you can only standardize a limited number of securities. The equity market is complete right now because if you as an investor want to buy or sell a call option or a put option on Google, I’m not going to tell you Amazon is like Google. They may be similar in some respects, but they’re different. Contrast that with the Treasury market, where any strategist will tell you that an eight-and-a-half-year bond  is almost identical to a ten-year bond. That makes it more efficient to have three or four or five hedging instruments rather than a hundred or 200 instruments with insufficient liquidity.

    Es: From a financial stability perspective, what are the consequences of this market imbalance? 

    MF: This is a vulnerability in the making that we are already seeing. In March 2023, we had the regional bank crisis, where several huge regional banks collapsed in a span of days. Why did it happen? It’s not because they made bad loans. It’s not because they were speculating in the stock market. It’s not because they lent money to a developing country that went under. It was because they bought Treasury bonds. Why did they have such huge imbalances? Partly because the CEOs of those banks believed the promises of the various monetary authorities that rates would be low forever. And so, they were happy buying bonds at 1.5 percent, not realizing they would suffer a considerable loss when they went to 4 percent. But the imbalances are also partly because of their unwillingness or inability to deploy effective hedges.

    Banks have a held-to-maturity account, they have an available-for-sale account, and they have a trading account. And once you put bonds in one account, you’re not supposed to move them from one to the other. Otherwise, your accountants will not be happy. The IRS may be unhappy.  Therefore, they put many of those bonds in a held-to-maturity account to avoid the unfavorable market-to-market. But by doing that, they got stuck with them. And so they couldn’t sell them after they fell five points. They had to wait until they fell thirty points, and in the process, they went bankrupt or got taken over for a nominal amount.

    Es: This is a fantastic point and a very different perspective from the mainstream view of a cascade of bank failures: banks failed partially because they believed in the Fed and its forward guidance.

  3. Positioning Aden

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    Prior to October 2023, about a seventh  of global maritime trade passed through the Gulf of Aden and the Red Sea to and from the Suez Canal. As a result of attacks by Houthi fighters on commercial ocean freight traveling through the area, that volume has fallen by more than half. Longer shipping routes around the Cape of Good Hope have increased freighting rates dramatically; the average price to ship a forty-foot container almost tripled from $1,400 to $4,000 between December and January. Today, the cost remains around $3,100. 

    Longer freight routes also increased world demand for oil, both to power container ships and increase stocks from shipping delays. As 2024 has progressed, however, declining European purchases have offset this increase. As of May, Brent Crude prices remain at the annual average for 2023 of $82 per barrel. The International Energy Agency forecasts that world oil demand this year will increase by 1.2 million to 103.2 million barrels per day, while OPEC is forecasting an increase of 2.2 million to 104.2 million—about a 1–2 percent change, but headed in the wrong direction for the goal of climate change mitigation. 

    In the following conversation, Phenomenal World editor Andrew Elrod speaks to Assistant Professor of Political Science at West Texas A&M University Kaleb Demerew and historian and analyst Dr. Gregory Brew of the Eurasia Group about the regional and global implications of the developments in the Red Sea region.

    A conversation with Kaleb Demerew and Gregory Brew

    Andrew elrod: Let’s begin at the regional level. What were the geopolitical tensions surrounding the Red Sea shipping routes prior to the Israeli assault on Gaza, and how has the Houthi response altered these dynamics?

    Kaleb Demerew: The region has seen rising instability for decades. Competition between Ethiopia and Egypt, as well as between Iran and Saudi Arabia, has transformed the African coast into a strategic battleground. Turkey’s military base in Somalia, the Gulf States’ installations in Eritrea (along with a new $35 billion development in Egypt), and Ethiopia’s planned naval base in Somaliland are just some of the major indications that the traditional geopolitical divide between the Horn of Africa and the Middle East has eroded. The war in Gaza is intensifying these sources of instability. 

    The Houthi attacks ought to be understood within this wider geopolitical context. Beyond the immediate war, the Houthis are advancing Iranian interests against those of the Egyptians and the Saudis, who are direct stakeholders. This is really about power projection—showing the extent to which Iran can arm proxies with sophisticated and highly impressive sea drones and undermine Saudi, and, by extension, American influence in the region. 

    Gregory brew: These rising local tensions coincide with surprisingly stable global oil markets. In recent decades, the center of gravity of world oil production has shifted from the Persian Gulf to the Gulf of Mexico, while the bulk of oil consumption has shifted from the United States to China. Though the price of ocean freight spiked in January, the industry has largely adjusted. While the price of oil has oscillated, as it always does, based on perceptions of risk, overall prices have remained fairly stable.

    This is in sharp contrast to the Yom Kippur War of 1973 or the Iranian Revolution of 1979, when events in the  region had cascading effects on the world order. Today, Saudi Arabia is shipping oil to China, while Russia has adjusted its trade by exporting oil to India. Formerly risk-heavy ties, such as Europe’s dependence on Russia or America’s dependence on the Middle East, don’t play as much of a role in the global energy economy as they once did.

    This is in part due to the changes in the global energy economy that have taken place over the last twenty years, including the rise of the US as a major exporter.1 Attacks on shipping in the waterway have discouraged its use by Western shippers, indirectly encouraging dependence on shipping streams (at least in terms of energy trade) that avoid potentially risky chokepoints.

    There’s no question that the violence in the Red Sea is disruptive—to the states of the region and potentially beyond, given how the US and a coalition of international partners have gotten involved. It’s only that the oft-assumed crisis pertaining to oil has not occurred. The world is not as it was in 1973.

    Kaleb, assuming the US intervention in Yemen proves lasting (as I think is likely to be the case), what kinds of impacts could that have on the current situation inside the country, and could it prove to help or hinder Houthi consolidation of power while potentially destabilizing other parts of the Red Sea region?

    Kd: At this point, there is a general consensus, even among the Saudis, that the Houthis will remain in North Yemen. The Houthis themselves seem to acknowledge their inability to capture Aden, particularly due to the Sunni majority there. The Saudis perceive that they need to act far more responsibly, given these realities, and given that they, not the UAE or the US, share a border with North Yemen. This explains both the China-brokered attempt at Saudi-Iran rapprochement early last year, as well as the Saudis’ relatively restrained response to the recent Houthi naval attacks. 

    In recent years, the US has had a limited role in Yemen. Much of the US intelligence and logistical support to the Saudis and to the UAE happened prior to 2018. In 2021, the Houthis were targeting oil tankers and other strategic locations in both Saudi Arabia and the UAE with aerial drones. It was the Saudis bearing the brunt of these attacks. Even between Saudi Arabia and the UAE, there is no consensus on the future of Yemen. Even if North and South Yemen remain permanently separated, it would leave the Houthis with a continued presence on the Red Sea—for this reason, they do not really need to consolidate any more than they already have. 

    The Saudis are already adjusting to this new reality, while the UAE is likely hoping to shift the balance a bit more. Meanwhile, the US is increasingly sidelined. In short, the status quo has already changed. Ultimately, the US may have to adjust to a reality that includes a sovereign state governed by a proxy of Iran, despite potential hesitations to formally recognize it.

    Kd: What do we make of the increasing international disorder, on the one hand, and the relative stability in energy markets, on the other? 

    GB: The fact that the global energy market has absorbed the Red Sea disruption may be linked to deteriorating regional stability. It’s why China has not gotten more involved, even though their trade is being affected. Ultimately, China is less threatened by a disruption in the Red Sea than, say, in the Strait of Hormuz where their energy supplies would be directly affected. 

    The US would like to see a resolution to the problem but lacks the will to get involved, as the Red Sea isn’t a theater of national security priority for the US. So because buy-in is low, the capacity of local actors like the Houthis to produce instability is arguably higher. No one wants to take full responsibility for addressing the problem.

    Kd: Energy is only one of several commercial goods that travel across the Red Sea, the  total worth of these goods being close to $1 trillion. To say that we do not feel the impact of Red Sea crises on energy prices is one thing, but to call it a “crisis that wasn’t” probably misses the mark. 

    To Egypt, whose $8 billion bailout from the IMF did not even account for losing half of the source of its Suez revenues, this is certainly a crisis. To the extent that several Horn of Africa nations rely on wheat from Ukraine and Russia, interruptions in that supply certainly constitute a crisis. These economic crises in Northeast Africa are of great concern to the United States and its allies, given the concerns over terrorism and immigration. And this is all to say nothing of inflationary effects of the rising cost of container goods shipments. Certainly, consumers in the West having to pay a little bit more for manufactured goods does not constitute a crisis per se, but the inflationary effects will still be felt in the long term. 

    And while the United States has successfully de-risked its energy supply chain, “de-risking” itself is not risk-free. In 2015, China invested about $250 million dollars in a port in Pakistan called Gwadar, with up to a billion dollars planned in  ancillary investments in infrastructure such as airports and desalination plants. The idea was that this port would provide a land bridge for the construction of an oil pipeline from China’s Middle East export partners that would bypass the Strait of Malacca, a small strip of ocean cutting across the Indonesian archipelago. China was always fearful that this strait could be easily blockaded by rivals like India or the United  States in the event of a military confrontation, leaving it effectively cut off from its energy supply. So, Gwadar represented the most important strategic tool for de-risking. However, just last month, separatist rebels launched a coordinated attack on Gwadar port, leaving some analysts wondering whether China’s presence in Pakistan could be sustained. Without Gwadar, China may become vulnerable again to an energy blockade. 

    So, again, de-risking is not risk free. Domestic headwinds in US politics may impact its ability to continue producing oil at such high quantities soon, once again increasing its reliance on foreign exporters. The decline of the position of the Red Sea in global energy trade does not mean that Red Sea security is no longer high-stakes, even for the US. 

    ae: To what extent are the rivalries in the Red Sea region constrained by the larger economic and military ties with China, Europe, and the United States? 

    kd: Here is a counterfactual exercise that is of interest. Let’s imagine that the United States did not care about the Red Sea. Rather than attempt to flex its naval power in that region, it would look to revitalize its many bases in the Persian Gulf and continue to outsource Red Sea security to the Saudis. Clearly, this is not the case—just as the Houthis used the war in Gaza as a springboard to justify a campaign with broader aims, the United States, very early on, has used Red Sea instability to assert itself in the area in a very new way. 

    Of course, it is doing so now through a multilateral coalition, compared to the unilateral campaigns of the early 2000s, when the US launched its first military base in the Horn of Africa. This all  means that policymakers in the US clearly see some bigger issues at play behind the Houthis’ unprecedented show of force, and the US is not content to repeat the mistakes of the pre-9/11 era and leave the Red Sea to the Saudis and the Egyptians. The same can be said of China, which now has a base in the Horn of Africa. China and Russia recently signed a deal with the Houthis for safe passage of their ships. 

    The Red Sea remains the most important naval route connecting Europe with Asia, and this makes it vital  for naval mobility and logistics, especially since all the major powers now operate military bases in the region. In a conflict scenario, controlling or denying access to these waterways would entail a strategic objective to influence enemy military capabilities of adversaries and restrict the movement of naval forces.  This is what helped the Ottomans stake out their own sphere of influence despite the ostensible naval superiority of the Portuguese in the sixteenth century. So, given these strategic interests represented in this waterway, great power rivalries play a very significant role on both sides of the Red Sea. 

    gb: I see a separation in commitment from states depending on their perceived interest in the region and their pre-existing commitments. Take China, for example. Beijing could take an interest in what is happening in the Red Sea, as the trade linking China to Europe and North America is the most directly affected. The Chinese ostensibly have aspirations to expand their influence in the Middle East. But they have shown very little interest in getting involved. Europe, likewise, has mobilized military forces to safeguard shipping, but is ill-equipped to address the core problems. The US has the military power to bombard the Houthis, but it cannot muster the diplomatic strength to find a workable solution to the crisis in Yemen or the violence in Sudan or Ethiopia. These challenges are further compounded by the fact that local states—Saudi Arabia, the UAE, and Iran—have become involved and largely pursue their own interests, rather than solutions that would reduce instability in the area.

    kd: To the extent that the Chinese do not seem as outwardly concerned by Red Sea instability as the United States, I think this may have more to do with a cost avoidance strategy. Since the US has already engaged a ten-country coalition to counter Houthi attacks, China can choose to sit on the sidelines and avoid creating new antagonisms, especially since they do not feel directly targeted by the Houthis. This is fairly in line with the Chinese approach to risk in international engagements, and indeed, even some European countries, such as France, have recently started to dial back their commitments to supporting the coalition. I agree with Greg on this point: in a sense, nobody, not even the United States, wants to take responsibility for stability in the Red Sea. But, ultimately, situations may necessitate stronger engagement.

    ae: How could events in the Red Sea reinforce or undermine the broader security settlement, in which US allies Egypt, Israel, and Saudi Arabia are arrayed against Iran? 

    gb: The view from Saudi Arabia is that Iran is an enemy, and one that should be countered, but through a variety of means, not simply military strength. The purpose of the security arrangement with Israel—the so-called Grand Bargain—is to contain Iran, but Riyadh sees it first and foremost as a way to obtain valuable concessions from Washington that would help balance the potential threat posed by Iran. A security guarantee from the US would preserve Saudi Arabia from attacks like the September 2019 assault on Abqaiq. There is also increased concern over Iran’s capabilities following Iran’s attack on Israel on April 14—even though that attack did little damage, it demonstrated the power of Iran’s drone and missile arsenals. Yemen is, for Saudi Arabia, a crucial security challenge and one that it will attempt to manage with its tenuous normalization with Iran in mind. For Iran, the Houthis offer a certain degree of insurance against Saudi and Israeli pressure, since it is from Yemen that Iran and its Resistance Front alliance can threaten the states of the Gulf. 

    kd: The interesting part here is that the Saudis do not seem to feel as threatened by the Red Sea attacks as the United States and the EU. For the most part, they are still shipping oil containers and commercial goods through the waterway and they do not feel that the Houthis will target them. At the same time, the past year can be considered an era of gradual Saudi–Iran rapprochement, first with the China-brokered meeting  between the two countries, and now with the Saudis seeking some kind of settlement in Yemen. 

