The Arctic Geopolitics In Disarray: 

Fallout Of The Ukraine War – Analysis

 March 7, 2022 

By K.M. Seethi

When environmental scientist Jessica Moerman said, “What happens in the Arctic doesn’t stay in the Arctic,” she was only referring to the sensitive polar region’s role as the “frontline for climate change.” Moerman reminded: “It may seem like it’s far away, but the impacts come knocking on our front door.” 

Moerman’s forewarning has significant geopolitical dimensions today with the Russian invasion of Ukraine and the consequent twists and turns in the Arctic political and strategic landscape. Amid fears and anxieties, a major question is whether the Arctic will become another theatre of great power rivalry in the emerging conflict between the West and Russia.  

Currently, the Arctic Council, headed by Russia has five NATO members (Canada, Denmark, Iceland, Norway, and the United States), and two of the western allies (Finland and Sweden) are also members of the eight-member inter-governmental body. There are eight other European countries in the Council with observer status. Besides India and China, there are three other (Asian) observer countries in the Council. The composition of the Council itself is an indication of the shape of things to come. 

In the wake of the Russian invasion of Ukraine, seven of the eight Arctic states declared that they would be halting the work of the Arctic Council. It was only last year (May 2021) that Russia assumed the chairmanship of the Council. These Arctic states also condemned Russia’s “unprovoked invasion” of Ukraine and emphasised “the grave impediments to international cooperation, including in the Arctic,” in a joint statement. It was also reported that all working group meetings would be halted indefinitely and no officials from these Arctic Council members would visit Russia for any consultation or deliberation in view of Moscow’s “flagrant violation” of territorial sovereignty and international law. The Director of the Center of Arctic Security and Resilience called this action “the Arctic seven speaking with one voice.”

However, even as Russia’s role as the chairperson is now under challenge, the other seven Arctic Council members—Canada, the Kingdom of Denmark, Finland, Iceland, Norway, Sweden, and the United States—and the council’s working groups are reported to have considered alternative ways to continue critical work in the region. But, according to Sherri Goodman, former U.S. deputy undersecretary of defense and a senior fellow at the Wilson Center’s Polar Institute, “there’s no forum for dialogue and discussion with Russia, the largest Arctic country, on matters that affect the people, the ecology, the geography of the Arctic.” Goodman also warned that the consequence of Russia’s invasion might “increase the risk of miscommunication and miscalculation in the North, at a time where Arctic activities are increasing.”

Plausibly, after the military take over of Crimea in 2014, Russia was not allowed to take part in any Arctic meetings on security (this included the Arctic Forces Security Roundtable) even as the Arctic Council was not mandated to handle security issues. Experts, however, fear that President Vladimir Putin may continue to remain unpredictable and his order to put nuclear forces “on high alert” has obviously intensified the threat scenario in the Arctic also. In response to the seven-members’ resolution to halt the Council’s work, Moscow’s Arctic senior officials warned that any temporary freeze would “inevitably lead to the accumulation of the risks and challenges to soft security in the region.”

Sanction Forays in the Arctic 

While the Western sanctions continued to shake the various sectors of the Russian economy, many major oil investors and firms also came out with statements that they would be pulling out of Russian resource development or may not continue with new projects with Russia, including in the Arctic. The first such announcement came from BP when it said that the company would exit its 19.75 per cent shareholding in Russia’s Rosneft and ordered its directors “to resign from the Rosneft board with immediate effect.” BP Chair Helge Lund said: “Russia’s attack on Ukraine is an act of aggression which is having tragic consequences across the region. BP has operated in Russia for over 30 years, working with brilliant Russian colleagues. However, this military action represents a fundamental change. It has led the bp board to conclude, after a thorough process, that our involvement with Rosneft, a state-owned enterprise, simply cannot continue.”  

