Congo Now

Haha! Loved this poster of Rosie the Riveter - totally apt!

Congo – an economy of blood minerals

I just finished reading Radio Congo by Ben Rawlence which piqued my interest in the Democratic Republic of Congo.  You don’t hear much about the country unless you actively seek out news and information about it.  The mainstream media almost never reports on it, even though the country has been through the most violent wars and grotesque human rights violations of modern time. So sadly, while most of us probably remember the Rwandan genocide of 1994, we are largely oblivious of the wars it triggered in neighboring Congo in 1996; the Second Congo War of 1998, also known as the Great African War because of the large scale involvement of African countries; and the violent outbreaks of conflict that continue to plague the country to this day.

There are political reasons, other than just a mere lack of interest, that this war is so underreported – the top being the illegal and unethical exploitation of Congo’s mineral resources, a business that is worth millions, if not billions, of dollars a day!   

Congo’s mineral wealth makes it the richest patch on earth.  It holds 80 percent of the world’s coltan reserves – which is used to produce high-end electronic goods and so will not run out of demand anytime soon; more than 60 percent of the world’s cobalt; and is the world’s largest supplier of high-grade copper. Other than that, gold, tin, zinc, diamonds are among the minerals mined there. Although war may have started because of ethnic antagonism, it has been perpetuated due to the mineral wealth of Congo, making the country a victim of the resource curse.

This is how the war economy is working.  The corrupt government headed by Kabila grants concessions to multinational firms to mine minerals in return for cuts and support against opposition groups in the country. Cuts make their way to the private coffers of the government. In areas where the government does not have a stronghold, these corporations are able to assert authority and exploit minerals by making alliances with rebel and militia groups, who use the small profits made in the partnership to buy weapons to threaten the local population and maintain their control.  The result of this is that around 80 percent of Congo’s mineral wealth is being smuggled out of the country to neighbouring countries, where it is then transported to Europe and the west.

So it is clear who the winners are in this conflict – and this is not to say that the Congolese government is without blame.  They have sold the future of their country very cheap. On the other hand, despite all the riches and resources their country holds, the people of Congo have not benefitted in the least. Per capita income is approximately 200 dollars, which is among the lowest in the world. Education and healthcare is almost non-existent. They only make cheap labour for the multinationals and warlords, often working for no wages, only the promise of food and shelter.

Backgroud

The modern conflict started with the end of the war in Rwanda when 1.2 million Hutu refugees and militia fled to Congo in fear of the newly instated Tutsi government. Mobuto, then president of Congo used the Hutus in his own ethnic war against the local Tutsi groups. Rwanda and Uganda, backed by the U.S., joined in to fight the aggression against Tutsis, arming guerilla and rebel groups against Mobuto.  Mobuto was overthrown and replaced by Laurent Kabila. Kabila didn’t want to continue serving the economic interests of Rwanda and Uganda and demanded the foreign forces to leave. Seeing their economic interests at risk, Rwanda and Uganda attacked the government in 1998 using local rebels and militia. Other African countries joined in to support Kabila, in what would become the Great War of Africa.  Although the war ended in 2002, it was impossible for the government and international organizations to disband the rebel groups that spread throughout eastern Congo. Just recently, fighting has broken out again between a local militia group M23, said to be backed by Rwanda and Uganda, and the Congolese army.  There is no telling how many more lives this renewed conflict will claim.

The Case for Big Government: 'Getting to Denmark'

Denmark’s economy is characterized by a high tax and spend regime, strong labor market policies, high income equality and close to equal wealth distribution. It makes a great case study for a successful social democracy where the state has actively intervened in the market to achieve low unemployment, high-income equality, and generous social services for all.

Denmark has long been a social democracy, both in terms of its government, and its social market economic model. The Social Democrats, vanguards of the welfare state, have ruled for the better part of the last half century, pointing to the fact that Danes do not want to part with their welfare state.

The argument against big government goes something like this – high taxes, large government transfer and services programs hurt the economy because they reduce the incentive to work hard, develop new skills, save or invest, or start a new business. Denmark’s overall tax-to GDP ratio was 47.7 percent in 2011, which is quite high compared to other wealthy countries (Eurostat news release April 2013), but GDP growth, per capita income and unemployment have all seen favourable growth over the past years. Currently, unemployment is 4.4 percent, much lower than many countries in Europe, and the U.S. The Danish model must have got something right.

Strong SME presence – Denmark’s economy is dominated by small and medium sized enterprises, albeit in low- and medium- tech industries such as food, textiles, and construction. However, Denmark is not without a stronghold in high-tech sectors such as renewable energy, engineering and pharmaceuticals. SME’s are known to drive growth and create jobs, which they successfully have in Denmark.

‘Flexicurity’ – The term refers to the flexibility in the Danish labour market brought about by major structural overhauls, which made labour mobile and employment protection minimal. But this is offset by the generous social security net.

