Archive for September, 2012

The experience of defeat

September 26, 2012

Next month will mark 20 years since Russia’s capitalist restoration culminated with the ‘voucher privatization’ scheme of Yeltsin and Chubais.

Under this program of fire sales, the price of state-owned assets was fixed (amid hyperinflation) at their book value of July 1992.

Then managers and workers of an enterprise were given preferential options to buy 51 percent of the firm’s stock (with the price of firm equity set at 170% of the total book value). Twenty-nine percent of the remaining stock was available for purchase by the general public through vouchers distributed to them at a nominal price (25 rubles or about 10 US cents).

Predictably, amid the social misery caused by withdrawal of state services, rising food prices and unemployment (millions of employees were laid off by privatized firms), these tradeable vouchers were sold off, quickly and cheaply, by members of a population hungry for cash.

The buyers were enterprise managers and, from outside, Komsomol leaders and wealthy institutional investors. Thanks to their liquidity, political connections and privileged social status, these parties accumulated large blocks of vouchers and converted them into ownership of newly private firms.

Thus the so-called ‘Red Directors’, the former managers of state-owned firms who during the 1980s under Gorbachev had acquired enterprise autonomy and limited ‘control rights’, now acquired full property rights.

By June 1994 two-thirds of Russian industrial employment was in privately-owned firms.

Writing later, Harvard’s Andrei Shleifer and Chicago’s Robert Vishny, who together with Harvard economist Jeffrey Sachs were policy advisors to Chubais, noted with professional ingenuousness:

One of the most interesting aspects of voucher auctions is the prices at which assets sell… [Results of privatization up to June 1993 put] the total value of the Russian industry at about $5 billion. It is possible to make these calculations differently and to come up with numbers as high as $10 billion. The point, however, is inescapable: the entire Russian industrial complex is valued in voucher auctions at something like the value of a large Fortune 500 company…

One way to calibrate how low the prices of manufacturing companies are is to note that U.S. manufacturing companies have market value of about $100,000 per employee. Russian manufacturing companies, in contrast, have market value of about $100 per employee  a 1,000-fold difference!

Throughout the 1990s, observers from the World Bank, Harvard University, RAND Corporation, the US Council on Foreign Relations and the Brookings Institute attributed the ‘challenges’ faced by post-Soviet Russia to the country’s lack of ‘social capital’ and ‘good governance’.

Russia, it was said, was an ‘anti-modern society.’ Its people had unfortunate behavioural proclivities that made them unlike the populations of advanced capitalist countries: they trafficked their women for sex, abused alcohol and other drugs, refused to procreate, lacked ‘trust networks’, didn’t value hard work, were prone to interpersonal violence, were corrupt and criminal.

Russians had, as well, inherited a kind of ‘Oriental despotism’. Property rights weren’t secure and contracts weren’t enforced because there was no rule of law.

This is the familiar métier of the ‘development’ report. The calamity of post-Soviet Russia is registered more vividly (and without the State Department songsheet) in its chilling headline figures.

Since 1991, and following the Stalinist bureaucracy’s restoration of capitalist property relations, there have been several million excess deaths. The life expectancy of Russia’s population fell by three years in the course of three years, and by five years in five, from 1992; it dived sharply again from 1998. Premature mortality disproportionately struck working-age men (aged 15-64). Among women, the total fertility rate in 1999 was slightly more than half its level in 1987; Russia’s rate of induced abortion remains by far the world’s highest.

Altogether, since 1991 the country’s resident population has contracted by seven million.

Far more than in other developed countries, death in Russia has arrived from medically treatable conditions developed by young adults and middle-aged people (e.g. stroke, and heart disease caused by hypertension). Tuberculosis and pneumonia rates more than doubled in the course of five years from 1991; death from diabetes rose steeply due to a fall-off in affordable insulin supplies and difficulty in receiving dialysis.

External causes of death rose dramatically (mostly for males aged 20-50), due seemingly to chronic stress and alcohol consumption. The death rate from suicide increased by 50% in the two years from 1991; death by homicide and accidental poisoning more than doubled over the same period; trauma from traffic accidents and violence showed a substantial rise.

Mortality and indices of morbidity spiked again from the crisis year of 1998.

The scale of post-Soviet Russia’s social, economic and demographic collapse has no precedent in the peacetime history of any industrialized country. But over the past half-millennium, as I described in a previous post, devastation of this sort has been seen in many noncapitalist societies following conquest or settlement by states bringing with them the novel institutions of capitalism.

The sharp fall in the birth rate, the rise in alcoholism, prostitution and interpersonal violence are behavioural features exhibited time and again by populations defeated by imperialism, and constrained (by the coercive power of the victors) to adopt new cultures, property rights and other forms of economic governance, child-rearing practices, schooling and constitutions.

So the diagnosis made of the former Soviet Union’s defeated people  shiftless, criminal, sterile, with addictive tendencies — has been heard before. Familiar too are the contemptuous depictions of Russians by filmmakers and novelists, the exasperated reports by social scientists returned from ‘capacity-building’ missions, the condescending journalistic well-wishing and subsequent expressions of disappointment at being ‘let down’, the racist dinner-party humour indulged in even by liberal sophisticates, the excursions of charitable organizations, development agencies and missionaries, and the solemn prophecies of demographic involution.

Notoriously, the pastoralist Herero of South-West Africa were said to be committing ‘race suicide’ under Wilhelmine rule. And in the first 30 years of the twentieth century, across equatorial middle Africa from Leopold’s Congo through British Uganda to Tanganyika, fertility rates were chronically below reproduction level. This prompted European colonists to fret about ‘dying races’, since they sought a guaranteed workforce for rubber and cotton plantations while maintaining a taxable population of subsistence farmers.

Examples from Australia, North America, Mesoamerica and South America need no description.

There are other less familiar cases. The Hawaiian population declined catastrophically throughout the 1800s: successive epidemics lowered fertility and killed thousands of people, as the monarch established alienable title to land and assigned it to prominent locals. Meanwhile norms governing religion, sex and the education of children were displaced, with conversion encouraged by Christian missionaries.

Less familiar still is the terrible fate of nomadic pastoralists from the grasslands and deserts of central Eurasia — crushed, during the seventeenth and eighteenth centuries, beneath the onrushing wheels of the Qing and Muscovite agrarian empires. Local herding societies (above all the Zunghar of Mongolia and Xinjiang) were eliminated by smallpox and military defeat. The depopulated pastures were soon filled by immigrant cultivators assigned private title to land, protected by military garrisons and provided with irrigation and other infrastructure for tilling.