BP’s decision is expected to have a major impact on Russia’s huge Vostok oil project in the Arctic. BP is known for its expertise in offshore development and, more importantly, its financing has been critical to Rosneft’s Arctic extraction project. Similarly, Equinor, Norway’s international energy firm, which has its projects in as many as 30 countries worldwide, including several of the world’s most important oil and gas provinces, such as in Russia, declared that it will stop new investments in Russia and will exit joint ventures. Anders Opedal, President and CEO of Equinor, said: “We are all deeply troubled by the invasion of Ukraine, which represents a terrible setback for the world, and we are thinking of all those who are suffering because of the military action.” The Norwegian energy firm has been in Russia for over three decades and had entered into a cooperation agreement with Rosneft in 2012. 

Like BP and Equinor, Shell also announced its “intention to exit its joint ventures with Gazprom and related entities, including its 27.5 per cent stake in the Sakhalin-II liquefied natural gas facility, its 50 per cent stake in the Salym Petroleum Development and the Gydan energy venture.” It also sought “to end its involvement in the Nord Stream 2 pipeline project.”  Shell’s chief executive officer, Ben van Beurden, said that “We are shocked by the loss of life in Ukraine, which we deplore, resulting from a senseless act of military aggression which threatens European security.”

ExxonMobil, one of the world’s largest publicly traded energy providers and chemical manufacturers, which operates the Sakhalin-1 project on behalf of an international consortium of Japanese, Indian, and Russian companies, said that they were “beginning the process to discontinue operations and developing steps to exit the Sakhalin-1 venture.” The company also announced that under “the current situation, ExxonMobil will not invest in new developments in Russia.”

India’s state-run Oil India Ltd (OIL) also said “it has no immediate plan to invest in Russia, indicating uncertainty on investment in the massive Vostok project of Russia’s PJSC Rosneft Oil Co., which it was eyeing through a consortium,” according to the Mint report. A consortium of ONGC Videsh Ltd (OVL), Indian Oil Corp. Ltd (IOC), and OIL was planning to invest jointly in the massive Vostok project of Rosneft. India was also exploring to invest in Novatek’s Arctic LNG-2 project as part of its energy profile expansion. Though India is soft on the Russian invasion of Ukraine, its foreign ventures in Russia are subject to the pulls and pressures of the West and its international sanction. 

The Wall Streat Journal reported that Norges Bank Investment Management, the world’s largest sovereign-wealth fund is “divesting its Russian holdings.” Norges, the arm of the Norwegian central bank that operates the $1.3 trillion fund, announced that it would be “freezing investments in Russia.” The Norwegian government also announced a range of actions being taken to support Ukraine, including allocating funds for humanitarian aid, joining European Union sanctions and withdrawing the oil fund from Russian investments. Norway being a member of NATO is also committed to providing military equipment to Ukraine.

Singapore-based Trafigura, one of the world’s leading independent commodity trading and logistics houses, said that it “immediately froze its investments in Russia. The firm also announced that it was “now reviewing the options in respect of our passive shareholding in Vostok Oil.” 

TotalEnergies, a major multi-energy firm that produces and markets energies on a global scale, which also has a major stake in Russia, condemned Russia’s military aggression against Ukraine, which it said would have “tragic consequences for the population and threatens Europe.” The firm announced: “TotalEnergies supports the scope and strength of the sanctions put in place by Europe and will implement them regardless of the consequences (currently being assessed) on its activities in Russia. TotalEnergies will no longer provide capital for new projects in Russia.” The war in Ukraine also led Italy to put on hold its share of financing for the $21 billion Arctic LNG 2 project led by privately-owned Russian gas producer Novatek,   

Given the tempo of withdrawals, freezing and halting resorted to by the Western firms in the Arctic energy sector, Russia might explore alternative channels for investment and exploration. China could be a possible investor, but it is not yet clear, in spite of its political support to Moscow, whether Beijing would come up with major investments in the energy sector in Russia to offset the sanctions. 

