Category Archive: Interviews

1. The Nakba and the Law

   August 21, 2024 6:01 pm Comments Off on The Nakba and the Law

   In the international legal system, the Palestinian cause has made significant headway since the start of the war in Gaza. In addition to legal processes that have arisen from Israel’s conduct in the war itself—it stands formally accused of genocide at the International Court of Justice (ICJ), and Israeli leaders including prime minister Benjamin Netanyahu face the prospect of arrest warrants for war crimes and crimes against humanity committed—the so called rights-based approach to Palestinian self-determination has picked up steam. In under a year, nine new nations have announced formal recognition of Palestine, and last month the ICJ issued an advisory opinion declaring Israel’s occupation and settlement of Gaza, East Jerusalem, and the West Bank illegal.¹ These developments advance the notion that a Palestinian state exists de jure, albeit under belligerent occupation by Israel.

   From the perspective of Palestinian liberation, the rights-based approach has significant advantages over the paradigm it is overtaking: the Oslo framework whereby Israeli and Palestinian representatives negotiate under American oversight toward the establishment of a future Palestinian state. These bilateral negotiations have consistently failed because of the profound power asymmetry between the parties and the partial role of the US as broker. By turning to international legal frameworks and institutions to make claims towards a resolution, the rights-based approach avoids such roadblocks.

   But the legal approach has its own shortcomings. By assuming the logic of partition, ongoing efforts within existing legal frameworks overlook the foundational violence of Palestinian dispossession and displacement dating back before the onset of Israel’s occupation in 1967. Responding to these limitations, in a recent law review article, Palestinian legal scholar Rabea Eghbariah has introduced Nakba as a new legal concept to capture the precise harms inflicted upon the Palestinian people. (The article, “Toward Nakba as a Legal Concept,” drew the ire and censorship of legal academics and administrators from Columbia Law School, as an earlier version had at Harvard; it was eventually published by Columbia Law Review in Spring 2024.) As an attorney and as a researcher, Eghbariah works on restrictions on the civil and political rights of Palestinians, and is completing his doctoral studies at Harvard Law School. Phenomenal World editor Jack Gross and attorney and writer Dylan Saba spoke to Eghbariah about Nakba and Palestine in international law.

   An interview with Rabea Eghbariah

   Jack gross: Let’s start with a foundational question. What is unique about the Palestinian experience vis a vis international law?

   rabea eghbariah: There are two ways to think about this. One is a point of uniqueness, and one is a point of salience—what might not be unique, but becomes particularly vivid in the case of Palestine. There is of course a lot that is unique about Palestine historically, but my work is also about demonstrating that the international legal structures implemented in Palestine are part of the broader international legal system and the colonial hierarchies that it produces more generally. It’s a place to see them in their starkest form. 

   There is a century-old history now of the Palestine question. It can be traced to different origin points, but one key point of reference is the 1917 Balfour Declaration, when the British administration officially committed to advance a “national home for the Jewish people” in Palestine. From there, international law became the framework that incubated Zionism in Palestine through the mandate system. A unique aspect of Palestine under this system is in it being the only place, out of all that were classified and incorporated by the Mandate commission, to be endorsed and developed as a settler colony. 

   The mandate system was a League of Nations system.² Within it, different nations were classified as Class A, B, or C Mandates. Palestine was a Class A Mandate—which meant that it was, quote unquote, the closest to civilization and self-administration, from the point of view of the classifiers. The Balfour Declaration was issued in 1917, five years of military rule followed, and the British Mandate of Palestine was formed in 1922. 

   Zionism and British colonialism worked in tandem under the mandate system. Anyone can find this embedded and codified throughout the entire text of the British Mandate for Palestine. Article 7, for example, contains the only mention of the word “Palestinian,” referring to provisions for the acquisition of Palestinian citizenship by Jews. The resulting system follows this logic, erasing 94 percent of the population by negatively defining them simply as the non-Jewish communities of Palestine, and grants supremacy to Jewish national claims to the land. The Mandate is meant to facilitate both the immigration of Jews to Palestine and the development of  Zionist self-governing institutions, while suppressing or denying the same for Palestinians. 

   This all of course predates 1948. It is the precondition of the Nakba, the establishment of a system that denied self-determination and made it impossible for Palestinian people to establish self-governing institutions. And it was clearly stated as such. Balfour would explicitly write in a letter to Prime Minister David Lloyd George, “in the case of Palestine we will deliberately and rightly decline to accept the principle of self-determination.”³ 

   The Mandate established the international legal infrastructure that sets the scene really for what is happening here in Palestine. 

   We’re talking about a settler colonial project advanced through international legal institutions that culminates in the 1948 Nakba. Leading to that point, international law reasserted itself with the partition plan. After the 1936 Arab revolution against the Mandate, the British were essentially looking for a way out, and following World War II, the British decided to delegate the Palestine question to the newly assembled United Nations (UN). The UN dispatched a committee to report on Palestine, and it set forth two competing visions: a minority vision for a single state, and a majority in favor of partition.⁴ The majority, which of course won the day, contains a lot of explicitly racist language, arguing Palestinians are too backward to be granted the right to self-determination, and so on. This colonialist language was still very influential in 1947 and informed the ways in which the international community dealt with Palestine. 

   dylan saba: How do you understand the fact that partition—both a kind of colonial strategy and a legal technology—won the day?

   re: Partition is a mechanism developed in the course of colonization. The British used it first in Ireland, then in the Indian subcontinent. It was understood as a kind of solution and a form of decolonization—answering, through these measures, questions of nationhood—but of course, in each instance, it violently entrenched the legacies of colonialism. In the case of the Indian subcontinent, this meant a large, violent population transfer—tearing up the territorial integrity of the land, transforming the range of political identities imaginable, and suppressing Kashmiri self-determination.

   In Palestine, partition cast the Zionist settler colonial project as a “conflict” between two competing nations rather than one of between a settler society and a colonized people. The concept of partition has also entrenched the Zionist logic of an exclusivist Jewish identity that must be bifurcated and separated from Arab and Palestinian political identities. The two state mantra goes back to this premise of partition.

   Once the logic of partition was adopted in Palestine, it necessitated denying Palestinian self-determination and fragmenting the territorial integrity of the land to install the Jewish state on top of it. The recommendation of the UN Special Committee on Palestine (UNSCOP) in 1947 was to give 56 percent of Palestine to the future Jewish state, at a time when Zionists in Palestine held only 7 percent of the Mandate’s total land area. The report’s authors acknowledged that the recommended 56 percent included the most fertile lands while the other unit, namely the future Palestinian state, would perhaps be economically unviable or require continuous international aid to sustain it. Of course the Palestinians rejected it, and it is important to recall that Palestinians continued to articulate political visions that defied partition and offered alternative political horizons even after 1948.

   Partition, however, was never implemented in Palestine in its original form but rather birthed the 1948 Nakba and entrenched a brutal system of domination, fragmentation, and denial of self-determination ever since. The UN Partition Plan, adopted in November 1947, paved the way for the conquest of 80 percent of Palestine by Zionist militias and the displacement of over 750,000 Palestinians from their homes between 1947–1949, never to be allowed to return. Zionists used partition as a pretext to carry out this Nakba. As Ben-Gurion himself put it: “We presume that this is only a temporary situation. We will settle first in this place, become a major power, and then find a way to revoke the partition… I do not see partition as a final solution to the Palestine question.”

   The term Nakba emerged to describe this radically violent transformation of Palestine from an Arab-majority territory for over a millennium to a self-proclaimed Jewish-state that is built on top of Palestinian destruction. In the aftermath of 1948, the Nakba also reflected an Arab problem unfolding in Palestine, rather than a Palestinian problem projecting itself onto the Arab world. The making of Israel in Palestine meant the rupture of the territorial continuity of the Arab world, and therefore reflected the crisis of the Arab nationalisms. Seventy years later, Palestine is exceptionalized, the Arab world has been further fragmented, the project of Arab nationalism has declined, and Arab governments in the region perceive Palestine as something they need to manage. 

   jg: In your paper, you describe a historical episode that is illustrative of how international law has attempted to grapple with the specificity of the Palestinian experience—attempted to use concepts to understand and act in the wake of atrocities. In a report following the Sabra and Shatila massacre in 1980, chaired by Sean MacBride, a group of international lawyers debated the utility of the genocide concept and whether it was appropriate to account for that violence. 

   re: The MacBride report is very valuable just in how it exhibits a process of thought. The authors are writing a report concerning the Israeli invasion of Lebanon, and are confronted with the question: Why are the Palestinian people in Lebanon to begin with? In trying to understand the massacre at Sabra and Shatila of 1982, they come to the conclusion that what is happening in Lebanon is tied to what’s happening concurrently in the rest of Palestine—and the forms of governance and domination are connected. So they look for a framework that will allow them to capture these two locations. 

   In need of a framework to capture this totality, to link these different coordinates, they expand the concept of genocide. That is, they experiment with what the term genocide is and what it can include. They cite Lemkin and take notice of how Lemkin talked about cultural genocide. They consider how “cultural genocide” could be incorporated into the legal concept of genocide. They try to expand the doctrine, but ultimately reach an impasse. There is a majority opinion that says this is genocide, and a minority opinion dissenting with this view based on the notion that genocide requires special intent. Now, the massacres of Sabra and Shatila undeniably are genocidal—and there is the UN resolution declaring them as acts of genocide in 1982. But the MacBride report authors can’t agree on what genocide is, so they end up recommending to establish an international committee that will look into the concept of genocide as applied to the Palestinians. That’s the only path to a unanimous recommendation. 

   Another illuminating parallel in comparing then to now is the rhetoric. The motto to “eliminate Hamas” is today’s pretext for genocide, whereas the slogan for the genocidal massacres back in 1982 was to “eliminate the PLO.” The report on Sabra and Shatila illuminates both how the Palestinian experience has intersected with genocidal violence over seventy-six years, and at the same time, the limits of existing concepts to capture the totality of the Palestinian experience.

   In the article, I argue that we need to use Nakba to name the crimes against the Palestinian people. Just as the Holocaust introduced the crime of genocide and the South African experience introduced the crime of apartheid into the international legal vocabulary, the Palestinian experience has the potential to introduce the crime of Nakba to international law. 

   It’s understood that international legal crimes pertaining to groups have always overlapped—the Holocaust, for example, included practices that we can easily identify as apartheid. Still, we distinguish between these concepts because we understand that, despite this overlap, the foundational violence that defined the Holocaust is extermination, whereas the foundational violence that defined Apartheid is segregation. So if we look at the Palestinian experience and ask what is the foundational violence that defines the Nakba, we will realize it is displacement. 

   But the Nakba never ended, and its foundational violence of displacement has birthed a structure of fragmentation that serves to deny Palestinian self-determination. The Nakba concept aims to be attentive to this ongoing displacement, fragmentation, and denial of self-determination—the distinctive nature of what Palestinians have undergone for the past century.

   ds: You write about fragmentation in your article. It’s clear from your argument that the legal regime in Palestine—the territorial fragmentation, the various legal statuses conferred onto Palestinians from different areas on the map—are downstream from partition’s initial intervention. Even Jewish nationalism, now codified in Israel’s 2018 Nation-State Law, is part of that fragmentation from partition. When we look at the Mandate system, we see how the international legal system served the interest of colonial powers and the nascent Zionist state. But it’s less clear, today, given the extraordinary power imbalance between Jewish Israelis and Palestinians, what the purpose of fragmentation is. To put it bluntly: why not just dominate? Why create all these intricate systems? 

   re: It is plainly domination by fragmentation. The more fragmented the group is, the less it has the ability to govern itself or resist as a group. Fragmentation creates a coordination problem. There exists an extremely sophisticated system of domination that classifies Palestinians into different legal statuses and ID systems, so that each sub-group becomes defined by its own struggle. As an initial mapping, there are five main legal statuses for Palestinians: Palestinian citizens of Israel, residents of East Jerusalem, residents of the West Bank, residents of Gaza, and refugees or diasporic communities. Each status has an internal dynamic of control, domination, and relative legal privilege. It’s divide and conquer reversed, first was the conquering and after was the dividing. This mode of governance creates Palestinians with greater legal privileges than others, subsets from whom the occupation can extract different functions, tiered labor pools, and so on. On a very basic level, this is the same logic and aim at work when Benjamin Netanyahu promotes political divisions between Gaza and the West Bank. 

   On the question of domination by fragmentation, it’s helpful to think of this system as having been constructed over a period of over seventy years, whose origin point is partition, namely, a supposedly binary case of fragmentation. But over time this origin point leads to a more layered system of fragmentation, given that in 1967 Israel also conquered the remaining Palestinian lands. What do you do with all these people that you’ve conquered? They’re now, properly speaking, subjects of your regime, but you can’t make all of them citizens, because that will sabotage the project of maintaining a Jewish majority. Palestinians index a problem for the Zionist project, which is that the mere existence of Palestinians challenges and disrupts the system, and so it evolves with each step aiming to further fragment, control, and govern that existence. This system of control is structured by legal classifications that determine the socio-legal status of each Palestinian in the system.

   ds: What you’ve identified as fragmentation is a principal political barrier for Palestinian liberation, and elaborating this problem is important. I’m curious how you see the role of developing this legal concept of Nakba. Is it to name the political horizon and to reaffirm a struggle against fragmentation? Is it about external pressure, galvanizing international advocates so that they may correctly name the form of domination? What is the function of legal scholarship in addressing problems that are unsolved during historical circumstances that are unfolding?

   re: To address your first question, I would say you’re absolutely right: unity and fragmentation are forces that co-produce what Palestinians are today. Different junctures in time make manifestations of unity or fragmentation more salient. In 2021, for example, the protests against the ethnic cleansing of Sheikh Jarrah expanded swiftly to manifest in a unity of Palestinians between the Jordan River and the Mediterranean Sea. This popular uprising was therefore dubbed the “Unity Intifada.” The genocide in Gaza, in contrast, has uncovered the forces of fragmentation more clearly. Each sub-group of Palestinians has faced an entirely different material reality that reflects the depth of fragmentation. Still, it would be a grave mistake to think of this fragmentation/unity in binary terms. The forces that drove the Unity Intifada are really always at play. At the same time, Zionism’s driving mechanism is the ever-expanding fragmentation of Palestinians. The Nakba concept articulates this dialectic, and how Palestinian existence is defined by the interplay between imagined unity and material and legal fragmentation.

   Now, as to your next question, why should we even try to make this concept? Is it just purely an intellectual exercise? What I can say is that we are observing a moment where there is urgency in the language we use. I think what I’m trying to do is to offer a diagnosis that addresses the root cause of the problem. There is a risk that, if confined to a certain subset of the Palestine question, the question of genocide may exceptionalize Gaza. The Palestine question becomes the Gaza question, and the Gaza question becomes the genocide question—as if this were unrelated to what’s happening in the West Bank, to what’s happening in ‘48, to what’s happening in Jerusalem, or to what’s happening in refugee camps. There is a fundamental injustice that has been unfolding for the last seventy-six years. Developing a distinctive concept of Nakba—as was done in the past, iteratively, for genocide and apartheid—grants us the language to talk about this fragmentation and domination in all its totality. 

2. Coalition Rule

   August 16, 2024 2:23 pm Comments Off on Coalition Rule

   India’s Lok Sabha elections in June ended a decade of single-party majority rule for Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP). With the BJP winning 240 seats, down from the 303 they won in 2019 and short of the 273 needed for an absolute majority, the ruling party must now rely on its regional allies in the National Democratic Alliance (NDA) in order to govern. While the elections have been considered a setback for Modi, the BJP still won twice the vote share of its next-largest competitor, the Congress Party. And importantly, Modi’s reelection as prime minister marks only the second time in India’s history in which a ruling party has been elected to a third consecutive term.

   Critical questions remain for India’s central government over the next five years. How will the BJP’s new reliance on regional allies shape—or constrict—its political agenda? What is the future of the party’s Hindu nationalist agenda—central to the 2024 campaign, especially after Modi presided over the inauguration of the Ram Temple on the site of a destroyed sixteenth-century mosque? And what will be the impact of a revived national opposition in the Lok Sabha, led by Rahul Gandhi of the Congress Party?

   We spoke to Rahul Verma to discuss the early days of the new coalition government, and how political developments since the election will shape Indian democracy in the near- and medium-term future. Rahul Verma is a Fellow at the Centre for Policy Research and a Visiting Assistant Professor in political science at Ashoka University. His research explores voting behavior and party politics in India, and his 2018 book, co-authored with Pradeep Chibber, Ideology and Identity: The Changing Party Systems of India, examines party formation and multi-ethnic politics in India. This interview has been edited for length and clarity. 

   An interview with Rahul Verma

   Sanoja bhaumik: It’s been two months since India’s Lok Sabha election, and Prime Minister Narendra Modi must now govern as part of the NDA coalition with other parties. What are the implications of the new NDA coalition for Modi’s government?

   rahul verma: The election results were a surprise. Exit polls had predicted a landslide for the BJP-led government. While some gains for Congress were predicted, few expected that they would reach almost 100 seats. It’s important to note that from his time as the Chief Minister of Gujarat to his tenure as the Prime Minister of India, Modi has never run a coalition government. One may call the BJP-led government in 2014 and 2019 an NDA government because there were allies, but those allies did not have a significant bearing on government formation. As the BJP has lost a significant number of seats from 2019 and is now running a coalition, multiple pressure points have emerged, and they will continue to have a bearing on the government. 

   First, between 2019 and 2024, it seemed like Prime Minister Modi and Home Minister Amit Shah were in total control of the party. They called the shots. But at the same time, to some extent, we are likely to see a much reduced imprint of Modi and Amit Shah—such as in the choice of Chief Ministers, the next BJP party president, among others. I don’t think this would have occurred if the BJP won the majority. 

