June 8th, 2021
The Crisis Canal
The Crisis Canal
Why did the Ever Given capture our collective imaginations? At the tail end of its moment in the spotlight, the poet Kamran Javadizadeh tweeted: “I too am ‘partially refloated,’ I too remain stuck in the Suez Canal.” Two fluorescent yellow-vested construction workers with an excavator—lego-like compared to the gargantuan hulk of the vessel—attempted to wrench the giant ship from the sand bank. Dredgers and tugboats aided by rising tides finally refloated the massive freighter, launching it back on its voyage from Yantian to Rotterdam.
While the immediate cause of the ship’s running aground may have been a sandstorm blowing in from the Sahara, the vessel’s size—it is one of the world’s largest container ships—was a decisive factor. Its stymied trip seemed symbolic of the shorted circuits of supply chains in the year of the pandemic. And, like the products it carries, the ship is a transnational project: Japanese-owned; Taiwanese-leased; German-managed; an Indian crew; its Panamanian flag indicating the ship’s registry in that offshore haven which grants asset-owners tax exemptions and enables the employment of cheaper foreign labor. This whale of a ship beached by the khamsin—seasonal windstorms (the ‘winds of God’) that can wreak havoc for fifty days and nights—temporarily blocked the liquid arteries of global trade.
The Suez is a man-made strait through which more than 12 percent of world trade and 10 percent of crude oil flows. On any given day, its waters carry one-third of global container ship traffic. A short-cut to Europe, the canal is a conduit in the contemporary maritime silk road that ribbons across the South China Sea, through the Malacca Straits to the Bay of Bengal and the Arabian Sea into the Gulf of Aden. From its southerly entrance in the Red Sea, the Suez laboriously winds into the Mediterranean, channeling iPhones and Pelotons towards the Global North. The incident in the Suez was so evocative because it was a sudden reminder of the “global economy” as a set of real-time processes involving minerals, material, management, and labor. Easily forgotten at the consumption end of the supply chain, and a far cry from comparative advantage models taught in economics classrooms, these are the processes that shape the actual organization of the shipping industry, transnational production, and global finance.
In sharp juxtaposition to the breathless temporality of financial markets, the stuck ship was the global economy materialized—just-in-time production chains come to a halt. On the other hand, as a metonym for the global economy, the Ever Given is somehow Hayekian: a cosmopolitan realm of global capital and lex mercatoria where cross-border trade is primordial and commercial law critical to the expansion of the “extended [market] order.” The Ever Given is emblematic of the barge economy—the offshored and outsourced platforms in which labor-standards and corporate regulation are circumvented to generate profits. No wonder Captain Karan vir Bhatia—one of almost half a million seafarers stranded at sea due to Covid restrictions—described his field of employment as a “shadow sector.”
Largely confined to the extractive and exploitative rungs of global-value-chains, markups for producer firms in developing countries have been declining since 2018. For poorer economies, participation in transnational supply chains has meant increases in labor productivity alongside declining real wages. In contrast, firm mark-ups have increased sharply in Europe and North America—home to the corporations that capture the bulk of profits by owning the intellectual property embedded in products from apparel to pharmaceuticals.
‘Capital requires the state’
The obstruction of a vital shipping lane blocked the passage of at least three hundred other vessels, including oil tankers and, apparently, one Russian warship. Looting of the stalled vessels—“stranded assets” or “sitting ducks” as they have been variously called—was a much-reported concern. Ships bearing jet fuel, live animals, grains, and Ikea furniture were rerouted back through the heavily militarized Horn of Africa—passing by war-ravaged Yemen—to the longer route to Europe via South Africa. Shipping corporations called the US Navy to protect their assets from seafaring pirates. As Anwar Shaikh has written: “Capital requires the state and the state requires… the proper functioning of capital.”