However, trends in China-Russia trade may provide some indication that there could be some possibilities. According to a report, bilateral trade between the two countries exceeded the $100-billion mark for three successive years, and China continued to be Russia’s top trading partner. The report says that energy and agricultural trade witnessed a steady growth, with Russia emerging a top energy supplier for China and agricultural exports reaching a record high of $5.55 billion. Yet, in terms of investment, Russia ranked only No.13 among foreign destinations for Chinese investment at $12.8 billion (two years back), according to the Chinese official data. But experts suggested that the figure could be raised to a “much higher level, given the massive opportunities in a wide range of areas, including energy, agriculture, manufacturing and technology.” 

Meanwhile, Chinese experts continued to put the full blame of the Ukrainian crisis on the West. For instance, an analyst writes in Global Times: 

Russia didn’t initiate the current war in Ukraine. Russia is ending the 8-year war triggered by the pro-Western Ukrainian regime in 2014 when Donbass broke up refusing to accept the violation of the Ukrainian Constitution that is the coup-d’etat sponsored by Brussels and Washington. 

The aim of the West is as clear as a day — to encircle Russia with unfriendly regimes alongside its borders, strangle it with that military loop and force to stick in the geopolitical quagmire for decades. Being involved in continual counteractions with such regimes, Moscow would have less political, diplomatic, military and economic resources for acting on other directions, for example, in post-Soviet part of Eurasia, Arctic, the Middle East.

The analysist continues: Washington’s strategy is to oust Russia from the access to warm seas such as the Black Sea, the Caspian Sea and the Baltic Sea and impede the political and economic communication between Russia and the world. Ousting Russia from the seas would mean that for the time being the Anglo-Saxons continue to be the only power able to control the world’s oceans. They will preserve this position as long as they can deter Russia and China away from the main ocean routes accessible from the seas like the South China Sea. 

The author, who is said to be a Ukrainian expert located in Russia, further writes: “Trade diversions against China is another of Washington’s dreams. Western experts continually put forth different kinds of tactics on how to split up the unity of Russia and China.” 

However, it remains to be seen if this ‘unity’ is sustainable in the context of the huge energy sector in Russia getting affected. According to Goodman, “there may be long-term consequences from these moves to disinvest, especially in an increasing shift to renewable energy.” She said that as “the Russian Arctic oil and gas reserves increasingly become stranded assets with the EU and U.S. accelerating their green transition, Russia’s both economic power and leverage power will eventually decrease.” 

Nord Stream 2 Episode 

A major setback for Russia, in the wake of its intervention Ukraine, came when Germany stopped the Nord Stream 2 Baltic Sea gas pipeline project, constructed to augment the flow of Arctic Russian gas direct to Germany. The $12 billion project was completed last year pending certification by Germany and the European Union. This project was announced way back in 2015 amid threats of sanctions by Western countries following Russia’s annexation of Crimean Peninsula from Ukraine and its support to the rebels in the Donbass. Even as Germany continued to argue that Nord Stream 2 was a commercial venture, Ukraine tended to see it as an “existential threat because it eases Moscow’s reliance on Ukraine to ship gas to lucrative European markets.” Ukraine argued that it would lose billions of dollars in transit revenue. 

Washington also believed that the project would reinforce Russia’s sway over Europe. It knew that Russia was already providing 40 per cent of the EU’s total gas supply and that the new pipeline would increase that amount by as much as “55 billion cubic meters per annum.” Hence it continued to oppose the construction and did everything possible to sink the Nord Stream 2 project. As Joe Biden assumed office, efforts were underway to revive the strained relations with Germany. Yet, Germany was resisting Washington’s pressure saying that the U.S. cannot be a substitute for Russia given its geopolitical proximity and reduced transaction costs. However, the situation began to change for the worse with Putin’s action in eastern Ukraine. It was at this time that U.S. had warned that it would suspend the project amid reports of Russian invasion.  On 23 February, the U.S. Secretary of State Antony Blinken applauded “Germany’s decision to take administrative steps to halt the certification process for Nord Stream 2, which will prevent the pipeline from becoming operational.” He said: “This action is in line with the United States’ longstanding opposition to Nord Stream 2 as a Russian geopolitical project and the President’s commitment that Nord Stream 2 would not move forward following the beginning of Russia’s invasion of Ukraine.”  