   Second, I think there are going to be some pressure points that will emerge from the larger BJP ideological family. Over two terms, and especially from 2019 to 2024, Prime Minister Modi was able to create a new ideological arc in India’s political landscape. Many of the demands of the Hindu nationalist Rashtriya Swayamsevak Sangh (RSS)-BJP—which has been there for the last seventy-five years—were fulfilled: the abrogation of Article 370 that granted autonomy to Jammu and Kashmir, the construction and inauguration of the Ram Temple in Ayodhya, the Citizenship Amendment Act (CAA) and the National Registry of Citizens (NRC), and a debate on a uniform civil code. But now, we’ve seen RSS chief Mohan Bhagwat and certain leaders within the RSS-BJP ideological fold making comments about the BJP becoming overconfident, not listening to workers, and so on. I don’t think anyone in the RSS-BJP questions the ideological commitments of Modi. But I do think there could be disagreements around the concentration of power within the hands of Modi and Shah, and questions around a government that’s largely run by the Prime Minister’s office. 

   The third pressure point, of course, is that the NDA coalition needs allies to run the government, and it also needs help outside the alliance to be able to pass any bill in the Rajya Sabha (the upper house of Parliament), where the current NDA alliance does not hold a majority. 

   Fourth, we’ll see a much more aggressive opposition, both within the House and in civil society, as opposition numbers and strength have increased. This is what we’ve seen in the recent budget session, where the opposition took the government to task on many issues. Before, you didn’t have an official leader of the opposition in the Lok Sabha. Now that leader is Rahul Gandhi. I also think you’ll see more voices from media and businesses, which were perhaps not as vocal in previous terms.  

   However, we must remember that the BJP is the anchor of the new coalition. The party won 240 seats, one of the highest proportions that any coalition anchor has won in the past twenty-five years. The party has insisted on projecting an image of continuity—“business as usual.” They may have lost some seats, but that’s what comes with ten years of incumbency. At the top level, most ministers have remained unchanged from the previous government. There are fewer new faces than expected. Although there were rumors that the BJP would have to give certain key portfolios and positions to allies—like the Lok Sabha speakership—this hasn’t been the case.

   This is also not a historical anomaly. Throughout Indian history, it was only Prime Minister Jawarahal Nehru who returned a third consecutive time in 1962. And when you step back and look at the global picture, incumbents are facing serious challenges all around the world. Some aspects of this story are therefore not exclusively reflective of the state of the BJP or its policy history.

   Sb: Who are the main actors in the NDA coalition?

   rv: In India, you need 273 seats in the Lok Sabha to reach a majority. The BJP has 240, and the two largest allies are the Telugu Desam Party (TDP), led by Chandrababu Naidu from Andhra Pradesh, which has sixteen seats, and the Janata Dal-United, led by Nitish Kumar of Bihar, with twelve seats. There are also smaller parties with one and two seats each, bringing the current NDA tally in the Lok Sabha to 293. In that sense, both Chandrababu Naidu and Nitish Kumar are extremely critical to the BJP’s survival as a government.

   Both politicians have been in and out of the BJP alliance for the last twenty-five years, even before Narendra Modi came onto the scene as prime minister. Their ability to shift between party alliances also points to their political opportunism and ideological malleability.

   Nitish Kumar was earlier part of the Vajpayee-led BJP government between 1998 and 2004. He first quit the BJP-led alliance in 2013, and over the past decade, he has moved in and out of the alliance multiple times. Ideologically, Nitish Kumar is a vocal supporter of caste census—a nationwide survey of household caste status which would have large implications for the nation’s affirmative action and caste-based reservation policies, which in part draw on the last nationwide caste census undertaken during the British Raj in 1931. Kumar conducted a caste census in Bihar, which found that dominant castes comprised only 15.5 percent of the total population, thus intensifying demands for increased reservations for marginalized castes in the state (reservations currently account for approximately 50 percent of government jobs and seats at public universities). The BJP remains non-committal on the issue, as its Hindu nationalist ideology aims to surpass caste divides through a unified Hindu identity. 

   Kumar’s Janata Dal-United has been in power since 2005, promoting a vision of “growth with justice” in India’s poorest state. In his first six years in power, he managed to create a very positive image of development and governance. The social base of Kumar’s party comes from lower castes—mostly numerically smaller jatis within the Other Backwards Castes (OBC) and scheduled castes (SC).  His party in its earlier avatar did rely on a substantial chunk of Muslim voters. That no longer seems to be the case, since he is in alliance with the BJP, which has very low support from Muslim voters given the party’s Hindutva ideology. But Kumar does make on-and-off statements posturing on the question of secularism. In fact, he was one of the prime movers of the opposition alliance in 2022 around state assembly elections in 2023. But in December 2023, he decided to walk out of the opposition alliance over some internal differences. The BJP had great results in that month, where they won in Chhattisgarh, Madhya Pradesh, and Rajasthan. In Kumar’s own calculation, he might have bet that the BJP was likely to come back to power. 

   It’s a similar case with Chandrababu Naidu, who has pursued a pro-development, pro-liberalization, increasingly technocratic government in Andhra Pradesh. Like the Janata Dal-United, the TDP has also moved in and out of the BJP alliance for many years. The TDP was part of the BJP-led government under the Vajpayee regime and allied with Modi in 2014. But in 2018, the TDP walked out of the alliance over the issue of giving special status to Andhra Pradesh, which would entail financial assistance and incentives for development from the Centre following state bifurcation and the loss of Hyderabad to Telangana in 2014. In this election cycle, Naidu had been desperate to forge an alliance with the BJP from August 2023, likely due to the party’s recent electoral successes. Modi, in turn, signaled an alliance with Chandrababu Naidu very late into the campaign season.

   The allies may have greater weight and influence in the coalition government than before, but one has to remember that each of these parties came into the BJP fold when the party seemed invincible—the end of 2023 and the start of 2024, especially with the inauguration of the Ram Temple. At this time, it seemed that the BJP would even improve on its 2019 seat share. So the allies walked into the BJP camp knowing the BJP’s ideological position around Hindu nationalism. 

   While ideological differences could be used as a pretext for leaving the alliance, I don’t anticipate we will see huge disagreements in this regard from the allies. But I do think we’ll see more concerns voiced from these parties. For example, the Kanwar Yatra religious pilgrimage is taking place in North India, and the government in Uttar Pradesh (UP) passed a law that any eatery on this route would have to display the names of the owners and their religion. Many allies expressed dissatisfaction with this policy, and the Supreme Court later rejected it. These are the types of disagreements that may come up. Some allies like Kumar might voice concerns over the caste census, but at the end of the day, they know what they’ve gotten themselves into when it comes to the NDA coalition. 

   Sb: How has the opposition—and in particular the Congress Party, fared after the election?

   rv: The Congress Party has experienced a revival in this election. The Congress-Samajwadi party alliance in UP in particular did the maximum damage to the BJP, which had tried and failed to repeat their past performance in the country’s most populous state. 

   The opposition effectively pushed back against the BJP’s narrative on development and India’s rising image globally, instead centering their own narrative with questions of unemployment and economic anxiety. They used the BJP’s clarion call of Abki baar 400 paar (“We will get more than 400 seats in the parliament”) to stoke fears about the ruling party’s desire to change the Constitution and take away reservation benefits from lower castes if they received a majority. The opposition was also able to reap the benefits of any anti-incumbency sentiments. 

   What happens going forward will depend on the actions that the government takes. How many mistakes will the government make? Will the opposition be able to mobilize people on the ground for these issues? Looking at the past decade wouldn’t give you much confidence about the opposition’s ability to take advantage of the BJP’s mistakes. But I think the last four months paint a very different picture—things have changed significantly since the start of the year. Part of the opposition’s gains were taking advantage of the BJP’s mistakes, their overconfidence which reached a level of hubris. The BJP attempted to cast a sort of psychological domination, saying they would win over 400 seats, indicting opposition leaders with charges of corruption until they joined the BJP, and finally, arresting two sitting chief ministers—Hemant Soren of Jharkhand and Arvind Kejriwal of Delhi. These moves created a sense of unease in an important segment of the population, and the opposition was able to capitalize. 

   Sb: The Union Budget for 2024–2025 was released in late July. What are your initial thoughts on the budget proposal? Does it reflect some sort of response to the election results?

   rv: I’m not an economist or someone who tracks the budget for a living, but my political reading is that you could see the implications of the 2024 elections in the budget. Firstly, the two allies’ states—Andhra Pradesh and Bihar—received special packages in tens of thousands of crores of rupees. In some ways, the budget is placating these allies, who made some demands to ministries that were not given. Instead, they received a very substantial allocation in the Union Budget to pursue developmental projects in their states, such as the development of Andhra Pradesh’s new capital in Amaravati and road projects in Bihar. 

   The budget also demonstrated that within the government, there is a realization that unemployment and economic anxiety are serious issues. As an example, the proposal allocates money for an internship program to equip students for the job market. But overall, there wasn’t a huge shift in favor of welfare schemes—the government hasn’t suddenly become more populist. Budgets are political documents in a certain way, but the government is still projecting the message to industry, business, as well as the larger electorate that not much has changed. The BJP remains fiscally conservative and on the side of fiscal consolidation, with more allocation for capital expenditure. 

   In this budget session, we’ve seen several speeches from the Congress Party and other opposition leaders cornering the BJP. Rahul Gandhi spoke about the caste census and bringing in more representation of marginalized groups. Abhishek Banerjee of West Bengal’s Trinamool Congress (TMC) accused the speaker of being partial towards the government, especially around allegations against opposition leaders. These interventions indicated the nature of the political shift that has followed the 2024 results. The relationship between the Treasury and opposition bench has changed—first because of the size of the opposition contingent, and second because of the renewed confidence in the opposition camp. 

   Sb: Over the past decade, and in the past five years in particular, the BJP has faced significant criticism for its authoritarian tendencies. Do you think the coalition government will lead to a shift?   

   rv: What we had between 2014 and 2024 was a single-party majority government. That was different from what most of us had seen in our lifetimes from 1989 to 2014, where we had coalition governments. Even if we had a big Congress Party government between 1991–1996 or 2009–2014, these regimes were largely dependent on allies, so they were more “give and take” compared to the BJP. But Modi’s BJP also had a tendency of unilateralism, where those at the top would make decisions and move ahead without a consultative process. There was mutual animosity across the aisle. The opposition doesn’t trust the Treasury, the Treasury doesn’t trust the opposition. Between 2014 and 2024, there was a greater polarization at the top compared to the past, and I think the government should bear the larger blame for this polarization. At the end of the day, it’s their responsibility to run the house. Now, I’m not sure if this will change, but I think the changes will be minor to begin with, especially given that the government has projected the message of “business as usual.”

   Nonetheless, politics continues to be dynamic. Every three to six months, the balance of power within the pressure points I highlighted will change. In a few months we’ll have assembly elections in Haryana, Maharashtra, Jharkhand, and Jammu & Kashmir—states which look very difficult for the BJP. If the BJP doesn’t do well, then the perception of power slipping further away from Modi and Shah will become slightly stronger. But if they can turn things around and win more than two states, then the opposite would occur. 

   Of course, the balance of power doesn’t only depend on electoral results. It’ll also depend on the reactions to any government scheme or policy measure. If you have a scheme like three Farm laws, stemming from a unilateral decision that spurs anger on the ground, then I’m not sure that the BJP has the political capital to deal with uprisings as they have done in the past, especially between 2019 and 2024. 

   Sb: The Ram Temple inauguration back in January was viewed by many as the launch of the BJP campaign. What do you think the election means for the future of the RSS-BJP Hindu nationalist project?

   rv: I think there has been a significant shift in India’s political culture. The BJP has seen a setback, but if they continue to lose election after election, then that’s when we’ll see a different trajectory in the BJP’s ideological project, which saw some success over the past ten years. But if the BJP manages to correct course, then you would see another trajectory. This will also depend on how long the coalition government survives. Will they manage to complete a full term? What if the government calls for a snap poll? Will Modi lead the BJP in the next election, or would he step aside? What kind of succession battles will we see within the BJP, and what impression will the RSS have? These all will shape the future of BJP’s ideological project. And let’s remember that the RSS completes one hundred years in 2025—an important marker for their expansion efforts to claim India as a “Hindu rashtra”—a Hindu nation. For them, it is important for the BJP to be in power at that time.

   The bigger challenge will not come only from the electoral side, but also from the economic front. I don’t think anyone has easy solutions to the issue of poverty and unemployment. Then we also have challenges on the governance front, especially around regional imbalances in  growth, as well as tensions around “law and order.” There are certain regions where the BJP is weak and the opposition is strong, but the balance of power between the states and center has changed drastically over the last ten years in favor of the central government. 

   Finally, the most significant challenge for the BJP is ideological and organizational. They’ve fulfilled some of the demands that have been there for decades. Now, what new version of this project will they put forward, and what traction will it get from the general public? In the past ten years, the party has inducted hundreds of leaders from opposition parties, and many of them may not share BJP’s ideological project. What if they start raising concerns once the party weakens electorally? These are some of the unknowns for the next two to four years. 

   Sb: Do you think this moment constitutes some sort of regime change or shift in India’s party system overall?

   rv: I am trying to write a paper on the same topic, which is whether 2024 signals the end of India’s fourth party system—characterized by BJP dominance—or not. The short answer is I don’t know, as there are certain things that are not very clear. For one, the BJP in its defeat has become a much bigger tent in India. While their vote shares have declined by 1 percent or so, and while their seats have come down in comparison to 2019 from 303 to 240, even in defeat, the party has been able to reach some sort of threshold of vote shares in southern states where they were not previously present. Even with their defeat in West Bengal, the BJP remains the principal opposition party, and that’s not going to go away. The BJP managed to win Odisha for the first time. In that sense, the BJP has become a pan-India party, and it is twice as large as the Congress party at this moment—Congress has somewhere around 20 percent of the vote share, while the BJP has around 37 percent, and Congress won 99 seats. The BJP is running the government at the center and in many states. The changes that the BJP has brought to the political culture and ideological map over the past decade cannot be whisked away. A new government won’t be able to transform things overnight. 

   Some of these changes will be permanent. Even if the BJP continues to lose elections, what happened between 2014 and 2024 will have an afterlife. But if the BJP course corrects and returns to power, even in a coalition, this system gains another lease on life. This will all become clearer in the next two to three years. However, the challenges that await the BJP are enormous. The ground beneath its dominance has been shaken. It would require a new thinking on BJP’s part to turn the rising tide. It would be too early to say that defeat in 2024 suggests the end of the BJP-dominant system, because the imprint laid down in the last ten years will take some time to fade away.

3. Selling American Bombs

   August 15, 2024 2:48 pm Comments Off on Selling American Bombs

   Martin Luther King once called the United States government “the greatest purveyor of violence in the world.” That formulation may be controversial, but no one denies that the US is by far the world’s biggest arms dealer, with a 42 percent share of the global arms export market.   

   Since the Cold War, Congress has passed various laws to govern the sale and financing of American weapons and humanitarian aid to foreign states. These laws, which have changed with the wars and conflicts of the intervening decades—and with the balance of powers in and between the Congress and the White House—impose limitations and notice requirements on certain kinds of transfers. 

   Since October, arms transfers have become one point of tactical conflict over the US’s support for Israel’s genocide in Gaza—by those hoping to end that support and those looking to extend it. This week, months after the Biden administration declared Israel’s still ongoing invasion of Rafah, Gaza’s southernmost city, to be a “red line” for the US, Congress was notified of a new $20 billion arms sale to Israel. Meanwhile, Palestine solidarity activists have demanded that Vice President Kamala Harris, the Democratic nominee for President, endorse an end to such transfers altogether to compel Israel to end the war. In response, the Harris campaign clarified that Harris “did not support an arms embargo on Israel,” a statement which constitutes “one of her first firm policy positions.”

   To understand the mechanics of the US role in supplying weapons and military equipment to foreign governments, Phenomenal World contributing editor Tim Barker and writer Dylan Saba spoke with Sarah Harrison, an attorney formerly employed by the Department of Defense’s Office of General Council. Among other roles, Harrison specialized in DoD humanitarian assistance, foreign disaster relief, the Leahy law, Women, Peace, and Security issues, and African affairs. She is currently a Senior Analyst at the International Crisis Group.

   An interview with Sarah Harrison

   DYLAN SABA: What happens when the US makes an arms transfer? What is the chain of decision making across the President, the Congress, the Defense Department, through to the delivery of weapons?

   SARAH HARRISON: There are two legal categories that determine the course of an arms transfer, which depends on the type of purchase: whether a country is purchasing equipment from a private company versus equipment from the US government. The latter is classified as foreign military sales, or FMS. The former is a direct commercial sale, or DCS.

   For foreign military sales, a country can purchase arms or defense articles (broadly, military-type equipment) using its own money or through foreign military financing, the acronym for which is FMF. FMF, generally speaking, is US-granted security assistance.

   A lot of people are familiar with the fact that Israel receives from the US the most foreign military financing of any country in the world—close to $4 billion a year. Of the $3.8 billion that Israel annually receives, most of it is foreign military financing, which is used to purchase US-made weapons through foreign military sales. In April, Congress passed an even larger amount, as part of a big international security package with transfers to Ukraine, Israel, and Taiwan.

   Once a request for a sale is made, there’s an internal review process in the State Department, which approves FMS cases, and DoD’s Defense Security Cooperation Agency (DSCA) oversees and executes the cases. This interagency process can be coordinated with the White House, but they are rarely involved in every sale to every country—different administrations have different policies regarding which sales get flagged.