These examples vary in the type of societies that were supplanted and in the type later constructed. But in each case a similar genocidal logic applied.

The introduction of exclusive, possession-based property rights meant that, suddenly, personal entitlements with regard to worldly things (e.g. natural resources)  including the power to use such material resources or facilities to satisfy basic needs, undertake sustenance-drawing activities or secure personal livelihood  were conferred only by virtue of owning the resource, or from the consent or authority granted by owners. Unless an individual held personal property rights, was a joint owner through membership of a group or entity that held communal property rights, or received permission from such an owner, he had no claim at all over the owned resources: they were unavailable to him.

Abruptly deprived (usually through violence or its threat) of familiar sources of livelihoods, the vast majority of people were thus compelled on pain of starvation to hire out their capacity to work in ramshackle new labour markets. Meanwhile authorities attempted, in the manner of war victors, to eradicate the behavioural patterns, basic social units, forms of cultural transmission and child-rearing practices of the defeated societies, and to replace them with norms and preferences more suited to the new market-based economy. As even small perturbations may do, these vast social experiments tended to produce imbalanced sex ratios: changed sexual practices then encouraged the spread of venereal diseases, which led to a sharp and prolonged fall in fertility. Such catastrophic social disruption then produced the sort of demoralization and dysfunctional behaviour that nowadays is attributed to poor ‘trust networks’: alcoholism, prostitution and high rates of interpersonal violence.

In the case of post-Soviet Russia, some clear causes of the high death rates stand out:

  1. Withdrawal of timely, effective, free public healthcare with universal population coverage (in today’s Russia, patients’ private out-of-pocket payments at the point of delivery now account for 25% of service-provider funding);
  2. Labour turnover (i.e. unemployment following rapid privatization) leading to unavailability of basic sources of livelihood, with material deprivation causing psychosocial stress (‘labour market shock’); and
  3. Worsened nutritional delivery (more expensive and less fruit, vegetables, meat) and poor dietary habits due likely to removal of food subsidies and failed retirement provision.

The reinstatement of capitalism also brought a collapse of Russian agriculture, with an end to state provision of credit, seed, fertilizer and machinery. Tractors, combine harvesters and irrigation equipment depreciated beyond repair. Livestock inventories fell by a half within ten years; land devoted to grain production fell by one quarter over the same period; and the application of fertilizer per hectare fell by nearly half in the three years from 1990, and by 80 per cent by 1998. Yields (particular during winter) dropped accordingly.

The magnitude of this collapse can be seen in the following time series of global consumption of synthetic fertilizer, the basis of agriculture since the Second World War and Green Revolution. The Soviet Union was the world’s largest single user of this product.

The Volga watershed was one of the largest grain production regions in the world.

Societies whose continued existence impedes the outward growth of capitalism have, naturally enough, historically evoked an implacable hostility among the agents of imperialism. The more stubborn the resistance, the more hysterical such (entirely functional) attitudes grow. Eventually they may provoke the urge to exact vengeance through annihilation, to watch whole populations roast, in agony, on the pyre, as a way to teach holdouts a collective lesson.

In Russia’s case, racist contempt had been mixed, during 80 years in the combustion chamber of anti-communist ideology, with glowering elite hostility towards the property relations that had been established by the Bolshevik revolution and that later were maintained precariously under the rule of the bureaucratic caste.

George Kennan, the US author of anti-Soviet ‘containment’, had complained of ‘the little group of spiteful Jewish parasites in Moscow’, who had ‘abandoned the ship of Western European civilization like a swarm of rats.’

This was a prevailing theme among twentieth-century rulers and intellectuals: Churchill’s claim that the contest between Bolshevism and Zionism was a ‘struggle for the soul of the Jewish people’ (and his earlier promise to ‘strangle the Bolshevik baby in its cradle’), Hitler’s Vernichtungskrieg against ‘Judeobolshevism’, and Wittfogel’s dismissal of the bureaucratic regime as another ‘Asiatic’ hydraulic civilization.

Broadly comparable historical circumstances had earlier produced similar features. In the cases described above (South-West Africa, etc.), imperialist rapine was helped along by a supercilious disdain for low-yield ‘garden’ cultivators (horticulturalists), livestock herders and foraging peoples.

These societies usually kept their hunting, pastoral or cultivated land, waters, etc. as open-access resources, common property or small family plots. The absence in these benighted realms of exclusive property rights, and the low productivity of agrarian activities, allowed them to be categorized anthropologically as ‘savage’ or  ‘barbaric.’ (Compare this contempt to the fraternal recognition with which the likes of Cortés greeted the high-yield agrarian empires of Aztec Mesoamerica and Andean South America).


‘Border protection’ and nationalization of the high seas

September 19, 2012

On any reckoning, the Australian government’s militarized ‘border protection’ regime has now endured for over a decade. Initially viewed by journalists and decried by left-liberal critics as a mere electoral manoeuvre, to be extended or retracted according to the public mood or change of government, it has instead hardened into a permanent standing feature.

It has resisted disbanding or reform, despite widespread opposition and notable failure to achieve the ends publicly adduced for it. Maritime patrols have multiplied and detention camps become encrusted. How to explain their emergence and survival?

Most discussions neglect a crucial aspect. ‘Border protection’ is made possible, and appeals to Canberra, thanks to the recent spread of state jurisdiction over parts of international waters.

The latter development, which has allowed ‘privatization of the oceans’ and extension of ‘national security’ bailiwicks, was described in the previous post.


How exactly have legal arcana about fisheries management, by swelling Canberra’s maritime jurisdiction, led to the Australian government’s ‘new regime’?

  1. Since the 1970s, the acquisition by states of limited jurisdiction and exclusive economic rights over adjacent coastal waters and extended continental shelves has meant growth in that portion of the world’s territory in which states can (practically speaking) restrict the movement of people.
  2. Non-nationals have kept legal rights to innocent passage through these (international) waters, and vessels there remain under flag-state law.

    But coastal states have gained implicit authority to regulate almost every other activity  including transit with the aim of arriving in a country to seek refuge there. (The explicit authority to prevent and punish infringement of domestic immigration laws begins outside a state’s territorial sea, in its contiguous zone.)

    This has implied a paring back of the right to seek asylum from persecution.

    This right had always, from the beginning, been heavily circumscribed and sparingly awarded, and was trumped whenever it was held to conflict with any other prerogative. The provisions of refugee law, according to one Australia High Court judge, do not impose any ‘limitation upon the absolute right of member States to regulate immigration by conferring privileges upon individuals… [No] individual, including those seeking asylum, may assert a right to enter the territory of a State of which that individual is not a national.’