Following this, the German subsidiary of the Nord Stream 2 operator—Gas for Europe GmbH—announced “its possible liquidation due to current events around the project.” However, amid all developments in Ukraine, Russia continued to argue that Nord Stream 2 was only “a commercial project and is being implemented jointly with European partners.” Russian Foreign Minister Sergey Lavrov told in an interview that the “situation around the Nord Stream 2 showed that Europe holds an absolutely subordinate and dependent place at the global stage.” But Moscow’s invasion of Ukraine has not helped her realise its dream of dominating the European energy market. 

Geopolitical Challenges 

With Russia’s invasion of Ukraine, the Arctic has become a new terrain of big power rivalry with the U.S., Russia and China contemplating to employ military and economic power to secure and sustain access to the region at the expense of the polar region’s ecosystem. The U.S. National Security Strategy sought to upgrade  the Arctic “as a corridor for expanded strategic great power competition between two regions – the Indo-Pacific and Europe.” 

It may be recalled that in March 2021, the U.S. Army brought out its new Arctic strategy under the heading, “Regaining Arctic Dominance.”  According to the document, the Army must “organize to win in the Arctic” and that the region represents “an arena of competition, a line of attack in conflict, a vital area holding many … natural resources, and a platform for global power projection.” An article in The Arctic Institute says that the US Army strategy adhered to other publications from the Government of Canada, the Norwegian military, the United States Navy, and other Arctic and non-Arctic state institutions “committed to increased military engagement in the circumpolar north.” According to Jen Evans, “these ambitious new Arctic security policies are more than just saber-rattling: NATO doubled Arctic military activities from 2015 to 2020 and Russia has assigned at least 81% of its nuclear weaponry to northern fleets, all in the name of (re)gaining Arctic dominance.” Evans also recalled, “the Arctic remained a pivotal military theater throughout the Cold War. During this period, the Arctic was characterized by high levels of militarization, which included the regional placement of intercontinental ballistic missiles (ICBMs), long-range bombers, nuclear weapons, and a host of additional military resources.” 

Strategic thinktanks also noted Russia’s growing interest in the Arctic. SIPRI, for example, had brought out a background paper in 2016 which noted that the “rift between the West and Russia—due to Russia’s intervention in Ukraine from early 2014 and Russia’s more assertive or aggressive foreign policy—has made the other Arctic countries more concerned about the aims of Russia’s military modernization in the Arctic.” Some analysts had seen “this Russia–West confrontation as a new driver of militarization in the Arctic and as increasing the possibility of tensions between NATO and Russia spilling over to the Arctic.” As the SIPRI background paper noted, Russia’s Arctic policies are now available in two documents: The Foundations of the Russian Federation’s State Policy in the Arctic until 2020 and Beyond, adopted in September 2008; and The Strategy for the Development of the Arctic Zone of the Russian Federation and National Security Efforts for the Period up to 2020, adopted in 2013.  

These two documents underline the significance of the Arctic as a major storehouse of natural resources by 2020 and the security challenges emerging from the enhanced accessibility of the Arctic region. Basically, these documents focussed on non-military challenges and underline the importance of cooperation among all Arctic states in dealing with the region’s issues. However, the Arctic also appears more specifically in military and security documents, such as Russian Military Doctrine (December 2014), Maritime Doctrine (July 2015) which highlight “specific military maritime security concerns, with a strong focus on the security of the bases and units of the Northern Fleet in the Arctic.” 