   Once the request is approved by the State Department there is, for certain major arms sales to most countries, a legal requirement in the Arms Export Control Act (1976) that the Executive branch notify Congress thirty days prior to issuing a letter of acceptance allowing the sale to formally move forward.¹ 

   That thirty day period is the time in which Congress can act if they want to prevent a sale from happening. But for NATO allies, Israel, and certain other major partners of the US, that window is actually fifteen days. (“Ally” in this context specifically means a country that the US has a defense pact with, so Israel is typically referred to as a “close partner” in the US government for these purposes. At least that is how we referred to Israel in the Office of General Counsel at DoD when I worked there from 2017–2020.) A formal notification of an arms sale goes to the Senate Foreign Relations Committee, to the House Foreign Affairs Committee, and to the Speaker of the House. Each gets a notification, but in practice, for foreign military sales, the administration usually first has informal discussions with the majority and minority parties in each committee. They call this getting “four corners” approval because it’s the chair and ranking member on the House Foreign Affairs and the Senate Foreign Relations committees—these four give an informal nod indicating they won’t oppose the transfer. Then the executive branch moves forward with the formal notification and the sale, knowing it won’t get held up. There has never been an arms sale that’s been successfully stopped during the Congressional notice period.

   (During the Trump administration, Congress did pass a joint resolution of disapproval—the formal term for stopping an arms transfer—in protest of an arms sale to the United Arab Emirates, but Trump vetoed.)

   The notification process is similar under direct commercial sales, except it all runs through the State Department, which issues the export license to the private company selling the defense articles. Before the State Department issues an export license for that sale, they give the same thirty-day notification to Congress—though that is fifteen days for NATO allies, Israel, and other close US partners. Once the Congressional notice window has passed, the export license can be issued and then the procurement process starts: the company can build the defense article or provide the defense services for that foreign country.

   Congressional notifications are only required by law when sales meet a certain threshold—and these thresholds are higher for NATO allies and major partners.² For example, if there was a foreign military sale with India of, say, $14 million for major defense equipment, Congress would be notified, but that wouldn’t be the case for a NATO member or for Israel.

   DS: What kind of details are getting shown to Congress?

   SH: Congressional notifications include detailed information about the sale, including the recipient country and a description of the amount and types of equipment and/or services that will be provided. Now, if a President wanted to get around this notification period, they could apply the emergency waiver, which requires a detailed description to Congress of the equipment and/or services and the emergency that requires the sale or issuance of an export license in the national security interest of the US. But overall, the institutional culture is that Congress is familiar with the executive’s foreign policy justifications, and they’re the body that set up the legal framework for the US to supply billions of dollars in weapons to other countries—so they don’t, as a body, exercise significant oversight of those arms transfers.

   DS: Do we know how many times Israel has gone through this process since October? And what is, roughly, the total timeline from request to delivery?

   SH: My understanding is that there have been over a hundred transfers since October 7, but most of these, if required, had Congressional notifications provided either prior to October 7 (meaning the procurement process took a long time), or they were transfers that didn’t cross the threshold to require congressional notification, or, as we know for two FMS cases, they received an emergency waiver.

   The timeline question is tricky—there’s no set timeline for FMS cases. It depends on demand, production, and bureaucracy. For example, the production of ammunition has ramped up, but the demand is so high, largely due to the war in Ukraine, that it’s not clear that increased production means ammunition is getting especially quickly to any one country through FMS.

   There are bureaucratic processes that can prioritize cases or countries. A presidential administration could require bureaucrats to hurry up on a certain country if there’s paperwork that needs to be moved. This is possibly what the government means when they say they’re trying to expedite transfers to Israel—it’s getting through that lengthy process to get the approvals completed.

   The President, if he really wants to expedite the transfer of defense articles, can use the Presidential Drawdown Authority, which allows him to reach directly into Department of Defense stockpiles and transfer that equipment. This minimizes the length of time that a country has to wait for the equipment (because it does not have to go through the procurement process), which is what the Executive has mostly done with Ukraine. It’s a broad authority that allows the President to draw on Defense Department stocks anywhere in the world. The Presidential Drawdown Authority is separate from an FMS or DCS case.

   DS: Is that authority also different from the war reserves stockpile, which you’ve written about?

   SH: Yes. While the Drawdown Authority is a broad authority that allows the President to draw on Defense Department stocks anywhere in the world, the war reserve stockpile is set up through an authority provided to the DoD to be able to stock its weapons in another country for use in times of emergency.

   The War Reserves Stockpile in Israel is a DoD stockpile that dates back to the 1980s. It’s physically located in Israel, and the goods that are stored there are available for use by the DoD or transfer to another country. It’s intended for times of war or emergency, but there’s no specific legal requirements on its use. Originally, overseas DoD stockpiles were only allowed in NATO countries, but Congress later expanded the law to include major “non-NATO allies” (a statutory term that confers certain benefits), which includes Israel. 

   The stockpile in Israel has been used to transfer shells to Ukraine, and we know of instances in the past where it’s been used by Israel—notably in the 2006 Lebanon war and the 2014 Gaza war—but there’s no public reporting that they’ve done so since October 7. That’s partly because those transfers, and the implementation policy that facilitates them, are in general quite opaque. (In the 2014 case, for example, the White House was unaware of the transfer until after it happened, despite it being downstream of a $3 million foreign military sale from the US to Israel.) It holds an estimated $4.4 billion value of military equipment, but there is no robust reporting requirement on these stockpiles. In the Ukraine case, there is some evidence that suggests transfer was completed via a request from the US government with final approval coming from the prime minister of Israel—suggesting a significant degree of Israeli control over the stockpile.

   Civil society groups have asked the Biden administration to be more transparent about when it transfers arms, what arms it’s transferring, and what legal authority it’s using, like it does with Ukraine via press releases from the State Department and DoD detailing what’s being sent, how much, and under what authority. Administration officials I and others have spoken with decline extending this practice to Israel. So we don’t know if they’ve used the war reserve stockpile post-October 7, 2023. If a true emergency existed, the president could use the drawdown authority to quickly transfer Defense Department stocks to Israel. 

   But the Defense Department has been concerned about the depletion of its own stocks because of the war in Ukraine and because Congress took so long to provide more money for restocking. Congress finally did so in the significant appropriations bill that I mentioned earlier for Israel, Taiwan, and Ukraine.

   DS: So you mentioned that there’s been no congressional nonapproval of arms transfers to Israel since October.

   SH: No successful stoppage by Congress of an arms transfer ever.

   DS: Does that mean that Israel is getting all of the specific quantities that it is asking for?

   SH: No. It’s my understanding, based on trying to read into what the administration has said, particularly a statement by a general back in March that Israel isn’t getting everything they ask for, that the Biden Administration is not necessarily approving every single foreign military sale request. That is their prerogative. At the same time, they’re definitely not advertising any limitations, or the reasons for those limitations, with the single exception of the 2,000 pound bombs that the President put a pause on—which is of course a drop in the bucket compared to the sheer quantity of defense articles that continue to be sent to Israel.

   TIM BARKER: You’ve talked about the lack of transparency and the various reporting requirements. What is the basic law governing transparency about the arms transfer process?

   SH: It depends on the authority. For foreign military sales, DSCA posts on the website when a congressional notification has been issued for a major arms sale, but we don’t know anything about below-threshold transfers because there is no transparency required. And I think even if DSCA didn’t post the notifications on their website, we might still know about them because members of Congress could let the public know or journalists know about those notifications.

   But, again, those notifications are only for major transfers. It’s possible that there could be an effort to just send a lot of below-threshold defense articles and defense services to another country in order to evade the kind of transparency that comes with congressional notifications. There are human rights groups, civilian protection groups, and groups that promote arms control who advocate for increased transparency in this process. 

   Transparency is specifically dependent on the policy of the executive branch–it is by no means bipartisan. In regards to Ukraine, the Biden administration has demonstrated a well coordinated attempt, both internally in the executive branch and with partners and allies in Europe, to make this process of supporting Ukraine as clean, above board, and transparent as possible. That is unique to this administration. That said, they have chosen not to do that with Israel despite its status as a top recipient of US arms.

   Leaving aside the question of whether they should be sending weapons at all, the executive branch should have the same approach it has with Ukraine with every partner and ally around the world.

   TB: It’s striking how much basic information about arms transfers is only in the public record because of leaks of one kind or another.

   SH: Yeah. The number I cited earlier—that there’ve been hundreds of transfers since October—came from a leak. That’s not something that the executive branch came out first to reveal.

   TB: I want to ask about the arms pause of especially large bombs. What happens when an administration wants to slow-walk arms transfers or use this process as a form of putting pressure on the partner?

   SH: As far as we know, that pause on 2,000 pound bombs is the only time in the war that the Biden Administration has publicly used its considerable leverage. After the World Central Kitchen strike in April, the President responded by making a private phone call to Netanyahu, during which Biden reportedly did not say his policy was changing, but did threaten to change it. After that call, it seemed like there was some kind of quick action taken by the Israeli government to open up some humanitarian access points, even if it was for show, because the White House seemed to indicate it was not going to put up with the killing of international citizens in a humanitarian organization.

   The Biden Administration had already tolerated tens of thousands of Palestinians dying, but this was where Israel crossed a line. This underscored an obvious fact, which is that when you use your leverage you can change the trajectory of a conflict. This President has refused to do much more than that because he feels his administration’s approach to Israel is principled.

   The arms pause reflected some discomfort on the part of the administration with dropping 2,000 pound bombs in places where there were a lot of people. That pause is clearly not as far as they ought to go—rather, it looked more like an attempt to save face, as they have stuck to a dead-end policy. The pause has not done anything to stop the bloodshed in Palestine; the phone call after the WCK strike seemed to be a more effective use of leverage.

   DS: What is the extent of the prerogative of the executive here? I’m presuming that these sales can happen because there’s been an appropriation made by Congress that would cover them. Is that correct?

   SH: The sale of arms can either happen with money the US has given another country—usually foreign military financing, or FMF, as I described earlier—or with money the foreign country has through taxpayer dollars or other means of income. Israel typically uses their FMF, which is $3.3 billion a fiscal year. That money is transferred to Israel in the first month of each fiscal year and sits in an interest-bearing account. Israel has used that interest to pay down debts to the US, but it cannot use the interest to purchase defense articles.

   DS: And this account is for the purchase of American weapons, so to what extent does the prerogative of the executive extend over that? Can the President simply impose an arms embargo at that intervention point, and prevent sales until some condition is met?

   SH: So I think the President’s lawyers would say yes, or they might say, it’s complicated, but here’s a way in which you can argue that you have this authority under the constitution. And I think members of Congress would push back against that and say, no, we hold the purse, we decide when countries receive and can spend US dollars.

   That question has not been litigated or answered in the courts. This question comes up a lot in discussions with lawyers who think about the extent to which the president does have the authority to simply not allow the spending of money that Congress has authorized and appropriated. This sort of happened with Ukraine and the Trump administration, though it was a self-interested quid pro quo as opposed to an attempt at foreign policy-making. Congress authorized and appropriated security assistance for Ukraine if Ukraine met certain milestones. The executive branch eventually determined Ukraine met those milestones and that they should get the assistance.

   But then-President Trump dangled that security assistance as a bribe to solicit information that might hurt his presidential opponent, then-former Vice President Biden. That’s one recent case of the President withholding congressionally approved money, although that was in the context of soliciting foreign interference in a domestic election. But no court has determined the specific context in which the President is constitutionally authorized to withhold funds that Congress has appropriated for security assistance.

   DS: So while there’s an open legal question about the extent of presidential control here, there’s enough authority over this process that Biden was able to successfully change Israeli policy by making a phone call threatening to use this authority.

   SH: Well I think that there were some proposals by Republicans, even after the WCK phone call, to basically say, in statute, that the president can’t have that authority. And I think there’s disagreement on the Hill about where the wiggle room lies within executive branch authority to hold one shipment, two shipments, three, all the way up to all transfers. Some of the disagreement is about legal authority, and some is about the nature of various conflicts—such as instances where the transfer of weapons may not be in the national security interest or where the US might be in violation of its international or domestic legal obligations by transferring such articles.

   DS: On that topic, can you tell us about the Leahy Law, and the provision of the Foreign Assistance Act that regulates countries that are restricting the flow of humanitarian aid?

   SH: Congress already has a legal framework that it has established through statutes to rein in transfers when the executive branch knows of violations of international law. There’s a handful of statutes related to prohibiting arms transfers or the provision of security assistance broadly to countries found violating human rights or the law of war. The main statutes related to human rights are the Leahy laws and 502B of the Foreign Assistance Act, while 620I of the Foreign Assistance Act relates to the provision of humanitarian aid.

   We can just start with the Leahy laws. There are two of them. There is a Defense Department Leahy Law and a State Department Leahy Law. Both of these laws apply to expending US money on security assistance to units of foreign security forces. These laws are very narrow, and only apply to a unit of a foreign security force—not the entire force or entire country. They are triggered when the US government—either the Secretary of State or Secretary of Defense—has credible information that the unit of a foreign security force (this does not include non-state forces, only foreign state forces) committed a gross violation of human rights. If such credible information is available, that unit cannot receive any more granted US security assistance. However, both of the laws have an exception to this prohibition. The State Department exception requires that the unit perpetrators of the gross violation of human rights have to be remediated, which means they have to be taken to court and prosecuted and sentenced. The DOD exception is more watered down than that, but for consistency, the departments have agreed, under a policy memo, to do what’s called a remediation process at the state department standard (i.e., the perpetrators must be prosecuted and sentenced for the exception to apply). Those are the Leahy laws.

   Meanwhile, 502B of the Foreign Assistance Act cuts security assistance to an entire country if there is a consistent pattern of gross violations of human rights. 502B has been applied in the past, but its application is not public because there’s no reporting requirement to Congress and no transparency requirement to announce its application. The oversight provision in 502B allows for the Senate or House to ask for a report from the State Department within thirty days on the human rights practices of a given country. Senator Bernie Sanders did attempt this last December—to force the production of a report and a debate in the Congress—but it unfortunately failed to pass. 

   And then there’s 620I of the Foreign Assistance Act, which does not apply to human rights like the Leahy Laws and 502B, but does apply when a government of a foreign country is directly or indirectly prohibiting or otherwise restricting humanitarian assistance provided by the US. In the case of Israel, we saw that immediately. The Israeli government announced and executed a blockade very quickly after October 7. That persistent blockade is why there have been reports of famine there now: people are starving because of the Israeli blockade on humanitarian assistance.

   Even US officials were frustrated by the fact that high level officials in the Israeli government weren’t allowing a shipment of flour and other dry goods to reach Gaza from Turkey. This was a very public case, and still the executive branch was not cutting assistance, even though 620I prohibits assistance under the Foreign Assistance Act and Arms Export Control Act to the whole country. There is even an exception in the law if the President provides a description to Congress of why they’re applying the exception for national security reasons, yet the Biden administration wouldn’t acknowledge any violation of 620I by Israel, so never applied the exception.

   DS: The prevention of aid delivery is a very concrete, very unambiguous violation of human rights. There’s been a lot of documentation of Israeli practices that are arbitrary, which I think is the nicest way to say it, and in effect are a total limitation on the quantity of assistance getting in. I wanted to ask you about the report that the State Department issued reviewing Israeli practices in the war. I found it pretty notable that in the report, they said that there’s reason to think that Israel is violating international humanitarian law, or violating the principle of distinction with its bombing campaigns. But it basically gave approval to Israel’s practices around restricting aid. Why do you think they took that line, in light of all of the evidence?

   SH: There are a few things I’d like to say here. When the blockade happened in October, I think 620I—the law that addressed the restriction of US aid—actually caught the executive branch off-guard. That law is pretty obscure—prior to last October, it was rarely applied or discussed. Typically, when the US government is trying to transport humanitarian aid to other countries, it gets in, and the challenges mainly involve dispersing aid within the active conflict areas. Those logistics are really difficult, and the US often hires local implementers to get aid out to people in those areas. But in general countries aren’t just implementing blockades on US humanitarian assistance or UN aid. That assistance often gets into places where logistics are hard and there are serious security concerns, like in Somalia. So the question about 620I, regarding Israel’s full blockade on Gaza, seemed to catch lawyers and policymakers off guard. It took pressure from the civil society groups that flagged the law for Congress to start asking questions. Public attention to that law only started to pick up in early 2024. 

   Months later, in March, I talked with executive branch officials, and they said they were still discussing the legal interpretation of the statute. The central, lawyerly question they were assessing was: What is US humanitarian assistance? Are US contributions to the UN that are then provided, via the UN, to Palestinians in Gaza equivalent to direct assistance from the US? This is indicative of a lawyerly approach; executive branch lawyers are typically trying to read into the language of statutes to give as much flexibility to the executive branch as possible. 

   Based on separate conversations, a second question that I know was being asked within the executive branch in late March was: what does “prohibiting or otherwise restricting” mean in the law? US officials told Congress that they were leaning toward an interpretation where otherwise restricted also meant prohibited—in other words, to read the language more narrowly such that 620I would only apply in the case of an all-out prohibition.

   Let’s look back at the timeline of events related to 620I. In December, Senator Van Hollen had drafted legislation to address application of 620I to Israel, though the language in the statute was applicable world-wide. Then in February, the President issued National Security Memo 20 (NSM 20), which was based on Van Hollen’s draft legislation. In my opinion, this was the Biden administration’s attempt to appease critical Democratic lawmakers who were trying to hold the executive branch accountable for the laws it seemed to be flouting. When the memo was issued, the President’s press secretary said it created no new standards for the executive branch.