    ‘Border protection’ policies have thus been a predictable result of circumstances in which the free movement of people conflicts with the sovereign right of states to determine who may enter and remain within their territorial borders  and in which state jurisdiction has been extended into places where it didn’t previously apply.

    Creation of exclusive economic zones (EEZs) has endowed states with maritime interests of high strategic worth. These naturally have become matters of ‘national security’, to be preserved if necessary by the armed forces.

    Within their respective EEZs, states have been obliged to place their coercive instruments at the service of locally owned firms, to pursue and protect these firms’ property claims in assets (fisheries, offshore oil and gas reserves, elevated platforms, drilling rigs, etc.) against interference, encroachment, seizure, expropriation or unilateral transfer of ownership.

    This has licensed states to undertake enforcement measures within maritime zones: patrols, emplacement of sensors, surveillance, reconnaissance, interception, forced boarding, detention and confiscation of vessels, declaration of ‘exclusion zones,’ declaring approved sealanes, etc.

    No dramatic leap of logic or political principle has been involved, therefore, when it has been declared that EEZs, contiguous zones and territorial waters, those beleaguered redoubts of ‘national sovereignty’, should also be protected against ‘unauthorized maritime arrivals’.

  3. Nonetheless the much-stated need to protect Australia’s vulnerable maritime approaches against ‘boat people’ has been a pretext which state leaders have deliberately used to pursue Canberra’s strategic objectives.



I’ll say a little more about the implications of this first point towards the end of this post, but will explain the second point firstly.

In 2004 Canberra announced creation of a Joint Offshore Protection Command (now Border Protection Command) comprising ADF and Customs personnel. It would be responsible for Operation Resolute, a joint patrol of Australia’s EEZ.

The Navy website for this program boasts that its ‘Area of Operations covers approximately 10% of the world’s surface.’

Along with these operations  centred on the energy-rich Timor Sea and the northwest coast abutting the Indian Ocean, off the Pilbara and Kimberley  the BPC was to oversee a Maritime Identification Zone.

The latter would cover all vessels passing within 1000 nautical miles of Australian coastline. It would oblige all vessels seeking to enter Australian ports, as well as those merely having strayed inside the Australian EEZ, to provide Australian authorities with information regarding location, speed, crew, cargo and course of transit.

International law provided no basis for imposing such requirements on foreign-flag vessels. The area involved stretched into the territorial waters of Indonesia, Papua New Guinea, East Timor, New Zealand and New Caledonia.

The strategic considerations underlying such policies are pointed to in the ADF’s 2012 force posture review. Canberra’s military planners note that, amid shifts in the ‘Asia-Pacific strategic balance and great power competition’, including Washington’s regional ‘pivot’, Australian forces must be prepared to take part in ‘coalition operations in the wider Asia-Pacific.’

They note that ‘securing sea lines of communication and energy supplies will be a strategic driver for both competition and cooperation in the Indian Ocean region to 2030, and Australia’s defence posture will need to place greater emphasis on the Indian Ocean, as indicated in the 2009 Defence White Paper.’

Defence Minister Stephen Smith spoke of developing a ‘force posture that can better support operations in our northern and western approaches, as well as operations with our partners in the wider Asia Pacific region and the Indian Ocean Rim.’

And what might such joint operations be?

In 2010, military strategists from the US Center for Strategic and Budgetary Assessments presented Pentagon planners with a ‘candidate’ air-sea battle campaign for use in ‘potential conflicts involving China that could arise in the Western Pacific.’

In the envisioned theatre-wide combat, US naval forces would focus on ‘high-priority’ anti-submarine, anti-surface, anti-missile warfare and area denial in the East China and South China seas.

Washington would depend on allies (with Japanese and Australian forces foremost) to engage in ‘distant blockade’ and interdiction against China-bound seaborne trade:

In the event of a protracted conflict, choking off Chinese seaborne commerce to the maximum extent possible would likely be preferred to conducting large-scale operations in China itself.

Indonesia maritime chokepoints

US and allied forces ‘could exploit the Western Pacific’s geography, which effectively channelizes Chinese merchant traffic’:

Traffic bound for China would be intercepted as it tried to enter the southern portions of the South China Sea, i.e., beyond range of most PLA A2/AD systems, from the Malacca, Singapore, or major Indonesia straits…

Australian and other allied forces would thus have three key tasks:

      1. Securing “rear areas” by neutralizing any PLA units forward-deployed to such areas;
      2. Establishing a “distant blockade” to interrupt Chinese seaborne commerce; and
      3. Cutting off or seizing Chinese offshore energy infrastructure.

Australian equipment and personnel would be useful for such maritime interception operations ‘since they generally would not involve major combat, allied aircraft and ships too vulnerable for employment against the PLA’s A2/AD battle network… These forces would patrol key chokepoints in Southeast Asia as the central element in a distant blockade’:

Lastly, “distant blockade” operations could also require two additional operations: disrupting Chinese undersea telecommunications lines; and seizing or destroying of Chinese undersea energy infrastructure and/or disrupting undersea energy flows to China.

Carrying Out Peripheral Operations to Secure “Rear Areas”

Over the past several years, China has helped develop port facilities in places like Gwadar (Pakistan), Chittagong (Bangladesh), and Sittwe (Burma) that could be used for military purposes. It recently deployed naval forces off Somalia in conjunction with anti-piracy operations for the first time, and PLA officials have floated trial balloons about acquiring access to forward bases. It continues to wage vigorous “dollar diplomacy” with various statelets in Oceania that could eventually translate into access to facilities for military purposes. In short, China appears to be developing options for creating a network of overseas military bases stretching from Africa to Oceania. Such presence would be consistent with the actions of many other rising powers throughout history; however, it could have serious implications for the military balance and consequently for US security and the security of its allies.

Preserving a stable military balance under these conditions would necessarily require the United States and its allies to maintain the capability to neutralize PLA bases outside the Western Pacific. This would involve removing the threat of diversionary PLA operations.

Such peripheral operations could take some time to complete, given the large distances between theaters of operation. Still, the United States and its allies would enjoy two important advantages. First, assuming the US fleet controls the seas, allied forces could take the lead in many of these peripheral operations, with US forces in support. For example, Australia is the most powerful state near Oceania, and has highly capable military forces that could conduct operations to neutralize any small PLA forces in the region.

Thus Canberra’s strategic focus has, since the 1990s, been on establishing its military capacity for sea control and power projection in nearby regional straits (several of them key global maritime chokepoints) and on countering Beijing’s so-called ‘string of pearls‘.

