Rena Pederson, DCFR member and former speechwriter at the U.S. Department of State, recently wrote about the situation in Burma and the challenges and scrutiny faced by Aung San Suu Kyi in the battle for democracy in this changing state. In the article, Ms. Pederson highlights Suu Kyi’s recent political moves, Burma’s rising ethnic issues, and concerns of Burmese citizens who hope for a more democratic future. Read the full article here.

DCFR had the great privilege of hearing from Dr. Gerry Galloway from the University of Maryland on the topic of water security flashpoints and challenges ahead. Dr. Galloway has worked in water resource management throughout the globe with governments, supra-national bodies like the Asian Development Bank and the World Bank, and NGOs on the ground. 

The water resource challenges the U.S. faces are complex, with floods, droughts and erratic weather patterns imposing new requirements. Galloway notes that the very challenges the U.S. must meet however are similar in nature to those of other countries. A recent U.N. study suggests that the water challenges, which face the globe, are all about management. We can face our water challenges if we are willing to rise above politics. Galloway indicates that the various water issues have their own sensitivities and tradeoffs in terms of the uses of water and the resources available. In Texas, if one is concerned with growing crops, for example, then drought is an issue. In the East, floods and hurricanes are of concern.  These are the same dynamics across the globe—the nature side of the equation. Of course, demand and supply-side management falls to policymakers who must address societal changes and urbanization as well.

“We need to put science to use to solve the problems, and implement the best ideas, whether they come from India or Indiana,” says Galloway. He cites a metaphor: Engineers are incapable of solving water challenges because they are too scientific; and correspondingly, men are trying to deal with a problem in which women are needed. Gender is a pressing issue in developing countries in regards to water management. By putting these two ideas together, one could say you do not understand the context of the water issue. An engineer can dig a hole for a well but there is a context: How am I going to be able to replace that water? Who will oversee the maintenance of the well? The modern engineer has to deal with social structure and local practices to address managing water resources.

For Galloway, the global water flashpoint of concern to him covers the arc from China through Southeast Asia to India. There are so many millions of people’s lives at stake, with tensions increasing. He is particularly concerned about the Mekong River Basin because of the many parties involved —Burma, Vietnam, Laos, Cambodia, Thailand and China, where the headwaters are located. Getting the parties to cooperate is a predominant challenge, he offers from decades of experience working on Mekong Basin issues.

Demand for water is growing across the globe, especially in developing countries. Galloway suggests that we need to reorder how we use water. The issue of virtual water is real, he says. The concept of how many gallons of water are used per product is a useful way to analyze water use and trade. The U.S. is a top exporter of water since we export our crops, many of which have a high water content.

China’s water challenges are a frequent source of water news. From his experience, Galloway believes that the Chinese are working very hard to achieve their goals. “They have massive problems, which far exceed our ability to fully appreciate them in this country,” he says. “The Chinese are doing outreach,” he notes from his last fours years of consulting with them on flood risk management.  “They have been working on water resource management for about 4000 years, and yet they are reaching out to other countries for assistance.”  Galloway notes that China’s hydropower generation development is less of a problem than them using fossil fuels; it is a tradeoff, he acknowledges.

Familiar with most debates surrounding water —whether based on science, economics, climate change or politics—Galloway does not believe in the water wars hype. His position leans towards humanity using its technology (and common sense) to resolve conflicts and resource management tradeoffs.

Dr. Gerry Galloway has served as a consultant to the Executive Office of the President, the U.S. Water Resources Council, the World Bank, the Asian Development Bank, and the U.N. World Water Assessment Programme. He is a member of the Louisiana Governor’s Advisory Commission on Coastal Protection, Restoration and Conservation; a Department of State Energy and Climate Partnership of the Americas Fellow; and a consultant to Natural Heritage Institute Team reviewing dams and climate change in the Mekong Basin. His slide presentation is here.

On February 26, DCFR had the honor of hosting Ambassador Vicki Huddleston, former U.S. Deputy Assistant Secretary of Defense for African Affairs. Ambassador Huddleston spoke about the jihadist takeover of Northern Mali and why and how the U.S. should be involved. The Al-Qaida faction in Mali was a derivative from the Algerian Civil War, the first time Al-Qaida attempted to take over a state. Remnants of the Islamic army headed to Mali after the war.