   There’s a provision in NSM 20 that requires written, credible assurances of compliance with international law and ensured access for humanitarian aid from foreign countries receiving US defense articles. NSM 20 also requires the executive branch to report to Congress on whether countries are complying with 620I. This is not a requirement in 620I itself, it’s a requirement in the President’s own memo issued. This was good news because it required the lawyers to advise on the law and for the policymakers in the State Department to decide whether Israel is in compliance, which meant a lot of deliberating about what constitutes US assistance, and what is “prohibited” versus “otherwise restricted.” It’s also possible the lawyers ultimately applied an understanding that any prohibition or restriction would have to be arbitrary in order to constitute a violation of 620I. They might have used arbitrariness—a standard in international law—as a way to shape the interpretation of domestic law. I don’t know for sure. My point is that I think that there are a lot of ways the executive branch was working through the interpretation of 620I, all the way up until May when they had to give the report you mentioned to Congress.

   And by the time they provided that report, they had supposedly gotten Netanyahu to ease up a little bit on restrictions to humanitarian access. This is likely why they could then feel comfortable in determining that 620I wasn’t applicable, because Israel wasn’t engaged in an all out prohibition or an arbitrary prohibition of US humanitarian aid—since there was some assistance getting in, any assistance still being prohibited could arguably be considered non-arbitrary for reasons like security. Of course we know there have been countless reports of things arbitrarily not being allowed into Gaza, but Israel argues it’s for national security reasons.

   I think this all boils down to a story of just how creative executive branch lawyers are compelled to be in order to give as much flexibility as possible to the President—especially when the goal is to not cut assistance to Israel.

   DS: I want to zoom out a bit, but still ask a legal question. One striking aspect of the US government’s response to this war has been its stated attitude towards bodies of international law. I know that the United States has long had a contentious relationship with a lot of the formal sources of international law and tribunals, but after the Security Council passed the ceasefire resolution in March with the US abstaining, some State Department spokesman got behind the lectern and basically implied that the Security Council resolution was non-binding. Given your experience in government, were you shocked by that?

   SH: Because of everything that had happened up until that point, I was not surprised. I think the US stance mattered primarily because it continued to undermine the posturing of the Biden administration vis-a-vis the rules-based order. In abstaining from a UN Security Council resolution and then subsequently saying it’s non-binding, when many others consider it to be binding, the US continues to affirm the narrative that it is hypocritically flouting international law with respect to Israel, and will continue to do so. Obviously, as a legal matter, the State Department advised them that they could reasonably say that the resolution was not binding, but I don’t think it matters whether an international legal scholar would say that’s correct, it’s still detrimental to other US policies and objectives of advancing adherence to international law.

   DS: It makes sense that there’s a plausible argument to make and then the lawyers make the argument. But do you think that similar discussions are happening around, for example, the ICJ preliminary measures ordered in the genocide case, which is unambiguously a declaration of international law? I’m curious if you have a sense of how orders such as those are received by the government, and how they’re counseled on their obligations with respect to orders from the ICJ.

   SH: I don’t think the ICJ opinions, including the July advisory opinion on Israel’s occupation, were welcomed by this administration, mostly because of the self-imposed political constraints on how the US approaches its relationship with Israel. The ICJ opinions, as well as the ICC prosecutor’s application for warrants to arrest senior Israeli officials, does create real legal obstacles for executive lawyers that they have to work through in a serious way, because these issues cannot just be dismissed. While another country might straightforwardly ignore whatever the ICJ or the ICC says, the State Department and Defense Department lawyers will grapple with the rulings and warrant requests, work through them, and come up with ways in which to advise the President on how the US needs to adhere to its own international obligations. 

   This is why I was really frustrated by NSM 20 when it was issued in February. I saw it as an attempt to appease the Democratic members of Congress who were criticizing the executive branch. But what it meant for lawyers and policymakers within the bureaucracy was a lot of churn because they take these things seriously. It would never result in stopping arms transfers to Israel, which as we know is where the United States’ leverage lies in ending this carnage.

   Like NSM 20, it will take a lot of time for State Department lawyers and policymakers to handle the repercussions of the ICJ cases and ICC arrest warrant application. But clearly, at least as of now, they’re not taking any position that entails the US stopping the transfer of arms. So read into that what you will. It seems pretty clear that US lawyers don’t agree with what the ICJ has said or what the ICC is doing. If they did, they would have to advise their clients to stop transferring weapons to Israel. 
   

4. Haiti’s Long Struggle

   August 1, 2024 2:05 pm Comments Off on Haiti’s Long Struggle

   In October 2023, the United Nations Security Council voted to “authorize the deployment of a multinational security support, headed by Kenya.” While Russia and China abstained, they too condemned “the increasing violence, criminal activities, and human rights abuses and violations which undermine the peace, stability, and security of Haiti and the region.” A few months prior, the Caribbean Community (CARICOM) had expressed its “support for the restoration of law and order” in the country. The United States pledged $200 million to assist military troops. In addition to 1,000 Kenyan police officers, the Bahamas, Jamaica, Belize, Suriname, Antigua and Barbuda, Guatemala, Peru, Senegal, Rwanda, Italy, Spain, and Mongolia promised armed contingents. 

   Former Prime Minister Ariel Henry—who served as the de facto, and therefore unelected, acting president—had previously made his second request at the UN meetings in September, urging the international community to act “in the name of women and girls raped every day, in the name of an entire people victim of the barbarity of gangs.” A few months prior, the Minister of Justice and Public Security also serving as Minister of Culture and Communication of Haiti, Emmelie Prophète, had claimed that neighborhoods overrun by “urban guerillas” were “lost territories.”

   The mainstream international news transmits Haiti’s crisis as a problem of gang violence beyond the control of the state. But before Henry’s 2022 and 2023 requests, social movement and human rights organizations as well as social media activists had noted his crushing silence around the hundreds massacred and kidnapped during his term. Moreover, several independent reports have outlined how various national, international, and transnational actors, including state and other diplomatic functionaries, “manufactured” the chaos.¹  

   According to the National Network of Human Rights Defense (Réseau National de Défense des Droits Humains, RNDDH), between November 2018 and March 2024, “gangs” led over twenty-five massacres and other armed attacks, involving the murder of over 1,500 people, the collective rape of over 160 girls and women, the disappearance of dozens of people, the maiming of hundreds of people, and the destruction of more than 450 homes, resulting in the internal displacement of more than 500,000 people. While at the beginning of this period, these armed groups acted in isolation and in competition with one another, in August 2020, nine armed groups federated under the leadership of former police officer Jimmy Chérizier, an effort commended by Haiti’s National Commission of Disarmament, Dismantlement and Reinsertion (Commission Nationale de Désarmement, Démantèlement et Réinsertion, CNDDR). In January 2024, Chérizier consolidated the rest of the gangs in the capital to launch a “revolution,” taking control of the international airport surroundings to prevent Henry from returning to Haiti after his trip to Kenya. Over the next few months, the group bulldozed police stations and prisons, burned down public hospitals, universities, and libraries, and killed several hundred people. They destroyed the Superior Court of Accounts and Administrative Disputes (Cour Supérieure des Comptes et du Contentieux Administratif, CSCCA) offices where government spending receipts are archived, including the dossiers concerning the PetroCaribe arrangement with Venezuela. 

   To replace Henry’s government, CARICOM facilitated the formation of a Presidential Council with seven presidents, all men,² and the majority representing the Parti Haitien Tèt Kale (PHTK), in power since 2011.³ In May 2024, the Council’s first act was to confirm the international community’s commitment to pursue the mission, despite popular denunciation of the thirteen-year UN Stabilization Mission between 2004 and 2017 that enabled the arming of the gangs. The Council also sidelined people’s basic demands to “chavire chodyè a” (break with the system), formulated through the question “Kot Kòb PetroKaribe A?” (Where is the PetroCaribe money?). 

   The following conversation—featuring Sabine Lamour, Georges Eddy Lucien, and Ernst Jean-Pierre—pushes us to view current events in Haiti beyond a crisis resolvable through military occupation, elections, and “good governance.” Rather, the struggle in question is one of historical proportions, waged between the people of Haiti and the neocolonial state. The conversation asks not just: who are the gangs? But also, why the gangs, and why now? 

   Sabine Lamour is a Sociology professor at the Université d’État d’Haiti and served as Haitian Women in Solidarity (SOFA)’s national coordinator for five years. Georges Eddy Lucien is a History and Geography professor at the Université d’État d’Haiti. Ernst Jean Pierre is the general coordinator of GRIDAP (Research Group of Initiatives for an Alternative and Participatory Alternative). Based on an October 2022 panel discussion at the 9th Annual Philosophy of Religion in Africana Traditions conference, this text has since been edited to reflect the recent political developments outlined above.

   —Mamyrah Dougé-Prosper

   A conversation with Mamyrah Dougé-Prosper, Sabine Lamour, Georges Eddy Lucien, and Ernst Jean-Pierre

   Mamyrah Dougé-prosper: Gangs—also called bases—control territories left abandoned by the state. These popular neighborhoods have little to no access to potable water, electricity, schools, hospitals, and jobs. Many of these territories are places on the state’s map while others are informal settlements or shantytowns of more than one million people. Most gangs are concentrated in the Port-au-Prince metropolitan area near industrial parks, international ports, petroleum distribution centers, warehouses of imported luxury goods and foodstuffs, and along intra-national and international trade routes. Gangs are mostly composed of boys and young men (with a few women) who, faced with high rates of unemployment and without basic educational skills, decide to join for protection, in order to acquire masculine respect from their community, and to make money. In contrast, gang leaders are former police officers and private security agents.⁴

   The first gangs were extensions of self-defense brigades established after the overthrow of the twenty-nine-year dictatorship of the Duvalier family. Then, the brigades were reinforced to protect popular neighborhoods in Port-au-Prince from death squads during the 1991 coup d’état against democratically-elected President Jean-Bertrand Aristide. Upon the return of the deposed head of state in 1994, guns were distributed to his supporters, leading to the de-politicization of these formations and their turn to criminal activities, including kidnappings. During Aristide’s second term (2001–2004), these “neighborhood” gangs were strengthened to counter former military officers—demobilized in 1995—aiming to overthrow his government. After the forced removal of Aristide in 2004, the UN stabilization mission troops muted his militiamen.⁵  

   Gangs are not a monolith. Yet, over the last six years, militant scholars have qualified the twenty-three primary gangs operating in the Port-au-Prince metropolitan area as paramilitaries or extra-legal armed forces of the state. What explains this? 

   Georges Eddy Lucien:  Since 2016, the police have been incapable of quelling the popular uprisings, incapable of making the people retreat. The gangs came to serve two functions. Firstly, they serve as censors in the concentrated working class neighborhoods—we know that 67 to 69 percent of the Port-au-Prince agglomeration lives in precarious neighborhoods. We can take the example of Lasalin residents who participated in the October 17, 2018 protest, who were massacred three weeks later by the gangs. This conveyed the message to the people from working class neighborhoods that they do not have civic and political rights; they cannot be involved in protests. There are other instances, such as the Belair massacre during the first peyi lòk—translated by some as “general strike”—or the Kafou Marasa (Cité Soleil) massacre. 

   So the gangs play the role of censoring residents, and they censor progressive organizations as well. During the period of 1987–88, following the overthrow of the Duvalier dictatorship, numerous popular organizations operated inside of the neighborhoods, including student groups and unions. But today, it is difficult to organize a meeting in neighborhoods from where the grassroots base would be drawn. The second mission of the gangs is to banalize concepts like “children of the poor” or “revolution” and to contribute to the criminalization of social movements. Under the government of Jovenel Moise (2017–2021), the gangs’ participation in the protests trivialized the demands. Those are all strategies.

   The army—the traditional actor(s) that the Haitian state or the local and international oligarchy typically use, especially the United States, to resolve the crisis—is no longer there. If you look at 1946, 1956, 1986, it’s always the same thing: we sleep, we wake up, we find that the army has taken power. But the Haitian army dissolved in 1995 when deposed President Jean-Bertrand Aristide returned to power. Today, the repressive apparatuses, whether the police or the gangs, play a huge role. Certainly, during the Duvalier dictatorship, there was always a link between the army and the militia. But the army had more logistical means and more guns than the militia. Informality is important, because when the army needed to do things off the books, it would use the militia. This was the case for the coup d’état of 1991, when they used the Front for the Advancement and Progress of Haiti (FRAPH), a known product of the Central Intelligence Agency (CIA). 

   MdP: Gang members’ firepower has increased to include war weaponry like Russian AK-47s, US-made AR-15s, and Israeli Galil assault rifles. Some arms trafficked in Haiti are bought from shops in Florida, in the United States, where gun laws are lenient. They are then shipped from Miami’s port where cargo is arranged in itemized containers requiring intensive searches. Illegal guns enter the country through maritime ports in the private control of oligarchs like Gilbert Bigio’s Port Lafito, through unofficial landing strips, and across land borders with the Dominican Republic. At the same time, over the last thirteen years, the PHTK regime systematically underfunded and under-armed its own armed forces. 

   The gangs of today—founded or enhanced by PHTK rulers, other politicians, and key oligarchs—are the new death squads. They traffic organs and humans, drugs, and arms. They kidnap on behalf of others, or to raise funds to buy ammunition. They kill to conquer new territory or as retaliation against rival formations. Gangs also provide security to private businesses, like those of merchant capitalist Reynold Deeb, against petty thieves, and assault competitors. They break up strikes. For hire by politicians, like former president Michel Joseph Martelly (2011–2016), gangs threaten voters to prevent fair elections and deter participation in protests. They murder political opponents.⁶ How has today’s social movement in Haiti contended with such violence?

   GEL: Despite the presence of the gangs, the last peyi lòk (general strike) in July 2018 showed that these strategies were not able to make the people retreat. This created the necessity for military intervention on behalf of local and international oligarchies. It’s similar to 1802 when the Leclerc expedition was launched in Saint Domingue (Haiti): the colonial metropole realized that the repressive apparatuses at the local level were incapable of making the masses of slaves retreat. This incapacity of the French metropole to block the masses of slaves for a period of about ten years, from 1791 to 1801, made them reinforce the repressive apparatuses. It is the same case for the 1902–1915 crisis. Foreign military intervention reflects the incapacity of the local and international oligarchies to quell uprising. 

   The social movement that we are discussing today arose in 2015–2016 and has lasted for a six-year period during which there were various uprisings. Since the major protests in 1929 against the US occupation (1915–1934), we have not experienced such a long period of sustained uprisings. After the withdrawal of US troops, local and international oligarchs were able to maintain continuity and control. But in 1946, there were other mass protests. After ten years, in 1956–1957, the local oligarchy was able to take control for the next thirty years through the Duvaliers, until around 1985–1986. Now, we can see that since 2015, the people have begun to rise up again. This period reminds us of the period between 1902 and 1915, during the thirteen-year resistance of Rosalvo Bobo against deepening relations between the local and U.S. oligarchies.⁷

   MdP: This current crisis, then, is a reflection of the persistent divides and interventions that have characterized politics in Haiti even before the Revolution of 1804. What are the historical dimensions informing the social movement that arose in 2015–2016?  

   Ernst jean-pierre: It’s important to recall our history as a people and the specific form of colonialism that took place in Haiti. The arrival of Christopher Columbus in 1492 created a new colonial reality. They appropriated the riches of the land, devastated the environment (the flora and the fauna) and the Indigenous people who lived there, and introduced the transatlantic slave trade of Africans. The Code Noir (Black Code) that regulated the slave system in Haiti considered enslaved Africans as subhuman—this has repercussions until the present. 

   In 1791, the Bwa Kayiman ceremony served as the site of planning for the first major slave insurrection of the Revolution, which achieved the general liberation of all slaves and claimed independence in 1804. But following independence, the sons of whites, mulattos, and Creoles made claims to the land, demanding to be compensated for lost and damaged property. Jean-Jacques Dessalines, a major leader of the Haitian Revolution and the first ruler of independent Haiti, opposed these demands. His aspiration for independence extended beyond the abolition of slavery, to a system of equality based on the values of the Bosals—Africans born on the continent and not in slavery—who held communalist values around labor and freedom. Representing a break from the inherited colonial system, Dessalines proposed to redistribute the wealth of the land among all Haitians, issuing a series of measures directed towards these aims.⁸

   Dessalines’ decrees represented radical efforts to address the colonial system of wealth, but they caused tension within the new nation. In October 1806, Dessalines was assassinated, marking a pivotal moment that split the nation in two. The succeeding government sent the Bosals to the mountains and countryside, imposing a Rural Code similar to the colonial Black Code.⁹ This re-inscribed a form of racism, even apartheid, in the society, by maintaining a peasant class to produce the agricultural products for a cultivator class of Creoles. This fundamental split unfolded into the crisis of 1843, dividing the country into four parts. By 1915, Haiti fell into the hands of the US occupation, during which many North American institutions and companies such as the Haitian American Sugar Company (HASCO) were engaged in the export of sisal, rubber, and sugar cane. 

   Haitians ended up with a state that does not correspond to the aspirations of the masses, a cheap prototype of the Western nation-state. Haitian law is a copy of French law, with no sense of environmental or communal rights. The educated, elite classes took the reigns of the government, granting themselves social and economic privileges and requiring the majority to wait. This is the present condition. This is what led us to the crises of 1943 and 1946, as well as the crises after President Dumarsais Estime and President Duvalier. The crises recur because the historical problem has never been solved: the fight between the Bosals, the peasant people, and the elites. The elites put in place two powerful weapons: education and the state. It is a combination of these things that are fighting against the popular masses. 

