Valentina Pasquali

Washington DC – It was a black Monday on Wall Street, with the Dow Jones that dropped 500 points – the worst loss in seven years – after a series of dramatic events that hit the US financial system over the weekend. Major investment bank Lehman Brothers went bankrupt; Bank of America abruptly bought off failing Merrill Lynch; and insurance group AIG says it is in desperate need of new cash injections. All of this came only weeks after the government-led bailout of mortgage giants Freddie Mac and Fannie Mae, and of investment firm Bear Sterns.

Benn Steil and Sebastian Mallaby, from the Council on Foreign Relations, held a media conference call in the afternoon to explain the significance of this chain of events. “The stakes of this current crisis go well beyond just a few financial institutions,” said Mr. Mallaby, Director of the Maurice R. Greenberg Center for Geo-economics. According to the former Washington Post columnist, the US role on the global stage is at risk. The world is watching the American model of free-standing investment banking and innovative financial engineering taking a serious hit and being outperformed by the more conservative European approach. While some of the most important financial institutions in the world collapse under the weight of debt they don’t have the cash to repay, “New York’s position as the pre-eminent go to place for ambitious young financiers is at risk.” As a longer-term result, the US might be losing economic competitiveness if highly innovative industries such as software and finance start migrating elsewhere.

According to Benn Steil, Director of the International Economics Council on Foreign Relations, the biggest concern for the US Department of the Treasury and the Federal Reserve is to salvage the credibility of dollar-denominated assets and prevent flight of capital abroad. “We do need to be concerned about the future of the Fed and Treasury, especially as they keep expanding their lending activities and last resort interventions,” Mr. Steil said. Inflation spurred by the need of the Federal Reserve to guarantee an excessive number of bad assets – by injecting increasing liquidity into the market — could motivate investors to abandon the US and pour their money onto Europe, for example. And, not coincidentally, the European Central Bank is already imposing much stricter restrictions on the kind of assets it takes as collaterals for its loans. In this sense, the decision by the US Government to refrain from intervening in the case of Lehman Brothers tried to send the message that the American financial system is still on solid footing with the exception of a few bad apples: “It was the right decision of the Fed and the Treasury not to step in with any sort of financial guarantees for Lehman Brothers and to let them go if that needed to be the case,” Mr. Steil commented.

The current financial crisis could potentially have a distressing effect on the already dwindling value of the dollar. High-level Chinese officials are among those concerned, especially over the exceptionally loose US monetary policy. China is particularly affected by it, since it continues buying US Treasury bonds in order to keep the value of the Yuan stable while the demand for Chinese exports increases. Benn Steil explained that the bailout of Freddie Mac and Fannie Mae stemmed from precisely this consideration. The main appeal of US Government bonds for foreign investors is that those assets are some of the most risk-free, since the Federal Reserve will always have the money to guarantee them, “at least in the sense that they can print the dollars needed to back those liabilities,” Mr. Steil noted. Worried that letting go of those investments could seriously damage the reputation of dollar-denominated assets, hampering capital inflows to the US from abroad, the government had no choice but to intervene in the case of Freddie and Fannie – which were always partially government owned.

In any case, it is expected that foreign governments will be careful in abandoning the US market, since many of them hold the majority of their national reserves in dollar-denominated assets. It would be counterproductive for them to diversify at a rate that would contribute to a sudden crash of the dollar and hence undermine the value of their own reserves. However, because foreign governments have accumulated enormous stocks of US assets in the past, “the threat of selling them does have the potential of becoming an important leverage in foreign policy,” Mr. Mallaby explained, since they could threat to disrupt the US financial markets at any time.

News of the financial meltdown, of course, reached the campaign trail and both Barack Obama and John McCain made the economy the centerpiece of their stump speeches on Monday. However, according to Mr. Mallaby, it would be unreasonable to ask them to introduce specific solutions in these remaining two months of the campaign, when it becomes very hard to talk about real policy issues and even more so about technicalities such as derivatives and collateralized securities: “They don’t want to look like they are indifferent but at the same time they don’t want voters to roll their eyes,” Mr. Mallaby said. As a result we should expect both candidates to focus on the more easily understood consequences that the financial turmoil will have on the real economy.