A less harmful tax mix – High taxes have not hampered employment or growth in Denmark. This is because the main sources of tax revenue are consumption and income taxes, instead of social security taxes or corporate/ employer taxes. In 2007, consumption taxes totaled 16 percent of GDP in Denmark and 13 percent in Sweden, compared to just 5 percent in the U.S. In the same year, incomes taxes accounted for 14 percent of GDP in the U.S., versus 19 percent in Sweden and 29 percent in Denmark. Income tax rate is among the highest in the world in Denmark at 55.6 percent in 2013.

Supply-side versus demand-side economics – Denmark was able to introduce supply side structural reforms early on which improved the level and the quality of the production sector, particularly technology and human capital. It recognized that favourable industrial policies, labor market policies, education and training policies, and other structural policies are the key to sustainable progress. Denmark was among the first to deregulate its financial markets and liberalize capital movements, it introduced new technology polices and labour market overhauls and an array of industrial reforms – all accomplished by 1980s. What is remarkable about these reforms is that they did not weaken the welfare state model.

Aside

Although Denmark has not adopted the Euro, its exchange rate and monetary policy are linked to the EU. This gives Denmark little influence over the value of its currency – which is usually always stronger than the Euro and this in turn, makes Danish goods and services uncompetitive.

Stole this image from instagram (:s) to share my idea of the perfect wedding! Who needs all the ridiculous hullaballoo of a wedding when you are marrying the man you love - keep it simple and real.

Austerity versus Stimulus: The Right Question to Ask

The European Central Bank has announced its commitment to keeping interest rates low. This announcement comes following the criticism many European Union countries voiced against the European austerity measures and their failure to restore economic stability.

Europe adopted fiscal austerity as the path to recovery for its economy. The reason was that the debt-to-GDP ratios were too large in Europe, i.e. they were spending a lot more than their earnings, which is not sustainable. Therefore, in order to achieve lasting stability, budgets were to be balanced.  Also,  while stimulus would have made and kept Euro’s value low making its goods competitive, it would have also caused inflation which Germany feared.  Therefore, the European Union did not have many options but to adopt austerity. Europe set about raising taxes, where they were already back-breaking, but did not quite cut spending. 

On the other hand, despite a debt-to-GDP ratio of approximately 105 percent, the U.S. signed a huge stimulus bill and aggressively started pumping money into the economy (The stimulus of 2009-12 averaged over 6 percent of GDP annually – source: The Wall Street Journal). This unwavering commitment to an expansionary stance and aggressive quantitative easing policy even earned Ben Bernanke the nickname ‘Helicopter Ben’ for talking about using a ‘helicopter drop’ of money to fight a slowing economy.  However, just like EU did not go all the way with austerity, the U.S. also shied away from a full stimulus.  Deficit reduction efforts were taking place in parallel, although not as strongly as in Europe.

So, which has been a better response? Austerity measures have a contractionary effect on economies. Keynesian economists argue that during recessions, when the economy is already shrinking, stimulative polices such as increased government spending, tax cuts, lowering interest rates are a more appropriate response. The stimulus allowed the U.S. to experience faster growth than Europe, and keep unemployment levels well below Europe’s 12 percent (Youth unemployment is as high as 25 percent in Europe). Although the U.S.’s economy has fared better, both policy measures have had little success.

One argument I have come across, made by Charles Wolf Jr.,  is that the success of either policy depends on the response of the private sector. In both, the U.S. and Europe, the private sector did not respond positively to the policies and not much was done to mitigate the reasons for this response.  In the U.S., after 2009, private and household savings went up which offset the goal of the stimulus to increase aggregate demand. Private businesses were investing abroad instead of at home, which also did not help the stimulus.

Another argument is that neither policy was adopted fully and completely. Although on paper and in the media, Europe was on the path to austerity, government spending was actually rising (see chart below for government spending before and after the crisis). In the U.S. as well, many government spending programs were cut to control the deficit.  

 

(Source: Constantine Gourdiev’s research)

Latvia has been hailed as the poster child for adopting complete austerity – even though it is not a triumphant success. Being the hardest hit economy in EU in 2008/2009, during the two years that followed Latvia's government sacked 30 percent of public sector staff and cut salaries by 40 percent. New taxes were introduced and existing ones were raised. As a result, the economy registered positive growth as GDP grew by 5.5 percent and 4.5 percent in 2011 and 2012 respectively. This is all good, but only in relative terms. Latvia has not bounced back to pre-crisis growth levels, and unemployment is still quite high at 15 percent (source: cnbc.com).

In light of all this, a more poignant question to ask would be which sectors of the economy are being affected by stimulus and austerity measures. Both measures have merit, so long as intelligent cuts and spending decisions are made; i.e. cutting spending on over-sized and non-competitive sectors, such as defense and public administration, while increasing spending on education and infrastructure which can have a significant impact on recovery.

The beautiful Canadian countryside