   In this uneven struggle, we witness the wear and tear performed by the masses to produce the collapse of the state, a cadaver state. There is a carnival song that says exactly this, that the state is a cadaver or a corpse. On that state, you cannot build anything. People demand a change in the system, the system of slavery we fought against. The world powers made us pay dearly for that struggle. The seeds of the alternative lie in the Bosal struggle—built on lakou (communal lands), in the bitasyon (plantations), based on consensus, democracy, solidarity, and konbit (mutual aid). 

   MdP: The social movement that arose in 2015–2016 then sought to collapse the state, to resolve this historical problem between the masses and the elites. Following the first round of the 2015 presidential elections, the political opposition—including mass-based and other civil society organizations—shut down the capital to denounce the PHTK’s manipulation of the results. Before this pivotal moment, resistance to the PHTK’s development projects was localized: defense against land grabs in Caracol in 2011, the island of Ile-à-Vache in 2013, and the island La Gônave in the Port-au-Prince Bay in 2014, to name a few examples. But the social movement that arose in 2015–2016 targeted the PHTK regime directly, leading to the annulment of the election results. New elections in 2016, however, still ushered in PHTK-pick Jovenel Moise into power. 

   The social movement attempted to block the PHTK’s further pursuit of this historical “Scramble for Haiti.” The moment recalled the fraudulent elections that led the party to power in 2011, which brought into view the PHTK strategy to delay parliamentary elections and instead rule by decree in order to gift communally-stewarded agricultural lands to multinational elites as free trade zones. Many also pointed to the PHTK’s misuse of public monies—like the 2010 earthquake reconstruction funds and the PetroCaribe proceeds—to subsidize extractivist projects such as the construction of the largest industrial park in the Caribbean, Caracol Industrial Park, in 2011; the establishment of Moise’s banana plantation Agritrans in 2014, before he was revealed as the PHTK presidential candidate; and the building of the country’s first multi-purpose deep water port to accommodate larger cargo ships, Port Lafito. All of these public-private partnerships are tax exempt. 

   In present-day Haiti, who controls these free trade zones? 

   sabine lamour: The Haitian oligarchs are not a monolithic group either. They do not share, among themselves, the same vision or consciousness. There is the segment that has existed since the revolutionary period, the formerly “freed,” who up until now consider themselves the heirs of their white colonialist fathers. This group formed the national bourgeoisie, which was successful from 1804 until the US occupation in 1918. In this bourgeoisie were also those from France, England, and Germany. Daughters of the national bourgeoisie already in place were married to foreign sons, the result of trade relations. The national bourgeoisie renewed itself by keeping a skin-color based hegemony over the larger population. But through the US occupation of the Caribbean, new groups came into power. Emergent capitalists from the Levant also extended themselves across the region. And in Haiti, “benefiting” from their lighter skin color, they eventually replaced the initial national bourgeoisie. 

   The bourgeois class is plural. It is an exploded class that is not necessarily unified. However, if there is a thread that the groups we might consider elites or oligarchs hold in common: nothing “national” interests them. They invest in commerce; so, even if Haiti can produce rice, Reynold Deeb, the chief officer of Deka Group, prefers to buy and bag it in the US to sell in the country instead of supporting national production. Can we actually call these oligarchs a national bourgeoisie? 

   They exist in secluded spaces, isolated from the majority of the population. Their children don’t go to the same schools. If they are sick, they seek care in Miami. They hold multiple citizenships. This is a type of stateless bourgeoisie that builds nothing with the masses. Every time their interests are threatened, when the contradictions might compel the change or social transformation needed for resources to be veritably shared across the population, when capital is in trouble, this plural bourgeoisie allies with the international community or with the United Nations to offer foreigners whatever resources Haiti possesses in order to secure its position and continue extracting wealth.  

   Interestingly, one of the newer elements in this present crisis is the transnational bourgeoisie’s active engagement with politics. Traditionally, they had practiced a “politique de doublure / stand-in politics” where they funded politicians only accountable to them into power. But now, they have decided to enter national politics with their own faces. Gregory Mevs—whose family owns the Varreux Petroleum Terminal and the SHODECOSA industrial park—served as the co-chair of former President Martelly’s Presidential Advisory Council on Economic Growth and Investment. Reginald Boulos, founder of Sogebank and owner of a chain of supermarkets and car dealerships, established his own political movement under the late former President Moise. The bourgeoisie show their faces not because they are concerned with social transformation, but because they want to directly control what I call the “predation sites” in society. Customs is one site of predation, affording the capacity to import guns, rotted carcinogenic foods, and other expired products that kill. But the bourgeoisie monopolize all industries. The Gilbert Bigio Group, for example, controls construction (iron and wood imports). 

   When the bourgeoisie realize that, little by little, the majority is increasing in power, and that at any minute, there might be a social explosion in Haiti, they seek to control the spaces of power. But they do not decide to control the spaces for themselves, instead they share control with international interests. 

   MdP: As Sabine Lamour remarks, the PHTK state has been openly accommodating to these transnational elites. It also facilitated the rise of a small group of aspirant capitalists. Within the first year of his term, Moise’s government proposed a budget that increased the salaries of himself and his cabinet while raising taxes on the working poor and the middle class. He pulled Haiti out of the PetroCaribe agreement with Venezuela, which put the country back on the market to purchase petroleum products. In July 2018, at the behest of the International Monetary Fund (IMF), Moise announced the removal of gas subsidies. Raised gas prices inevitably lead to increased mass transportation and food prices. In response, dissenters erected barricades to block all national trade routes and disrupt all commercial activity across the country for two days: the first peyi lòk. Moise repealed the announcement. A month later, the PetroChallenge movement was launched. Protests erupted in all ten major cities in Haiti around the slogan “Kot Kòb PetroKaribe?” (Where is the PetroCaribe money?), demanding that the PHTK regime account for its use of over 3 billion US dollars of the PetroCaribe funds earmarked for the improvement of infrastructure and social programs.

   The social movement that arose in 2015–2016 was concentrated in the capital, but it took on a national scale with the first peyi lòk. While different land defenses outside of Port-au-Prince mentioned earlier had deployed their own messaging, by 2018 all protest demands converged into the question, “Kot Kòb PetroKaribe A”? What is so important about PetroCaribe?

   gel: The July 2018 uprisings, one of the most significant uprisings of recent years, brought up the question of PetroCaribe because PetroCaribe itself questions the logic and and undermines the functioning of the international financial system introduced to Haiti in 1825, when French banks gave the formerly colonized nation a loan. Typically in these arrangements, the bank wins and the country that receives the money loses. However, PetroCaribe offered the possibility for both Venezuela and Haiti to be winners. 

   Within PetroCaribe, Venezuela agreed to allow the borrower to pay back the loan with goods they produce, straying from the neoliberal model that has broken the dynamics of production in Haiti. There was a possibility of challenging the international financial system. July 2018 was also one of the first times that the social movements spoke of “chavire chodyè,” breaking with the system. 

   MdP: After months of nation-wide protests in 2018, an official investigatory report revealed that President Moise himself had profited off PetroCaribe funds, leading to calls for his resignation. Instead, Moise voted against the recognition of Nicolas Maduro in the Organization of American States in 2019. That year, there were gas shortages, which prompted another peyi lòk, this time lasting three months. What is “peyi lòk”?

   sl: It is a mode of resisting. It is the result of contradictions so striking inside society that the people are forced to block the system. How can the government take away gas subsidies when the price of fuel per gallon exceeds the minimum wage! During the first peyi lòk in July 2018, mobilizations took place all across the Port-au-Prince metropolitan area and spread throughout the entire country, paralyzing all commercial activity. And the government was forced to retreat over the fuel issue.

   Within the peyi lòk, despite the paralysis, numerous activities take place within organizations both in civil society and the political opposition. Panels are held, position papers are released, flash mobs and protests are organized. Demands themselves are not on lock. Thus, we can say that peyi lòk tempers gang insecurity and offers a moment for organizations to become more politically active, meeting more often to discuss. 

   Of course, there is a contradiction in peyi lòk: people in need can become collateral damage—they cannot go about their daily work to reproduce themselves, they must be able to afford to stock up on food. The government also utilizes the peyi lòk period to repress militants, those who take to the streets every day to maintain barricades against the police and gangs. 

   gel: The peyi lòk prevents accumulation: there is a lòk, or lockdown, on the accumulation of international investments. It stops production at places like Savane Diane, a free trade zone manufacturing products for Coca-Cola; Caracol Industrial Park, where we produce clothes; or areas like CODEVI in Ouanaminthe or SONAPI in Port-au-Prince where there are numerous factories. It’s almost like in 1791 when the masses of slaves prevented the metropole—in today’s case, the United States—from accumulating. 

   ejp: The peyi lòk is not something new, it is an appropriation of a peasant mode of struggle called “koupe wout” (cutting off roads). Jean-Jacques Dessalines’ Indigenous Army used this tactic to cut off French military commander Joseph de Rochambeau’s supply line during the revolution in 1802. This method was deployed after independence by different revolutionary peasant leaders seeking to isolate and control their own region. The Kako fighters adopted this koupe wout tactic to prevent the further incursion of the US Marines into the countryside. Such blockages disrupted US occupiers’ reinstatement of forced labor to build those very roads that facilitated the transport of export crops.  

   I interpret it as a mode of struggle being adapted to Port-au-Prince and other cities: it prevents communication between other departments, circulation and movement, and functionality of the capitalist system within cities themselves. It’s a historical and cultural system of resistance. We integrated some English and French words;  we say “barikad” (barricades); we say “lòk,” but it was called “gran chimen bare” (roadblock), where nothing could circulate freely.

   mdp:  In January 2020, Moise disbanded Parliament to rule by decree, and by early 2021, he announced a referendum to adopt an Organization of American States-produced constitution that would expand the decision-making scope of the executive. He refused to step down from the presidency and made no plans to organize elections at any level. Rather, he gifted agricultural lands to another oligarch, Clifford Apaid, and replaced three supreme court judges (circumventing parliamentary procedures). Mass protests carried on until June. And just a few days before his assassination, Moise appointed Ariel Henry as his new (seventh) prime minister. 

   International headlines have focused on chaos and crisis, concealing and even conflating these popular uprisings with gang violence. What are the demands of this social movement? What are the different ideological tendencies on the ground?

   sl: There is a constant in the demands—the right to self-determination. Whether it is in relation to the Haitian state, or to the international community who always wants to impose a series of measures onto us, we always demand that at a certain point, we too can propose our way of life. This thread has run through in every social movement,  whether the political element is women, peasants, young people, or teachers unions. The second demand is recognizing the intersectional dynamics of the struggle, the ability to recognize people as people, beyond sex, race, class, and religion. The third demand is the fight against impunity, the fight for access to justice. 

   This social movement has an exploded leadership where everyone has the ability to act. These constants suggest that there is a political fidelity, an anarchic tendency, which scares the transnational oligarchies. One of the elements allowing us to condense our different demands is the ability for a person to be free. Freedom is a fundamental element within the activist movement, and it carries a particular set of political ideals that permeate Haitian society. Since the Revolution of 1804, we realized that within the question of freedom is a question of well-being, but not well-being in the Western sense based on private property. 

   ejp: The urban working class neighborhoods are more mobilized than the peasants in the current struggle, and political leaders have been discredited. The historical mission of the popular masses is a battle against an unjust global order—that’s the common thread of Haitian popular struggles, which can be linked to broader anti-imperialist leftist discourse. But if you look closely at the emergence of popular struggles, it is an existential battle around the need to live. This struggle is permanent in nature, and it’s reflected by the impossibility of dialogue between the elites and the masses. The traditional political elites lack a narrative to address popular demands, they cannot appease the struggle for change. That’s why they are always in crisis. 

   In 2021, following Moise’s assassination, various progressive civil society organizations and parties came together to draft the Montana Accords, which allowed for a transitory government to organize free elections and pursue the PetroCaribe trial. But these efforts reduced the organized struggle to the question of taking power. The popular masses were waging a historic battle to change the Western capitalist system definitively. There are two battles in Haiti: a battle for real change, and a battle for power. The latter does not have the aspirations of the popular masses.

   sl: The scenarios being played out right now are ones we have lived through since 1806, centering around self-determination, redistribution, and resource production. If you consider 1806, 1843, 1865, or even 1915 and 1934, as well as the struggles of 1986 and 2004, you will see these ghosts constantly returning to Haiti.

   In every major crisis, the same question is raised. How will we build a community on the 27,500 square kilometers of land that we have together, to live together, if some don’t view others as fully human? This is the basis of the struggle in Haiti: those in charge claim all the resources produced within society belong to them, and they never hesitate to seek outsiders to intervene in the issue. But there’s a question of what needs to happen internally to build a true fellowship, a common political project to build a society. This battle has existed since the nation was formed. The proposed political projects thus far end up fostering some form of exclusion and an absence of redistribution. Now there is a political coherence within the chaos that Haitians must address.

   This discussion was published in collaboration with Lefteast.

   
   

5. Class and Commodities

   8:59 am Comments Off on Class and Commodities

   Few economists in the course of Colombian economic history have matched the influence of Salomón Kalmanovitz, who has played a key role in the professionalization of the discipline since the 1970s, when he returned from the United States to teach microeconomics at the National University of Colombia before teaching Marxist political economy at the University of the Andes.

   Kalmanovitz’s entry to the economic debates of the 1970s transpired alongside the boom of dependency theory in the continent, which postulated the idea that the international division of labor imposed on Latin America by the great powers was intrinsically unjust, given that the prices of raw materials were always low in relation to the prices of manufactured goods. This rationale accompanied a critique of foreign direct investment, which dependency theorists argued decapitalized subjugated nations, thus enclosing them in a shell of growing underdevelopment. The leader of dependency theory in Colombia was the self-taught economist Mario Arrubla, whom Kalmanovitz criticized early on in his career, arguing that dependency analyses ignored the social structure and institutions of the countries they examined, thereby neglecting the existence of classes and their conflicts in history. In short, Kalmanovitz’s criticism was rooted in a Marxist comprehension of class struggle. 

   Later in his career, Kalmanvoitz developed a comprehensive review of Colombian economic history. Economía y Nación, his 1988 book, showcases his understanding of the social structures and factors of production behind the Colombian economy: 

   Colombian history is only transparent if it is conceived as an interior history that is inserted in a universal history, which, in turn, modifies it profoundly. This starting point differentiates me from interpretations and analyses that make Colombia a product of the dependency of the great powers, a passive agent of an infamous universal history that gave us a bad place in the international division of labor, which invaded and denationalized us with its capitals and overdetermined us to misery and non-development.¹

   In the following interview, Kalmanovitz discusses economic growth in Colombia over the course of the twentieth century, the Colombian economy’s dependency on oil exports, and the policies of Gustavo Petro’s left-wing government.

   An interview with Salomón Kalmanovitz

   CAMILO ANDRÉS GARZÓN: One of the most important debates for Latin American economists in the 1960s and 1970s was around dependency theory, in particular, the idea that economic growth was limited by the global structure of capital. In Colombia, that debate took place in Mario Arrubla’s widely circulated 1969 work, Essays on Underdevelopment. What made you object to Arrubla’s dependency argument? 

   sALOMÓN KALMANOVITZ: Mario Arrubla was a precursor, in some ways, to economic historian Andre Gunder Frank or Brazilian economist Theotônio dos Santos, two scholars who developed dependency theory in Latin America. They shared a hypothesis around the impossibility of economic development under the brunt of imperialist domination, given the structural stagnation in the economy due to the relationship of subjugation between the Colombian or Latin American economy and the imperialist core.

   I read Mario Arrubla’s book with great enthusiasm when I was doing my doctorate in the United States at the end of the 1960s. My critique was based on the fact that Arrubla used Marx’s simple reproduction scheme with two sectors, which assumed a stationary economy. Arrubla said that the lack of a sector producing capital goods was the axis of the dependence that condemned Colombian society to underdevelopment. Arrubla’s text was aimed at questioning economist Lauchlin Currie’s economic development proposals for the country. Arrubla said: “in our country there are no exceptional conditions that allow for a significant development of capitalism.”² He wrote, “Colombian society constitutes a substructure within a structure that comprises it: the imperialist system.”³ For the self-taught Arrubla, this meant that the agrarian sector had remained traditional, without capital or relatively mechanized agriculture in the 1950s. Given the structural conditions of dependence, the situation would eventually lead to the spontaneous collapse of Colombian capitalism and to a development of the productive forces under socialism. 

   I was familiar with the schemes of expanded reproduction from Adolph Lowe at the New School of Social Research in the 1960s. In my critique, I wanted to argue that the existence of the capital goods sector was not a condition for economic development, as demonstrated by the economies of several European countries, including Denmark and the Netherlands, which specialized in certain consumer goods for exports and had high growth. My initial problem with Arrubla’s argument was that it defined the international relationship as a given and dominant.

   This idea of dependency, which was very popular in the 1970s, had very poor empirical support, because Latin America, and Colombia in particular, had not remained stagnant. On the contrary, these countries had experienced periods of high growth. In fact, the Colombia economy had been developing quite rapidly, even in the 1960s, when it was perceived to be stagnant. 

   It was easy for me to show that the hypothesis of secular stagnation of the Colombian economy was not true, and that the data showed that capitalism had been developing in Colombia during the twentieth century. At the time, I argued that the data did not support Arrubla’s fatalistic analysis: “the recovery of the economy and industry observed since 1968, which combined a great growth of agricultural production, an increase in exports, and a recovery of international coffee prices . . . call into question even more the author’s diagnosis of the destitution of Colombian capitalism.”⁴ My main criticism was that by insisting that international relations were intertwined with the social relations of production, dependency theory ignored the local developments of capitalism under that imperialist framework.