    The Saudis are most concerned about economic expansion and to the extent that Iran does not threaten MBS’s economic vision, I think Iran seems less and less like a threat to the Saudis. This doesn’t mean Iran and Saudi Arabia will ever become partners—indeed, they will likely remain rivals but will seek to pursue their rivalry in ways that minimize direct confrontation. To the extent that the Saudis consider the Red Sea their own sphere of influence, they may not tolerate continued Iranian activity there. And this is perhaps one of the  reasons the Houthis have been acting at their own discretion and gradually moving outside of Iran’s operational control, certainly in terms of their Red Sea engagement. The fact of the matter is the Hamas  attacks on Israel severely tainted the environment for the future of Israel–Saudi cooperation. What this  means is the Saudis will probably try to remain restrained in terms of their engagement with both Iran and Israel in the short term. Meanwhile, through the recent barrage of rocket attacks against Israel, Iran is demonstrating an unprecedented capability to coordinate with its proxies in the Red Sea region. This all motivates more active US and EU involvement in the Red Sea, which is exactly what we are seeing.  

    ae: What are key economic trends in the region to watch that could bear out or contradict your answers above? Are there particular development projects, commodity markets, or other markets we should be paying attention to?

    kd: If the conflict is sustained, and if commercial ships continue traversing the African continent to sail across the Cape  of Good Hope, the Red Sea will certainly lose much of its relevance. Of course, this will have very clear inflationary effects, but as long as the costs can be passed off to consumers,  I can see companies choosing to pay the higher shipping and insurance costs to avoid the political risks of the Red Sea. But even if the Red Sea’s economic significance were to diminish, its importance for military strategy will remain. In fact, in this scenario, I would expect more military naval activity in the Red Sea and the Gulf of Aden, not less. With commercial activities out of the  way, the costs of military (naval) engagement would be dramatically reduced. 

    gb: Most of the major energy producing states of the Middle East are trying to get away from dependence on energy exports. Saudi Arabia, the UAE, Kuwait and others are all embracing economic development strategies that pursue the energy transition. Yemen, on the other hand, will need to tap its fossil-fuel resources—oil and gas—to fund its economic recovery after decades of war. It’s tough to see how Yemen escapes its current humanitarian and economic predicament without leveraging these resources. So, as counter-intuitive as it may seem, I think increased interest in developing these resources, in the pursuit of helping to bring peace to Yemen, can (in the short-term) form part of a broader strategy, one that regional states can take a large part in leading, even as the general trend is away from fossil fuel exploitation. 

    ae: The future of the world order has an immediate political salience this year, with the US election and the  division within the Congress over supplemental military spending for Ukraine and Israel. Do you see US  domestic politics as a variable in the regional situation around the Red Sea? 

    kd: To a certain extent, yes. As we have seen with the procession of the Abraham Accords, there is a manner in which a Trump presidency would reshape the scope and manner of US engagement in the Red Sea.  However, just like it would have been hard to predict the Abraham Accords, or Hamas’s attacks on Israel, it would be impossible to predict precisely what these changes will look like, or even whether this will make the region more or less stable.

    gb: I think both a Biden and a Trump administration would face a very difficult road ahead with regard to Yemen. Military strength cannot accomplish the US goals against the Houthis, but a Trump administration would likely favor increased use of military force, potentially spreading the fight to include Iranian targets, as there is broad support for the idea that pressure on Iran will rein in the Houthis. So there’s a risk of the conflict growing under a Trump presidency. But the outlook for Biden isn’t much better. The US doesn’t have effective means of leverage to compel the Houthis to change their actions.

  4. The Techno-Patrimonial Welfare State

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    The success of the Bharatiya Janata Party (BJP) over the last decade of Indian politics, and its frontrunner status in this year’s parliamentary elections, has often been attributed to its welfare policies. The rise of Direct Benefit Transfers (DBT)—whereby beneficiaries can receive transfers from over 500 government welfare schemes directly into their bank accounts—has been crucial in this regard. Over the past decade of BJP rule, the amount paid through DBTs increased over twenty-five-fold, from 60 billion INR (approximately $718.8 million) to 2.1 trillion INR (approximately $25.1 billion), reaching over 1 billion registered beneficiaries as of September 2023, according to data released by the Ministry of Finance. The rapid expansion of DBTs was facilitated by several advances in technology: the increased availability of affordable mobile phones and internet plans in India, especially after the launch of Reliance Jio in 2016; the rise of Aadhaar, the government’s biometric identification program that offered the first all-purpose ID in the country; and the establishment of Pradhan Mantri Jan Dhan Yojana, the government’s financial inclusion program announced by Prime Minister Modi in 2014, which has been responsible for opening over 500 million new bank accounts for largely unbanked Indian citizens.  

    How does this “new welfarism” differ from the rights-based approach that preceded it under the Congress-led governments of the 2000s? And how does the political narrative underpinning this shift attempt to reimagine Indian democracy? Yamini Aiyar, public policy scholar and former president of the Centre for Policy Research, calls this model of social policy the “techno-patrimonial state,” supported by the creation of a new “labharthi varg,” or a beneficiary class, that can be politically mobilized. 

    In the following interview, Rohan Venkat speaks to Aiyar about social-democratic notions of welfare, the “freebies” discourse in Indian social policy, and the implications of the “techno-patrimonial state” for the BJP’s electoral success at the local and national level. This interview first appeared in India in Transition, a publication of the Center for the Advanced Study of India at the University of Pennsylvania as part of an ongoing series around the 2024 elections. It has been edited for length and clarity. 

    An interview with Yamini Aiyar

    Rohan Venkat: What questions oriented your examination of India’s new welfarism?

    Yamini Aiyar: The questions I asked were rooted in my own career as a public policy researcher, which, by some coincidence, began in the early 2000s when India first began to build out its welfare state. That effort emerged largely out of a constellation of social movements, organized civil society, the judiciary, and elite interests coming together to build what we have since called the rights-based welfare architecture. This began with the Right to Information and the National Rural Employment Guarantee (NREGA), the Right to Work, the Right to Education, and the National Food Security Act in 2013. I cut my teeth working closely with social movements, studying the unfolding of these programs, particularly the effort, largely led by social movements, to draw on the grammar of rights to pry open spaces for citizens to participate in direct claim-making.

    Why did we need to articulate welfare in this framework of socioeconomic rights? Across Western Europe, many robust welfare states emerged through progressive redistributive social policy without this rights-based framework. India was clearly doing something different, and I wanted to better understand that difference. I saw the good, bad, and ugly of this early effort. I also saw the emergence of technology, as a tool in the welfare narrative, taking hold in 2009–10 when the Aadhaar project embedded itself into the mainstream.

    After 2014, the political establishment changed. In an early speech to Parliament, Prime Minister Modi called the NREGA—which guaranteed at least 100 days of wage employment to rural households—a monument to poverty. This is often understood in partisan political terms, but there was also a fairly substantive change in the framing of welfare. The whole rights discourse was replaced by a discourse on accountability as direct citizen claim-making. Technology made cash transfers a real possibility. I was an observer and an occasional participant in the very robust debate that took place between 2010 and 2014, particularly in the run-up to the legislation of the National Food Security Act on this question of cash transfers. The debate hinged on two critical issues—efficiency of delivery, since cash transfers could potentially cut through the layers of incompetence and corruption of the state, and the role of markets in enabling access to basic services. 

    The rights approach took a normative position on the centrality of the public sector in delivering basic services. It also saw rights as a means of deepening citizen capacity to place claims on the state and extract accountability. By contrast, the cash transfer debate saw efficiency of direct delivery and the role of markets as the key to accountability. The two views had a very different imagination of the terms of the social contract. This was before Universal Basic Income (UBI) became a policy buzzword. By 2016–17, JAM (Pradhan Mantri Jan-Dhan Yojana, Aadhaar, Mobile) and UBI made their way into the welfare discourse, transforming the contours of the debate.

    By 2017–18, fueled by the rapid scale of Aadhaar, cash transfers were a reality, and the term “Direct Benefit Transfers” (DBT) was installed in the vocabulary of India’s welfare state. In trying to understand these developments, I felt the need to reframe the terms of the public debate on welfare—an old problem in the Indian public sphere. Our discourse on welfare very quickly reduces itself to the question of populism; in the old days, what we used to call populism, populist social policy, freebies. Now the new term being used is “revdi”—sweets. 

    Rv: What is the “techno-patrimonial welfare state”?

    YA: My argument is that we’ve abandoned the idea of welfare as core to the social contract, and we’ve abandoned the idea of welfare as evolving within a normative framework of rights. Using what technology can offer in terms of direct benefit transfers, welfare is being reframed as a gift offered by the party leader rather than as a fundamental right that ought to frame the terms of the social contract between citizens and state.

    In this new framework, citizens are passive recipients of government benevolence, offered with the direct patronage of the political party leader. Welfare, in these terms, becomes about the patronage and charisma of the leader rather than a moral obligation of the state and an articulation of citizenship within a framework of rights.

    Rv: You connect this to the idea of the compensatory state that’s been put forward by the economist Rathin Roy.

    YA: In a 2022 speech, Modi claimed that the youth of India should be aware of this new “revdi politics.” This brought back the old debates around freebies vs. merit-based subsidies, tradeoffs between growth vs. welfare, that economists and development professionals have indulged in for many decades. In fact, when the NREGA was being debated, some had argued that it was equivalent to a helicopter drop of cash into the hands of the rural elite, a freebie as opposed to a sensible policy for social inclusion and welfare on the part of government.

    There has been a flurry of writing about what is and isn’t a revdi, and what should be the nature of government social policy. As I started engaging with these questions, I began to recognize that the debate on welfare and the associated policy response can in fact be traced to two very distinct but interconnected disillusionments with the social, economic, and institutional context in India.

    The first disillusionment relates to the nature of the Indian economy. Since 1991, Indian growth and the associated dynamics of India’s structural transformation have pushed us in the direction of jobless growth. Back in 2004, against the backdrop of “India Shining” and the electoral victory of what eventually became the Congress-led coalition of the United Progressive Alliance (UPA), this question of jobless growth was at the center of the political discourse. The Congress party went to the elections with the phrase “inclusive growth.” Inclusive growth was politically powerful because the economy was growing but not producing enough jobs for the demographic dividend that we were about to reach. That was the logic for why the NREGA, or the Right to Work, became so essential and politically potent. This reality has not just continued, but it has been exacerbated over the course of our growth history. 

    Amit Basole has a really important paper that looks at this. He argues that in the trajectory of our structural transformation, the moment in which people were pulled out of agriculture and into the non-farm economy was largely shaped through a movement into the informal construction sector, where jobs are informal and precarious, rather than into low-scale manufacturing, as was the case globally. Given the unusual nature of our structural transformation, we have always been plagued by the question of job creation for the youth.1 The honest truth is that the Indian state and its economic policy has simply failed to tackle high youth unemployment; politicians are not unaware of this—even if they don’t want to always admit it in the public discourse. 

    As Rathin Roy has so evocatively argued, welfare has emerged as a “compensation” for these failures. This is the compensatory state. In analyzing the contours of the compensatory state, I found several distinctive features about India’s peculiar path to welfarism. India’s welfare state hasn’t developed in the traditional social-democratic model of a negotiated bargain between labor and capital. Nor has it developed along the lines of the conservative American welfare regime that sought to offer meager means-tested benefits, but was really committed to the idea of full employment. Intriguingly, it isn’t even like the productivist welfare regimes of East Asia that seriously invested in core human capital health and education with the explicit goal of mobilizing the productive capability of the labor force to participate in economic growth.

    Our welfare state is evolving very much according to a logic that is almost designed as a bargain—a Faustian bargain—for failing to build an economy that can provide full employment. Its core approach is to use fiscal policy as a means of transferring public finances to citizens as compensation via cash and in-kind transfers. It’s not about offering protection to labor or strengthening labor’s bargaining power. It’s not about enhancing productivist capability. 

    Just think about some of the more recent cash transfer programs that different political parties, including the BJP and the Congress, have launched. Youth unemployment cash transfers, cash transfer to particular kinds of skills, PM Kisan—a cash transfer to our farmers. This is the compensation that the state has to offer because, in a country as unequal as India, in a country where the poor are your primary voters, no matter how capital-friendly a political party is, it cannot go to the polls without engaging with the lived realities of the vast majority of Indians. That’s the beauty of democracy, with all its attendant challenges.

    The second disillusionment has a lot to do with the Indian state, which is where the technology comes in. We all know that the Indian state is incompetent, corrupt, and apathetic. These failures have circumscribed the elite discourse on welfare. Several years ago, I co-authored a paper with Lant Pritchett titled “Taxes: The Price of Civilization or Tribute to the Leviathan?” Against the backdrop of an incompetent state, the bargain of taxes that society strikes—the willingness to be coerced into paying the state on the expectation that the state provides a set of public services that would improve my productive capability—simply doesn’t hold. This is a fair conclusion on the part of the taxpayer. But we must recognize the consequences of this reality, for it has circumscribed the nature of the public discourse on taxation, delinking progressive taxation and redistribution. Progressive taxation has historically played a huge role in building a more equitable society and a more equitable and functional welfare state.

    The debate on cash transfers in India finds its origins in the notion that our public systems just don’t work. Any excessive investment in public systems is the equivalent of tribute to the Leviathan rather than a price of civilization. What technology allows you to do is bypass this extractive incompetent state and deliver whatever minimally you have to deliver to the citizen. It overemphasizes the possibilities of the market because the state has simply failed.

    In some senses, this is where the legitimacy for the project of India’s digital public infrastructure, for the project of Aadhaar, finds its roots. We don’t ask questions about the limits of technology because we’ve all mobilized ourselves around the possibility that technology will allow you to bypass this failed state. On the basis of the legitimacy of technology, you build a welfare system that does not invest into the public system. One of the consequences of that, I would argue, is we are valorizing the possibilities of efficiency over the messy realities of democracy, which are about negotiating, bargaining, and responding to competing claim-making—realities that require strong, robust public systems at the grassroots to cohere.

    Rv: You highlight a contradiction in this new model: it is moving away from entitlements and rights to be based more on duty, but at the same time it’s sold as more aspirational and “progressive.” How does this narrative—where people are given cash, rather than public or merit goods, and bypassing many layers of the state—come across as aspirational, instead of as a dole from the government? 

    YA: It is very much couched in aspirational terms, and it uses the vocabulary of progress. Viksit Bharat, “Aspirational Bharat,” talks about the ease of living. It very interestingly positions the present cash transfer-based model of welfare as empowerment in contrast with the welfare of the past, which it frames as the welfare of entitlement. The prime minister in different speeches has spoken about empowerment as a process of fighting poverty on your own strength, where you as a citizen have a set of duties to use the opportunities that are being offered to you with a degree of responsibility.