Mali is a “battleground between Islam and the West.” Huddleston highlighted the key players in the conflict: the nomadic north, the Malian state, Al-Qaida, and the West. Though one of the most culturally diverse states in the world, Mali and its surrounding countries are also some of the poorest around the globe. Additionally, the lack of infrastructure, including roads, makes containing borders nearly impossible and leads to an abundance of “ungoverned spaces” where extremist groups can congregate.

Without the recent intervention of the French, 12 million people would be under jihadist control. However, in order to keep Al-Qaida at bay in the region, formerly (and potentially still) under the direction of head terrorist Belmokhtar, the West must defeat the terrorists, secure the North, and train local militias to guard and protect their territory. In the end, however, an enduring solution must be an African one, supported by the West helping build capacity.

Africa is one of the fastest growing areas in the world economically, but the Sahara is a nexus of religious extremism, terrorism, and crime, funded by smuggling and kidnapping. Without intervention from the West, oil supplies will eventually be disrupted and the area could fall into chaos. If the terrorist influence in the Sahara spreads, the West will be further drawn into a sprawling, hard-to-contain series of conflicts with great harm to global security.

Last week, DCFR hosted Professor Alyson Warhurst, CEO and founder of U.K.-based Maplecroft, a leading source of extra-financial risk intelligence. Warhurst focused on growth markets and oil and gas producing countries considered hotspots for 2013. Looking at both political, economic and societal risk, Maplecroft studies how risks conflict and interact with each other and how this impacts a countries’ risk profile in the future.

The Maplecroft lens is a useful way to assess risk and investment opportunities. Political risks can be described as “top-down” challenges, owing to conflict, security risks, and a lack of rule of law, which can often slow development. “Bottom-up” challenges are derived from societal risks; corruption and human rights issues are often indicators of future political risk, which foreshadows both financial and business risks. Reforms in Myanmar and China indicate that their current higher-risk environments will eventually become more amenable to foreign investment. Their political leaders allow for change, which ultimately facilitates more openness for trade and investment. However, in Myanmar, pitfalls remain and are tied to the uncertainty surrounding political reforms. Interestingly, numerous countries in Africa, Khazahkstan, Turkmenistan, Australia and others in Asia are displaying high growth patterns because of their integration with China. Much of this integration unsurprisingly shows patterns of natural resources trade.

Risks can be considered “global risks” that do not respect national boundaries— terrorism, pandemics, and natural disasters.  There are also cross-regional risks such as food scarcity and resource insecurity. Warhurst mentioned that analyzing how a country bounces back in the aftermath of a disaster is an indicator of their potential for future investment. Food insecurity is a major driver of social unrest. Numerous countries represent Maplecroft’s ‘falling stars’, countries that were on the rise, but back-peddled due to political or societal risks. Egypt, Tunisia and Algeria come to mind; Egypt and Vietnam are also troubling as leaders continue to crack down on dissent. Western supply chains are also said to be contracting in Vietnam.

There is a great need to invest in growth economies, suggested Warhurst. Massive growth in middle-class consumerism in African countries make it an ideal place for investment. But violence and extremism coupled with the potential for increased dissent among educated youths keeps several countries in the high-risk category, especially in the Middle East-North African (MENA) region. Four hundred million are expected to enter the global labor market, with the highest growth in MENA and Sub-Saharan Africa. Capitalizing on this growing labor market, however, can reduce and alleviate social unrest by providing opportunities.

By tracking different types of risks, it is possible to map which areas will be attractive markets twenty years from now. By understanding how these risks interact with one another, investment in emerging markets can be both possible and strategically advantageous.

Yesterday DCFR had the honor of receiving Dr. Robert Pastor, professor and director of the Center for North American Studies, American University and author of “The North American Idea: A Vision of a Continental Future.” Pastor’s message was that North America —the U.S., Canada and Mexico— is more than a geographic expression. If we imbibed the North American idea into the public’s consciousness, the 21st century might just be a North American century versus an Asian one. A big obstacle to this reality is a lack of leadership and mountains of special interests blocking regulatory reforms between the three parties to streamline trade.  A lack of political will in infrastructure development to allow for trade flows has hampered NAFTA’s growth and development as well.