Finally, it remains to be seen whether the American electorate will hold the Bush Administration at all responsible for the turmoil on the financial markets. Although Mr. Mallaby and Mr. Beil said this would not be entirely fair, since the roots of the crisis are much deeper than whatever regulatory stance taken by George W. Bush in the past eight years, they acknowledged that this could very well happen. “I would think that there is always a risk for an incumbent party, especially for one that has been in office for two terms,” Mr. Mallaby concluded.

Originally reported and written for Washington Prism

In spite of the fact that water covers more than two-thirds of the Earth’s surface, 97.5% of it comprises of salt-water. For the most part, the fresh water supply is either stored as ice at the poles, in underground beds that are inaccessible to humans or retained as soil moisture. As a result, only a small fraction of the planet’s water resources, approximately 1% of the total, is available for human use. With the world population growing exponentially, issues of water scarcity are becoming increasingly pressing.

A UNDP report from 1999 predicted that access to water was likely to be the single biggest cause of conflict in Africa in the following 25 years. Almost a decade later, the global pressure on water supplies has increased due to population growth, continued deforestation and climate change, making water an increasingly scarce and precious commodity. According to the World Bank, 1.1 billion people today lack access to safe water, normally calculated as a minimum of 20 liters per day from an improved source within one kilometer of the home.

“Africa’s Lake Chad,” writes Lester R. Brown, founder and president of the Earth Policy Institute, “once a landmark for astronauts circling the earth, is now difficult for them to locate.” The lake, surrounded by fast-growing countries such as Cameroon, Chad, Niger and Nigeria, has shrunk 96% in 40 years. “The shrinkage of Lake Chad is not unique,” notes Dr. Brown, one of America’s leading environmentalists and author of Plan B 3.0: Mobilizing to Save Civilization. “The world is incurring a vast water deficit.” The flow of the Jordan River is also steadily diminishing – along with those of the Yellow River in China, the Mekong in Southeast Asia, the Amu Darya in Central Asia and the Colorado River in the United States. And, as the Jordan River decreases, the Dead Sea is also shrinking. Over the past 40 years, its water level has dropped by some 25 meters and it is estimated it could disappear entirely by the year 2050.

Moreover, with demand growing, several countries are exploiting their groundwater to the point of exhaustion and water tables in parts of China, India, West Asia, the former Soviet Union and the western United States are dropping. According to Dr. Brown, in the Indian state of Tamil Nadu, with a population of over 62 million, wells are going dry almost everywhere because of the depletion of underground water tables. Similarly, Iran is over pumping its aquifers by an average of five billion tons of water per year, causing “water refugees” to abandon their villages in the eastern part of the country as wells dry up.

Considering the extent of the problem, it shouldn’t be surprising that the 1999 UNDP study forecasts that should water wars occur, they would most likely break out in regions where rivers or lakes are shared by more than one country. Lester R. Brown agrees. “Nowhere is this potential conflict (over water) starker than among Egypt, Sudan, and Ethiopia in the Nile River valley.”

The Nile River Basin

The Nile River Basin is a reservoir of water covering 1.3 million square miles, a surface slightly larger than the territory of India. There are ten riparian countries to the Nile River, the longest running in the world: Egypt, Sudan, Ethiopia, Uganda, Tanzania, Kenya, Democratic Republic of Congo, Rwanda, Burundi, and Eritrea. However, three of them – Egypt, Sudan and Ethiopia – account for 85% of the territory that constitutes the hydrologic boundaries of the basin.

Whereas 95% of Egyptians rely exclusively on the Nile for their water supply and 77% of Sudan’s fresh water comes via the river, the Nile originates in Ethiopia and controls 85% of its headwaters. “Ethiopia is an interesting case,” says an economist with the Ministry of Water Resources in Addis Ababa who asked not to be identified by name, “since its economic fate is closely tied to unreliable rainfall and since 90% of its water resources are ‘trans-boundary,’ which means that rivers flow into other countries that inevitably oppose upstream development that might reduce their own resources.”

The already high demand for water in the region is projected to increase steadily through the next forty years. The population in Egypt, today at 75 million, should reach 121 million by 2050. Sudan is expected to have 73 million people by 2050, almost double today’s 39 million. And the number of Ethiopians is projected to grow from 83 million to 183 million.

Population growth is not the only factor of stress on the region’s water resources. David Shinn, former ambassador to Burkina Faso and Ethiopia and professor of International Affairs at George Washington University, told Washington Prism in an interview, “Irrigation projects are the greatest threat to the future of amicable Nile water usage.  Big irrigation projects simply use so much water that never returns to the river system.”