   My critique resonated deeply because it was based on Marxist theory insofar as it used Lowe’s schemes of reproduction, and because it questioned Arrubla’s insufficient attention to the class struggle and the battle for a new mode of production. It was also empirical, as I had the advantage of having a more specialized training. Even so, I very much respected Arrubla because he was self-taught, alongside the philosopher Estanislao Zuleta. They both studied during the early days of Colombian academic life, since the Conservative Republic of the 1950s did not allow academic freedom and restricted scientific debate.

   Arrubla responded to my criticism fifty years later, in 2004, in the magazine Al margen. He said that he had “abandoned those theses dictated by his revolutionary ardor: that Colombian capitalism had structurally closed the road to rebirth, that it could be promptly subverted and that revolutionaries should set as a goal the construction of socialism and the statehood of the economy by a popular government.”⁵ He replied that he never intended to argue that the subaltern countries were totally stagnant, and that they only submitted to external economic determinations, but rather that “he wanted to attack that provincial village psychology that is absorbed in its own routines until an external wave arrives that fractures those routines or sweeps away everything.”⁶ 

   CG: How did dependency theory evolve in Colombia?

   SK: Dependency theory was transformed because there continued to be a strong political dependence—the Colombian political system is subjugated to US interests. That was true and continues to be true, although now to a lesser extent. So dependency exists, but it does not imply economic stagnation. Within a condition of dependence, there is foreign direct investment, which helped Colombia develop certain sectors, such as oil, mining, manufacturing, and the automotive industry. Foreign direct investment has been a factor of capitalist development. 

   Since the 1970s, there have also been Colombian economists who have dedicated themselves to investigating questions of trade and development within a dependency framework. One example was José Antonio Ocampo, who worked under the director of ECLAC, but avoided the “excesses” of dependency theory, perhaps because of his US training. As a result, his research on trade is very rigorous. He explains the phases of growth and collapse of trade through a complex combination of the dependency argument—Colombia as a peripheral country, subjected to the international division of labor—and another perspective stating that there is an internal social substratum, a land-owning class predatory of natural resources who can only participate in world trade when they generate high rents, and then must withdraw when normal market conditions return.⁷

   CG: In 1995, you began working at the Banco de la República. How did your views from the 1970s evolve from this point?

   SK: In 1995, when I started working at the Bank, I was sent a Venezuelan magazine from Cúcuta with an article by Douglass North on Latin American backwardness. North’s work led me to a new ideological balance: I could maintain what I had done and give it a new direction, leaving behind the Marxist approach of seeking a socialist social organization, but without losing sight, according to Marx himself, of the advancement of political freedom and productive forces. Thus, I continued to insist on my prior interests in agrarian reform and taxation.

   Marx held that social relations, in particular class struggle, would determine the course of history. Marxists emphasized peasant struggles and above all the confrontation between capital and labor as the fundamental axes of social change. In my early work, I closely followed the historical chapters of Capital, especially the section on land rent in volume 3, as well as Vladimir Lenin’s Development of Capitalism in Russia. But another important influence in my formation was the Anglo-Saxon Marxism of Eric Hobsbawm and Paul Sweezy who absorbed the empirical tradition and applied it in their analyses. When I returned to Colombia I had problems with my militancy in a political group called the Socialist Bloc and decided to withdraw, freeing myself from the radical pressure of politics. I was forced to seek new horizons, discovering the institutionalism of Ronald Coase and Douglass North. Reading the latter was a revelation that led me to absorb what had been done in the social sciences over the last twenty years. North had been a Marxist and was able to combine that school with that of the American institutionalists such as John Commons, among others, to give rise to the so-called new institutionalism, which merged economic history with the analysis of institutions. 

   CG: In your view, what are the main factors that contributed to economic growth in Colombia during the twentieth century?

   SK: Measuring economic growth through GDP per capita, Colombia’s average growth rate for the twentieth century was 4.6 percent. Since the rate at which the population increased was 2.3 percent per year, per capita growth was also 2.3 percent. Unfortunately, this growth wasn’t enough to absorb the entire working age population, as evidenced by high unemployment, underemployment, and informal labor afflicting more than half of the country.

   Although this growth allowed Colombia to reduce its gap with developed countries, it was not as successful as countries like Korea, Taiwan, Thailand, and Indonesia, whose rapid industrialization during the second half of the twentieth century was driven by their exports to developed countries. 

   One characteristic of Colombian growth is its low relative volatility, which is lower than Argentina, Brazil and Mexico. In a 1980s paper, Miguel Urrutia attributed this quality of Colombian development to the lack of populism in the country, in contrast to the political and macroeconomic instability it produced in the rest of the continent. The growth of the Colombian economy in the twentieth century had two major blows. From 1925–1950, the Great Depression and World War II slowed the economy, leading to a 2.8 percent contraction of GDP. Real GDP growth approached 5 percent in the next quarter century, but the population also grew, so GDP per capita fell relatively. The Latin American debt crisis during the 1980s also slowed Colombia’s growth, although it was the least affected economy in the subregion. The new international crisis at the end of the century, however, did affect Colombia severely, leading to a contraction of 4.1 percent of GDP in 1999.

   The period of highest economic growth in Colombia was from 1905 to 1924, with a GDP growth of 3.4 percent, followed by the period between 2000 and 2015, in which the GDP grew by 3.2 percent per year as a result of the global commodity boom, significantly lower population growth, and broad social service coverage. But given the levels of unemployment, informality, and poverty that have affected more than 60 percent of the population, it is clear that national economic growth did not provide opportunities for progress to the majority.

   A fundamental determinant of growth is economic productivity. In this regard, Colombia’s performance is dismal. Colombia’s decline in productivity is due to an agricultural lag—agricultural productivity is always below the average level of the economy. While the agro-sector was Colombia’s driving economic force in 1960, it showed signs of fatigue by the 1980s and 1990s. This can be shown through migration patterns. In Colombia, the movement of labor from the countryside to the cities explains 24 percent of the growth in productivity, while rural-urban migration explains 80 percent and 53 percent of the productivity gains in Chile and Peru, respectively. 

   CG: Can you speak about the effect of commodity markets on the Colombian economy?

   SK: During the 1980s, deindustrialization not only reflected the increased growth of services, a common occurrence in economies that exceed a certain growth threshold, but also a decrease in competitiveness and a “Dutch Disease” around the mining and energy boom, which began in 1982 with the discovery of oilfields in Caño Limón and Cusiana. 

   Foreign direct investment has also been a feature of growth. If you look at the evolution of foreign direct investment from 1947 to 2017, you’ll notice that Colombia was quite reluctant to it until the 1990s, which explains why the Colombian economy grew at a slower rate than its potential. In the twenty-first century, more than half of the foreign direct investment has been directed towards the mining and energy sectors. These trends reflect an important structural change: the dynamic sectors are now mining, hydrocarbons, and biofuels, particularly ethanol and palm oil. In 1978, mining accounted for 1 percent of the GDP, but in 2015 it reached 8 percent. Meanwhile, industry occupied 22 percent of the GDP in 1978 and only made up 11 percent in 2015.

   Nevertheless, the oil boom collapsed after 2015 as prices plummeted, harming economic growth and causing an increase in the fiscal deficit that forced the then government of Juan Manuel Santos to reduce its spending. With mining-energy exports representing 60 percent of total exports within the five year period from 2010-2015, Colombia became highly dependent on foreign currency generated through the energy sector. 

   CG: How do you see the relationship between foreign investment and Colombia’s dependency on the oil sector? Is this linked to domestic class structure over the last three decades? 

   SK: Oil exports today account for a little more than half of the country’s total exports, generating a surplus that has an impact on the exchange rate. When the exchange rate is reevaluated, it leads to a loss of dynamism in the non-oil exporting sectors and curtails the profitability of domestic activities in favor of competition from imports. Therefore, we are faced with a case of “Dutch disease,” in which goods that obtain a higher rent in the global market contribute to the country specializing in that activity, which deteriorates the profitability of other exports, and more seriously, leads to domestic production losing ground to imports.

   Foreign direct investment has not been decisive in the development of the Colombian oil sector, which is dominated by the state-owned company Ecopetrol. Foreign companies may explore and exploit their most profitable findings, but after a period of time, they return their physical assets to the state and Ecopetrol is in charge of their subsequent exploitation. 

   Its impact on the class structure of the country has not been significant, because we’re talking about a capital intensive sector that generates little employment. Ecopetrol’s labor union, the Unión Sindical Obrera, has maintained a nationalist stance, but it has not been widely disseminated in a country where the percentage of the working class that is employed in large companies is relatively small. Guerrilla groups like the ELN also have nationalist agendas, but their presence is relatively marginal and does not affect production, although they frequently bomb pipelines carrying oil to the ports for export and suspend them in exchange for official subsidies.

   CG: What about your study of the agrarian economy and development, where you diagnosed the “agricultural backwardness” of Colombia’s economic productivity?  

   SK: In this field, together with Enrique López, I was able to show that the development of Colombian agriculture has been slow and tortuous, in part because of property rights that are extensive, inefficient, and difficult to justify.

   Following “La Violencia” of the 1950s, the National Front government implemented an agrarian reform to promote market, credit, and technological approaches that would modernize peasant farms. But these approaches largely evaded land distribution. In short, agricultural development throughout the twentieth century was uneven, with strong expansion after 1930, sustained acceleration from the second postwar period until the 1980s, and thereafter relative stagnation. This resulted in mediocre agricultural growth during the twenty-first century.⁸ 

   Colombia has a very unequal distribution of agricultural property, a Gini of 0.56, which has only slightly changed with the development and modernization of the sector. Coffee has been the star commodity since the 1930s, retaining its quality and presence in international markets. Aside from this central export, flowers, beef, cocoa, rice, mangoes, potatoes, milk and its derivatives, Hass avocados, and tilapia have achieved sales abroad worth more than $10 billion in 2022. 

   6.3 million are employed in the countryside (39 percent) compared to 16.1 million employed in other regions, demonstrating a process of rural urbanization. According to Santiago Perry:

   Colombia’s rural areas are home to 11,838,032 people, or 26 percent of the national population. Sixty-two percent of them, that is, 7,351,418 people, live in poverty, and 21 percent of the rural population–2,545,177 people–live in extreme poverty or destitution. So nearly two-thirds of rural dwellers are poor and more than one-third of the rural poor are destitute.

   Gustavo Petro’s government has proposed an agrarian reform, but the constant changes in the leadership of the Agriculture Ministry have delayed the official plans to acquire three million hectares. Only 180,000 hectares have been purchased to date. 

   CG: Finally, how do you evaluate Colombia’s economic growth during the past two years of the Petro administration?

   The national economy grew by only 0.7 percent in the first quarter of 2024. In 2023, the economy grew by less than 1 percent because of a 13 percent drop in exports: exports that reached almost $57 billion in 2022 ended at $49.5 billion in 2023, due to the drop in the price of oil, whose exports account for more than half of all total exports. Compared to the world output growth of 2.4 percent and US growth of 2.5 percent, Colombia’s figures are not encouraging.

   During the entirety of Gustavo Petro’s administration, the economy has grown by an average of 0.8 percent for six quarters. The third quarter of 2023 was a contraction of -0.6 percent. This is quite mediocre, given that Colombia’s growth has historically been above 4 percent per year. 

   The foreign current account balance is negative and has worsened—it was -2.7 percent of GDP in 2023, and we are projecting that it will be -3.1 percent in 2024. This means that demand has been diverted towards foreign goods and services, contributing to low economic growth. For the remainder of Petro administration, we can predict that the Colombian economy will grow between 1 and 1.5 percent annually, which means a lost four years for the country’s development. 

   But low economic growth is not just a Colombian problem—it has taken Latin America by storm. ECLAC estimates that the region will grow 1.9 percent in 2024, although Colombia will be below that threshold with only 0.6 percent growth, a third of the Latin American average. This regional slowdown has to do with commodities, though oil is a separate matter and is trading above $80 dollars a barrel. Colombia shouldn’t have international trade problems, but economic policy has not been supporting the development of the oil sector.

   The 2022 tax reform affected companies more than their owners, and it’s been one of the factors behind the low economic growth. Likewise, the uncertainty arising from the administration’s policies, as well as distrust towards reforms that in themselves may not actually be harmful, has put investment decisions on hold. Although public spending has been very large, generating a fiscal deficit of 5.6 percent of GDP, it has not been enough to boost growth. Investment has not taken off, and on the contrary, it has fallen by nearly 15 percent.

   Colombia, as we previously mentioned, has a high dependence on oil exports, made evident by the boom and bust cycles of oil prices that generate sharp revaluations or devaluations of the national currency, distributing the fundamental balances of the economy. When prices are booming, they prevent the development of labor-intensive exports, and when they collapse, they generate fiscal deficits that prevent the implementation of countercyclical policies. This is a favorable moment for the production and export of fuels in the country, but even so, I imagine that businessmen will be engaged given their expectations of Petro’s policies.

6. The Buffer Zone

   July 24, 2024 2:57 pm Comments Off on The Buffer Zone

   Since Hamas launched its attack on southern Israel on October 7, the question of deterrence has loomed over the region: who holds it, what does it consist of, and how will the balance of forces tilt or not tilt towards a widening regional war. 

   No regional actor has raised the specter of a crumbling deterrence arrangement more sharply than Hezbollah. Almost as soon as Israel began its genocide against Palestinians in Gaza, the possibility of a “second front” war in Israel’s north has been in play: will Netanyahu push for escalation to sate a war-hungry populace and an extremist political coalition? Will Hezbollah push for escalation alongside other members of the Axis of Resistance? Are escalations of rhetoric, media interventions, and military operations a path towards war, or the continued management of mutual deterrence?

   In the following interview, writer and lawyer Dylan Saba and Phenomenal World editor Jack Gross speak to Nicholas Noe about these developments, Hezbollah’s growth, and the possibility of “all-out” war between the IDF and Hezbollah. Nicholas Noe is a senior fellow at Refugees International, the director of the Foundation for Global Political Exchange, and the translation service Mideastwire.com. He is the author of numerous articles and commentaries on Lebanon and the region, and the editor of the 2007 book Voice of Hezbollah: The Statements of Sayyed Hassan Nasrallah.

   An interview with Nicholas Noe

   Jack gross: Despite talk about containing regional conflagration since October 7, there has been a very active conflict across the border, with many casualties, infrastructural and agricultural destruction, and significant depopulation on both sides. What has been happening in southern Lebanon and northern Israel since October?

   nicholas noe: This isn’t an easy question to answer, given the points of view that are implicated: the Israelis and Lebanese on either side of the border, the residents of the nearly eighty-year-old Palestinian camps in Lebanon, especially the Rashidieh camp near Tyre, the residents of Beirut. The question of what is happening, who is being affected, how they are being affected, and what this conflict means to them is not so simple to answer.

   In basic terms, a tit-for-tat exchange between Hezbollah and Israel has been underway since October 8. Reports estimate over 95,000 Lebanese have been displaced from their south, and 60,000 Israelis from their north. Israeli strikes have killed over 300 Lebanese, while Hezbollah strikes have killed thirty Israelis. Thousands of homes have been obliterated in southern Lebanon, and farmland has been destroyed by hundreds of white phosphorus attacks. Last month, the IDF announced that its plan for a full-scale attack in southern Lebanon had been approved.

   But from a strategic military point of view, what we have is an unprecedented situation in the so-called Arab-Israeli conflict: for the first time, a group from the Arab side has been able to militarily assert what the Israeli side calls a “buffer zone.” This is a huge deal. Many things have transpired over the last nine months that some analysts predicted, but this situation is unprecedented and extremely significant. Things are in a very different place from five, ten, or twenty years ago—and this is a consequence of a transformation in the military balance of power. 

   Dylan saba: Can you say more about the buffer zone, and why that’s a significant development?

   NN: The fundamental development is that for the first time in, let’s say, contemporary Israeli history, their opponents have de facto created an area within what Israel considers its borders that cannot be inhabited by Israelis. This has never happened before, and it has a huge bearing on Israel’s desire or willingness to escalate with Hezbollah. 

   Ds: Let’s back up a little bit. Who is Hezbollah, as a political and military force within Lebanon and in the region more broadly?

   NN: Hezbollah is a Lebanese, Shia political party and military organization, that came into being during Israel’s war on Lebanon in 1982. It has decisively become a regional, international actor. It has done so by building its capacities, such that today a key ally of the main superpower in the world is unable to take decisive military action against Hezbollah because of how significantly they have changed the balance of power and the qualitative military edge.

   Hezbollah is now a major force that has only grown in power over the last twenty years, and it has been able to do so, I would argue, because of the failure to address the underlying grievances and structural problems that have existed for many decades.

   jg: Could you say more about that growth? How have political and economic factors in the region, Hezbollah’s involvement in Syria, and its deepening relationship with Iran led to the growth of its military capabilities?

   NN: Militarily, Hezbollah has proven itself to be very proficient in learning and building their capacities. They did it under duress in 2005, when the Syrian army was kicked out of Lebanon. They did it with their so-called ally Bashar al-Assad and the dictatorship in Syria in 2011 until the present. They have learnt and built their strength. And politically, there are no durable solutions on offer to the underlying grievances that make Hezbollah an effective actor—and the failure to produce those solutions, particularly in 1999 and 2000, is an origin point for the present. 

   In February and March of 2000, Hassan Nasrallah, the head of Hezbollah, gave two key interviews, as Hafez al-Assad was traveling to Geneva to broker a peace deal between Syria and Israel. That deal would have obligated Lebanon, because Syria had 30,000 troops and tens of thousands of secret police in Lebanon. Hezbollah was at the time a relatively weak actor.