    For example, in the seventy-fifth Independence Day speech, he speaks about how the government has made efforts to provide twenty-four hours of electricity. It is the duty of the citizen to use it responsibly. In a similar way, the home minister has offered a distinct definition of empowerment, saying “we have provided gas connections, we have provided toilets, etc.” It is now the responsibility of citizens to use these opportunities to upgrade their lives. This is what we define as empowerment. But this framework is silent about the obligation of the state to provide these basic core public services to rights-bearing citizens. Citizens are being reframed as responsible and dutiful rather than active rights-bearing claimants of welfare.

    This articulation of empowerment differs substantially from the rights-based model of welfare, which deployed the grammar of rights to empower citizens to place claims on the state. This is very important in the Indian context. From our founding moment, the articulation of political rights has been much fuller than the articulation of socioeconomic rights, which were placed within the directive principles. Welfare was framed as charity offered on the patronage of what the government can do, as opposed to a core right that the state is obligated to offer to its citizens. The Indian state, after all, was not referred to as the “mai baap sarkar” (parental state) for nothing.

    The UPA-era rights movement was trying to upend that. Its failure to do so with any teeth perhaps had a lot to do with incompetence of the Indian state. The tantalizing opportunities of technology moved us away from that aspiration of rights-based welfare very quickly. We hear a lot about the duties of the citizen as a consequence of the efforts of the government in improving their ease of living, but there is no language for recognizing that citizens have certain basic rights, and it is the state’s obligation to deliver a minimum standard of public services to all citizens. That’s the distinction.

    Rv: You mention that although this new model is strongly identified with the BJP and Modi, it’s not limited to them. We see echoes in other parties looking at welfarism, as well as many echoes in the past. You mention Jayalalithaa, former Chief Minister of Tamil Nadu, in your piece. I wanted to get a sense of this as an Indian phenomenon, rather than just a BJP one.

    YA: Even the so-called freebie politics of Tamil Nadu were framed within a broader vocabulary of rights and dignity. Even the handing out of the sari and the giving out of the television, which epitomized Tamil Nadu politics—both the Dravida Munnetra Kazhagam and All India Anna Dravida Munnetra Kazhagam indulged in this competitive welfare over many decades—was embedded in this vocabulary of rights, dignity, and justice. But what I find distinctive about this current moment of cash transfer-based techno-patrimonialism is that actually it is stripped of any language of rights and dignity. It’s about a set of handouts that the state can offer to beneficiaries.

    Second, this moment has the distinct ability to deploy technology that didn’t exist as effectively and efficiently in the past. The cash transfer mode allows you to bypass all the intermediaries, both the political as well as the bureaucratic intermediaries of the state. Its political salience is really significant because it draws a direct connection between the leadership and the beneficiary.

    Now, of course, popular leaders of regional parties and others in the past—Jayalalithaa epitomizes this, but Indira Gandhi too—had this direct connection between leadership and the voter. But the ability to bypass the intermediaries is new. Giving credit political attribution becomes much more direct in this sense. Louise Tillin, Neelanjan Sircar, and I have all made this argument drawing on Lokniti data. You can see this direct attribution changing over time between the days of the UPA, where state governments and state chief ministers were able to receive far more credit attribution, as opposed to the present context, where much of the direct attribution is going to the party leadership, cutting out the intermediaries and the state government, if you look at the BJP as one example.

    The third thing that is unique and different about this moment is the kind of political mobilization around the category of beneficiary, the “labharthi.” The “labharthi varg” (beneficiary class) has emerged in the political lexicon as a category of political mobilization. Political leaders can cut through the intermediaries to forge a direct, emotive relationship with the individual voter in a way that effectively undermines collective interest-based claim-making, claim-making that relies on caste or religion-based mobilization. Instead, it creates a very neutral social base of beneficiaries around which mobilization can take place. It is politically a useful tool. For instance, it allows the BJP to reject criticisms of discrimination against religious minorities and Muslims by pointing to the distribution of benefits across the population. It’s a clever and effective tool to undercut the traditional strategies of electoral mobilization around collective interest-based claim-making on state resources. I think this is what makes it so powerful. It also deepens the direct relationship forged between the party leadership and the individual voter, allowing for that loyalty to become what Neelanjan Sircar calls “vishwas politics,” the base on which voters are mobilized and political parties are able to strengthen their hold.

    Rv: How have people responded to the idea of the “techno-patrimonial welfare state”? 

    YA: This is very much a work in progress, and I’m trying to grapple not only with the contemporary political moment, but also what the evolution of India’s welfare state tells us about the terms of the social contract, as well as about the nature of our democracy. Right now, we can only cite claims of efficiency. We don’t know because we don’t have good data. In the old days, there were a lot of evaluations that laid bare the good, bad, and ugly of government schemes. There is a paucity of good evaluations today, so we don’t have a good sense of what is happening on the ground.

    Some may say: “Shouldn’t we be satisfied with the fact that benefits are reaching people?” And to that, my response is, are we really risking our democracy by marveling at the ability of the state to deliver some cash into some people’s bank accounts? Is that all that we are expecting the state to do? What is our social contract? Are we looking to build a society that is fundamentally about values of equality that build solidarities across communities, that recognizes the importance of investing in all of us? Or are we a society that’s just going to bask in the glory of this very limited achievement?

    No country in the world has been able to become an economic powerhouse without serious public investment in core public and merit goods that the state is obligated to provide its citizens, like education and health. It’s almost like we have given up, and we’ve legitimized this surrender by saying, “At least this is working, and this is a big step forward in building state capacity.” I’m really trying to provoke us to think harder about this.

    My critique isn’t that we should not be doing this. My critique is that we should really understand what its larger political economy consequences are, and we should push back against the urge to depoliticize the distributional struggle in a country as unequal and divided as India today.

    Rv: How are you thinking about this argument in regards to the 2024 election?

    YA: This is a good time to better understand the relationship between these kinds of welfare schemes and voter behavior and perspectives. What does the state at the grassroots look like in the present moment? As I mentioned earlier, one of the most critical shifts that have taken place by virtue of this technology-oriented cash transfer welfare system is that it has resulted in degrees of disintermediation of the local state. Who or what is the local state in the present moment? How do citizens engage with the local state with this technology-leviathan that is being built up, and what is it doing to sites of deliberation, dialogue, and collective action at the grassroots?

    These were always fairly weak in India, and the reality of our local government system—which was meant to have an embedded structure of Gram Sabhas as sites of dialogue and deliberation at the grassroots—never really entrenched itself except in a few states, Kerala being the most visible example. But now that those investments have become even more diminished, and the role of local governments is changing, we need to better understand the dynamics of these spaces to determine the emerging terms within which state-society relations are being framed at the cutting edge. We don’t have enough empirical work on that. To me, that would be the basis of understanding how accountability systems are being built, the architecture of the state, and both of these elements together, what contribution they are making to the nature of our democracy.

  5. A Progressive Tax Reform?

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    In 2022, Gustavo Petro, Colombia’s first left-wing president of the twenty-first century, emerged victorious alongside a coalition of liberal ministers experienced in the public sector and academia. One key figure in this coalition was José Antonio Ocampo, an academic with several political appointments over the past three decades, who served as Colombia’s Minister of Finance during the first year of Petro’s term.

    Ocampo was a leading participant in Petro’s tax reform, the only ambitious bill supported by the president that managed to gain Congressional approval in November 2022, when the government had just began its term. The reform aimed at raising approximately 20 trillion pesos ($5 billion) on average between 2023 and 2026, the equivalent of 26 percent of the government’s public investment budget.  

    Today, Ocampo is a professor at Columbia University, where he is Co-Director of the Economic and Political Development Concentration in the School of International and Public Affairs. He served as director for the Center for Studies on Economic Development at the University of the Andes, a private university in Bogotá. He began his political career in 1992 as the Minister of Agriculture for the Liberal government of César Gavirio, and then served as the director of the National Planning Department under Liberal president Ernesto Samper in 1994. Two years later, Samper appointed him Minister of Finance (1996–1997), where, at the height of the drug trafficking boom, he placed stronger controls on foreign financial inflows, including a requirement for foreign capital to pass through the Bank of the Republic. Ocampo’s book The Economic History of Colombia (Historia económica de Colombia)—published in twenty editions—remains a crucial reference for Colombian economics. 

    During the 2022 presidential elections, Ocampo served as campaign coordinator and head of programming for the centrist candidate Sergio Fajardo. After Fajardo lost in the first round, then-candidate Gustavo Petro brought Ocampo to his team as Minister of Finance, a decision meant to signal seriousness around economic matters. However, the economist and sociologist lasted only nine months as the head of the ministry. His exit took place amid sudden shifts in Petro’s strategy for governance, in which Petro slammed the door to ministers of different political tendencies, favoring those with a vision of government more aligned to his own. 

    During his brief tenure, Ocampo pushed forward a reform to place a heavier tax burden on the upper classes and the corporate sector, especially oil and mining companies, which, as a result of the new policy, are now projected to contribute 57 percent of national tax revenues for 2023. This contribution is scheduled to come down to 35 percent in 2024 and 20 percent in 2025. The 2022 tax reform effort can be juxtaposed with Iván Duque’s 2021 tax reform, which inspired a national strike of over two months and served as a basis for Gustavo Petro’s presidency. 

    In the following interview, the former minister speaks to Camilo Andrés Garzón and María Camila González about his reading of the region’s economic growth, his tenure in Petro’s government, and the debates around progressive taxation.  

    An interview with José Antonio Ocampo

    Camilo garzón: Across Latin America, there has been discussion around the role of the state in reducing inequality and stimulating economic growth. In the case of Colombia, President Gustavo Petro has insisted that increased state intervention is necessary to address these challenges, while other governments in the region, like Javier Milei in Argentina, have chosen the opposite path. What are your thoughts on this debate?

    José Antonio Ocampo: Without a doubt, the question of reducing inequality presumes state intervention. In developed countries, for example, a mix of progressive taxation and dedicated social spending for middle and impoverished sectors is used to tackle inequality. 

    The data available for Latin America shows that the region makes use of public spending, though much less than developed countries. Taxes, meanwhile, are hardly utilized. In other words, the taxation system is not progressive. In Latin America, the value added tax (VAT), which is added to the payment for goods or professional services, reflects this system. VAT can even be called a regressive tax, as impoverished sectors spend a higher proportion of their income on consumption, and thus end up paying a higher proportion of value added tax. On the other hand, personal income tax, a form of progressive taxation, is not predominant in Latin America. 

    The other question is what determines economic growth. Here the debate has to do with the effectiveness of market liberalization reforms, which occurred in Colombia in the 1990s. I believe the evidence from Latin America suggests that such reforms have produced very little positive effect, and even a negative effect. 

    During the period of industrialization in Latin America, from 1950 to 1980, the regional economy experienced, on average, an annual growth rate of 5.5 percent. From the market liberalization reforms of 1990 until 2023, the region grew 2.5 percent. In fact, from 2014 to 2023, the average annual growth rate was barely above 0.9 percent. 

    In other words, economic growth has not taken place. There are many polemics regarding what happened, but I would say that today, in Latin America as in the rest of the world, there’s a consensus that the state has to intervene in what is generically known as “industrial policy.” But I prefer to call it “productive development policy,” because this intervention can also serve the primary and service sectors. 

    The experience of the last decades makes it clear that the state has to intervene, and it must use several instruments, from development banks to innovation efforts, and in some cases production boosts and support for the export sector. There’s more awareness today around the importance of these mechanisms of state support. It is clear that East Asia has been the most successful region in terms of development, and there’s no doubt that state intervention made this possible. China has also had a high economic performance, making it the world’s main exporter today.

    maria camila gonzález: As Minister of Finance in Petro’s government, you led a regional platform for tax cooperation with the goal of promoting a conversation around progressive taxation. How has this question advanced in both Colombia and around the world? 

    JAO: There are three levels to consider. At the national level, we have the tax reform that I negotiated, which was approved by Congress in 2022. The reform aimed to induce some kind of progressive effect on the tax structure, for example, by reducing tax benefits for individuals with a monthly income higher than $2,548. The reform also included a wealth tax, a complementary tax levied on the net value of taxpayers’ assets. The reform also proposed making oil and mining companies, the largest players in the export sector, pay more taxes. According to estimates from the Ministry of Finance, 57 percent of tax revenues in 2023 came from oil and mining companies. I’ll also mention that in Colombia, 23 percent of tax collection depends on companies and 6 percent on households. This is the opposite of the situation in developed countries, where the OECD average between individuals and businesses is 24 percent versus 9 percent. 

    Proposals for a global minimum tax have been developing over the last decade. In 2021, the OECD established what they call the Two-Pillar Approach to global tax reform. Since then, the agreements have been signed by over 137 countries, representing 90 percent of the world’s GDP. Easiest to understand is Pillar 2, which  proposes a global, minimum tax of 15 percent on all companies that serves to protect the tax bases of the countries involved. It doesn’t eliminate fiscal competition, but instead establishes multilaterally agreed upon limitations. Pillar 1 basically requires large multinationals to distribute the taxes they pay evenly across the countries in which they operate. The idea is for Pillar 1 to reallocate taxing rights on more than $125 billion each year to jurisdictions, and for Pillar 2 to generate new tax revenues of $150 billion per year worldwide. 

    The problem is that Pillar 1 only applies to very large companies, limiting its reach to approximately just 100 around the world. Developing countries don’t gain much. In response, African countries have promoted a process to generate the UN Framework Convention on International Tax Cooperation, with an even broader agenda in the works, which includes a wealth tax and regulations for tax havens. 

    My idea was to create, at the intermediate level, a mechanism of regional cooperation that would allow Latin America to do what this international agreement is trying to do—share data between tax authorities to increase the collection of taxes across the region. It would also prompt the important question of making information about suspicious contributors available to tax authorities. 

    Cg: If the need for more progressive taxation—like a personal income tax—is so urgent, why has it been so difficult to pursue in Latin America?

    JAo: The most complicated and important issue within the debate around progressive taxation is the question of VAT versus personal income tax. In general, the VAT is a regressive tax, and it disproportionately burdens median and low income taxpayers. In contrast, the income tax is progressive, but systematic evasion—including moving money to tax havens—means that places like Colombia and the region more generally have struggled to collect this revenue. 