The Suez has a history of being weaponized with consequential outcomes for global trade. The 1967 Arab-Israeli war, which led Egypt to close the canal, trapped fifteen cargo ships in the Suez for eight years. Maritime trade was forced to take the longer passage around the Cape of Good Hope propelling a demand for bigger Japanese-built ships. In its very construction as colonial infrastructure the Suez figured from the start in relations of economic dominance and subordination, and inter-imperialist rivalries. More than a century ago, Rosa Luxemburg wrote that, with the Suez, Egypt became “caught in the web of European capitalism never again to get free of it.” The mid-nineteenth-century French-led construction of the waterway on the backs of a million and a half fellaheen—state-conscripted labor—thrust Egypt into a colonial mode of capitalism. Funding this decade-long infrastructure project which ended up costing $1.9 billion (in today’s terms) required sovereign debt issuance. The sterling loans were rerouted back to Europe to purchase European capital goods and repaid through the onerous taxation of the Egyptian peasantry. Suez “formed the nucleus,” wrote Luxemburg, “for Egypt’s immense national debt which was to bring about her military occupation by Britain.”
Despite having left the Commonwealth in 1947, Egypt was coerced into reducing its spending on dollar oil (produced by American firms) and purchasing sterling oil instead. Angered by Anglo-American backtracking on promised financing to help construct Egypt’s Aswan Dam, Gamal Nassar nationalized the (British-French) Suez Canal Company in 1956, impeding the movement of sterling oil from Iran through the Mediterranean. When British, French, and Israeli forces invaded the canal, it was Eisenhower’s threat to dump US holdings of sterling-securities on world markets which eventually compelled the British to retreat. The crisis marked the end of sterling oil and set the stage for the dominance of the petrodollar and Pax Americana.
In the following decades, the Suez remained critical to the construction of the postwar American order. It was in Suez where the first UN peacekeeping mission originated. After the crisis, Egypt, which houses the largest inventory of major weapons in the Middle East and North Africa, become thoroughly enmeshed in the military-industrial complex. And Britain’s balance of payments instabilities in the aftermath of the Suez Crisis led to restrictions placed by the Bank of England on British banks lending to non-sterling areas. These contingencies helped shape the City of London (aided in no small way by Wall Street) into the center of offshore dollar-funding.
Formal empire has given way to bond markets, but the entwinement of monetary and political sovereignty—and the inequality between sovereigns who have such autonomy and those who don’t—persists. Recall that at the start of the Covid-19 pandemic, non-resident financial flows exited developing and emerging economies en masse only to rebound after the US Federal Reserve pumped liquidity into global credit markets. Monetary and fiscal relief amounted to one-fifth of GDP in advanced economies but only seven percent of output in smaller economies and a paltry two percent in the poorest of nations. Acutely sensitive to the ebbs and flows of the global dollar cycle—in which global financial conditions tighten with dollar appreciation and vice versa—a year into the pandemic, emerging markets, once again, are rattled as rising interest rates on long-term US treasuries make for jittery financial flows to the Global South.
Despite a decade-long growth in local-currency bond markets in emerging economies, it is still cheaper for them to borrow in dollars. This means that for peripheral sovereigns, monetary sovereignty is the less efficient market-outcome unless they find themselves, as several now do, in default. Then the costs of borrowing in foreign currency become exorbitant. Even prior to the pandemic, emerging markets (EM) faced a new mutation of ‘original sin’ whereby dollar strengthening spurred foreign investors (facing both local-currency and return losses) to sell off their local-currency EM bond-holdings. The great irony is that local currency borrowing, meant to stabilize emerging markets from currency mismatch and bolster monetary sovereignty, leaves EMs more susceptible to global market sentiment as dollar appreciation prompts foreign investor exit, amplifying local currency slides. On the other hand, borrowing in dollars means that EM sovereigns face a less skittish foreign investor base.
This structural dilemma rooted in the hierarchical architecture of the international monetary system reinforces the EM risk premium while strengthening dollar dominance. Despite the immense challenges confronting developing economies during this crisis, the IMF’s tepid response has been to urge them to withstand larger exchange rate devaluations with little acknowledgment of the deleterious impact of currency volatility on peripheral economies. The IMF itself has only deployed about 10 percent of its monetary firepower. Austere conditionalities continue to be embedded in its lending programs. The leading multilateral lender is still mulling over the US Treasury Secretary’s Janet Yellen’s proposal to issue $650 billion in new SDRs and has indicated moving on this front in August. In any case, this belated funding—even if all of it were to be funneled to the Global South—falls far short of the $3 trillion required to help EMs navigate the crisis.