A Report of the NATO Parliamentary Assembly, Political Committee, NATO and Security in the Arctic (October 2017) noted that Russian violations of the territorial integrity of Ukraine, Georgia, and the Republic of Moldova have raised concerns over territorial conflicts between Russia and the rest of the Arctic states.” The Report says that “Moscow, as the largest Arctic littoral state, recognises the geostrategic importance of the Arctic and vital Arctic energy resources, and has built up its military to protect what it perceives as Russian territorial interests in the region. Russian disregard for the territorial integrity of peaceful neighbours cannot be ignored in the High North.” It also pointed out that in “the aftermath of the annexation of Crimea, Russia’s Arctic build-up is viewed more sceptically by other littoral states. Moreover, as a result of Russia’s military build-up in the High North, its ability to limit or deny access and control various parts of the region has increased significantly.” The Report further noted that China was “interested in the exploitation of the sea lanes that will slowly open up as a result of global warming. Moreover, China is also interested in strengthening its ability as a non-Arctic state to access Arctic mineral resources and fishing waters. The PRC has taken steps over the past several years to protect its interests in the High North, pursuing a presence in Svalbard, Iceland, and Greenland.” It may be noted that China had come out with its Arctic policy in 2018 assuming itself as a ‘Near-Arctic state’ with a grand ambition of building a ‘Polar Silk Road.’ It is here that both China and Russia have a great interest in developing ‘Northern Sea Route’ (NSR) as a new geopolitical circuit connecting with Europe and beyond. 

In short, at the heart of the problem is the geopolitical contiguity of big powers linked by the Arctic region—compounded further by the quest for energy security and the resultant rivalry for control over the trade circuits. Russia’s invasion of Ukraine has only deepened the security issues in the Arctic, and the consequences of this war will be more enduring than anything else in the preceding decades. 

The author, an ICSSR Senior Fellow, is Academic Advisor to the International Centre for Polar Studies (ICPS) and Director, Inter University Centre for Social Science Research and Extension (IUCSSRE), Mahatma Gandhi University, Kerala.  

K.M. Seethi is Director, Inter University Centre for Social Science Research and Extension (IUCSSRE), Mahatma Gandhi University, Kerala. He also served as Dean of Social Sciences and Professor of International Relations and Politics, Mahatma Gandhi University. He frequently writes for ‘Global South Colloquy.’ He can be contacted at kmseethimgu@gmail.com

Why China cares about the label of

democracy

Author: Xunchao Zhang, University of Wisconsin-Madison

27 January 2022

If you access any Chinese state media or pro-state social media published in late 2021, you will be bombarded with attacks on US President Joe Biden’s ‘Summit for Democracy’ and relentless insistence that China is the world’s largest democracy. Beyond the fear of geopolitical containment, it is puzzling why China cared about Biden’s democracy summit.

It is not initially clear why China would insist on being a democracy when claiming democratic status risks falling into a rhetorical trap.

While most Western media dismisses China’s claim to democracy as simply a cynical propaganda ploy, some ‘democratisation optimists’ in the West have suggested that China’s reaction to Biden’s summit shows China’s commitment to some vague notion of eventual democratisation. These observations miss the point. China’s reaction to the summit — clinging onto the concept of democracy — largely reflects a lack of a conceptual alternative, geopolitical fear and some genuine domestic perception that the country is democratic.

The most important problem facing China is a lack of alternative concepts to legitimise the state. Although contemporary China is the heir to a socialist revolution, beyond nostalgic leftist circles, orthodox Marxism cannot capture the public imagination as an alternative to liberal democracy.

Granted, there is growing intellectual interest in critiques of democracy such as meritocracy and the Schmittian notion of self-justifying authoritarian state power. Eric Li is perhaps the most eloquent critic of democracy in China offering universal critiques of liberal democracy, such as institutional vulnerability to being captured by elites and the tendency to be gridlocked in unhealthy partisanship and identity politics. Beyond critiques, there are also alternative visions being offered, such as by Daniel Bell who often characterises China as an examination-based meritocracy rather than electoral democracy.

Yet, so far, none of the alternative concepts of legitimisation have gained official endorsement. You will not find meritocracy or citation of Carl Schmitt in the plethora of documents produced by China Communist Party plenums. These alternative concepts are rare sights even in the less rigid Chinese media propaganda targeting foreign audiences.

There are also geopolitical concerns. Embracing any legitimisation concept other than democracy by China, even one that is not explicitly anti-democratic, may unite the Western world in a democratic alliance against China. There are anti-democratic leaders and anti-democratic movements all over the world, usually referred to as ‘populists’, who do not have a systematic anti-democratic ideology. Most of these populists also take up anti-China foreign policy positions. Some even treat China as a scapegoat for their domestic grievances. There is little chance for anti-democratic solidarity between China and the international populist right.