    An additional consideration has to do with the key variable of the labor market. An improvement in labor market conditions—either through a reduction in unemployment, more job opportunities for women, or a decrease in labor informality (which is very high in Latin America, in Colombia around 60 percent of employment is informal)—tends to have a progressive effect on taxation and income distribution. The recent history of Latin America demonstrates this reality. The years with the greatest distribution of income across all countries in the region—2002 to 2003 and 2013 to 2014—correspond to the years with the greatest economic growth and the best labor market performance. In other words, good labor market conditions are at least as important as public welfare in improving the distribution of income. 

    mcg: What do you think of the social reforms proposed by Petro’s government, which aim to modify the role of the state in healthcare, pension redistribution, and the labor market?

    JAo: The proposed reforms have triggered various polemics. The first thing to highlight is that there are undoubtedly progressive impacts in some more than others. The pension reform will have the greatest impact, because it seeks to address a huge gap in coverage—today, only one out of four senior adults in Colombia has a pension. The reform also seeks to provide an end-of-life income to people who are not able to retire, which will help eliminate extreme poverty among older adults. 

    The progressive nature of other reforms is more debatable. The healthcare reform proposes to focus on disease prevention, giving private companies a secondary role in the administration and management of health resources. Overall, it aims for the healthcare system to remain in the hands of the state. 

    In Colombia, everyone has an equal right to healthcare, so in principle, everyone has access to the healthcare system. But as the Petro government correctly notes, the problem is that primary care varies widely across rural sectors or remote areas far from health centers. The reforms seek to address this situation, and if successful, they would help reduce inequality. But there’s also a question of the state’s role in managing the healthcare system. Should the state be in charge? Will this improve the system? I have my doubts. I don’t think the government has the capacity to manage our complex healthcare system.

    The labor reform is also controversial. Some aspects of it may be considered progressive, since it gives greater labor protection to certain sectors. But my first concern is that it makes labor more expensive, which will increase informality and have some negative effects. Salaries in the formal sector would have to remain low. My other concern is that the reform includes regulations to strengthen unions and make dismissals more difficult under certain conditions. These changes are not necessarily progressive, because unionized workers in Colombia do not make up the most impoverished sectors, who remain excluded from the reform. 

    Cg: These ambitious, progressive reforms have been difficult to pass through Congress, especially amid expected tensions with private actors such as healthcare companies and private pension funds. Is the battle worth the wear and tear in Congress?

    JAo: I managed to pass the tax reform. Reforms can pass if there’s interest in negotiations. My diagnosis is that there’s no real interest in negotiating the healthcare reform, and this is the reason for its failure. The Colombian system of Health Promoting Entities (Entidades Promotoras de Salud, EPS), in which private companies provide a basic health plan to their affiliates, has an 80 percent popular approval rating. The system is considered very poor in terms of access, but compared to the globe, Colombia is one of the few countries that effectively has universal access to healthcare. 

    The EPS has been in place since 1993. At that time, the liberal government of César Gaviria and his minister Gabriel Londoño proposed to imitate the Chilean health system, where you are required to buy health insurance, and the quality is dependent on how much you pay. Thus, higher-income sectors had better insurance than lower-income sectors. We fought for the benefit to be the same for everyone, contrary to the original proposal. Everyone contributes proportionally to their income, but the benefits are equal for all. Additionally, a subsidized system was created to cover health insurance costs for those lacking a formal job. 

    I do not agree with the Petro government’s former Minister of Health, Carolina Corcho, who says that there is no guaranteed right to health in Colombia. Of course, there is a lingering problem–—rural and impoverished sectors do not have equal access to health services. This needs to be improved, but, in my opinion, it could be achieved without healthcare reform. The 2015 statutory health law, which recognizes health as a fundamental right and lays the foundations for guaranteeing it, includes public policies aimed at reducing inequalities in the social determinants of health. 

    mcg: President Petro has recently spoken about reforming the 1991 Constitution, in order to form a popular mandate that would allow more people to retire and reduce national inequality. How could those changes be pursued? 

    JAo: In general, several policies sought by the government could be achieved through laws and public spending, and they don’t require amending the Constitution. Of course there are many gaps, and we continue to be a very unequal society with high poverty and a lack of universal access to social and public services. But several policies and the expansion of social spending, which have all occurred within the Constitutional framework, have generated progress. Multidimensional poverty has decreased from 60 percent of the population in 1997, when it was first measured, to 13 percent.  

    Some changes proposed by Petro do require a constitutional reform, like the question of decentralization. But even agrarian reform can be achieved without a constitutional amendment. As Minister of Agriculture, I promoted the current Law 160 of 1994, which allows for large-scale transformations in the countryside through the National Agrarian Reform System and establishes subsidies for land acquisitions.  

    The problem is the provision of resources to the National Land Agency, which allows it to buy land for redistribution. In fact, this is what the Petro government is trying to achieve now. When I was Minister of Agriculture, the National Land Agency’s budget for buying land for redistribution saw the largest increase. 

    While some policies require a constitutional reform, most of them instead need an effective social policy. I agree with political analyst Rodrigo Uprimny, who pointed out that the President’s proposal is “unnecessary, inopportune, contradictory, unfeasible, and therefore risky.” This is why I believe it is necessary to take care of our monetary policy as well, which according to the Constitution, must be coordinated with the general economic policy. To apply this principle, the Constitutional Court has already determined in a 1999 ruling that monetary policy must take into account its effects on employment and productive activity. 

    Cg: Petro came to power with the promise of pursuing the energy transition, but he has delayed some renewable energy projects. At the same time, the government has not decided if it will explore new hydrocarbon deposits. You have said many times that they will.

    JAo: I do believe that climate change has made the green transition a global question. I spent ten years between the United Nations and the Ministry of Agriculture working on the creation of the Ministry of the Environment. When I became Minister of Agriculture, environmental management was still under the jurisdiction of Inderena, an institute attached to the ministry, and we proposed to establish a new Ministry of Environment. All of this is to say that I’m very sensitive to this question, and recognize the urgency for a green transformation of the economy. 

    The problem is—who should be in charge of it, what can be done and what should Colombia do? The country produces 0.6 percent of the world’s oil, meaning that if it stops producing, its supply would be quickly replaced by another producer. Decreasing national oil production does not matter in terms of global climate change. And as I argued in intra-governmental debates, we must consider three transitions: the green transition, the export transition, and the fiscal transition. We depend on oil for all three. If we stop exporting oil, we have to export something else, but we are still lacking a similarly profitable equivalent. 

    When it comes to the national budget, individuals who sell oil are important for income tax revenue, as are Ecopetrol’s profits. As a result, oil management must be cautiously included in the energy transition. There were internal conversations around respecting the signed contracts—numbering over 200 at the time—for hydrocarbon exploration. 

    The main obstacle for clean energy projects has been the approval of transmission networks, mostly due to disagreements with the indigenous population of La Guajira. As a result of issues with the transmission network, many companies have abandoned solar projects in La Guajira. The lack of a guaranteed transmission grid slows down the entry of renewable energy projects into the country.

    mcg: You’ve stated before that your time in the Petro government was one of the toughest periods of your life. What legacy do you see from your time as Minister of Finance? 

    JAo: The Duque administration left us with monstrous economic imbalances, a large fiscal deficit, including a rising deficit in the Fuel Stabilization Fund, and a huge amount of public debt. There was also a balance of payments deficit, over 6 percent of GDP in 2022. The only other year during which we had a similar deficit was in 2015. But oil prices were at rock bottom then, while prices in 2022 were soaring. 

    The Petro government arrived to power under these difficult conditions, along with other structural factors, such as inflation derived from Russia’s invasion of Ukraine. In fiscal matters, the public debt of the national government that I entered in 2022 was around 60 percent of the GDP. When I was Minister between 1996–1997, public debt was at 20 percent.  

    Fiscal debt, inflation, and the balance of payments deficit were complex situations. We faced the task of reducing these economic imbalances. Achieving that goal, alongside passing the tax reform, were my main two accomplishments as minister. Fortunately, the management of these imbalances has continued after my departure.

    Cg: What is your general view on the cooling of the Latin American economy this year?

    JAo: I published an article in January where I refer to “Latin America’s second lost decade.” In the paper, I demonstrate that between 2014 and 2023, the average annual growth rate for the region was barely above 0.9 percent, worse than the average of 1.3 percent during the 1980s, a period which earned the regional title of the “lost decade.” This most recent moment has been a huge failure for Latin American economic growth. It is true that this diagnosis varies across regions, some Central American countries and Mexico had much higher growth rates than South America in 2023.

    Although foreign direct investment has remained robust, borrowing costs have increased. Consider the global context of low growth in trade volumes, which have been stagnant for the last two years, following the pandemic. The situation should prompt regional leaders to focus on productive development policies that promote dynamic sectors of the economy. This could help avoid continuous turmoil, especially given the continental predicament of frequent macroeconomic crises, with Argentina as the most dramatic example.

  6. Petrobras in Transition

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    Luiz Inácio Lula da Silva’s campaign for his third term as Brazil’s president was defined by the idea of reconstruction. This encompassed a political recovery from the antidemocratic reign of Jair Bolsonaro, as well as the promise of reindustrialization and a green transition for Brazil’s economy. The role of state-owned petroleum giant Petrobras, key to such efforts, has been a focus of debate in the Brazilian development story. 

    Petrobras was created in 1953 as part of one of former president Getúlio Vargas’s popular developmentalist projects, known as the National Petroleum Policy, which secured a state monopoly over oil drilling, refinement, and transportation. The national monopoly lasted until 1997, when it was taken down by Fernando Henrique Cardoso’s administration, whose National Privatization Plan also promoted Petrobras’s massive initial public offering and allowed the firm to be traded on the international market. Currently, the Brazilian state is the majority owner of Petrobras, owning 50.3 percent of voting shares. 

    Through its seventy-year history, Petrobras never lost its centrality in Brazil’s development project. From the national-developmentalist nature of its foundation, to its entry on the global market, to the contemporary debate regarding its role in Lula’s third term—the firm reflects the evolution of debates around Brazil’s development path.

    Cibele Vieira is the general manager of the São Paulo Oil Workers’ Union (Sindipetro Unificado) and a director at the Oil Workers’ Federation (Federação Única dos Petroleiros, FUP), where she represents Petrobras workers nationwide. We spoke to Vieira about Petrobras’s role in the Lula administration, the history of Petrobras in the context of Brazilian development, and the country’s recent entry into OPEC+. 

    An interview with Cibele Vieira

    hugo fanton: Debates about oil exploration have been prominent since Lula entered office last year—how it relates to the goal of inclusive development, new industrial policy, and the administration’s environmental agenda. What has the historical relationship been between national development and the management of Petrobras?

    cibele Vieira: The discussion about oil exploration in Brazil arose in the postwar context. Oil was understood as a strategic asset central to securing national sovereignty. It was fundamental for the military and automotive industries, and for consumer goods production. Petrobras was founded in 1953, seven years after developmentalists started the O petroleo é nosso (“the petroleum is ours”) campaign—its inauguration as a state-owned enterprise with a monopoly on oil exploration in Brazil was a victory for this slogan and movement.

    There have been disputes ever since. Since the beginning, we invested in drilling and refining, so Petrobras became internationally prominent in deep sea drilling. And since 2006, with the discovery of the pre-salt oil reserve, Brazil has been one of the world’s largest holders of petroleum reserves. We understand that this was an important issue regarding the disputes that led to the coup of president Dilma Roussef in 2016 and Lula’s arrest in 2018.1 There’s a close connection between Brazil’s deep internal political crisis and its position among the world’s greatest oil producers.   

    Historically, the social movements and left parties in the country have understood that natural resources should be explored to support Brazil’s national development—in a sustainable way and in accordance with the population’s needs. In the case of oil, this means that exploration without concomitant investment in industrial development, new jobs, and economic growth just doesn’t make sense. But this perspective clashes with other approaches. The liberal administrations of Fernando Collor de Mello (1990–92) and Fernando Henrique Cardoso (FHC) (1995–2002) both had privatization plans for Petrobras. In 1995, a massive month-long oil workers strike erupted, halting the selloff while other key industries were privatized. When Lula came to power in 2003, it was with a completely different vision regarding the state and the role that the company should have in the economy of the country.

    Lula’s (2003–11) and Dilma’s (2011–16) administrations changed Petrobras’s structure and mission from a fossil fuel exploration company to an energy management company also dedicated to the energy transition. After Dilma’s coup, Petrobras went back to focusing solely on fossil fuels during Michel Temer’s (2016–18) and Jair Bolsonaro’s (2019–22) administrations. The firm’s role as a promoter of national development was abandoned. 

    Temer and Bolsonaro were way more successful than FHC in dismantling Petrobras. In the last few years, Petrobras’s own oil distributor, BR Distribuidora, was privatized along with many refineries and subsidiaries. The company’s strategy, once driven toward the supply of petroleum-based products for the domestic market, was transformed, with a new emphasis on financial markets that increased profit margins and dividend payments. The energy transition, incompatible with the new short-term profitability plan, was eliminated from the agenda. Indeed, it is impossible for a biofuel subsidiary to match the profitability of drilling in the pre-salt oil region. Additionally, the firm’s research center was completely dismantled. 

    So the debate that we have with oil workers now concerns certain parallels between Lula assuming office in 2003 and in 2023. The new administration wants to resume its previous project and mission, but there are obstacles left by the prior administrations.

    hF: What is the labor movement’s assessment of Petrobras’s management and the new Lula administration, just over a year since his inauguration? 

    cV: FUP was part of the government transition team’s working groups, and contributed considerably to the proposals for the oil industry. Nonetheless, given the narrow victory, the government must make concessions in order to maintain its coalition. 

    Besides these disputes on the overall national political scene, the unionist movement also faces additional challenges. This year, in the oil workers’ wage campaign, we are discussing internal governance issues. Despite changes in the presidency and in the internal board, there are other divergent perspectives clashing inside Petrobras—Bolsonaro supporters are still there, alongside pro-developmentalists that frown upon the unionist movement because they think that workers must conform and follow the rules, and there are those of us in the trade union movement. So there are political disputes about the company’s role in the national arena but also over the internal power relations inside Petrobras itself.