   In these interviews, Nasrallah said that, if Syria went for a peace deal, Hezbollah would continue to resist the Zionist program: they would protest this normalization, they would reject Israelis traveling to southern Lebanon. And a journalist from the Egyptian newspaper Al-Ahram provocatively asked him, “What will you do if there’s an Israeli flag on an Israeli embassy in downtown Beirut?” This was where the region seemed to be headed. Nasrallah’s reply was that Hezbollah would resist it, and they would organize conferences against it, but the subtext for the Al-Ahram reader was that they wouldn’t car bomb the Israeli embassy. The Syrians had the preponderance of power in 2000 in Lebanon whether Hezbollah liked it or not. 

   He also made a second point, which was that Israel would not go down the peace path. He was right, of course. There wasn’t peace in 2000, the Syria track collapsed, and Camp David collapsed. 

   In May 2000, the Israelis left Lebanon without a peace agreement under fire from Hezbollah, marking the first time an Arab force ejected Israelis from occupied territories. Hezbollah’s bet since then has been a belief that the Zionist Israeli project will collapse. That was the occasion of his infamous “spider’s web” speech, in which he said “Israel, which owns nuclear weapons and the strongest war aircraft in the region, is feebler than a spider’s web.” That was twenty-four years ago—before 9/11, before the US-led global war on terror, which had enormous effects on the region, before Obama and the promise of a new detente, before Daesh, before the Arab Spring. None of these events have changed that fundamental claim. He would often make statements challenging other leaders to pursue a peaceful track, which would put Hezbollah out of business. But unfortunately, as he was right to assert, that track seems unavailable.

   Ds: What exactly are the underlying grievances? In what sense are they irresolvable? And if they are, was that a foregone conclusion since 2000, or have the events since October 7 set Hezbollah and Israel on a new course of confrontation? 

   NN: Hezbollah bears a number of different interests. For example, they are certainly interested in the preservation of the Islamic Republic of Iran and its power, even if that means a nuclear program in the future. These interests are related to their own future as an organization. But in this case as in others, the reduction of sources of conflict—i.e. the nuclear program—reduces the potential that they can act on that interest. 

   I personally wish for a just resolution and the construction of Palestinian rights, addressing the Israeli occupation, which is of course the foundational grievance—the fundamental source of regional conflict. But if the Israelis and Americans had been smart, they could have leveraged the Iranian nuclear deal to de-escalate the rationale that has led Hezbollah to become as “dangerous” as it is now. 

   Hezbollah claims a right to resist Israeli occupation, because Sheba’a farms, Kfarchouba, and Shmail Ghajar (northern Ghajar) are occupied by the Israelis. Okay. The Israelis could—in one hour—end Hezbollah’s legal claim of fighting to liberate occupied territory. They could do it in an hour, but they haven’t in the twenty-four years since they left south Lebanon. We can have a long discussion about Israel’s justification for this, but the point is that they could easily eliminate this issue by leaving those territories, which are not Jerusalem or Judea and Samaria. It’s not their big issue, and it’s also what the Lebanese who are opposed to Hezbollah recommended: Take away their raison d’etre! Put it in the UN trusteeship! Nasrallah himself said it, in 2000, “Let the Israelis leave Sheba’a. Then, the Israeli government can stand up and say ‘Do we occupy any more Lebanese land?’ To which the Lebanese will have to reply, ‘No.’ And the matter will be closed.”

   If Israel cannot make a political concession on a grievance as small as that, where they sacrifice no strategic advantage whatsoever, then the prospects for any other de-escalation seem slim.

   Ds: With the ceasefire talks between Israel and Hamas looking pretty much dead—certainly, the Netanyahu government doesn’t act interested in really pursuing them further—it seems like the Israelis and the Americans are going to try and leverage what’s being marketed as a unilateral wind-down, or semi-ceasefire, on the part of the Israelis, thereby de-escalating the conflict in the north. This seems like a huge long shot. Do you see any pathway to de-escalation that can bypass a bilateral Israel-Hamas ceasefire agreement?

   NN: The path to de-escalate the situation between Hezbollah and Israel is through an agreement with Hamas on Gaza, full stop. The Axis of Resistance is a coordinated front, and their coordinated strategy is working despite the evident devastation. If there is to be a durable ceasefire, it’s a question of Hamas’s interests and those of their allies, including among them Palestinian Islamic Jihad, Hezbollah, and Iran. They may broadly agree to something that sounds durable, but is, in fact, very temporary. 

   But something that seems to get lost for analysts is the basic fact that these actors are in a war. Hezbollah and Hamas are not political actors driven by a need to de-escalate. These are military actors who deem military means as the only possible end to conflict. This is of course true, and perhaps even more true, for their Israeli counterparts: the belief that militarism is the only response. 

   Ds: Israel seems genuinely open to the possibility of a northern front, and should this happen, I don’t imagine that we’re on the verge of rapid victory for the Axis of Resistance. If Israel does end up crossing the border into Lebanon to root out Hezbollah in the south, it could turn into a war of attrition—one that places a massive strain on Israel in terms of its military overextension and the economic burden of mobilizing that many reserves. What is Hezbollah’s calculus here? Do they draw Israel into a long war of attrition to accelerate the collapse they are anticipating, or are they geared towards a more rapid victory, trying to overpower Israel with force and end the war via shock?

   NN: No, they know that shock and awe is not the way to succeed as an asymmetrical actor. It’s a long, patient strategy. My problem is with the idea that they can, over the long term, have a reasonable chance of success measured from their own metrics, which are deeply problematic. I’m not sure they can even reach success over the long term on their own terms. 

   Ds: Do you think Hezbollah is preparing for a scenario in which Israel invades through Syria?

   NN: If Hezbollah were betting on Assad for anything they’d be in a very weak position, but they know that. Hezbollah is sure of one thing, which is themselves, their fighters, and their allies—the true believers. Then there are people in the villages and the broader Lebanese milieu who are supportive, as well as the Islamic Republic of Iran, the Houthis, and the Shia militias in Iraq and Syria.

   Ds: So if military escalation carries the day on both sides, what is the transition from the gray area that we’re in now to an open war? Would the Israelis initiate a ground invasion of southern Lebanon, with intense and widespread airstrikes leading up to it? Another possibility is a massive strike from Israel calibrated to spark a Hezbollah invasion of northern Israel. There have also been rumors (or boasts) from the Israeli side that they know Nasrallah’s location in real time. Could the threat of assassination spark an open war?

   NN: We have no way to understand how this might begin. The Nasrallah target is a different issue, but I seriously doubt that after forty years they could get him. They can’t get Sinwar or Mohammed Deif or others.

   But if we put speculation aside, the basic issue remains that Hezbollah is strong enough to represent an existential threat to the state of Israel. It’s very hard to understand how you diplomatically arrive at a deal, given the pretty clear pathway toward escalated conflict. I thought for a few months that the Israelis and the Americans could save face by accepting a deal in south Lebanon, with Hezbollah redeploying some of their elite Radwan units, but I don’t think that’s possible anymore. De-escalation has been deferred at every turn. There was a chance twenty-four years ago, and there was again a chance to render Hezbollah irrelevant via America normalizing relations with Iran, but right now we’re going towards a deeper conflict, and I don’t see how the actors that are involved can head that off.

   jg: Can you speak about the southern Lebanon? It is a region that was under Israeli military occupation for almost twenty years, with Israel retreating in 2000 to the internationally recognized border. What was the political significance of the withdrawl? And what is the political culture of the South, vis a vis Hezbollah? 

   NN: Having just been in the South with friends and family, I have to say that I never imagined that people who have historically been opposed to Hezbollah, who saw family members killed by Islamists affiliated with Hezbollah, would now be ready to fight with them. But in this era, it’s not really breaking news. From a personal perspective, I find it surprising—I never expected to see bartenders who hate Hezbollah buying weapons and preparing to defend their villages. But this degree of unity is not breaking news to, say, intelligence services of various countries. This may have something to do with why so many are confident in telling the Israelis to not pursue escalation.

   We should also consider the pressure on Hezbollah from those same areas to end this conflict. This is also really important to the other major power broker in South Lebanon among Shia, which is Haraket Amal. At this point, it seems pretty fantastical to imagine Israel reprising its strategy from 1982, which was to drive a wedge between political, historical, or religious divisions among the people—funding a civil war, essentially.

   Ds: What is Hezbollah’s endgame? We’ve heard Nasrallah talking about the “great war” for a long time. What is the great war, and does Hezbollah see itself as preparing for it at this moment? 

   NN: We have seen pretty clear theorizations of how this ends, from both sides. Powerful Israeli actors have made public statements about what victory means: the people of Gaza killed or expelled to tents in the Sinai or wherever. The vast majority of Palestinians in the West Bank would be also transferred somewhere else, maybe even Palestinian Israelis too. We know this vision of the endgame. 

   For Hezbollah’s part, they have articulated extensively the view that Israel will not be able to withstand a “great war”—an open war with hundreds of thousands of fighters—presuming that scores of Israelis with second passports or easy paths for out-migration will leave the country rather than fight for it. The “great war” will create a cataclysmic moment for Israel. 

   Let’s set aside some of the fantastical aspects of these two views, and attempt to look at it from a more realist perspective. It’s not a given that the Israeli state and its body politic will fracture under the pressure of a massive attack. It’s unclear whether enough people would suddenly leave Israel, or at least enough to create a kind of tipping point. Either way, a huge segment of Israelis may enter military service to fight for the land they believe is theirs. A fundamental aspect of the Hezbollah strategy for victory that Nasrallah has articulated repeatedly is something like: “In Lebanon, we’ve dealt with no electricity, no water, over decades, we can bear suffering. The Israelis cannot, and that will be their fatal flaw.” I’m as unconvinced by this as I am by the extremist Israeli vision of victory.

   jg: The picture you’ve painted is one of many years of tensions stacking up such that escalated conflict is basically inevitable. And the fundamental fact underlying that inevitability is the military capacity of Hezbollah. Have analysts failed to internalize that the military balance is determinative? What do people get wrong about the conflict?

   NN: It didn’t have to come to this—I wouldn’t go so far as to claim inevitability. The Israeli state has been militarily dominant for many decades. Within the responsive project by their opponents, Hezbollah has become the most successful faction to date, and Iran backed them quite successfully, such that in the present, Israel cannot act upon its doctrine of deterrence in regards to Hezbollah and Iran. Israel cannot disproportionately strike its opponents without a huge counter strike. That’s unprecedented in the state of Israel’s history, at least since its founding.

   Actors on all sides of a war may see each decision as a gamble, so that if something goes wrong and you start a big war, it was simply a mistake. But that really reduces the legal, moral, and strategic responsibility required by the circumstances. In my view, there are no mistakes or miscalculations. I think we should say the truth, which is that the combatants are willing to risk escalation, and the relevant actors here are military actors. These are military actors who are in control. The Israeli destruction of Gaza is very calculated. They are good at this; so is Hezbollah, so is Iran—the unprecedented April 13 encounter is a measure of how these actors’ coordination can minimize harm. The single biggest anti-missile engagement in modern history resulted in a single partial casualty. This should tell us that any talk about “miscalculations,” let alone “stumbling into war” or whatever other metaphors are used, is incorrect. 

7. Supermarket Economics

   June 27, 2024 4:03 am Comments Off on Supermarket Economics

   Behind the retail grocery industry’s image of public routine churns an incredible and evolving feat of collective enterprise. The companies that own and operate grocery stores serve as the primary source of food for the country’s 130 million households. Employing some 2.8 million workers across 62,000 locations—about three stores for every incorporated municipality in the country—supermarkets are anchor institutions in the developmental pattern of American capitalism. (Employment at warehouse clubs such as Costco and supercenters such as Walmart: another 2.4 million workers.)

   Supermarkets have also undergone a phase of restructuring. Over the past generation, as general merchandise retailers such as Walmart or Target have used their distribution networks to move into food, supermarket owners have responded by consolidating ownership. Stitching together larger and larger purchasing networks through waves of mergers, the modern grocer has become a species of the broader family of retail giant, pulling the commodities of the erstwhile truck farm and wholesaler of manufactured foods through the new “logistics” industry that has grown up since the deregulation of trucking and airlines in the late 1970s.¹

   Today, over half of all sales in food retail come from just eight companies.² The two largest grocery-store owners, Kroger and Albertsons, together employ one in four retail grocery workers. In October 2022, these two industry leaders reached a merger agreement: Kroger would purchase a 100 percent equity stake in Albertsons for $24.6 billion. The Federal Trade Commission (FTC) opened an investigation, subpoenaing over 2 million documents from Kroger and Albersons and an additional 300,000 documents from ninety-one third parties. In an attempt to persuade the FTC to allow the merger, Kroger entered into an agreement with third-party C&S to sell 413 stores—a technique Albertsons used to complete the purchase of Safeway in 2015 (it later purchased the third party in that deal.) Unsatisfied with this remedy, the FTC’s general counsel on February 26, 2024 filed a complaint in the United States District Court for Oregon seeking a preliminary injunction pending findings by the FTC. 

   The FTC’s complaint identifies over 100 metropolitan areas in seventeen different states where Kroger and Albertsons subsidiaries currently compete in the same geographic markets for customers, labor, and suppliers. In these places, it argues, a combined Kroger-Albertsons could raise grocery prices and lower grocery wages. Nine state attorneys general joined the complaint seeking a preliminary injunction. Under the original terms of the deal, Kroger and Albertsons have until October 9, 2024 to complete the transaction, after which either party may exit.³

   Kroger and Albertsons have sought to delay both the Oregon hearing for a preliminary injunction and the Washington hearings of the FTC. The companies have yet to say whether they will extend the deadline of their merger agreement until after October 9 in the event an injunction is granted in any court. Hanging over all of this is, of course, the federal election on November 5. Historically, when antitrust legislation is enforced and tight elections approach, large mergers proposing to reorganize ownership of entire industries turn on partisan control of the White House. Nixon approved the Pennsylvania Railroad’s purchase of the New York Central in 1969 after Johnson had delayed it, and Nixon offered antitrust relief to ITT in exchange for funds for the 1972 Republican National Convention. A veritable merger wave, the century’s third, followed corporate America’s shift to Reagan in 1980. In October 2016, when many expected a Clinton victory, AT&T announced its plan to purchase Time Warner. Recently Trump has said explicitly to the oil industry he will allow consolidation in his next administration. 

   To understand how the industry’s evolution brought the merger and public challenge from the FTC and the states, Phenomenal World editor Andrew Elrod spoke with John Marshall about the history and economics of the US retail grocery industry. Marshall is director of capital strategies for UFCW Local 3000, which represents over 52,000 grocery workers in the Pacific Northwest; advisor to the president for UFCW Local 324, which represents over 22,000 grocery workers in California; and is also a former senior capital markets economist for the UFCW International Union.

   andrew elrod: Just this past December, the US Census released its most recent data on the number of firms, establishments, employment, and payroll in the US economy. It found over 96,000 grocery store locations employing nearly 3 million workers.

   Three quarters of employment came from less than 1 percent of companies, which own a quarter of all locations.⁴ So employment is dominated by larger stores. There were also 20,000 specialty food stores and 53,000 general retailer or “big box” stores. Altogether, these 170,000-some establishments are the main points of distribution of household food in the United States. With average household spending around $8,000 per year, the 130 million households in the US make this a trillion dollar market.⁵ It’s also a market critically important to public welfare: in the US, earners in the bottom half spend between 9 and 40 percent of their after-tax earnings on food at home. 

   How does this rough description compare with your understanding of the industry? What do these census statistics leave out or obscure in the structure of the retail grocery market?

   John marshall: Those figures are basically consistent with my understanding of the industry. Food is bought and sold everywhere from farmers markets to convenience stores to airport lounges, from restaurants to traditional grocery stores, and so on. Government agencies and private sector research institutions employ different parameters, but the figure that people generally use when they talk about the grocery industry is something between $900 billion and a trillion, and as you said, if you’re going to be even more expansive, up to one and a half trillion—that’s if you include the soda sold at the drugstore. In the traditional “one-stop-shop” grocery store segment of the market, Kroger and Albertsons are the two leaders. 

   There is segmentation of the industry across the various supermarket brands in the United States, corresponding to the changes in distribution of income in the workforce. Forty years ago, we were a less unequal society, and middle-income grocers like Kroger and Safeway had a larger market share because the middle class was larger. These were middle class grocery stores that offered middle class products to families with middle class desires and tastes. 

   What we’ve seen now is the hourglass-ing of the supermarket industry: significant growth at the high end targeted to higher income consumers, like Trader Joe’s, Whole Foods, and Sprouts, which have premium natural organic products, and warehouse clubs like Costco, which also have a significantly higher household income customer base. 

   At the same time, there’s been significant growth at the low end: Walmart, Dollar Tree, Dollar General, Family Dollar. Hard discounters like Aldi and Grocery Outlet have grown significantly as well. The changing nature of supermarkets and who they’re catering to has followed changes in income distribution pretty closely.

   This is the larger backdrop but it’s important to point out that there’s no reason why Kroger and Albertsons couldn’t also be expanding their store footprints as well. Kroger has a discount banner—Food 4 Less—which is very profitable but they haven’t invested in expanding it. Instead Kroger and Albertsons have spent billions of dollars on Wall Street investor payouts.

   ae: And now the two largest firms at this “middle of the market” position are trying to merge, and the Federal Trade Commission, led by administration appointee Lina Khan, is trying to stop this deal.

   jm: The proposed Kroger-Albertsons merger is, I think, a significant turning point in the industry, and is symptomatic of some underlying trends. 

   The industry has been consolidating slowly but surely for decades. In the 1960s and 1970s, we had a very fragmented market with lots of relatively small operators in many local markets across the United States. That began to change with the introduction of scanner technology at the checkout in the 1980s and 1990s, when grocery stores began to consolidate significantly because you had to have capital and scale to invest in that technology. Local grocery stores or bodegas weren’t able to. 