Strategists such as Ross Babbage (in 1988) have noted the convenient placement, for this purpose, of Australia’s Indian Ocean External Territories:

Christmas and the Cocos Islands could serve as convenient forward refuelling and staging points for aircraft and ships in the north-western approaches… [Access] to these territories would also extend Australia’s reach into the surrounding region for surveillance, air defence and maritime and ground strike operations. The islands could, in effect, serve as unsinkable aircraft carriers and resupply ships.

For public consumption, politicians cite the geographic location of Australian offshore oil and gas reserves and the proximity of ‘failed states’.

Refugee boat arrivals to the Cocos Islands, Ashmore and Cartier Islands and Christmas Island also provide a useful pretext for militarizing the portions of the Indian Ocean, Timor Sea, Arafura Sea and Coral Sea that fall within the Australian EEZ.

The transit of ‘boat people’ has granted Australian authorities a convenient and plausible reason to undertake patrols and inspections, place sensors, conduct surveillance and reconnaissance, engage in interception and forced boarding, detain crews and seize vessels in these areas.

Meanwhile the ‘fine strategic location’ of Australian offshore detention facilities in the Admiralty Islands and Nauru is apparent from a ‘cursory glance at a map of the Pacific’, or some acquaintance with naval history.

Manus Island RAN

manus 1948

Of course, Australia’s state leadership does not spell out publicly, before a mass audience, its strategic goals and its tactics for meeting them.

Nonetheless it sometimes, for various reasons, finds it necessary or expeditious to allow certain matters to appear, through reliable media conduits,  ‘in front of the children’, if only to rouse electorates in their support.

One of the basic tasks of electoral politics (and its satellites in the media and academic worlds) is to mobilize and harness a mass constituency behind narrow elite objectives. In the present context, stoking of anti-refugee attitudes, among its other benefits, allows such a happy convergence of popular feeling with ruling-class aims.

Left-liberal critics of ‘border protection’ policies attribute their introduction to  ‘perennial’ Australian popular chauvinism and anti-immigrant racism. In reality, public attitudes on such matters have no existence outside of their shaping by professional opinion makers, and exercise no independent influence on the initiation of state policy.

Mass opinion, and particularly that of ‘activist’ groups, may nonetheless provide a useful tool or lever for achieving elite objectives, when the latter conflict with goals held by the ruling elite of another state.

Thus the respectably ‘progressive’ concern for threatened whales and endangered southern bluefin tuna may help satisfy Canberra’s strategic purposes, in another region mentioned in the ADF’s recent force-posture review:

Increased pressure on resources may see interest in engagement in the Antarctic continent… Increased resources for relevant agencies, not just Defence, will be necessary to strengthen Australia’s presence in Antarctica and the Southern Ocean in the face of likely future challenges.

Or consider Australian 1999 military intervention in Timor-Leste, which various activist groups conceived as supporting local ‘self-determination’, and thus worthy of salute. This operation (repeated in 2006) secured maritime control over the deepwater Ombai-Wetar Straits, a vital avenue off the northern Timor coast for US submarines passing between the West Pacific (and East Asia) and the Indian Ocean.

The East Timor matter illustrates what concerns lie behind Canberra’s attitude to maritime law and seaborne traffic.

In 1973 the UN Convention on the Law of the Sea convened in New York, with US delegates holding the following strategic priorities:

Because of dependence on oil and other resources, and the need of the military to pass through and over straits and in zones of economic jurisdiction, one of the primary security objectives of the United States may become the achievement of working relationships with coastal developing states.

The U.S. Government maintains that the invulnerability of its nuclear missile submarines depends on their ability to pass through international straits submerged and unannounced. International agreement on a 12-mile territorial sea would place dozens of international straits under the “innocent passage” regime of the territorial sea unless the demands of maritime states for unimpeded passage are agreed upon. (The legal regime of “innocent passage” permits transit by all ships except those which threaten the peace, good order or security of the coastal state. The lack of a more precise definition has left coastal states in a position to determine for themselves what is or is not “innocent passage.”)

Five international straits have been identified as essential for passage by U.S. missile submarines: Gibraltar, Malacca, Lombok, Sunda and Ombai-Wetar. Two of these are too shallow for underwater passage, the other three are controlled by states with which the United States maintains good relations and working modus vivendi, and which have and probably will continue to permit passage for submerged U.S. submarines.


The navy has been concerned that the breadth of the continental shelf under national jurisdiction might limit the freedom of the United States to place listening devices off the shores of foreign countries.


In addition to the questions of transit through straits and submarine tracking, a third strategic concern is that zones of extended coastal state jurisdiction will curtail conventional naval operations.

It was declared ‘essential’ for the passage of US ballistic missile submarines between the Western Pacific (and Northeast Asia) and Indian Ocean that these straits be ‘controlled by states with which the United States maintains good relations and working modus vivendi, and which have and probably will continue to permit passage for submerged U.S. submarines’:

The two Indonesian straits, Lombok and Ombai-Wetar, might be closed to unannounced underwater passage of U.S. SSBNs in any case because according to Indonesia’s interpretation of the archipelago principle of enclosed waters, they are considered internal rather than international waters.

On the other hand, the United States seems to have a working arrangement with Indonesia for passage of SSBNs through its straits though the Indonesian government has argued that the archipelago principle does not infringe on innocent passage, it requires prior notification of transit by foreign warships and has raised questions about the innocence of supertanker passage because of the danger of pollution.

In spite of Indonesian jurisdictional claims, the United States maintains that the Indonesian straits are international. According to press accounts and Indonesian sources, however, the United States routinely provides prior notification of transit by surface ships and presumably (if only as a practical convenience) relies on some special bilateral navy-to-navy arrangement for submerged passage, consistent with the requirements of concealing the details of SSBN passage from foreign intelligence.

Although this modus vivendi is rather contingent, it satisfies America’s needs as long as an Indonesian government as friendly as that of Suharto is in power.

Such concerns were impressed upon the Australian prime minister, visiting Washington in 1976 after Jakarta had annexed East Timor. The Fraser government’s negotiating position at UNCLOS dutifully aimed to ‘bridge the differences’ between the United States and smaller littoral and archipelagic states.

And, with that, I’ll now finish this post by returning to the first point mentioned at its beginning.

The gradual postwar development of the international law of the sea (culminating in the 1982 UNCLOS), under which states have extended jurisdiction into their adjacent coastal waters, took place during the same decades as codification of international refugee law. As long ago as 1930, at the League of Nations Conference for the Codification of International Law held in The Hague, delegates addressed the issues of territorial seas and nationality laws.

This historical coincidence does not imply complementarity. People’s right to free movement conflicts with the territorial sovereignty of states, and with the latter’s jurisdiction over borders and immigration. The first right retreats when the other privilege is advanced, just as personal (citizen) rights and property rights generally move inversely.