    The internal conflicts in Petrobras’s administrative council (Conselho de Administração, CA) mirror alliance disputes in the national congress. This means that there are divergences even among the advisors who were appointed by the government itself. Effectively, since the nominations reflect the government’s alliances in congress, Petrobras’s president doesn’t have the majority of seats in the CA. 

    Both President Lula and Petrobras’s president Jean Paul Prates have been emphasizing the company’s role in the energy transition, securing accessible fuel prices for the population, recovering economic growth, building naval fleets, and so on. There is a public defense of Petrobras. But the number of job openings announced for the new public tender is not enough—it doesn’t even cover this year’s workforce reduction by retirement. Petrobras used to be an enterprise with 86,000 workers, and now we have 40,000. The business plan that was released foresees a very small amount of investments, not nearly as much as what is actually needed. 

    hF: Is the vision of Petrobras as an explorer of fossil fuels still prevailing against the idea of an energy management company today?

    cV: That is still in dispute. Today Petrobras is able to approve investments in renewables, but not on the scale that is needed. It is clear that there has been a change in vision regarding the company’s role: Petrobras is back to positioning itself as a driver of national development and has adopted a plan to operate in refining throughout all Brazilian states—not just Rio de Janeiro and São Paulo. But despite political willingness, the numbers are very far from reaching the publicized intentions. 

    hF: What is the FUP’s outlook regarding Petrobras’s role in energy transition?

    cV: We at FUP understand the existential need to overcome the dependency on fossil fuel resources and that this is an ongoing process. At the same time, oil will not disappear tomorrow. Even while renewable production increases, oil exploration is still on the horizon.

    This means that some policies should go hand in hand: wealth generated by oil exploration must be invested in research and development of new energy sources. We have biomass and biofuel power stations in Minas Gerais and Bahia. We also have to discuss the production system, including the division between big and small producers and our relationship with regional development. 

    It is unacceptable to have great power plants surrounded by poverty. In biomass production, the resources should come from small farmers and not from agribusiness—that policy once existed but it was discontinued by Temer’s administration. This would be a concrete example of a just energy transition, which is what we stand for.

    Besides investing in new energy sources, it is also necessary to reduce the emissions impact of fossil fuels—for example, by reducing sulfur in petrol and diesel. Petrobras’s investments in refineries include planning to make fossil fuels less pollutant.

    We should continue oil exploration. Petrobras must explore new frontiers. We are in favor of exploring the Equatorial Margin region. It is a mistake to call it the Amazon River mouth, since the region is located more than 150 kilometers away from it. Since Petrobras has a long tradition of ensuring industrial safety in exploring oil, expanding this tradition would allow us to invest in new energy sources. This is our idea of a fair and popular energy transition.

    hF: Proposals for new oil exploration are controversial, particularly in the Equatorial Margin, where they have been criticized by Lula’s own environmental minister Marina Silva. Why does FUP argue in their favor?

    cV: Petrobras has been exploring oil in the Amazon for a long time. There is a refinery in Manaus. For years we have been operating in the forest. Other countries in the Amazon region also explore oil and have a history of dumping waste in the woods, which isn’t our case. 

    This is the difference that emerges from Petrobras being a state-owned enterprise—it is a more responsible company regarding the production process. The new frontier of exploration is the Equatorial Margin, which is not in the pre-salt field but is a very large offshore petroleum reservoir. This means that it isn’t about land exploration or exploration near the shore, as some have been saying. Also, Petrobras is the organization with the most adequate technology for this kind of drilling. Oil reserves don’t comply with our geographical borders. The recent Guyana-Venezuela dispute is related to exploration in the region that encompasses the Equatorial Margin. In today’s world, stopping the use of fossil fuels is not a feasible option. The Equatorial Margin will be explored, that’s for sure—by Brazil or other countries. 

    Our understanding is that new frontiers should be explored in a manner that ensures the proceeds are invested in energy transition. 

    If we look at the petroleum world map, most of the reservoirs are ancient and are going through a production decline. But Brazil is discovering new fields with huge reserves, enabling production to increase. We have an ever-more important role in producing oil while the production capacity of alternative energy sources continues to grow. If we don’t explore, as a pragmatic matter, we won’t have energy alternatives capable of meeting demand and we’ll have to pay a higher price for consuming oil nationally. 

    hF: What is Petrobras’s role in Brazil’s new industrial policy regarding foreign competition?

    cV: When we talk about global competition, it is not worth it to dispute in sectors where China has a much larger productive scale—it is not possible to compete with the prices they reach. But this doesn’t mean that we can’t have more complex industries, or that we should focus solely on providing commodities. There’s space for diversifying our market and overcoming economic dependency. Brazil isn’t in a bad economic position compared to other countries—we have agriculture, services, and industry. Continuing to invest in industrial expansion enables the generation of quality jobs, provides workers with a decent wage, and produces positive effects across the service chain. 

    Petrobras has a strategic role in this. Energy’s price and transportation are core issues for the industry. Building new natural gas pipelines is one of the main concerns both in Petrobras’s business plan and the new Growth Acceleration Program (Programa de Aceleração do Crescimento) infrastructure projects. I attended some of the meetings that the chemical industry had with Vice President Alckmin, and the main concern was gas supply. As Petrobras provides resources for the national industry, it is crucial for securing good prices and stability. There’s also Petrobras Diesel, which supplies fuel for a country that is highly dependent on road transportation. Besides the oil production chain, Petrobras also plays a major role in agribusiness by providing fertilizers. 

    The debate around local inputs for Brazilian production stems from this. When you build an oil rig, is the strategy to use imported projects, technologies, and components, or to invest in local resources?

    hF: Finally, what was the overall reaction in the oil workers unionist movement after the invitation for Brazil to join OPEC+?

    cV: FUP doesn’t have an official stance. I’ll share my personal point of view regarding this topic. Being a member of OPEC+ is different from being an OPEC member because it doesn’t necessarily imply compliance with OPEC’s provisions. If we look at our productive capacity and think about the petroleum reservoirs we have and how much oil we produce, it makes sense to join OPEC+. This organization directly influences oil’s international price, and following such decision-making processes is always positive. 

    Brazil’s pre-salt production costs are higher than Saudi Arabia’s and many OPEC members, but are still lower than others. Since many different countries have production costs above ours, the price determined by OPEC won’t hinder our production. From my point of view, taking part in the discussions about oil price formation doesn’t imply any risk of us having to comply with a lower production rate than what is feasible for Brazil. 

    Keeping up with this discussion makes Brazil safer. Unlike most of the biggest oil-producing countries, we don’t solely depend on oil as an energy source. This gives us a more comfortable position to discuss price formation. 

    Besides that, as Lula himself stated, there’s the energy transition issue. Our president was heavily questioned about the apparent contradiction in positioning Brazil as an environmental leader while joining OPEC+. The most salient question in the debate is whether it is best to leave these decisions in the hands of other countries or to actively take part. 

    Oil enterprises are central actors of the energy transition. They represent companies that already produce energy and that are expanding their activities to other sources. There is no possible way to create a responsible energy transition plan without engaging producers. Thus, the energy transition also depends on the discussions carried out by OPEC. If oil companies want to undermine any energy transition initiative, economically impairing alternative energy sources, all they have to do is lower oil prices. 

    Since Brazil is a large producer whose energy matrix isn’t completely oil dependent, we are in an even more comfortable place to promote the debate regarding energy transition within the organization.

    This interview was translated from Portuguese for Phenomenal World by Bruna Barro.

  7. Milei and the World

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    Lea esta entrevista en español aquí.

    It didn’t take long for the new President of Argentina, Javier Milei, to don gloves in the international arena and showcase his libertarian approach to foreign policy. Some political gestures have already stirred conflicts with Brazil and China—the country’s two most significant trading partners. In December, Milei invited former Brazilian president Jair Bolsonaro to his presidential inauguration, and last month, his administration initiated relations with Taiwan by arranging meetings with representatives from the Taiwanese trade office and Taiwan’s representative in Buenos Aires.

    Identifying as an “anarcho-capitalist,” Milei aims to strengthen ties with what he calls the “free world.” However, this ideological rerouting of Argentina’s foreign policy clashes with very particular dependency relationships, mainly with the International Monetary Fund (IMF) and China. Milei’s early confrontations with other leaders in the South American region and his immediate distancing from forums like BRICS and Mercosur (the Southern Common Market) indicate his desire to swiftly choose his adversaries. These conflicts could prove costly. 

    To better understand the initial steps of the Milei government’s foreign policy, we spoke with Maia Colodenco, Head of the International Affairs Unit at the Ministry of Economy of Argentina in 2019 under Alberto Fernández’s government. She represented Argentina at the G20, worked as a consultant for the Inter-American Development Bank, and served as Principal Advisor to the Executive Director for Argentina at the World Bank in Washington.

    An interview with Maia Colodenco

    CAMILO GARZóN: Some members of Milei’s economic team have already been announced. They include economic advisors who previously worked with Macri, such as Luis Caputo, the Minister of Economy, and Santiago Bausili, head of the Central Bank of Argentina. How do you see this initial circle of economic advisors?

    Maia colodenco: Milei undeniably came to power by winning the runoff, but he needed coalition forces to help him achieve that victory. On the one hand, this points at a certain negotiation of continuity with those forces that aided him in gaining power. On the other hand, considering the country’s current economic situation, I think Milei now recognizes the need for a certain macroeconomic pragmatism in contrast to his campaign rhetoric. It is a lesson learned from when Macri came into office, introducing shock policies that did not turn out well in the end.

    There were certain macroeconomic imbalances at the end of Alberto Fernández’s administration that needed resolution—imbalances that persist and have not been addressed yet. The analysis of exchange rate issues is still valid, and it requires a revision of the foreign exchange clamp (a set of restrictions on access to foreign currencies in Argentina), which was implemented in 2011 and is still in effect. There is still no clear policy on how they will structure local currencies alongside the dollar. Faced with these challenges, instead of dismantling the Central Bank of Argentina, they appointed Santiago Bausili, well known in the market sector, as the Bank’s President. This reflects a certain pragmatism and, in a way, hints at a tendency or focus towards dollarizing the liabilities of the Central Bank and eventually dollarizing the whole economy.

    So, while I can see some shock policies in other political areas, at least in terms of the economy, the continuity of certain figures within the sector may indicate a pragmatic approach. The negotiation of external debt with the IMF is likely playing a role in how this macroeconomic decision aligns with continuity measures.

    CG: How do you this government will navigate renegotiating the external debt and the country’s relationship with the IMF?

    MC: Negotiations with the IMF are always complicated, but we need to consider the precedents. Back in 2018, the Macri government took on the largest debt in the history of the IMF, which was also the most significant credit assumed by the government in the entire history of Argentina, amounting to $45 billion. In that sense, I believe that it is also in the IMF’s best interest to resolve the matter and maintain good terms with Argentina.

    During Alberto Fernández’s government—which I was part of—Martín Guzmán, the first Minister of Economy, renegotiated the debt with the IMF in a way that served Argentina well, in my view.1 The restructuring didn’t involve austerity measures; it allowed for debt refinancing without any labor reforms or privatization of state-owned companies. It curbed spending without being regressive. Unlike cases in other parts of the world, Guzmán initiated the negotiation by approaching private creditors with an analysis of restoration and sustainability based on maturities, and later negotiated with the IMF. This was a new strategy, and it proved successful. In contrast to some of the current policies being promoted, we believe that the program negotiated by Martín Guzmán aimed for a gradual adjustment, one which depended on how various factors had evolved in Argentina, while also including the issue of reducing IMF surcharges on the agenda.

    Now, the IMF clearly wants the numbers to add up and doesn’t care about what happens to the people in the country. For this government, Milei’s most recent mission objective—led by Luis Caputo and Chief of Staff Nicolás Posse—is to renegotiate the initial maturities of the debt that Argentina holds with the IMF, totaling $1.95 billion. Nevertheless, the impact of the new internal measures proposed by Javier Milei, currently being discussed in Congress, still need to be assessed, as they could also affect negotiations with the IMF.

    Among these measures are reforms to people’s pensions and the reduction of social plans, which together constitute a significant portion of public spending. There are also proposed reforms to healthcare systems, as well as everything related to reducing electricity and transportation subsidies. These reforms indirectly affect the relationship with the IMF insofar as they aim to reduce public spending with these adjustments, aspiring to achieve their fiscal deficit reduction goals. Depending on which variables they touch, whether these goals are achieved through increased employment or through less consumption and fewer economic stimuli, the impact may vary. In any case, the IMF will clearly commend Milei if fiscal deficit reduction is achieved. I don’t think they care how it’s done as long as the numbers show improvement.

    CG: On the other hand is Argentina’s presence in certain global economic forums. How do you interpret Milei’s recent speech at the World Economic Forum at Davos?

    MC: I think it stems from a misguided and outdated diagnosis of the current state of affairs—something from another era. For instance, there are aspects of his speech which I think no longer hold. He claims that the West has failed economically, but he doesn’t offer an alternative. If he is referring to the economic model of Southeast Asia, then that’s not a model he seems to admire. In that sense, we see a bit of a contradiction and a world of categories that harken back to the Cold War, as if there were still a sharp division between East and West. The world is currently multipolar, with actors much more atomized and a more conflicted globe, but the answer to our problems is definitely not a crusade against socialism, as he presents it. I also think the diagnosis is mistaken on Argentina’s self-awareness regarding its national and international role. In a Latin American context, a country like Argentina is far from insignificant, but it is not a systemic player in the broader context of the international economy. 

    An important trend in today’s international stage is the significant weight held by the private sector. Meetings like Davos have become very important, especially for influencing discussions on debt restructuring. The country needs to understand that it is not only engaged in relationships with state actors; there is a private sector that now holds as much influence as some states in various areas. However, this doesn’t mean Milei should solely focus on private entities as independent and self-sufficient units. Many developments, such as those occurring in the electric car sector, were driven by extensive state development agendas and investments. Someone like Elon Musk can praise entrepreneurial initiative all he wants, but his growth in various sectors has been considerably facilitated by the state. In that sense, when Milei’s discourse celebrates entrepreneurs unilaterally against the state, I cannot avoid perceiving contradictions. I believe he misunderstood the Davos audience, which consists of both types of actors—entrepreneurs and state representatives.

    CG: I find it interesting how Milei is already hinting at an alignment with the United States and Israel, while also distancing himself from Brazil and China. How do you think these changes affect Argentina’s presence in a group like BRICS?