Deforestation and soil erosion also represent a threat. According to Mongabay, one of the most influential climate and environment websites, Ethiopia lost 14.0% of its forest cover between 1990 and 2005. Fewer trees could result from less rainfall. They could also cause worsening soil erosion, which in turn would increase sedimentation and reduce the lifespan of water storage infrastructure.

Competition vs. Cooperation

“Since there is already little water left in the Nile when it reaches the Mediterranean,” Lester Brown writes in Plan B 3.0 , “if either Sudan or Ethiopia takes more water, then Egypt will get less.” Moreover, international agreements grant Ethiopia only a minuscule share of water. “Given its aspirations for a better life, and with the headwaters of the Nile being one of its few natural resources, Ethiopia will undoubtedly want to take more,” Dr. Brown believes.

Possibly the biggest problem with the Nile River Basin is the lack of reasonable agreements among riparian countries on the equitable share of water rights. The most recent one was signed by Egypt and Sudan in 1959 and resulted in a virtual Egyptian monopoly over Nile water. Based on an annual flow at Aswan of 84 billion cubic meters, it allocated 55.5 billion cubic meters, or three-quarters, of the water to Egypt and 18.5 billion cubic meters, one-quarter, to Sudan. “The 1959 treaty remains in effect but is only accepted by Egypt and Sudan.  This is the big problem,” Ambassador Shinn told Washington Prism. The other eight riparian countries do not accept the agreement, but unfortunately there is no formal structure in place for handling such political contentions. “There are periodic bilateral and even regional discussions on water-related issues, but they have not yet achieved a breakthrough on redistribution of Nile water.  That is why this situation could, not will but could, result in conflict some day,” said Ambassador Shinn.

The one example of an attempt at cooperative development of the Nile is the 10 year-old Nile Basin Initiative (NBI). The World Bank-led NBI provides a framework through which its member states can cooperatively make use of the resources of the Nile Basin to fight poverty and promote socio-economic development in the region. Each member has agreed to share information with other riparian states on the projects it intends to launch and, if possible, to undertake joint studies to ensure the sustainability of such projects. The initiative has been regarded as generally successful and the parties to the NBI appear very committed to it. However, Ambassador Shinn believes that the “NBI is an organization that deals primarily with technical and practical issues and not controversial political ones.  It is easier to cooperate on technical matters than political ones.” What remains to be seen is whether the riparian states of the Nile River can find a way to approach the hard-button issues of water rights and water equitable shares.

Responses

The story of the Nile River Basin illustrates the challenges confronting people and policymakers around the world. Current trends in population growth, deforestation, agriculture and the general inefficiency in the way we use available water signal that conditions of water scarcity are only destined to worsen and suggest that conflicts over water resources are becoming increasingly likely.

According to figures from the U.S. Census Bureau, world population is projected to grow from six billion in 1999 to nine billion by 2042. In the meantime, while more than one-fifth of the world’s tropical forests have been cleared since 1960, tropical deforestation continues at rates averaging about 0.7% per year. As for agriculture, close to 70% of the Earth’s freshwater already go towards irrigation projects. The Food Policy Research Institute projects that irrigated cropland area for grains will grow 11% worldwide between 1995 and 2025. Finally, wasteful consumption of water, especially in developed countries, is also contributing to the gradual depletion of global supplies. For example, a report published by the European Union Commission in 2007 estimates that water usage in the EU alone could be reduced by about 40%. As a result, water becomes a more precious resource each day.

If financial markets are any indication of the value of a commodity, a new movement toward the trading of water reinforces the idea that this will be the next most sought after good. It was recently reported that a wave of water purification companies are going public in hopes of increasing their value. “Water companies have become prized acquisition targets as a result of growing concerns over shortages of clean water, the increased infrastructure needs of developing countries, more stringent regulations and an aging water distribution system in the United States,” wrote Euan Rocha for Reuters.

The British economist Roger Bate, currently a resident fellow at the American Enterprise Institute, a conservative think tank in Washington D.C., explained to Washington Prism: “Water is traded amongst farmers, municipalities and industries in many semiarid countries: Australia, Chile, United States, South Africa. It is either literally transferred or the rights to use the water are transferred, much like a contract for many commodities.” Dr. Bates, an expert on water policy, believes that water trading “improves efficiency by allocating water to the most efficient uses, and as such it is also better for the environment.” The premise is that there is enough water in the world for everyone, but it is being used wastefully almost everywhere. What is needed then is a system for allocating water shares more efficiently and an increasingly large number of experts believe that markets can provide such a system.