In recent decades, the acknowledged right of individuals to seek asylum from persecution has been limited and rolled back by governing elites worldwide. Political leaders have each asserted their state’s pre-eminent authority to control who may enter and remain within the territories over which it holds jurisdiction. (From this follows matters such as the incarceration of asylum seekers during the ‘process’ of status determination.)

The notorious 2001 assertion by the Australian Prime Minister  ’We will decide who comes to this country and the circumstances in which they come’  expressed both a positive fact and a normative position: the state has sovereign authority over its territorial borders, and can set limits to migration flows.

Though a chorus of left-liberal groups and bien-pensant commentators shrieked at Howard’s words, none of them ever voiced a fundamental objection to the notion that a state has the sovereign right to determine who can enter and remain within its territory, and can set restrictions on numbers and categories of immigrants.

Seeking to make the best of this principle, rather than rejecting it, these ‘progressive’ voices merely plead that the state’s decisions (on refugees and immigration) should be made in more ‘humane’ fashion. (Thus the Australian Greens have repeatedly insisted that an increase in Australia’s ‘humanitarian program’ for refugees and family reunions should be balanced by a reduction in the intake of ‘skilled’ migrants, whom they have described as ‘queue jumpers’.)

Similarly, as described in the previous post, the Greens and associated conservationist groups uphold Canberra’s contested jurisdiction over portions of international waters (e.g. Australia’s Antarctic EEZ). They merely suggest that this control could be exercised better, e.g. total allowable catch of various fish species should be set at a ‘sustainable’ level.

On the other hand, the principled position  for socialists and for even minimally ‘left-wing’ people  is that the world’s oceans and their resources are not susceptible of appropriation by any state or private party  and that territorial states are not entitled, by virtue of their jurisdictional claims, to restrict the free movement of people (whether that movement involves flight from imperial violence, national dismemberment and state breakdown, or the pursuit, in a world of wage differentials between regions of varying levels of development, of a decent life in a country with jobs, roads, schools and sanitation).

Mare nostrum

September 12, 2012

England’s Game Laws of the late seventeenth century prohibited ‘inferior tradesman, apprentices and other dissolute persons’ from ‘neglecting their trades and employments’ and presuming to ‘hunt, hawk, fish or fowl’.

The jurist Blackstone noted that one of the aims publicly adduced for the laws was conservation, or ‘preservation of the several species of these animals, which would soon be extirpated by a general liberty.’ But the statutes’ true purpose, he went on to say, was to prevent the landless lower orders from providing for themselves, independently of the market, by ‘pursuing, hunting and destroying’ game. These proscribed activities, where tolerated, had disruptive consequences:

[In] low and indigent persons it promotes idleness, and takes them away from their proper employments and callings; which is an offense against the public police and economy of the commonwealth.

Similar laws against gathering wood or picking berries deprived rural populations (long since ousted from family plots and open fields) of access to the remaining non-market sources of subsistence. Such measures thereby compelled those unendowed with assets, on pain of starvation, to hire out their capacity to work in exchange for a wage paid by propertyholders, or to otherwise rely on subvention or charity. The Black Act of the eighteenth century saw poachers executed for ‘doing injuries and violence’ to certain types of property, e.g. hunting deer or hares or extracting resources from trees, warrens or fish ponds.

Thus the king’s dominion over his imperilled deer and forests once helped to establish and solidify incipient capitalist property relations.

More recently, a similar purpose has been served by the declaration of marine sanctuaries for whales and other endangered creatures – following the creation of Exclusive Economic Zones, supposedly to prevent the ‘tragedy of the commons’ from depleting the scarce resources contained within. These have allowed enclosure of what previously was res nullius: international waters adjacent to a coastline but beyond any state’s territorial sea.

Just as occurred earlier with land’s terrestrial bounty, the sovereign’s claim over marine resources was a necessary first step, through which it became possible for a few private agents or entities to appropriate the commons as their exclusive property (while most others were thereby deprived of access or use). The expansion of national jurisdiction has also served the strategic goals of naval powers.

Since 1945 the high seas have gradually shrunk for most purposes besides navigation, with exclusive rights assigned and national bailiwicks extended over formerly open-access waters.

One of the Truman Proclamations of 1945 asserted ‘the long range world-wide need for new sources of petroleum and other minerals’, and ‘in the interest of their conservation’ declared ‘the natural resources of the subsoil and sea bed of the continental shelf beneath the high seas but contiguous to the coasts of the United States as appertaining to the United States, subject to its jurisdiction and control.’ (Offshore oil production in the Gulf of Mexico dates from 1947.)

Meanwhile the ‘urgent need to protect coastal fishery resources from destructive exploitation’ and depletion was the pretext used to ‘establish conservation zones in those areas of the high seas contiguous to the coasts of the United States wherein fishing activities have been or in the future may be developed and maintained’. In these zones ‘fishing activities shall be subject to the regulation and control of the United States’, while the ‘character as high seas of the areas in which such conservation zones are established’ was preserved for navigation purposes.

Rögnvaldur Hannesson’s Privatization of the Oceans shows how the assertion by states of territorial rights was needed before private agents could acquire exclusive property rights:

[The] oceans are, or were, the last great commons. No single state used to have jurisdiction at sea outside a narrow belt, which as late as the middle of the twentieth century was only three nautical miles wide. Without a wider national jurisdiction at sea, it is hard to imagine how an economic institution such as property rights could have developed for any but the most stationery fish stocks. People who still have not reached the age of retirement have in their lifetime witnessed a revolution in the international law of the sea, by which states have gained control over fish resources off their shores. In the wake of this we have seen exclusive individual rights of access to fish resources develop.


[The] fisheries are but the last of the common property resources to which private property rights have developed; recorded history tells of enclosures and clearances of common land…


The enclosure of the world’s fish resources began as an attempt by states with rich fisheries off their shores to extend their jurisdiction over these areas and to clear away foreign fishing fleets. This development was enormously stimulated by the claims to exclusive national rights to offshore oil and ended in the establishment of the so-called exclusive economic zone [EEZ]. Without this jurisdictional framework it would not be possible to limit fishing except by agreement among an indefinite number of states, an outcome that is none too likely.

Earlier this year Christopher Costello, Leah Gerber and Steve Gaines proposed in a Nature article that the creation of tradeable permits presents a ‘market approach to saving the whales.’ Establishing property rights would allow sustainable harvesting of whales just as transferrable quotas were promised to do for fisheries, and in the same way that GHG-emission permits were said to make pollution abatement possible.