It is advantageous for Beijing to cling to the democratic label to avoid contributing to the formation of a united Western democratic coalition against China. Plenty of people in China genuinely believe their country is democratic. One historical reason behind this is the presence of so-called ‘people-oriented (minben)’ thought in traditional Chinese political culture, which emphasises governance ‘for the people’, rather than government ‘by the people’. Mencius outlined the classic Confucian ideal of state–society relations, under which ‘the people come first, the state comes second, [and] the ruler comes last’.

Yet a state that works for the benefit of the people is not necessarily democratic. People-oriented governance often means a paternalistic but responsive form of authoritarianism. Elites and the public in China often use performance metrics, rather than procedural and institutional criteria, to measure how legitimate or ‘democratic’ the state is. These performance metrics include economic growth and also Beijing’s ability to avenge China’s century of humiliation and reclaim China’s great power status.

The primacy of performance metrics over procedural ones is also reflected in survey data. Pollsters repeatedly find that a majority of Chinese respondents consider China a democracy. It would be self-deceiving for Western observers to dismiss these survey results as a simple reflection of public quiescence under state pressure. A more nuanced interpretation is that ‘democracy’ is simply what the public calls a state that functions well enough to live in.

Despite skepticism aboard, China’s endeavour to redefine democracy in its image has a receptive audience domestically. As long as enough of the Chinese public recognise their country as a ‘democracy’, there is no urgency for Chinese leaders to seek out risky alternative concepts of legitimisation.

While it remains advantageous for China to cling to the label of democracy in the short term, China’s claim to the label is risky. It is difficult for Beijing to redefine democracy in its own image internationally. And claiming to be a democracy makes China’s political system more vulnerable to Western critiques. By clinging to the democratic label, China risks falling into the rhetorical trap of having to keep defending how democratic it is.

Unless the Chinese state offers official backing to an alternative theory of legitimacy for its political system and provides more space for political theory and alternative discourses within China to flourish, it is unlikely that China can escape this rhetorical trap anytime soon.

Xunchao Zhang is a PhD student in the Department of Political Science at the University of Wisconsin-Madison

https://www.eastasiaforum.org/

The Rajapaksa family’s tightening grip on

Sri Lanka

Author: Shyamika Jayasundara-Smits, Erasmus University Rotterdam

29 January 2022

In 2021, the COVID-19 pandemic provided additional cover for a regressive turn in Sri Lankan politics. The consequences of economic and political crisis became starkly evident shortly before the year ended as the hold of the Rajapaksa family on the Sri Lankan state tightened.

From early 2021, the dead came to haunt the Rajapaksa regime, as the government — against all medical and scientific advice — continued to enforce the cremation of deceased Muslims. This drew major backlash from local civil society groups, the medical community and some in the international community. When the policy was eventually changed, it was not due to any government change of heart, but more likely intended to avert harsh words at the UN Human Rights Council’s March deliberations in Geneva, when a country-specific resolution on Sri Lanka was delivered.

While alleged war criminals continue to enjoy impunity, the regime clamped down on freedom of expression, harassing and intimidating journalists and expanding the use of draconian laws, including the Prevention of Terrorism Act (PTA). Though such moves were noticed in international fora, the government used the pandemic as an excuse to silence dissenting voices and clamp down on protests. These included mothers in the North seeking justice for lost children, youth protesting the privatisation and militarisation of higher education (the KNDU Bill) and farmers protesting overnight import bans on chemical fertilisers.

Strong words at the UN Human Rights Council in March and in the High Commissioner’s September oral report on Sri Lanka added pressure on the government to address lingering injustices with seriousness and urgency. Strong objections were raised to Sri Lanka’s poor human rights record during debates related to extending the EU GSP+ tariff scheme at the European Parliament in June. Sri Lanka’s Foreign Minister in Geneva and permanent representative to the United Nations in New York both claimed an international conspiracy in response.