Trading in water shares is becoming popular even among small investors. Ronald Saville told Washington Prism in an interview, “Water is already a limited resource just when considering it for consumption. Add into the mix the fact that we are going to rely more on it for energy, and its importance for the future is readily apparent.” Saville is a young professional employed in the field of international education in Washington D.C. “I think water will become the next oil and these companies will stand to make huge profits on it, similarly to the way oil companies are making them now,” said Mr. Saville, who has decided to buy shares of a “water mutual fund” known as Powershares Global Water.

Although markets can help allocate a commodity more efficiently by determining the price at which offer meets demand, questions arise as to how they can help distribute equitably a resource such as water, which is equally indispensable to all human beings independent of income, and as to whether or not finance can help preserve it for the future. Oil will be traded at higher and higher prices until it runs out. Unfortunately, while mankind can survive without oil, the same cannot be said for water.

According to Roger Bate, while oil is only slowly replenished, water is a renewable resource. “Water can be commoditized successfully without it ever having to run out,” Dr. Bate says.. “Water markets are based on tradable quotas calculated on supplies. If you set the quotas at below the total amount you will not run out.”  According to Bate, it is crucial then to set the right quotas. “It often happens that a government sets more quotas then there is water to fulfill,” he concedes. However, he believes that “this is not the fault of the market; it is the fault of the quota allocation, in this case the government”.

Even those like Bate who strongly believe in the efficiency of the market as a system of resource allocation see a role for governments and politics in the process. “Making sure people have the funds to be able to afford water is the job of a government, creating a safety net. It is much better that the poor pay for water and get used to paying for it so its not wasted, but that simultaneously they are subsidized to do so. For too long too many users, and notably farmers, have not paid enough for water and wasted it,” explained Bate.

Ethiopia is a very good example of the need for both investments and a political response. Since at an aggregate level Ethiopia still has an abundance of water, the biggest question for Addis Ababa is how to store it, manage it and, if necessary, transfer it.  The economist with the government’s Water Ministry told us: “This is the major concern, since it requires massive finance which of course is not readily available.  In the medium to long term, if investment keeps coming the improved ability to manage water resources will likely more than offset the reduced total quantity of water due to climate and localized factors.  But that may be a big if.”

Since water is a public good and one of the fundamental sources of life, and since it inherently raises trans-national issues, a concerted global political effort at managing and preserving it may be the best strategy for confronting water scarcity and the conflicts that could potentially arise. “I think that there is not much that can be done at a national level, other than more of the same,” the economist with the Ethiopian government told us. “The major solutions will need to be international.”

Originally reported and written for Washington Prism

Washington D.C. – Last month, the International Monetary Fund (IMF) and the World Bank (WB) held their annual meeting in Singapore, a gathering that witnessed a first step towards the reform of the governance structure of the IMF.

The 184 participating members approved a proposal to increase the quota shares of the four most under-represented countries on the organization’s Board of Directors: China, South Korea, Mexico and Turkey. Quota shares, in IMF jargon, translates into increased voting power, as well as wider opportunities to borrow money from the Fund.

The week prior to the summit, IMF’s Managing Director Rodrigo de Rato, speaking at the Brookings Institution, a research center in Washington DC, said that the proposed reforms will “rectify the most extreme distortions in the representation”.

The plan for change was strongly backed by President George Bush. The reforms, however, have met with the suspicion of two sets of members.
European countries are concerned that the rebalancing of quota shares within the Board of Directors will benefit the four under-represented countries at their expenses. Germany and the Netherlands put forward an alternative formula for reform that would distribute voting rights based more on the openness of the states’ economy rather than on mere economic power.

German finance minister Peer Steinbruck said in an interview to Bloomberg news service, “The one-sided position of the US that a country’s Gross Domestic Product (GDP) should play the predominant role is not in line with our views”.

At the same time a host of developing nations also voiced doubts, although in the end chose to endorse the vote. The group of 24 countries – including Argentina, Brazil, Colombia, Egypt, Iran, Pakistan, Peru, India, Venezuela, South Africa and Nigeria – issued a communiqué in Singapore saying that they welcomed the increases of quota shares for the four countries but that the package did not address “the fundamental issue of the under-representation of developing and low-income countries as groups.”