Anti-whaling and conservationist groups would presumably have recoiled in horror from this policy suggestion. But these groups themselves are helping to build the mare clausum in which such property rights may be established (and naval pre-eminence pursued).

In recent years, for example, the Australian Greens and the Humane Society have cheered a federal court ruling that the waters adjacent to Australia’s (internationally disputed) Antarctic territory constitute part of Canberra’s (unilaterally declared and widely contested) exclusive economic zone. Within these waters, according to the court’s finding, may be applied the provisions of the Commonwealth’s Environmental Protection and Biodiversity Conservation Act, enacted in 1999 under the Howard government. This decision meant that Canberra could legitimately enforce its domestic laws against non-nationals to whom flag-state jurisdiction had previously applied.

In 2012 Greens parliamentarians even sought to have Japanese-owned whaling vessels denied freedom of passage through international waters outside both Canberra’s territorial waters and its contiguous zone. They denounced  navigation through Australia’s EEZ/whale sanctuary as an ‘unwelcome intrusion’ against which the federal government should ‘take action’. Leader Bob Brown proposed legislation under which patrol boats would guard against the ‘invasion of Australia’s sanctuary’, including in energy-rich Antarctica.

The principle that the world’s oceans are not susceptible of appropriation by any state or private party has been voided by technological advance and junked by all notable political actors, from governing elites to environmental activists. This involves several matters of deep practical significance.

In Privatizing the Oceans, Hannesson presents the excision of EEZs from the high seas as a matter of routine upward progress: an enlightened dissolution of the commons, of a type familiar from recent history, allowing the venturesome lurch of capitalist property forms into yet another new frontier. The division of the high seas between national jurisdictions, on this argument, achieves something like the erection of barbed-wire fences on nineteenth-century pastures and prairies. Delineating ‘well-defined’ property rights to the world’s oceans is just the latest application of capitalism’s universally efficient solution to the problems of scarcity and resource depletion.

In reality, the carving out of EEZs from international waters, by sequestering raw materials and partitioning markets between territorial states, is something of a regression to pre-1945 arrangements involving fragmented zones of nationally-based access and operations.

It’s well-known that the international legal principle of freedom of the high seas was advocated by Grotius just as the Dutch East India Company (along with English and French merchants and navies) sought to penetrate marine routes monopolized by Portuguese and Spanish traders. And in 1918 the second of Woodrow Wilson’s Fourteen Points was the demand for ‘absolute freedom’ of navigation outside territorial waters – something immediately rejected by the other great naval powers, eager to maintain their colonial privileges. The 1930 League of Nations Conference for the Codification of International Law, held in The Hague just as the world economy began fracturing into autarkic blocs, granted states legal authority over territorial seas, subtracted from the high seas: ‘A State possesses sovereignty over a belt of sea around its coasts; this belt constitutes its territorial waters.’

From 1945 the Atlantic Charter and postwar GATT allowed the US to break down the old international system of exclusive economic zones. The latter had of course been established during the high-colonial era, when the ruling great powers granted their firms sole rights of investment in colonized territory, with fractured markets protected against competitors by customs barriers. Such restrictive arrangements, which prevented ‘access on equal terms’ to the ‘trade and materials of the world’, were later forbidden by multilateral treaty agreements such as the WTO.

Yet the terms of the UN Convention on the Law of the Sea (to which most states had granted ‘customary’ recognition if not ratification by the 1990s) re-created just such discriminatory barriers. Under its provisions, coastal states are held to possess, within their EEZs, ‘sovereign rights for the purpose of exploring and exploiting, conserving and managing the natural resources, whether living or non-living, of the waters superjacent to the seabed and of the seabed and its subsoil, and with regard to other activities for the economic exploitation and exploration of the zone, such as the production of energy from the water, currents and winds…’

With respect to fishing:

The coastal State shall determine its capacity to harvest the living resources of the exclusive economic zone. Where the coastal State does not have the capacity to harvest the entire allowable catch, it shall, through agreements or other arrangements… give other States access to the surplus of the allowable catch.

The Convention on the Continental Shelf assigned rights over ‘the mineral and other non-living resources of the seabed and subsoil’. It came into force in 1964, in time for North Sea oil and gas to be divided between the UK and Norway:

The coastal State exercises over the continental shelf sovereign rights for the purpose of exploring it and exploiting its natural resources… The rights referred to in paragraph 1 of this article are exclusive in the sense that if the coastal State does not explore the continental shelf or exploit its natural resources, no one may undertake these activities, or make a claim to the continental shelf, without the express consent of the coastal state.

The previous absence of clear demarcation had led to international skirmishes like the Cod Wars. While attribution of rights and jurisdiction through EEZs now deters similar low-level conflicts, it also elevates contests into a winner-takes-all matter. In a world divided into territorial states – each with the power to claim as revenue a portion of the surplus product extracted within its borders by privately-owned production units selling goods and services for profit – such disputes become a cause for strategic conflicts that inevitably are militarized.

This is true, above all, for marine areas containing hydrocarbon reserves, once offshore and later deepwater exploration and production became technically feasible and profitable. Firstly, the amount of capital tied up in the fixed investments required for oil and gas production (especially offshore) is huge and has correspondingly long turnover times. The (political, diplomatic, price, etc.) stability required to make such undertakings economically feasible demands a nexus of oil industry and state leadership. Secondly, and more crucially, the indispensable strategic and military worth of oil (e.g. the possibility of wartime interdiction) makes maritime zones containing energy reserves into grand strategic prizes. They are worth the price of diplomatic incident and military standoff to attain (though again, mostly for public consumption, such conflicts are usually presented as arising from disputes over ‘sustainable harvesting’ of fishing stocks).

Matters concerning oil supply bring into relief the impossibility of a peaceful alliance of global states and propertied classes for the joint exploitation of the world. They also make plain the purpose and consequences of dividing the oceans.

For example, in the Sea of Okhotsk there is a small enclave of the high seas (the so-called ‘peanut hole’) surrounded on all sides by waters falling within Russia’s EEZ. During the 1990s Moscow proclaimed a moratorium on all fishing within the enclave (which was mostly conducted by Japanese-, Chinese- and South Korean-owned vessels). It then enforced the ban by staging military manoeuvres and surveillance, effectively excluding fishing fleets. Around the same time the Russian government signed a production-sharing agreement with various oil majors to allow offshore oil and LNG extraction; production off Sakhalin began in 1999.  In 2006 Shell was forced to sell its stake in the consortium to Gazprom, after Moscow threatened to revoke operating permits, using environmental violations as a pretext.