    MC: The Argentine government has already formally announced that it has declined the invitation to join BRICS. Consequently, Argentina will no longer be part of a group that is key in parallel diplomacy to institutions of the global North. As I mentioned earlier, it would clearly benefit a country like Argentina to be involved in more international forums, especially economic ones. Participation in these forums can foster useful diplomatic and power dynamics, which can even influence support for various agreements. 

    In Alberto Fernández’s government, for example, we worked extensively in the G20. Many of the agreements we reached there were then extended to the IMF or the UN. All of that bespoke work contributes to building relationships with other states. In that sense, I believe it is a mistake not to participate, and I also think Milei is grounding this form of distance in a misguided diagnosis which leads to a diplomatic overreaction. Even the US State Department has affirmed that it would never ask countries not to join BRICS.

    Looking at Milei’s withdrawal from potential membership, I think his opposition was more strongly triggered by Iran’s recent inclusion in the BRICS forum than by a formal distancing from China. But even so, it is still an error—Argentina needs to improve trade relations with Brazil and China, its main partners. 

    We still need to wait and see what happens to Mercosur, since formal meetings have yet to take place. The Minister of Foreign Affairs, Diana Mondino, recently met with members of that forum to negotiate a free trade agreement with the European Union—this is despite Milei stating last year that Mercosur should be abolished because it was a defective customs union. Statements by Mondino are more nuanced; she speaks about “modernizing” Mercosur and says that the four member countries must reduce the number of customs barriers between them. On another front, regarding the Organization for Economic Co-operation and Development (OECD), Argentina will surely insist on joining—the question there is whether the OECD will accept its entry or not. 

    I believe Argentina should not have to choose between one forum or another. It could have a presence at both. However, it’s been Milei’s political decision to choose between the two. In my view, this decision seems to stem from an exaggerated line of action that had never been explicitly requested. Argentina has never before had to choose between China and the United States.

    In fact, we have historically had a very good financial relationship with the Chinese government through their swap agreement with the Central Bank of Argentina, which has been crucial for these countries’ economic relations. At the same time, the agreement with the IMF has also been very important. This shows that we can maintain very suitable agreements with the United States that are not incompatible with keeping good relations with China.

    CG: Can you elaborate on Argentina’s relations with China and Taiwan?

    mc: Argentina has always adhered to the One China principle. In our region, only Paraguay has expressly recognized Taiwan as an independent state. Since 2012, the relationship between Argentina and China has evolved, marked by increased investments in infrastructure. Just between 2007 and 2020, Argentina received $10 billion in investments from Chinese companies, primarily focused on energy, mining, and the financial sector.

    Historically, Argentina has maintained a strong and positive bond with China. The trade volume between the two countries has been a key element. As our second-largest trading partner, the possibility of having a credit line for commercial transactions has been crucial. This arrangement has allowed us to bypass the direct use of the dollar in currency exchanges—hence our growth in trade volume. Additionally, China has played a significant role in supplementing Argentina’s international reserves through the swap agreement. Additionally, there are major infrastructure projects in Argentina that are funded by China, including railways and dams in Santa Cruz. Many of these investments are related to logistics for exports and, in general, focus on infrastructure development.

    Sure, if one looks at the places where China has been directing its major interests over time, the role that Argentina plays in Chinese investments has somewhat diminished. However, Argentina still remains among the top three recipients of direct foreign investment in Latin America. In that sense, I believe that this shift in opinion regarding China has not worked well; it is evident that Argentina does not stand to gain from losing the Chinese market, or even simply from facing the risk of losing it.

    CG: Let’s talk about the case of Brazil, Argentina’s main trading partner. How do you see this relationship developing with both governments holding such divergent political positions?

    mc: Under Alberto Fernández, the national government made efforts to strengthen Mercosur. We believed that Mercosur needed to be modernized and made more efficient, while still safeguarding this crucial alliance between neighboring countries. I think that Lula will now be the guardian of that relationship, responsible for preserving Mercosur as a framework, though I suspect he doesn’t want to explore the possibility of creating alternate regional institutions at the moment.

    As to our direct relations with Brazil, the situation is now obviously different from the time when Bolsonaro was in power. Back then, even without a friendly relationship, many connections were well-kept. Since Brazil is a strategic and historical partner, we cannot afford to lose sight of our mutual identities. But Milei has already shown that he can take a more confrontational stance. He has already withdrawn Argentine ambassadors from Nicaragua, Cuba, and Venezuela, and he is currently in a dispute with Petro, though only on social media for now. 

    CG: Milei has arrived at a juncture where his ideological counterparts, such as Donald Trump or Jair Bolsonaro, are no longer in power. In Latin America, there was a period when left-leaning policies converged among governments in countries like Venezuela, Argentina, and Brazil, eventually leading to regional institutions like UNASUR (the Union of South American Nations) and BancoSur (the Bank of the South). Do you think something similar might happen if Milei finds regional counterparts that are consistent with his libertarian policies?

    mc: I haven’t seen any indications that Milei wants to create something similar to what existed during the so-called “pink tide.” It doesn’t mean it couldn’t happen eventually, but from what I see in the case of someone like Milei, who is a somewhat anti-institutional character, is that it would be more challenging for him to develop a similar regional institution. He is more skeptical of all these multilateral environments, not unlike Trump and Bolsonaro. The three share a diplomatic tendency to withdraw from various multilateral forums.

    Milei’s bilateral relations often lack pragmatism, although he has demonstrated some realism on certain macroeconomic issues. We will see how some aspects of international politics realign, but I believe that Argentina should neither remain in international conflicts nor overreact to them. 

    This interviewed was translated from Spanish for Phenomenal World by Eduardo Gutiérrez.

  8. Brand New India

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    With India headed to elections this April, the ruling BJP is rolling out enormous publicity campaigns to promote its record on economic growth and Hindu nationalism. Central to Prime Minister Narendra Modi’s third bid for reelection is the narrative that the Indian economy continues to grow and remains open for business. Amid the ample flows of international finance, and support from Western capitals, Modi’s India is an increasingly ethno-nationalist state. This week, tens of millions of Hindus mobilized across the country as Modi inaugurated a Ram temple in Ayodhya, in the state of Uttar Pradesh. Built at the site of a Muslim mosque destroyed by Hindu extremists in 1992, the temple’s unveiling represents a major step in Hindu nationalism—and the symbolic end of India’s secular republic. The question as to whether Modi’s Hindutva agenda lies in contradiction with the economic liberalism that has defined much of BJP’s policy is on many commentatorslips.

    The BJP has long relied on a well-oiled marketing machine to win votes. The advertising blitz now underway recalls the party’s “India Shining” campaign of 2004, launched by the Ministry of Finance. Then, as now, images were plastered across the country, expressing optimism about the country’s economic performance and promoting liberal reforms. At the 2014 elections, Modi ran with the slogan of  “good times,” promising development, a “muscular Hindu nation,” and a bright and glorious future.

    To discuss these ad campaigns and the connections between the seemingly separate spheres of economic growth, national identity, and international politics, we talked to the Indian historian of nationalism, Ravinder Kaur. She is the associate professor of Modern South Asian studies at the University of Copenhagen, and the author of 4 books, including Brand New Nation: Capitalist Dreams and Nationalist Designs in 21st Century India, The People of India, Identity, Inequity and Inequality in India and China, and Since 1947: Partition Narratives among Punjabi Migrants of Delhi.

    An interview with Ravinder Kaur

    TIM SAHAY: Your book, Brand New Nation, looks at how countries were plugging into the liberal global economy of the 1990s to attract investment capital, and far from diminishing the importance of nation-states, rejuvenated ethno-nationalism. You’ve argued that in the Indian case, the “liberal” economy and “illiberal” hypernationalism of Modi’s BJP are not separate phenomena, but two strands of Hindutva’s vision. How would you characterize these connections?

    Ravinder kaur: I begin my book in the 1990s, arguing that the last three decades of economic reforms basically transformed the nation into a commodity. I traced the ways in which India, the post colony, turned itself into an “emerging market.” Contrary to the understanding of globalization as a process imposed from the outside and resisted by local groups, I argue that economic “LPG” reforms—liberalization, privatization, globalization—were embraced by the policy elite in India. Initially, there was some political pushback against it, both within the BJP and Congress, but by the turn of the century, any resistance to them had disappeared. 

    This great transformation activated a seemingly unlikely alliance between global capitalism and hypernationalism, a foundation on which twenty-first century Hindu nationalism would begin taking shape. 

    In the early 2000s, the government organized and funded mass publicity campaigns, such as “Incredible India” and “India Shining.” These were used to try to brand postcolonial India as a lucrative investment destination for global capital. These campaign ads showcased India as  Hindu, rather than the multiethnic society that it is. The Brand India publicity material mostly appeared as a repackaging of cultural symbols—from yoga to Ayurveda, colorful festivals to nature, and a virtual absence of Muslims. These campaigns dovetailed with a broader cultural politics that sought to define who was included and who was excluded in India. 

    The question I took up in the book was: “What is a nation in the twenty-first century?” It leads us to a different set of answers. I elaborate on the idea of an “identity economy,” in which a national identity is put to work in the domain of the economy, and harnessed to boost the self-image, self-identity, and prestige of the nation. I look at ways the economic and the non-economic work together to produce a particular kind of nation form.

    TS: What is unique about this project of national rejuvenation? China’s CCP has the story of a century of humiliation at the hands of Western powers, while the Indian BJP narrative has been a millennia of humiliation, of being conquered by foreigners, whether Muslim kings or British colonialists. These civilizationist-nationalist narratives violently flatten their history.

    RK: The infusion of capital promises progress and prosperity, and is a sign of the nation’s arrival on the world stage. Capital appears as a curative force that can efface the shame of colonial subjugation and violence, and redeem the nation’s lost glory via economic growth.

    Identity economy entails reimagining the nation as a commercial enclosure that can be put at the disposal of investors—its territory as a vast reservoir of untapped natural resources, its population as a “demographic dividend” that provides both labor and consumer markets to sustain growth, and its cultural essence to be turned into a corporate brand identity. Thus, the emergent nation form—the brand new nation—is erected not just upon the scaffolding of economic growth, but also the promise of civilizational glory and rejuvenation.

    Stalled liberalization

    TS: Could you specify the link between liberalizing policy changes to attract foreign capital and India’s domestic politics?

    RK: One goal of these ad campaigns is to signal to the world that we are open for business. They seek to invite investment, both domestic and foreign. In India, much of the liberalization of the economy has taken place in the service sector, and the country’s service exports have boomed. There has also been an attempt to boost and open the manufacturing sector—as with the flagship program called “Make In India”—and turn the entire territory into a zone of production, with mixed results. Meanwhile, the vast agricultural sector—India remains a country where 46 percent of working age adults are engaged in farming—has been the last area to remain protected. When in 2020 the BJP made attempts to liberalize and deregulate farming, large-scale farmers’ protests broke out and forced the government to shelve its reforms. 

    Liberalization has not happened suddenly, as shock therapy, but gradually. There are regulatory requirements for Indian partnerships or joint ventures, rather than 100 percent foreign ownership. These projects lead to a lot of conflicts, as making land—especially farmland—available to investors is often fraught, and Modi’s land liberalization agenda too has stalled

    Likewise, modes of federal governance have changed a lot. India competes for foreign  investments but, within India, different regions also compete with each other to lay claim to those investments. The current government has sought to create what’s known as the “one nation” model—one nation, one tax, one market. This entails greater centralization of economic and political power in Delhi and the weakening of the regional power structures. This has been attempted, for example, through a common Goods and Services tax system that centralizes revenue collection, thus giving greater power to the central government. That too is a project to unify the entire territory, both in an economic and cultural sense.

    TS: The BJP’s major support has come from the rising Hindu middle classes of North India. Is the success of Modi and the BJP a bottom-up expression of a newly prosperous Indian middle class?

    RK: These policy initiatives have always been led by the elite; to think that they have ever had a grassroots constituency is a mistake. Only after the policies are made by the elite does the question of selling it to the population come up. This is where mass campaigns or political spectacle have become a central component of Indian politics.

    What I analyze in the book is how these mass publicity campaigns emerged as a form of governance. In the run up to the 2004 election, BJP prime minister Atal Bihari Vajpeyi launched the “India Shining” campaign, which celebrated the high growth rates the country was reaping while encouraging higher consumption among newly affluent Indians. When the BJP then lost the 2004 election, many blamed the “India Shining” campaign. What people forget is that though the government lost the election, its liberal economic reform program had already become hegemonic. The Congress Party’s counter slogan to the BJP’s “India Shining” was “Aam Aadmi ko kya mila” (“What did the common person gain out of it?”). The Congress-led United Progressive Alliance government (2004–2014) also wanted to deliver “reforms with a human face.”

    TS: When Modi came to power in 2014 his election campaign promised acche din: India Shining 2.0. Despite the optimism from many corners, India’s economy has underperformed since then. Growth rates have fallen, underemployment remains high, investors have been burnt, and inequality is skyrocketing. How has Modi’s government responded to all this? Is it concerned about inequality or is it totally committed to an oligarchic project with the Adani and Ambani families at the core?

    Ravinder kaur: I think it’s a balancing act here. Firstly, inequality has certainly widened in India since Modi came to power, and Adani and Ambani’s wealth have skyrocketed.

    At the same time, the Modi government has kept in place many of the welfarist policies established by the UPA. For example, it maintained the Right to Work (National Rural Employment Guarantee) schemes, which guaranteed 100 days of work to 64 million rural workers, especially women. It also preserved the Right to Food program. Likewise, the BJP increased social welfare goods. The most prominent successes have been targeted poverty alleviation programs: the distribution of cooking gas cylinders, widening access to bank accounts, and direct cash transfers. So it’s not the case that Modi simply embraced a free-market model, which would have had its own major obstacles in a country the size of India.

    A key difference between the UPA and the current government is how welfare is administered. Rather than a basic provision from the state, welfare provisions are marketed and advertised as a benevolent gift from the BJP government, indeed as the beneficence of Modi himself. This is not welfare as a citizen’s right but as a gift one should be grateful for. These branding exercises have reaped electoral benefits for the BJP, especially among rural women in  Uttar Pradesh and Madhya Pradesh.

    TS: Why has the rise of Brand India gone hand in hand with the decline in liberal democracy?