Such concerns are expected to be tackled in a second round of broader reforms of the IMF structure in a way that would recognize the growing weight of emerging nations. The G24 worries that this second phase is by no means guaranteed, as Brazil, India, Argentina and Egypt pointed out in a joint statement issued during the summit.
India, for its part, seems committed to try to take the two year reform plan on a more equitable path. Prior to the September 18th vote, New Delhi mobilized political dissent to try to stop the implementation of the reform as it was.

Now, after the vote has passed, it still intends to pursue a different strategy for further reform. India’s Finance Minister P. Chidambaram told in an interview to The Hindu that he was now “looking forward to all countries, including the G-7, agreeing to construct a formula based on relevant criteria and reflecting the economic strength of countries in the 21st Century.”
Johannes F. Linn, Director of the Wolfensohn Center at the Brookings Institution, and Colin I. Bradford, a Fellow at the think tank’s Global Economy and Development Program, recently co-authored an analysis of the reform plan in the Washington Post.
In their opinion, although the vote can be deemed as a first step towards making the IMF a more representative and legitimate body, “to truly repair what has become an ailing global financial institution, the members of the IMF should move forward quickly with the managing director’s longer term agenda and even go beyond it”.

The two analysts suggest an action program that would comprise of five steps. First the IMF should increase the “basic” quota allocations for all countries – independent of economic weight – in order to give the smallest and poorest members a greater share in voting and better access to finance. Second, criteria for the allocation of “shares” should truly consider the reality of changing economic and financial weights of countries.
A third important step would be to reduce the total number of IMF Board “chairs” from the current 24 to 20. This could be done by consolidating the European seats on the Board into one representing the European Union as a whole.

The idea is already under consideration in Europe and it has the backing of the president of the European Central Bank, Jean-Claude Trichet as well as the chairman of Euro-zone finance ministers, Luxemburg leader Jean-Claude Juncker. However Germany, the largest European member to the IMF, remains opposed to the plan.

Fourth, the Brookings scholars believe that the selection of the IMF’s Managing Director should become independent of nationality, merit-based and more transparent. In practical terms, this would basically require that the Europeans give up their traditional claim to electing the Managing Director.

Finally, the United States needs to step in, and lead the European Union – the most affected by all of these changes – into accepting the reform of the IMF structure.
This could be done by not claiming, for example, the American increase in shares that would likely follow most revised quota allocation formulas. It could also translate in the US renouncing its claim to select the World Bank’s President. And Washington could also give up the veto power that it exclusively enjoys at the IMF and WB boards.

“The US”, Linn and Bradford write, “has broadly supported the steps suggested above, but it has failed so far to offer up any serious contribution of its own. It is time for the US to show its readiness to take an effective lead in global governance reform and allow the IMF, to more accurately reflect today’s global economy”.

“Unfortunately,” Johannes Linn told Washington Prism in a phone interview, “the current US administration is showing little interest in taking any serious action that would shake the political balance within the IMF Board of Directors.”

Mr. Linn continued, “Certainly Washington is very busy dealing with other issues. At the same time the Bush administration does not appear too interested in strengthening the role of International Institutions.”
Although this might not be the moment for a real opening, “there could be a new momentum in a couple of years, with a new administration that would not necessarily have to be Democrat, but just simply more multilateral in its approach”, Linn said.

In an interview with Fareed Zakaria on the PBS show Foreign Exchange, Zanny Minton-Beddoes, Washington bureau editor for the Economist Magazine also expressed reservations on the willingness of the US to waive some of its influence; “the US is basically prepared to give up something but it’s not prepared to lose its veto power.”
Because of how the planned reform will negatively impact the Europeans and because the US administration seems unwilling to take those steps that could convince the EU to go along, the preoccupation of the G-24 that the second round of reform will not go through seems to be justified. “If pushed too hard,” Johannes Linn told Washington Prism, “the Europeans might walk away.”

The consequences of an eventual EU retreat from the Fund could be felt not only within the IMF itself but could also impact the World Bank; for example if the Europeans decided to retaliate, they could do so by lowering their contributions to the Bank’s programs, Linn pointed out in our interview.

A return to a less multilateral approach towards more significant regionalism is not necessarily a problem, depending on where one stands on the issue. “To me personally,” Linn said, “it would be very unfortunate though”.