   This consolidation happened at the same time as the increasing introduction of new products and services into supermarkets. So you began to see delis and meat counters, seafood counters, pharmacies, fuel centers, and floral departments—significant new product lines that had previously been the purview of specialized retailers were consolidated in what we now call supermarkets. The square footage of supermarkets grew significantly during this period, and employment grew in the sector as well.

   ae: What have the trends been since this earlier wave of consolidation?

   jm: If you go back to the early 1980s, according to the best data that’s available, about 35 percent of the industry was unionized. Today it’s about 13 percent. During the late 1990s—when the union firms were consolidating—we saw the peak in labor hours, the peak in employment in the sector, and a peak in average weekly compensation for workers.

   Then in 2003 there was a major strike of over 70,000 UFCW members lasting over four months in Southern California against the major employers, including Kroger and Albertsons and others, such as Safeway, which is now part of Albertsons. I call it a strike but it was really a lockout deliberately instigated by the employers, with the intention of imposing a second, lower tier of employment—more part-time work, lower pay, less benefits, and so on. The union employers used the threat of Walmart as an excuse to justify cutting costs, although Walmart had a relatively small share of the Southern California market. And they succeeded. If you look at the aggregate data from the Bureau of Labor Statistics, not only for union workers but for nonunion grocery workers as well, there’s a real turning point in 2003. Wages began to stagnate and, in real terms, decline. Hours declined, and hours per worker declined even more, from thirty-two hours per week down to about twenty-eight hours per week—where it remains today. This reduction in weekly hours is a critical element of the way the employers restructured work in the industry, because it keeps workers in a state of precarity—more easily manipulated by managers and more willing to accept undesirable shifts simply to get more hours. This essentially created an internal reserve army of labor.

   

   This attack on labor standards was made possible by the merger wave of the 1990s that allowed the employers to become larger and more geographically expansive, and it gave them the financial ability to weather a long strike. That four-month strike was very damaging to both the union and to standards in the industry. One of the main lessons the UFCW took away from that defeat was that it was no longer possible for individual locals in one part of the country to negotiate in isolation from other locals, and that nationally coordinated bargaining with the major retailers was a necessity if we were going to survive. Unfortunately that lesson was quickly forgotten and only a handful of UFCW locals have coordinated in recent bargaining rounds. The group of locals I’m currently working with is trying to expand that coordination, and the merger fight has helped us build toward that goal.   

   The crucial context for the 2003 fight was the significant growth in competition from super centers, specifically Walmart, that had begun to introduce grocery products into their discount store formats. Previously, Walmart was just general merchandise, but in the 1990s and 2000s they ramped up their sale of grocery products. Of course, Walmart is famous for “everyday low prices,” and these employers in the union sector—Kroger, Safeway, Albertsons, and others—decided that they needed to significantly reduce labor costs in order to compete on price. To be clear, the union employers were not yet facing meaningful competition from Walmart in Southern California, but they used the threat of Walmart as one rationale for attacking labor.

   Alongside Walmart, major retail employers sought size and scale to gain bargaining power in relation to suppliers. It’s well documented that Walmart’s use of scanner technology allowed for real-time data on what products were selling in which markets, at which prices, during what periods of time. Because of their size and the quantity of transactions, they began to get even better data on products than the manufacturers of those products had. This allowed them to gain significant leverage over those manufacturers in bargaining for prices. So Walmart began to get lower prices from Procter and Gamble, Nestle, and a whole range of other grocery products manufacturers. Companies like Kroger, Safeway, and Albertsons emulated this strategy. 

   In 2015, Albertsons acquired Safeway. Now Kroger is proposing to acquire Albertsons, which would make it just slightly smaller than Walmart in terms of grocery sales nationally. In places like California, Denver, Chicago, and other big metro areas in the United States, Kroger and Albertsons are together much bigger than Walmart.

   ae: There is a similarity to other union labor markets, such as in auto or long-haul trucking: growth of the non-union market, which the firms beholden to union contracts respond to by consolidating in order to increase bargaining power against the union. 

   You mentioned barcode scanners. To what degree is technology another force for consolidation in play here? Usually people tend to think of consolidating ownership and technological innovation as things that reduce employment. Did that happen here?

   jm: The labor reductions associated with the introduction of barcode scanners were relatively modest but that technology did give retailers significant new data regarding product sales, which allowed them to eventually negotiate better prices from manufacturers and to manage inventory much more efficiently. It also gave retailers much greater information about customer traffic patterns and gave them more confidence in their attempts to project the ebbs and flows of in-store labor demand, which contributed to the push toward greater volatility in workers’ schedules and the growth of the part-time segment. There’s evidence that, in addition to undermining worker stability, just-in-time scheduling is also counterproductive from an operations perspective because it inevitably leads to understaffing, but employers do it anyway.  

   E-commerce is of course a major technologically-driven development. In 2017, a very significant event occurred in the industry, and that was the acquisition of Whole Foods by Amazon. Up to that point, e-commerce for groceries was a very small part of the market. It had been tried during the dot com bubble of the late 1990s; a company called Webvan attempted to become an online seller of groceries and it resulted in a spectacular failure. 

   But because of Amazon’s significant size, power, and technical prowess, it was assumed that it would be able to crack the code. It’s also notable that the e-commerce market was and remains targeted at higher income consumers, which is very well matched with Whole Foods’ existing customer base. And so it was thought that the Whole Foods stores were well positioned to get to those shoppers. That was in 2017, and despite the fact that there’s been seven years now of Amazon’s ownership of Whole Foods, it hasn’t exactly worked out that way. The grocery industry is still trying to figure out how to make deliveries on an e-commerce basis profitable.

   In addition to the physical characteristics of food, which make it, unlike books, very difficult to deliver securely, the margin on food is relatively small. When Amazon went into books and other general merchandise categories with significant sales margins, it had a real opportunity to be cost competitive, even with delivery costs added into the equation. Sales margins for food, on the other hand, are two or three percent.

   The employers have tried to offset the increased costs associated with e-commerce by reducing in-store staffing, resulting in longer lines at checkout and an increased use of self-checkout lanes—but self-checkout has created more problems, specifically increased shoplifting, and many customers simply don’t like it, so to some extent that’s backfired. Now Kroger is trying to outsource more in-store jobs to third-party franchise operations. They currently use this model with the in-store sushi bars, but now they want to expand it to floral, deli, fresh-cut fruit, and eventually other functions. Franchise outsourcing isn’t a “technology” in the strict sense of the term, but it is a classic fissuring technique that, along with gig misclassification, we are facing right now.

   ae: But the supermarkets aren’t unprofitable, are they?

   jm: No, supermarkets continue to be profitable. The margin on sales is relatively low in the sector—only 2 to 3 percent of every dollar spent on groceries represents profit to the grocer. But grocery store investors and the companies don’t primarily measure profits as a share of sales. They measure profits in terms of equity investment. And with the exception of the kinds of warehouses and technology in e-commerce, which I’ll get to in a moment, building grocery stores and maintaining them is not as significant an investment as many other industries. Return on assets and return on equity in the supermarket industry, which is a more important measure of profitability for investors, is toward the top of all industries in the economy.  

   

   

   The reason return on equity, in particular, is so high is not only because the capital investments typically required are less significant, it’s also because the grocery industry tends to be very stable through economic cycles. It is even counter cyclical in some ways. If you’re a lender, you look at a grocery store and you think, ah, this is a company that’s a safe credit even during a recession. Typically, supermarket chains have had more debt, all else equal, than other businesses.

   Because they’ve been able to finance themselves with cheaper debt, the equity investors in grocery stores have been able to generate larger returns on their equity investments. The expectation is when the existing debt comes due, they’ll be able to roll it over into more debt and typically that’s what they’ve been able to do, as long as they continue to have good business prospects. If you’re well run, and you are not targeting a more discretionary, higher-end, and luxury consumer, but one that’s relatively immune to the business cycle, usually you’re able to use debt very safely. 

   ae: So, 2 to 3 percent net margin and what is return on equity? 

   jm: Over the past several years publicly traded US food retailers have reported an average return on equity of approximately 25 percent. 

   

   ae: What is the pressure to consolidate further? Having 25 percent returns on equity seems very lucrative.

   jm: It’s been very profitable historically. But I think they are concerned that the industry is going to change, and they see themselves potentially benefiting from that change. Retail grocery has a quality that is very attractive to companies like Amazon: volume. Consumers purchase food much more frequently than they purchase books or electronics or other general merchandise. The frequency of that business makes it desirable for a firm like Amazon because there are cross-selling opportunities: “Oh, it’s Sunday and you’re buying eggs and milk, would you like a phone charger with that?”

   That’s Amazon’s vision, and their entry in 2017 made supermarket executives and investors fearful that they were going to lose significant market share if they didn’t also have the ability to provide this service to consumers. That threat led to new partnerships and new investments in 2018 and 2019, which accelerated with the explosion of delivery demand in 2020 due to Covid.

   ae: Is the predicted large shift to e-commerce happening?

   jm: It hasn’t taken off the way it was expected to. Kroger is now into its sixth year trying a capital-intensive, semi-automated model in partnership with the British firm Ocado, and it still has not penciled out—just this March, Kroger announced the closure of three e-commerce facilities. Despite its significant investment in e-commerce capacity, it’s only 8 percent of Kroger’s sales.
   
   In addition to the very significant capital investment associated with building warehouses and robots, and the additional delivery labor, the problem is that—aside from the temporary burst in 2020, and the relatively small thirty-minute delivery market—there’s just not enough demand to justify building warehouses the size of three football fields. But that’s what Kroger is doing with Ocado.

   One reason companies like Kroger have continued to invest in e-commerce is that they see it as a stepping stone to new advertising revenue streams. Because e-commerce sales are conducted through a smartphone application or a computer screen it introduces an important opportunity for brands to reach consumers right at the point of purchase. That means Kroger can sell banner ads and search engine optimization to Nestle, Proctor & Gamble, etc. Kroger touts its ability to personalize these ads and help advertisers target them at precise demographic audiences based on the first party data Kroger and other retailers collect from customers. This is already a multi-billion-dollar industry and it’s projected to grow significantly. So Kroger hopes this new revenue stream will offset the higher costs associated with e-commerce fulfillment.

   ae: Has Albertsons also made large commitments in this area?

   jm: Along with its e-commerce initiatives, Albertsons is seeking to capture advertising revenues associated with online sales and all the customer data it collects. Like Kroger, it also launched its own retail media effort—Albertsons Media Collective—in late 2021.⁶

   In terms of grocery sales, as opposed to selling advertising space and data, Albertsons’ e-commerce relies mainly on third-party gig delivery platforms like Instacart and DoorDash. They have a small partnership with a company called Takeoff Technologies that builds and services what’s called a micro fulfillment center (MFC). Basically adjacent to an existing grocery store, there is this vertical hive of bins with different kinds of products inside them, which are automatically selected onto a conveyor belt. The conveyor belt will be brought to a human picker, who will then pick items from each of these bins and put them into a customer’s tote bag. The tote bag will then be available either for pickup by the customer or for delivery by a misclassified gig worker from DoorDash or Instacart.

   MFC’s require significantly less capital investment than the model used by Ocado, but they don’t work for many of the most popular selling items: bananas and broccoli crowns are too fragile; bottled water and paper towels are too bulky. This results in a situation where you can automate part of a customer’s order, but that has to be combined with items manually picked by a human worker. So when you visit these micro fulfillment centers in Safeway stores owned by Albertsons, the first thing you notice is lots and lots of workers, right? 

   This is increasing, rather than eliminating labor—which the firms admit. And this is before you get to the cost of investing in the MFC, the royalties that have to be paid to software developers, and so on. Analysts will ask on earnings calls about expanding these systems, and Albertsons executives just avoid the question. They’ve been doing it for four years, and I think have only six or seven throughout a network of 2,200 stores.⁷

   ae: Was it evident in the summer and fall of 2022—when the merger agreement was signed—that all of these expectations about e-commerce were being disappointed? Is the merger a recommitment to this soft market, to try and manage excess capacity?

   jm: Yes, it’s fair to say that relatively soon after Kroger began its partnership with Ocado, they acknowledged that it was performing below expectations and profitability remained a challenge. For Kroger, volume has been a real disappointment in its new e-commerce facilities, which I think is one of the primary reasons why they are attempting this very aggressive acquisition of their largest direct competitor, Albertsons. By combining Albertsons’ e-commerce sales with their existing e-commerce sales, I think they hope to get enough volume moving through these warehouses—and to achieve the level of delivery densities—to make the Ocado system profitable.

   Kroger CEO Rodney McMullen is the one who chose to make this very significant investment in the automated warehouses with Ocado, and that is proving to have been a bad decision. I think he is personally motivated to find a way to make that investment pencil out. And my expectation is that it won’t, and that the merger will be blocked, and that Rodney McMullin’s days as the CEO of Kroger are numbered. 

   More broadly, real doubts remain about whether the data-driven expansion into e-commerce and retail media will be a successful strategy for the supermarkets. In addition to the deteriorating in-store experience I mentioned, it’s not clear that most consumers really want this model. Kroger says it is concerned about losing market share to Walmart and Amazon, but it’s the smaller regional chains that are in some ways a bigger threat because they’re doing a much better job at offering local products and a better in-store experience. Trader Joe’s is another example that’s often cited as a threat to Kroger and Albertsons’ market share, but look at the Trader Joe’s model: zero e-commerce, zero self-checkout. I’ve got a lot of problems with Trader Joe’s, particularly the company’s illegal threats and interrogation of workers trying to form a union, but the company is an example of a successful business model that rejects in-store automation and surveillance capitalism.

   ae: You mentioned Walmart’s expansion into food during the 1990s and 2000s as a source of competitive pressure on grocery retailers. Yet you also mentioned the geographic nature of grocery markets. And so I wonder with all these other segments in the market, different clientele, and different geographic markets, to what degree is this variation in firm strategy introducing competition in the market, as opposed to segmenting the market. It sounds like Trader Joe’s is taking Kroger’s customers. 

   jm: This is significant in the context of the antitrust case. What we know is that customers who shop at Trader Joe’s also continue to shop at Safeway and Kroger, because you can’t get everything you might want at Trader Joe’s. Trader Joe’s has far fewer items for sale versus a traditional Safeway or a Ralph’s.

   To some extent this is also the argument that UFCW made in 2003, during the strike in Southern California. The threat of competition from Walmart was anticipated, but not yet real. Walmart had not, certainly not in 2003, and to some extent still not today, succeeded in penetrating the large coastal urban markets, whether it’s New York, or Los Angeles, or San Francisco, or Seattle. Now they have a modest presence, but for a number of reasons—not least the opposition that the United Food and Commercial Workers Union presented—Walmart’s market share in places like New York, Los Angeles, San Francisco, and Seattle is much, much smaller than their market share in most of the other markets where they compete. 

   But the real problem with Kroger and Albertsons isn’t that nontraditional retailers like Trader Joe’s are taking away their market share, it’s that Kroger and Albertsons haven’t been opening new stores while other retailers have. Instead, Kroger and Albertsons have spent billions of dollars on massive dividends and share buybacks. 

   ae: What about the labor market? One of the FTC’s arguments is that Kroger purchasing Albertsons will reduce competition for hiring workers. Of about twenty pages of argument, five of them are spent making the case that combining the two largest unionized retail grocers will reduce demand for union labor, that they set their wages based on what their competitors are doing, and that in negotiating labor contracts this competition strengthens unions at the bargaining table. It lists union contracts for something like 70 counties across four states where Kroger and Albertsons are signatories together employing over 65 percent of the retail grocery workforce. The companies disregard this and say the merger, by allowing the combined Kroger-Albertsons to compete with non-union companies like Walmart, will actually be good for workers. Is it a common labor market or is the labor market also segmented? Who comprises the labor market for grocery retail?

   jm: It’s segmented across a number of dimensions. One significant dimension now is that particularly in large metro markets, in places like California, Seattle, and Denver, a large share of the workers are in the union, and so there’s the collective bargaining market. For workers, that market has significant benefits that the nonunion sector lacks, particularly when it comes to retirement and health care benefits. Wages for employees who have been there for a number of years are also higher. Wages at the starting level are more comparable between the union and nonunion sector, unfortunately, but the benefits are far superior. 

   What we’ve typically seen is that older workers—workers who are thinking about retirement, thinking about the need for healthcare, particularly family healthcare—are much more attracted to work in the union sector, and once they’re in the union sector and have those benefits, they don’t want to leave. 

   During the Covid pandemic, with restaurants shut down and supply chains disrupted, significant questions emerged regarding the economy’s ability to continue to provide essential food to the population. It was an important moment for grocery workers. They were, for the first time, considered to be essential workers, because of the critical nature of their role at that point in time. And that was important to elevate the status, and even the standards in some cases, of work in the industry.

   It’s a huge advance that the FTC has used the collective bargaining market as a distinct market for the purposes of their labor argument in their opposition to the Kroger-Albertsons merger. The FTC is correct in doing so: the collective bargaining agreements cover the majority of the workers at the two companies, and the wages and benefits in those agreements are established through collective bargaining between the union and the two companies. Currently the union is able to play the two companies off against one another in order to make improvements in the contracts, but if there were only one company, Kroger, that power would vanish. So the FTC is acknowledging that reality, and that is, as far as I’m aware, unprecedented. 

8. Market Ideologies

   June 13, 2024 10:06 am Comments Off on Market Ideologies

   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.

9. The Structure of the US Treasury Market

   May 30, 2024 6:13 pm Comments Off on The Structure of the US Treasury Market

   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.

10. Positioning Aden

    May 23, 2024 8:09 am Comments Off on Positioning Aden

    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.