    RK: India’s efforts to brand itself as the “world’s largest democracy” helped project it as an alternative to an authoritarian China—whence the paradox: under Modi, the very democratic advantage that shaped Brand India’s image on the world stage entailed its steady erosion at home. Hindutva politics recognises this contradiction: it cashes in on India’s democratic credentials to gain external recognition even as it weakens democratic institutions at home. Consider the unabashed implementation of the hardline Hindutva agenda in Modi’s second term—from the revocation of the special status of Kashmir in August 2019, the Citizenship Amendment Act (CAA) that excluded Muslims, to the inauguration of the Ram temple in Ayodhya this week. What characterizes this moment of majoritarian muscle flexing is the heavy-handed suppression of dissent (the crux of democracy), especially in university spaces, and how the act of protest itself has been criminalized by the State.

    Alignments

    TS: What do you make of Modi’s India positioning the country as a pro-West bulwark against China? This project seems like it would be a momentous shift away from India’s long-held foreign policy of nonalignment.

    RK: If India is positioned as a bulwark against China, this is largely thanks to efforts by foreign powers rather than Modi. With much of the world “derisking” its economies from China, India now finds itself in a happy position. It is the only country which rivals China in terms of scale of population. 

    The old Indian project of pan-Asian unity is long gone. Nehru was very much invested in that, but it came undone thanks to the Indo-China War in 1962. The ongoing border conflict between India and China has caused immense nationalist mobilization on both sides. So regardless of which party is in power, given the security threat China poses to India, any government would be pro-Western. 

    TS: India today relies upon extremely anti-Muslim, majoritarian, identity-based politics, but it’s not clear to me that the Hindu extremists in Modi’s party are entirely under his control. How unstable is this as a basis for rule in a country with over 200 million Muslims and other minorities?

    RK: Whether the growing strength of Hindutva will lead to some social breakdown that causes investment capital to flee, we don’t know. For now, India remains profitable to many, such that the world more or less wishes India well. The United States grants Modi’s violent project a carte blanche. This provides a high degree of security. But the impacts of a further deteriorating social fabric remain to be seen. Such projects can never truly be contained.

    TS: Modi has also positioned India as a champion of the Global South. He has argued that India faces massive challenges and wants reform of the unequal Westen-led international order—just like developing countries in Africa, Asia, and Latin America. At last year’s G20, India championed the goals of debt relief, poverty reduction, and sustainable development. What makes this project different from the non-aligned movement of the 1950s–60s?

    RK: On the face of it, it looks as if the 1950s have returned. But much is different this time. Countries across Asia, Africa, and Latin America are no longer impoverished in the way they were at the time of decolonization in the mid-twentieth century, and there is tremendous inequality within the global South. Meanwhile, in terms of foreign-policy influence, larger and more prosperous countries, like those in BRICS, now have substantial clout in the world, and are seeking to come together. 

    So this is very different from the Non-Aligned Movement, which many people did not take seriously, because it lacked economic or military power. But nevertheless, the old Non-Aligned Movement always had very strong currency, primarily because it came with very strong moral arguments about anti-racism, decolonization, and nuclear disarmament. The current mobilizations have nothing like that. There is no alternative vision of the world that they are trying to put forward, but instead new ways to plug into the capitalist world-system for their own advantage.

  9. Petro at COP28

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    Lea esta entrevista en español aquí.

    Upon entering office in July 2022, Colombia’s President Gustavo Petro voiced a strong stance against fossil fuels, marking a contrast with other left-wing leaders in Latin America who rose to power through resources gained from extractive economies. Petro’s emphatic critique of oil and gas was apparent at the United Nations Climate Change Conference (COP28) held this year in Dubai, United Arab Emirates, the world’s sixth-largest oil exporting country. 

    At COP28, Colombia announced its commitment to the Fossil Fuel Non-Proliferation Treaty, drawn up in 2019. Until now, the only countries to sign on were Pacific island nations, in response to their extreme vulnerability to the effects of climate change. Colombia has now became the first and only continental country to agree to the treaty. In addition to his environmental focus, Petro controversially linked climate change inequalities and the war on Gaza in his address to world leaders. 

    Petro’s rhetoric at COP28 has signaled a transformative climate agenda, but how does this translate to domestic environmental and energy policies in Colombia? And given the changing political dynamics in the region, what is the Colombian government’s role in influencing broader climate policy in Latin America?

    Manuel Rodríguez Becerra served as Colombia’s first Minister of Environment from 1993 to 1996 under President César Gaviria. He was part of the World Commission on Forests and Sustainable Development and co-founded the National Environmental Forum in 1988, a coalition of non-governmental organizations (NGOs) that promotes environmental protection and sustainable development in Colombia. He recently published The Present and Future of the Environment in Colombia (2023). In the following conversation, Rodríguez Becerra analyzes Petro’s address at COP28, Colombia’s shifting role in global climate discussions, and the differing—and often conflicting—climate policies of Latin American leaders. 

    An interview with Manuel Rodríguez Becerra

    Camilo Andrés garzón: One of the Colombian government’s major objectives in COP28 was a global agreement on the suspension of fossil fuel usage. Is this goal realistic?

    Manuel rodríguez becerra: Achieving a majority-supported commitment to suspend the exploitation of carbon, oil, and gas on a specific date is not something that was going to happen during this COP. President Petro, with very respectable political reasons, said that Colombia would adhere to the Fossil Fuel Non-Proliferation Treaty, promoted in 2019 by the islands that are most at risk in the Pacific. Colombia is the first continental country to join this treaty, but that does not guarantee that it will find great consensus, given the fact that developed countries have repeatedly refused to establish a specific date to cease fossil fuel exploitation. 

    We already have a significant precedent: at COP26 in 2021, seventy-seven countries promoted to gradually eliminate the use and production of coal. The plan envisaged that more developed countries would give up the use and production of coal by the 2030s, and that the poorest countries would do so in 2040. The proposal was not approved. China and India supported this idea, but it is not clear whether these objectives will be met, since available data shows that the world is heading in quite the opposite direction: since then, fossil fuel consumption has actually increased. 

    A recent report published by the Stockholm Environment Institute found that the twenty governments responsible for more than 80 percent of global emissions are currently planning to produce by 2030 more than double the amount of fossil fuels that are necessary for the 1.5 degrees Celsius limit to be maintained. According to the study, the world is in fact on the path towards producing more hydrocarbons. Projections for 2030 estimate a 460 percent increase in coal production, an 83 percent in gas production, and a 29 percent increase in oil production. After twenty-eight COPs held between 1994 and 2023, there has yet to be a formal agreement to properly reduce the use of fossil fuels in the world.

    CAG: How do you interpret Petro’s speech before the presidents’ forum at COP28, in which he compared the war on Gaza and global climate displacement likely to occur in the future? In his speech, he stated, “Hitler is knocking on the doors of European and North American middle-class homes, and many have already let him in.”

    MRB: Petro is absolutely right when he points out that, in the future, there will be millions of migrants as a consequence of climate change. This is an issue we should all continue to insist on, since the displacement will affect the most vulnerable countries. However, it doesn’t seem so appropriate to compare this to the scenes of suffering in Gaza, since it is a very different problem with its own set of causes.

    Similarly, Petro’s comparison to the rise of the right in Europe and in the United States was not well received by the German Chancellery, which protested against the speech for “making crude comparisons with the Nazi era which ultimately relativize the Holocaust,” as was said in a statement. It is also interesting to note that when the Colombian government produced a written text based on Petro’s intervention, the President’s allusions to Hitler and Gaza were removed—a major lack of transparency. 

    In the same speech, President Petro stated that his administration was able to reduce deforestation in the Amazon by 70 percent with their own resources—but this is not entirely true. Colombia has received significant resources for deforestation through international cooperations with Norway, Great Britain, and Germany. On the other hand, it is good that donors know that their resources can successfully be translated into effective data on deforestation reduction.

    It’s still too early to see this as a definitive reduction, as it remains somewhat circumstantial. We need to know if the government’s plan will substantively reduce deforestation. I’ll remind you that there was also a significant one-year reduction in deforestation under President Iván Duque, Petro’s right-wing predecessor, but deforestation drastically rose in the following year. In that sense, we can’t celebrate a one-year reduction as definitive. I believe that donor countries monitor deforestation very carefully so that governments can meet these goals in the long term. 

    Cag: How do you view the Petro government’s emphasis on deforestation in the Amazon?

    MRB: The government has done well to focus its efforts on reducing deforestation in the Amazon basin and seeking active international cooperation around this initiative. This is true not only for broader climate change impacts, but also because the Amazon is the region with the greatest biodiversity in the world. Protecting Amazonian forests and surface water sources is of great importance.

    Colombia’s Minister of Environment and Sustainable Development, Susana Muhamad, also announced the National Restoration Strategy, with the goal of restoring more than 753,000 hectares of forest in the country by 2026. This is the most ambitious goal ever seen in a development plan; Colombia already had set a goal of restoring one million hectares of forest by 2030, but the Petro government is significantly speeding up this initiative. The real question is whether the Ministry and its environmental authorities will have the capacity to keep those promises. If met, these two environmental achievements—deforestation reduction and forest restoration—would be one of Petro’s greatest legacies. 

    In his COP28 speech, President Petro also spoke about the exploitation of gas and oil in the country, especially in the context of the Fossil Fuel Non-Proliferation Treaty. Many of us believe that suspending fossil fuel exploration in Colombia would be a major issue.

    Cag: Why do you say that?

    MRB: Different regions of the world vary greatly when it comes to greenhouse gas emissions. While agriculture, forestry, and other land uses account for 24 percent of the whole world’s total greenhouse gas emissions, in Latin America they account for more than 50 percent. In Colombia, deforestation, agriculture, and forestry represent 59 percent of the emissions of these polluting gasses. For these reasons, Colombia’s emission-reducing priorities should not necessarily be in decarbonizing the economy, but in stopping deforestation and transforming agricultural activity, even though advancing decarbonization is clearly an important objective.

    Furthermore, fossil fuels represent 3 percent of Colombian GDP, so suspending their exploration would threaten the country’s self-sufficiency regarding gas and oil—two fuels that the world will still consume to some degree for the next twenty or thirty years. The suspension would also sacrifice at least 40 percent of the country’s exports; this involves a considerable sacrifice of economic growth in areas that are vital for many social programs. Finally, the policy of suspending oil and gas exploration in Colombia may not have any substantial benefit for the planet as a whole: as long as an international demand is still at large, and without global agreements to meaningfully reduce the exploitation of fossil fuels, the resources that Colombia ceases to offer will simply be supplied by another country.

    Cag: Regarding climate policy, how does Petro’s influence compare to other Latin American leaders? Could he have developed a unified regional position on environmental issues at COP28?

    MRB: We are in a very diverse political context. In Argentina, Milei denies the reality of climate change, while in Brazil, Lula is striving for a difficult balance between extractivism and the defense of indigenous peoples. In Latin America, forming a regional position has been a historically arduous task. Regional positions are typically assembled and constructed ahead of the COPs; we clearly lack one at the present. The African Union is a very good example of a consensus regional position regarding climate change negotiations.

     There is a considerable lack of unity in Latin America; this is evident in discussions around the Amazon. During the Amazon Summit, Lula refused Petro’s proposal that Brazil should suspend oil exploration in the region, stating that Brazil would continue using coal and gas or gas and oil in the coming years. What is more, the exploration and exploitation of both has increased. We must recognize that Lula and Brazil hold the greatest weight in the negotiations around the Amazon region.

    Cag: Do you think COPs are useful in achieving a global consensus to battle climate change?

    MRB: The Convention has had little success, to say the least. In 1992, its goal was to reduce the amount of greenhouse gas emissions so that by the year 2000 they would not exceed the amounts emitted in 1990. Thirty years after the Convention was signed in 1992, emissions have increased by 60 percent since 1990.

    According to calculations based on current emission trends, as of June of this year, there are only eight years and ten months left to reach the temperature increase limit of 1.5 degrees Celsius established in the Paris Agreement, after which extreme climatic events are expected to intensify further.

    Some argue that if these measures had not been taken, the current situation would be worse, but that’s not the point. The point is that these agreements were designed to avoid a series of extreme climate events around the world which we have already been experiencing beyond any doubt. The heat waves in Europe in 2022 and the floods in Colombia in 2010 and 2011 are just a few examples. 

    Cag: Finally, what is your overall evaluation of the agreements reached during COP28?

    MRB: I’ve participated in about nine COPs, and I was also involved in the legislation of the Convention on Climate Change. The only treaty with reasonable vigor, an adequate design, and sufficient legal force was the Kyoto Protocol. However, it collapsed in 2009, largely because the United States—a great architect of this protocol—left it unratified during the government of George Bush. Once the Kyoto Protocol collapsed, work on the Paris Agreement began until the signature 2015 agreement. 

    Looking at everything that’s happened since 2015, we honestly don’t have reasons to be optimistic. Greenhouse gas emissions have clearly increased, and with the estimates of fossil exploitations currently underway, we’re very likely to surpass the 1.5 degrees Celsius threshold before the end of the century. It seems that developed countries don’t have the right attitude—they sign agreements, but they don’t keep their word.

    Of course, the major takeaway from this COP is the Loss and Damages Fund. This will be celebrated as a great achievement, but that fund was created during COP27. These types of announcements are meant to foster hope and testify to progress, but the problem of implementation remains. Back in 2009 in Copenhagen, developed countries committed to provide $100 billion a year starting in 2009 for mitigation and adaptation. Thirteen years have passed since then, and that goal has yet to be met. On top of that failure, it’s an insufficient sum. To illustrate the point: Africans estimate that they need around $700 billion in concessional resources for mitigation and adaptation—seven times the committed amount.

    The question is: if developed countries are not complying with the Mitigation and Adaptation Fund, why would they comply with the Loss and Damage Fund? Without resolving the compliance question, how can we claim the Fund as one of the great triumphs of this meeting?

    This essay was translated from Spanish for Phenomenal World by Eduardo Gutiérrez. 