There were a few glimmers of hope for the victims of war crimes in practice. The administration of US President Joe Biden imposed travel bans on some of the Sri Lankan military’s top brass. The Hague-based people’s tribunal indicted the Sri Lankan government after probing the 2009 killing of Lasantha Wickramatunge — a vocal journalist who reported on the infamous 2006 MIG-deal implicating Sri Lankan President Nandasena Gotabaya Rajapaksa, who was then defence secretary.

The government played the victim in the domestic arena. The newly-formed Commission on Political Victimisation was mandated to investigate the ‘victimisation’ of public servants and state officials working in corporations, the armed forces and police. The Commission’s lofty aims were not met, and instead it became a means to ensure the ruling Rajapaksa family and their friends continue to avoid facing justice. Those who lodged legal complaints against the regime’s supporters were ‘persuaded’ to withdraw them.

Further militarisation of the state was evident with the appointment of more military personnel to civil posts. Partisans, military elites and Buddhist monks were richly rewarded for supporting the regime, while Rajapaksa ensured an intensified ‘Buddhisation’ of state institutions. Prominent Buddhist monks were given high-ranking positions on the Human Rights Commission and one was appointed as Vice Chancellor of Colombo University. The Bodu Bala Sena (Buddhist Task Force) leader Galagoda Aththe Gnanasara — a convicted criminal who has incited violence against the minority Muslim community — was ironically appointed to the President’s new pet political project, ‘One country, One law’.

The Rajapaksa regime’s economic mismanagement of state resources through continued rewards to capitalist cronies and family members further reinforced Colombo’s economic decline. Credit agency Fitch Ratings predicted impending economic crisis after downgrading Sri Lanka’s economy to CC status in December 2021. In the last quarter of 2021, Sri Lanka’s economy contracted by 1.5 per cent and foreign currency reserves shrank from US$7 billion in 2019 to US$1.5 billion in December. Subsequently, government import restrictions led to widespread food and fertiliser shortages.

Further misery was added to households battling soaring inflation by a series of gas cylinder explosions due to poor quality gas imports. Colombo also fell out of grace with the IMF, which offered COVID-19 relief packages to most countries other than Sri Lanka, citing the government’s unwillingness to restructure its ailing economy. Rapid passage of the Port City Bill concerned some citizens and the media, who noted that the bill mainly benefits close friends and relatives of the Rajapaksas — while reinforcing close ties with Chinese state companies.

While Fitch downgraded Sri Lanka’s economy to CC, disheartened citizens downgraded the President’s status from the ‘Terminator’ to ‘Nandasena’, his first name. This symbolic political move was an attempt to distinguish between the decorated war-winning defence secretary — often identified by his second name, Gotabaya, or pet name ‘Terminator’ — from the President entrusted with the responsibility of looking after the welfare of all.

It is hard to imagine what positive political and economic developments can reasonably be expected in Sri Lanka in 2022. The pandemic means that global economic growth is likely to be sluggish or even negative, and Sri Lanka’s political elite seem intent on worsening the domestic economic crisis. Perhaps Prime Minister Percy Mahinda Rajapaksa’s spiritual visit to India at the end of the year — as well as the offerings he made to Indian deities — will miraculously cure Sri Lanka’s ills. The US$500 million in emergency loans requested by Colombo from India that may materialise in 2022 more likely will.

Shyamika Jayasundara-Smits is Assistant Professor in conflict and peace studies at the International Institute of Social Studies (ISS), Erasmus University Rotterdam.

https://www.eastasiaforum.org/

Solving Japan’s wage stagnation

Author: Richard Katz, Carnegie Council for Ethics In International Affairs

1 February 2022

The issue of wages has been on Japan’s political agenda since former prime minister Shinzo Abe urged companies to raise wages to fight inflation. Prime Minister Fumio Kishida included wage hikes in his slogan of ‘new capitalism’. But the government has only applied toothless measures, such as requests by the prime minister for companies to alter their behaviour, applying temporary tax cuts for permanent wage hikes and enacting a series of weak ‘equal pay for equal work’ laws.