Meanwhile the publicly-stated purpose of US maritime strategy is to employ military assets to ‘deter the ambitions’ of regional competitors:

Today, the United States and its partners find themselves competing for global influence in an era in which they are unlikely to be fully at war or fully at peace. Our challenge is to apply seapower in a manner that protects U.S. vital interests…

Expansion of the global system has increased the prosperity of many nations. Yet their continued growth may create increasing competition for resources and capital with other economic powers, transnational corporations and international organizations. Heightened popular expectations and increased competition for resources, coupled with scarcity, may encourage nations to exert wider claims of sovereignty over greater expanses of ocean, waterways, and natural resources—potentially resulting in conflict. Technology is rapidly expanding marine activities such as energy development, resource extraction, and other commercial activity in and under the oceans. Climate change is gradually opening up the waters of the Arctic, not only to new resource development, but also to new shipping routes that may reshape the global transport system. While these developments offer opportunities for growth, they are potential sources of competition and conflict for access and natural resources.


Credible combat power will be continuously postured in the Western Pacific and the Arabian Gulf/Indian Ocean to protect our vital interests, assure our friends and allies of our continuing commitment to regional security, and deter and dissuade potential adversaries and peer competitors.

From 1945 Washington became the dominant naval power in the Pacific Ocean. And now, invoking Wilson and Grotius, US diplomats such as Hillary Clinton routinely assert a ‘national interest’ in defending ‘freedom of the seas’ and unimpeded navigation in the region, especially in the South China Sea, Yellow Sea and Sea of Japan. Since 1979 the US Navy has conducted what it calls a Freedom of Navigation program. This involves practical demonstrations of might, whereby US military vessels deliberately detour into waters over which coastal states (such as China and Iran) assert a ‘security jurisdiction’ (i.e. in which they request prior notification of transit, and authorization for exercises, by military vessels). Washington asserts the right to conduct military surveys, manoeuvres and reconnaissance within the Chinese EEZ. Beijing rationally regards intelligence gathering within its coastal waters as preparation for armed conflict, and declares itself authorized to prohibit such activity as prejudicial to its security.

These practices betray the reality obscured beneath the rhetorical ploy. Washington – with the aid of its chief military allies in the Asia-Pacific region, Canberra and Tokyo – now plays the old role of the established European powers in the Atlantic, seeking through rampant bellicosity to maintain naval pre-eminence against a rising commercial and strategic competitor. Its partners seek to uphold Washington’s global reach, and thereby their own interests, against the expansion of Beijing’s regional naval prerogatives.

document prepared for the Royal Australian Navy’s Sea Power Centre for maritime research presents a public version of Canberra’s objectives:

There are a number of ways in which an increasingly restrictive navigation regime internationally might affect Australian interests. First, ADF ships, submarines and aircraft might find their access to certain areas of the ocean and super-adjacent airspace becoming restricted or subject to unacceptable limitations. Prior entry notification, navigation on the surface for submarines, and the restriction of international straits and ASL are not currently permissible at international law, and would limit the ADF’s operational effectiveness throughout the region. It could also impede the transit of allied navies in times of heightened tension or armed conflict, also hampering the efforts of coalitions of which Australia is a part.

In fact, Canberra itself violates the UNCLOS on unimpeded passage through international shipping channels, having imposed a system of compulsory pilotage for movement through the Torres Strait.

Similar strategic objectives to those held by the US governing elite were at work when, in 2004, Canberra announced creation of a Joint Offshore Protection Command (now Border Protection Command) comprising ADF and Customs personnel. Along with patrols centred on the energy-rich Timor Sea and the northwest coast abutting the Indian Ocean, the BPC was to oversee a Maritime Identification Zone, covering all vessels passing within 1000 nautical miles of Australian coastline. This would oblige all vessels seeking to enter Australian ports, as well as those merely having strayed inside the Australian EEZ, to provide Australian authorities with information regarding location, speed, crew, cargo and course of transit. International law provided no basis for imposing such requirements on foreign-flag vessels. The area involved stretched into the territorial waters of Indonesia, Papua New Guinea, East Timor, New Zealand and New Caledonia.

Meanwhile Anthony Bergin and Sam Bateman from the Australian Strategic Policy Institute have described some of the strategic issues underlying Canberra’s claims to Antarctic territory, including its adjacent waters and extended continental shelf.

In such circumstances, by demanding the expansion of Canberra’s maritime jurisdiction outside its territorial waters, and by providing pretexts under which this bailiwick might be enforced by military patrol boats, the Australian Greens (and environmental activists) present the national state as having a ‘progressive’ mission in world affairs, as being (potentially) an instrument of the angels. This fanciful vision is possible because, regarding political divisions over matters concerning fisheries management in the Australian EEZ, the Greens obscure the underlying questions of property relations and imperial rivalry that dwell beneath superficial disputes over morality. They thereby contribute once again to bestowing Canberra’s regional ambitions, and its all-but-certain participation in future military conflict between nuclear powers, with a degree of popular legitimacy and a ‘progressive’ sheen.

The statesman speaks

September 9, 2012

For two whole days, earlier this week, a storm of cheers and hurrahs rang out across the liberal commentariat  your Brad DeLong-types along with columnists from The Atlantic and The Nation  for what was described as the persuasive force and uncommon seriousness of Bill Clinton’s speech at the Democratic National Convention in Charlotte.

Liberal writers have occasionally turned a critical eye on the style of such televised events, with their gaudy solemnity and razzmatazz religiosity.

Generally, however, the likes of Eliot Weinberger reserve their scorn for one wing of the US state leadership. Few professional rewards are sacrificed nor any social standing risked with such efforts.

Rare is the non-radical who will portray with real venom an entire assembly of establishment creeps and crooks, as did Philip Roth in his description of Richard Nixon’s 1994 funeral  at which Clinton delivered one eulogy:

[The] whole funeral of our thirty-seventh president was barely endurable. The Marine Band and Chorus performing all the songs designed to shut down people’s thinking and produce a trance state: ‘Hail to the Chief’, ‘America’, ‘You’re a Grand Old Flag’, ‘The Battle Hymn of the Republic’, and, to be sure, that most rousing of all those drugs that make everybody momentarily forget everything, the national narcotic, ‘The Star-Spangled Banner’. Nothing like the elevating remarks of Billy Graham, a flag-draped casket, and a team of interracial pallbearing servicemen – and the whole thing topped off by ‘The Star-Spangled Banner’, followed hard on by a twenty-one gun salute and ‘Taps’ – to induce catatonia in the multitude.