The Ever Given also compels us to grapple with the consequences of consumption-led growth in the Global North on climate change. Even today, about one third of world trade is in oil and related products. Shipping’s contribution to fossil fuel emissions is about the same as that of aviation. Unlike planes, ships can be retrofitted to reduce emissions. But the goal of net zero emissions by 2050 will likely require a multilateral resolution of global trade and financial imbalances. Even if, as Michael Pettis and Matthew Klein have argued, Chinese workers increase their consumption spending, the question arises: by how much will increasing China’s consumption-share of GDP reduce global imbalances? Export-oriented growth, premised on a peripheral sovereign’s accumulation of hard currency, itself perpetuates global trade and financial imbalances.
Decarbonization requires massive investment in alternative energy and green infrastructure which, given present international monetary arrangements, can most efficaciously be financed with dollar-funding. At its root, however, decarbonization requires an overhaul of the international monetary hierarchy that perpetuates economic and ecological imbalances. The perhaps fleeting commitment to green energy embedded in the Biden administration’s early infrastructure bill proposal, the modest 1% increase in new discretionary defense spending, and Yellen’s push for a global minimum corporate tax are, figuratively speaking, green shoots. The infrastructure proposal has shunned private funds thus far, but powerful actors have already begin to advocate public-private partnerships for a green recovery in the Global South. This is a double-edged sword, one that is bound to entrap developing countries in further external indebtedness.
Josh Younger’s calculations of the costs of dealing with climate change suggest that in a zero-bound interest rate environment, delaying climate-change mitigation will lead to mushrooming costs. For emerging markets, these costs are even greater post-pandemic. Last year’s monetary easing propelled record issuance in foreign law governed, foreign currency denominated sovereign bonds in the Global South. Meanwhile efforts to restructure sovereign debt have stalled with the G-20 debt service suspension initiative extended until the end of the year. Private creditors have continued receiving payments from cash-strapped sovereigns, pandemic notwithstanding. In its mission to build a global repo market in African sovereign debt, the UN Economic Commission for Africa is lobbying for private-sector creditors to be exempted from current sovereign-debt restructuring negotiations altogether. The problem with the ECA-style collateral-based financing is that the risks associated with selling infrastructure-as-an-asset-class fall wholly on the EM sovereign-debt issuer while the rewards largely accrue to foreign investors.
In the event of dollar appreciation, the probability of dollar-liquidity shortages transpiring into external debt crises increases. Other potential sources of instability include the vulnerability of EM bond markets to sudden shifts in global market sentiment. Interest rates, however low, are greater than the current GDP growth rate of some sovereign borrowers. EM central bank asset purchases of sovereign and private-sector debt, while commendable in the face of this crisis, do transfer risk from private to public balance sheets. Such risk bearing is easier for key currency issuers to manage than it is for peripheral sovereigns whose fiscal and monetary capabilities are much more constrained. With effective vaccination far from assured for the vast majority in the Global South, in the near term, new mutations of the coronavirus or yet another catastrophic climate event may find EM fiscal and monetary authorities depleted of any monetary arsenal altogether.
As a path is built out of the crises of the pandemic, central banking revolutions in the Anglo-American heart of global finance—where monetary financing is no longer taboo—must be tethered to de-weaponizing transnational relations. Countries that have contributed least to global carbon stocks, but will be disproportionately harmed by climate change should be aided in their transition to low-carbon economies. Innovative financial instruments such as debt-nature swaps could play a role here. Such initiatives should not be left to unaccountable foreign private finance but could operate through the global network of central banks and involve central bank digital currencies.
Pending investigations on the Ever Given have prevented the ship from actually leaving Egypt. This ill-fated vessel is presently impounded midway through the Suez in the Great Bitter Lake—a poignant name for indefinite legal purgatory. Hopefully, as they navigate a difficult path towards a green recovery, developing economies will not be faced with a similar impasse.