  10. Governing the Climate

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    The twenty-eighth UN climate change conference, which took place in Dubai over the course of the last two weeks, has now come to an end. Like previous conferences, this COP took the form of a series of negotiations between countries to find an effective and legitimate approach to reducing dangerous warming. The entire architecture of the 1992 UN Framework Convention on Climate Change was built around differentiating between the rich industrialized OECD countries of the global North and the developing countries of the global South, attempting to account for the different needs and responsibilities of various nations. Conflict over money, machines, and how soon countries should phase out coal, oil, and gas have once again been at the forefront of negotiations. Remonstrations of the conference outcome’s gross insufficiency in the face of the climate crisis have come from many quarters, especially since the full phaseout of fossil fuels has not been enshrined as a requirement.

    The shared goal of negotiators at Dubai is to triple renewable energy globally by 2030. Such a commitment implies breaking through the financing barriers for developing countries, and creating political coalitions that can drive necessary national policy changes. At stake is something more fundamental: can the world historical process of “uneven and combined development” be decarbonized under the terrifying acceleration of anthropocenic crises?

    Navroz Dubash is a professor at the Centre for Policy Research in New Delhi and has been a key figure in international climate diplomacy for as long as there has been such a thing. Dubash was instrumental in setting up the Global Climate Action Network in 1990, and recently was coordinating lead author of the IPCC’s Sixth Assessment on Climate Change. He is the author of India in a Warming World: Integrating Climate Change and Development (2020) and Tubewell Capitalism: Groundwater Development and Agrarian Change in Gujarat (2002). Tim Sahay spoke with Dubash about the changing narrative of climate-oriented national development, and how past mistakes might inform a more resilient future.

    An interview with Navroz Dubash

    TIM SAHAY: You’ve been involved in international climate diplomacy since 1990, when the Cold War was nearing its end and the unipolar world was taking root. Now that we exist in a messier, multipolar world, how is climate diplomacy changing?

    Navroz Dubash: In the early years, there was a very strong cognitive lock regarding the design of the process. It was expected that we would simply follow the Montreal Protocol, which encouraged richer countries to produce substitutes for ozone-depleting chemicals, while transferring technology to poorer countries. 

    That somewhat simplistic protocol was later applied to the climate process, and I think it was damaging. In the case of the climate crisis, it’s of course not about finding substitutes for one chemical. It’s about ending the historical coevolution between fossil fuels and industrial development. 

    That line of thinking led to the top down approach of carbon rationing, set out in the Kyoto Protocol. When the US Senate unanimously refused to ratify Kyoto in 1998, arguing that it violated US sovereignty, it became clear that it could not work politically. That led to a period where climate negotiations were oriented around finding a way for the US to be brought back in. I think that was damaging because, as I like to say, other countries have politics, too. During that window—say from about 1998 to 2008—China was coming up in the rearview mirror. It was becoming the most important global determinant of whether we would be able to address climate change, and we weren’t thinking enough about how to structure the agreement so as to incorporate China.

    With little money or technology being transferred, much of the developing world saw the agreement as dysfunctional. The industrialized countries, for their part, wanted developing countries to prioritize cutting emissions. This resulting impasse led to the agonizing failure at Copenhagen’s COP in 2009. The negotiators still produced a statement because, as a former Indian negotiator once told me, the first rule of climate negotiations is that they never fail. But between Copenhagen and Paris, the only question that was possible to ask was: how do you get everybody on board? 

    What enabled the breakthrough at Paris in 2015 was a pre-deal between the US and China. The key phrase was “common but differentiated responsibility and respective capabilities.” They added a clause that basically said, as national circumstances change, this has to shift. And that language was carried verbatim into the Paris Agreement.

    TS: Since there is no planetary leviathan that can enforce decisions, the Paris Agreement was entirely bottom up and iterative. Countries submit a voluntary plan to cut emissions, they take stock every five years and ratchet up their ambitions. Much of this agreement was underpinned by a “G2” deal between the US and China. Is it the case that once the US and China stop agreeing on things, the Paris Agreement will blow up?

    ND: I agree that the guardrails of the Paris Agreement were set by the US and China. But it does not follow that their weakening relationship means blowing up the deal; we do still have the Paris Agreement. It has multilateral buy-in from a lot of actors—it survived the setback of Trump pulling the US out of it. That suggests Paris has a “political ratchet” mechanism in addition to the bottom-up ratchet. How smoothly those are implemented is, of course, affected by the US-China geopolitical confrontation.

    As it happens, I was in an India-US Track 2 meeting, when we got word of the pre-Paris China-US agreement. In the meeting we agreed on a bottom-up approach that would involve each country making Nationally Determined Contributions (NDCs). However, very soon the “High Ambition Coalition” of small island countries, which were very worried about the existential threat of climate change, intervened to alter the agreement. Thanks to their work, instead of limiting warming to 2 degrees Celsius, the Paris Agreement insisted on the need to limit warming to 1.5 degrees.

    Source: Global Carbon Project

    This had the effect of bringing the deadlines forward. This is because to limit warming to 1.5 degrees, everyone’s emissions would have to peak sooner and fall more steeply. The wager behind the Paris Agreement was that countries would come up with very generous NDC pledges and, upon implementing them at home, find that cutting emissions is in fact cheaper than they had initially thought. This would in turn contribute to a new green economy that would foster political coalitions domestically—going on to stimulate competition between countries, which would prompt some to go faster than they otherwise would have. At the next COP, their pledge would become even more ambitious.

    For some, this all relied on naming-and-shaming those that don’t meet their pledges. To me, the domestic implementation of NDCs—the national churn—was the more important part of the story. Once the target became 1.5 degrees, there wasn’t enough time left for that national churn. So, as soon as countries came up with their pledges, everybody was asked to up their pledges before anyone could get home to actually figure out their politics of implementation. 

    As for the current COP, I think there is a reckoning because we’ve now realized that the 1.5 degree target is really out of reach. We are in an overshoot scenario, and as soon as you get to an overshoot scenario you could overshoot by a little, you could overshoot by a lot. So that forcing mechanism of having a target—in a sense, it’s no longer there. To my mind, that means refocusing attention on the national story.

    Linking national development and climate action

    TS: How do different priorities of North and South play out? India often speaks in terms of climate justice, arguing that it has polluted very little over the course of its history and so deserves “carbon space” for development. Meanwhile, the lead US climate negotiator Todd Stern infamously once said “if equity is in, we are out.”

    ND: As you say, India has been the standard bearer, both at the governmental and the non-government level, for climate justice. Very early on, in 1991, Sunita Narain and Anil Agarwal wrote a pamphlet called “Global Warming in an Unequal World,” which had a huge impact. Even today, India continues to argue that there is a finite carbon budget that should be allocated to less developed countries. 

    For my part, I think the fact that the North has historically emitted much more than the South has consequences for how we should proceed. That said, I’m not sure that allocating a global carbon budget is the best way to operate. First of all, how do you allocate who gets to emit how much? The most important thing is to ensure that countries have access to the carbon required to meet their developmental needs while pivoting to a low-carbon future. 

    This is important because if a country gets locked into a high-carbon future, it will probably be an uncompetitive economy within ten or twenty years. Too much carbon now means shooting yourself in the foot with stranded costs, failure to develop new technologies, and so on. If there’s only so much fossil fuel we can burn and the rest we have to keep in the ground, then the principle should be maximizing global welfare, which means that if Nigeria needs to exploit some of its gas as a bridge measure, it should have first dibs on doing that, not Norway. 

    Where the rubber really hits the road is in figuring out ways to have capital infusions going from the North to the South. Climate action is going to be highly capital intensive. One of the implications of the climate equity story is how do you manage these massive transfers.

    Let me come back to a hobby horse of mine. So much of the climate conversation is dominated by Northern analysts—that’s where the research money is—so their interests end up dominating the discussion. For example, there is much more research on decarbonizing heating than on cooling, but given that the majority of buildings in tropical, developing countries are yet to be built, the future of cooling is the much bigger story. 

    To take another example, there’s a lot of conversation about pathways to net zero, which makes sense if you’ve already peaked. But for those who haven’t, they need to avoid locking-in at a high peak. Emissions trajectories should look like a hill, not a mountain. We should be thinking in terms of the idea of avoided emissions. What you do from a policy point of view to avoid emissions is quite different from what you do to reduce emissions. A carbon tax or a cap and trade system, for example, isn’t going to do much to help you avoid emissions because much of that is actually from infrastructure yet to be built like power, urban construction and transport. If 80 percent of future emissions are going to come from the developing world, we need to frame our questions accordingly.

    TS: Everybody’s talking about linking climate and development. You’ve written a book on the topic, but “co-benefits” like economic competitiveness or reducing air pollution are now broadly linked to national goals. Many countries are embarking upon a green project as one of national development. What do you make of these new varieties of governing climate?

    ND: I definitely see the shift in countries like India, Brazil, South Africa, and China thinking about climate as part of a larger project of remaking national economies. In a sense, I think that’s productive. The old framing of a “collective-action problem” that sought to distribute the “costs” of climate action was never going to work. Arguably, many of the developed countries have not delivered on climate finance or on phasing out fossil fuels first, so the North-South tensions have come roaring back. 

    I think co-benefits are a productive turn, but it’s yet to be seen how they will work. Broadly, we have two competing approaches. One is a European-led narrative that says the mitigation imperative is an existential one, and so should be first priority. We have, however, seen in the UK and Germany for example,  the extent to which climate goals by themselves are politically fragile. When something like the Ukraine war happens, or when energy prices spike, climate goals seem to take a back seat.

    The other approach is the idea that developing countries like India would pursue low-carbon development projects—public transport, for example— that would make for more liveable cities. This approach to climate is convergent with development; the choice between roads or railways are development choices but also climate choices. What’s really interesting to many of us is that the US Inflation Reduction Act implicitly adopts this approach; it wasn’t just for the developing world. This approach, what I call embedded—as opposed to standalone—climate framing, is an alternative to the European carbon-centric regulatory model, which is based very heavily on counting up and pricing carbon.

    TS: For decades the neoliberal project has gutted state capacity. A really interesting aspect in your work is the question of how states must be re-energized for green world-building. Bidenomics has called for a “whole-of-government” approach. A national developmental state is one thing, but one of the ways we’ve been thinking about the polycrisis is that the twenty-first century state needs to develop new eyes, ears, arms, and hands to intervene, listen, predict, and actually change the ways in which states are organized. What does that “climate-ready state” look like to you?

    ND: If a state wants to push a particular development agenda, it needs to have state capacities that can see the project out. A good example of such an institution is the Climate Change Committee in the UK, which is tasked with recommending five-yearly carbon budgets. It doesn’t have executive authority, but it has a kind of normative authority to set those budgets, which ministries are meant to align with; Parliament plus a few external actors drawing on the CCC’s analysis to hold those ministries to account. It charts a course not because it’s empowered to do so, but because it’s a place where a lot of ideas get digested and then injected into the public discourse with some credibility. Of course, that kind of vision isn’t enough. You need a strategy-setting body, but that has a much more complex analytical task.

    Another feature of such a state would be putting an end to what are currently siloed ministries, be they transport, or agriculture, or water usage or what have you. These departments need to work together. Take transport, for example: building transport infrastructure relies on a combination of urban planning and technology, plus, importantly, behavioral shifts. All this can’t just be dumped in the lap of a national transport ministry. In countries that are federated, it’s even more complex, and you have to also think about relationships between federal and provinces.

    Given all this, how do you develop mechanisms to coordinate? One way to do it is around existing epistemic communities. In the US, these take the shape of climate “task forces.”

    It is important to realize that there will be winners and losers as a result of these low-carbon transitions. Big shifts are on the horizon: phasing out the internal combustion engine, for example, means a whole new set of economic actors coming in around battery technologies and manufacturing. Land usage is bound to change, which is tied to powerful political interests. In the wake of Covid, there is also a shake-up of commercial real estate. How can these distributional conflicts be negotiated? 

    Some countries do a better job of this than others. South Africa has a deliberative tradition coming out of the post-apartheid era that can be used to work through thorny questions. In South Africa, the future of their electricity-mineral complex Eskom needs careful discussion. If it is to be dissolved, how is that going to happen in ways that bring labor unions along? South Africa’s Presidential Climate Commission has been a really interesting experiment.

    This returns us to earlier debates about varieties of capitalism. How does the nature of the capitalist enterprise in different countries make it easier or harder to make the green transition? In each case, one needs to start with the historical institutions that already exist, whether it’s corporate structures or forms of voting, first-past-the-post systems or proportional representation.

    TS: Developing countries at COP28 have pushed hard to get financing for a Global Goal on Adaptation. Adaptation to extreme climate, unlike energy transition, is not going to make anyone money. It requires a lot more grants, as everyone seems to agree. Has the political economy of adaptation gotten enough attention or is it just assumed that governments have an obligation to save citizens’ lives?

    ND: It is, I think, under-baked. Adaptation is distinct from loss and damage which received a political fillip at the last COP. Adaptation is, in many ways, conceptually much more complex than mitigation, which can be measured with an emissions trajectory. You can’t measure your progress towards adaptation using a single metric. You have to build a more resilient economy and society.

    The message coming  from the North is, we’re reasonably happy where we are, so we want to have systems that allow us to bounce back in the event of climate extremes. In the developing world, you already have massive loss and damage from floods, from weather events, and so on. It’s not about bouncing back, but about developing and building economic and social systems in ways that make it more resilient to both non-climate-triggered and climate-triggered shocks, understanding that one exacerbates the other. 

    To bring it back to the question of state capacity: it’s imperative to anticipate areas of vulnerability upfront. You might have to rethink your entire pattern of what, in India, we call minimum support prices for agriculture. Which crops are you supporting and therefore incentivizing? India’s Council of Agricultural Research has done good work on identifying climate-resilient crops. The government typically incentivizes rice and wheat, and there’s a big push towards incentivizing millets, which are more resistant to weather events.

    Similarly, water resources planning is going to be huge for South Asia going forward. There’s an existing debate about surface water versus groundwater, about so-called river interlinkage projects, whether large storage structures like dams make sense or not in the context of heavy rain runoff. All these developmental questions are inflected with a climate imperative, and part of that is the coordinating story I talked about earlier. 

    There are, to use the terminology of  my colleague Sharad Lele, multiple stressors and multiple objectives. The multiple stressors—in addition to climate change, you have land use, industrial usage, urban patterns, and so on— are currently dominating, though they will soon be surpassed by the climate tipping points. The multiple objectives carry over from mitigation, things like job creation, urban livability, and so on. This, and the question of adaptation, implicitly raises important questions: What kind of development do you want? What kind of economy and society do you want to build?