Then the realists take command, the connoisseurs of deal making and deal breaking, masters of the most shameless ways of undoing an opponent, those for whom moral concerns must always come last, uttering all the well-known, sham-ridden cant about everything but the dead man’s real passions. Clinton exalting Nixon for his ‘remarkable journey’ and, under the spell of his own sincerity, expressing hushed gratitude for all the ‘wise counsel’ Nixon had given him. Governor Pete Wilson assuring everyone that when most people thing of Richard Nixon, they think of his ‘towering intellect’. Dole and his flood of lachrymose clichés. ‘Doctor’ Kissinger, high-minded, profound, speaking in his most puffed-up unegoistical mode – and with all the cold authority of that voice dipped in sludge – quotes no less a tribute than Hamlet’s for his murdered father to describe ‘our gallant friend’. ‘He was a man, take him for all and all, I shall not look upon his like again.’ Literature is not a primary reality but a kind of expensive upholstery to a sage himself so plumply upholstered, and so he has no idea of the equivocating context in which Hamlet speaks of the unequalled king. But then who, sitting there under tremendous pressure of sustaining a straight face while watching the enactment of the Final Cover-up, is going to catch the court Jew in a cultural gaffe when he invokes an inappropriate masterpiece? Who is there to advise him that it’s not Hamlet on his father he ought to be quoting but Hamlet on his uncle, Claudius, Hamlet on the conduct of the new king, his father’s usurping murderer? Who there at Yorda Linda dares to call out, ‘Hey, Doctor – quote this: ‘Foul deeds will rise / Though all the earth o’erwhelm them, to men’s eyes’?

Who? Gerald Ford? Gerald Ford. I don’t ever remember seeing Gerald Ford looking so focused before, so charged with intelligence as he clearly was on that hallowed ground. Ronald Reagan snapping the uniformed honour guard his famous salute, that salute of his that was always half meshugeh. Bob Hope seated next to James Baker. The Iran-Contra arms dealer Adnan Khashoggi seated next to Donald Nixon. The burglar G. Gordon Liddy there with his arrogant shaved head. The most disgraced of vice presidents, Spiro Agnew, there with his conscienceless Mob face. The most winning of vice presidents, sparkly Dan Quayle, looking as lucid as a button. The heroic effort made by that poor fellow: always staging intelligence and always failing. All of them mourning platitudinously together in the California sunshine and the lovely breeze: the indicted and the unindicted, the convicted and unconvicted, and his towering intellect at last at rest in a star-spangled coffin, no longer grappling and questing for no-holds-barred power…

The style of these official events has been honed to even more ghastly effect over the subsequent two decades, as the US president has actually acquired no-holds-barred power.

Since Washington made its strategic turn towards unrestrained belligerence to counteract the emergence of competitive rivals  and since the state’s executive branch arrogated for itself the right to conduct ‘military and national security operations’, such as killing people anywhere any time, without having to grant due process or ‘publicly disclose the criteria which guide its actions’  the praetorian flavour to proceedings, the loving attention devoted to the murderous deeds of the ‘finest warriors in the history of the world’, has become more pronounced. So has the vicious gangsterism of the speakers’ language (see John Kerry, Joe Biden, etc.)

Witness the vice president’s extraordinary performance.

Faced with this, it seems reasonable to quote Walter Benjamin’s 1936 remarks on the aesthetics of imperialist war: on the historical emergence of a social order that allows ‘war to supply artistic gratification’, and encourages the population to ‘experience its own destruction as an aesthetic pleasure of the first order.’

Elsewhere I’ve described the brutalizing effect on audiences of many contemporary mass-entertainment products (TV, films, video games), and the functional purpose such cultural decay serves.

In Nixon’s day, US society had room for professionally-successful ‘progressive’ antiwar intellectuals, producing material like Roth’s Our Gang. But our own time is rather different. Special historical circumstances are needed to make possible something like the following scene from the TV series The Newsroom, created by the Democrat servant Aaron Sorkin.

The survival constraint bites at Fortescue

September 6, 2012

As the ‘new force in iron ore’ struggles to refinance its debt, sells assets and cuts back on spending, I’m reminded of an interesting article from The Economist – it’s true – back in December 2008.

It concerned the balance sheets, spending plans and refinancing opportunities of six large multinational firms (Rio Tinto, Xstrata, ArcelorMittal, Lafarge, Tata Steel and Cemex):

Lulled by expectations that industrialisation in China and other developing countries would ensure sustained demand, leading firms in the steel, cement and mining industries have entered the recession with far more debt than is normally viewed as prudent.


Borrowing levels that seemed manageable in the boom now look rather high. Might they even pose a threat to these firms’ survival?

There are no quick fixes. Raising equity is tricky since investors have been sucked dry by capital-hungry banks. Disposals could occur only at miserly prices, if at all, because most potential buyers have no access to funds themselves. Rio has abandoned plans to raise $10 billion from asset sales this year, for example.


Relying on debt markets would be foolhardy: ArcelorMittal has managed to roll over some of its French commercial paper in recent weeks, but the prospects of being able to borrow large amounts on normal terms are bleak.


[In] the fight to survive the biggest weapons are cuts in production and capital spending. ArcelorMittal has led the way on the former, with a reduction of output by one-third that even its chairman, Lakshmi Mittal, calls “very aggressive”. The cuts to investment plans are as dramatic: ArcelorMittal, Lafarge and Cemex have sliced their budgets for next year by between one-third and one-half, and on December 10th Rio cut its planned capital expenditure in 2009 from $9 billion to $4 billion. Xstrata has yet to announce its plans but a 50% reduction is possible. For the six firms combined, this would mean a $15 billion boost in annual cashflow—equivalent to about 18 months’ worth of interest costs.

As it tries to repair its balance sheet, Fortescue faces higher lending costs, and advisors are encouraging the firm to seek funding through new equity issues.

What’s noteworthy from The Economist article is the observation that banks and other financial corporations absorb much of the supply of equity finance, leaving less available for industrial and commercial firms, particularly when they most need it. International banking regulations and specifically capital-adequacy requirements have been tightened since 2008, and the much-vaunted stability of Australian-based banks stems in large part from their relatively low leverage ratios (though I’ve suggested the scarcity of domestic government debt among bank assets makes them more fragile than commonly realized). It’s not usually recognized that this has reduced the equity finance available to non-financial corporations and thus has tended to increase their indebtedness.

In these circumstances, the ‘big weapon’ of cutting expenditure – along with selling assets and paying off debts out of current income – may help to repair the balance sheet of an individual firm such as Fortescue. But it means, of course, that less money is thrown into circulation and less income is generated for the company sector as a whole. This is the means by which difficulties are propagated to other firms and generalized debt deflation sets in.