Japan is hardly the only rich country where price-adjusted wages have been suppressed in the last few decades, but it’s second only to crisis-wracked Greece in showing virtually no growth in labour pay over the past quarter century. For most of the past two centuries, wages in industrial countries grew over the long term at around the same rate as GDP. Then, beginning in the late 1970s, things changed.

The wage share of national income has now fallen to its lowest level in a half-century. Between 1996–2019, productivity grew at around an average of 30 per cent in 16 rich countries, including Japan, while real hourly compensation grew only 19 per cent in the typical country. In Japan, it was a negligible 3 per cent. Until recently, Japan’s workers ironically got a higher share of national income than workers elsewhere.

While economists disagree on whether policymakers can remedy the situation, the brunt of the evidence suggests that they can.

Some economists contend that the primary factor is the rise of Information and Communications Technology (ICT). To a greater degree than in past technological waves, ICT has decreased demand for low- and medium-skilled labour, and this has not been sufficiently offset by increased demand for high-skilled labour, so, more of the fruits of growth have gone to owners of capital via profits. The OECD estimates that new technology and related trends caused about 80 per cent of the decline in the wage share of income. If technology is destiny, then policy solutions are limited.

But technology cannot be the whole story. After all, wage suppression began two decades before the marriage of the personal computer and the internet sparked the ICT revolution. In Japan, it goes back to at least 1980 (the earliest comparable data available). Besides, rich nations have access to the same technology, so why do outcomes differ so much from country to country?

For these reasons, some experts correctly stress the declining political and bargaining power of labour. As early as 2001, Olivier Blanchard, later the IMF’s chief economist, argued that wage suppression resulted from diminishing union membership, neoliberal deregulation measures and the weakening of past alliances between labour and political parties. The decline in the labour share of national income has been most severe in countries like Japan, the United States and South Korea, where union contracts cover the smallest share of the labour force.

There is a marked difference in wage outcomes depending on the extent to which countries apply ‘active labour measures’ — some of which can raise the labour share of income by several per cent of GDP. These measures help unemployed workers find new jobs via retraining or matchmaking between employers and employees, enhancing their ability to resist demands for wage restraint. Japan and the United States unsurprisingly come near the bottom in spending on such measures as a share of GDP.

The diminished enforcement of antitrust measures in many countries has also enabled ‘superstar’ companies to gain an inordinate market share, increasing their bargaining power in a growing number of industries. In those industries, the labour share of income declined even more severely.

Japan’s situation is even worse than these global trends. The biggest reason for this is the sharp upsurge of poorly paid non-regular workers who rose from 15 per cent of the labour force in the 1980s to nearly 40 per cent in 2021. While regular workers on average earn 2500 yen (US$21.50) per hour, temporaries make just 1660 yen (US$14.30) and part-timers a meagre 1050 yen (US$9.05).

France, too, has a third of its labour force as non-regular workers, yet it suffers only a small wage–GDP gap. In both countries, the law requires equal pay for equal work. While France enforces its law, Japan has not mandated any Ministry to investigate companies and prosecute violators. Virtually all French workers are covered by union contracts, whether or not they belong to a union. In Japan, only union members are covered by contracts, and temporary workers are legally banned from joining. The result is that in France, unlike Japan, regular and non-regular workers labouring side by side in the same job get the same compensation per hour.

If Kishida wants results, enforcing ‘equal pay for equal work’ laws and instituting active labour measures would be good places to start, along with enabling temporary workers to join unions. But that would step on the toes of the powerful employers lobby, while the penny wise and pound foolish Ministry of Finance would likely object to spending money on active labour measures. Kishida’s actions on this issue are a key test of whether his ‘new capitalism’ is anything more than a catchphrase.

Richard Katz is a Senior Fellow at the Carnegie Council for Ethics In International Affairs. This is an excerpt from Toyo Keizai.

https://www.eastasiaforum.org/