The U.S.’s largest trading partners are Canada and Mexico. The middle class in Mexico is growing faster than that of China’s. And Mexico is sporting an evolving high valued-added manufacturing industry. Our energy interdependencies that already exist could be harnessed further in creative ways that benefit all three countries individually, collectively, and on the world stage. Pastor noted that the “pivot to Asia” could be made more sensible by strengthening the North American bloc first. Within the Trans-Pacific Partnership (TPP) countries, the three countries actually comprise the largest amounts of trade flows relative to the other TPP countries.

Pastor’s book outlines these ideas and more in full. Also read a shorter version: american-interest-rp-beyond-cont-divide-july-20121.pdf

……………………

In today’s WSJ, Bob Zoellick echoes Pastor’s ideas in an op ed: “First, this country should strengthen its continental base by building on the North American Free Trade Agreement with Canada and Mexico. Together, the three partners could boost energy security, improve productivity, and give North Americans an edge in manufacturing and other industries that are already experiencing rising wages in East Asia. A politically acceptable immigration policy, and a push for educational innovation using new technologies and competition, could lead to a more prosperous, populous, integrated and democratic future for the hemisphere.”

On another note: “Mexico Central Banker Warns of Bubbles”

Governor of the Bank of Mexico Agustin Carstens, who spoke to DCFR in February 2011, was recently quoted in the Wall Street Journal (Feb 5, 2013). Speaking in Singapore on Tuesday, Governor Carstens suggested that some emerging markets and advanced economies could face a “major financial stability challenge” with large capital inflows raising the risk of asset-price bubbles.”

“Today my fear is that a perfect storm might be forming as the result of massive capital flows to some emerging-market economies and some strong performing advanced economies,” Mr. Carstens said in his speech. “This could lead to bubbles characterized by asset mispricing. [Countries could] then face a reversal in flows as the major advanced economies start exiting their accommodative monetary policy stance.”

…Emerging market officials have taken steps to mitigate the impact on their economies from capital flows, spurred by the asset-buying policies of large industrialized nations like the U.S. and Japan and low global interest rates.

Mexico has also seen its share of capital inflows, with stocks hitting record highs this year and bond yields at or near record lows. The peso tends to be more vulnerable than some of its peers, however, to swings in investor moods on risk, as it is one of the most heavily traded of the emerging-market currencies.

For the full article, click here.

Last week, DCFR hosted Fluor’s Troy Ailshie and Sarah Soong of Hunt Consolidated to discuss infrastructure development and finance. Mr Ailshie noted that the U.S. spends less of its GDP on infrastructure than its main competitors, a 50% decline since 1950. He also mentioned that funding availability is becoming more constrained with traditional lenders facing challenges in 2013 and beyond. 

With infrastructure development and energy being linked, trends in energy and electricity consumption indicate increases in all regions, but the fastest growth occurs in non-OECD countries (61%) to OECD growth of 18%, according to the U.S. Energy Information Administration’s 2012-2035 forecast. Doing business in developing countries requires more creativity of project developers and sponsors; there are more diverse ranges of political risks and a lack of standard documentation and precedents.

On the financing front, Ailshie relayed that project bond financing is gaining momentum and institutional players are also filling the funding gaps. Another noteworthy trend is that regional financiers are financing projects that would have normally been supported by traditional European banks in places such as Oman and South Africa. The European debt crisis has shaken up this part of the industry. In the future, private investment via private-public partnerships are expected to play a more meaningful role to fund infrastructure projects. Government coffers are not sufficient to fund the infrastructure needs of entire economies.

Ms. Soong focused her comments on the financing of Yemen LNG. She mentioned that when the project started, there were no banks available for commercial lending, so all of the sponsors were international investment grade sponsors. This project was financed under the wire of the 2008 global financial crisis. Today, most of the funding sources used back then would not be viable. Soong also mentioned that it is vital to bring the host country of board for a successful outcome. The Yemen LNG project took great care to uphold high environmental standards in the development of the project, even transplanting coral to ensure it continued to thrive on the nearby pristine ocean floor.

Reported over the weekend, the pollution in Beijing went off the map’s edge. DCFR addressed this topic in the summer with Rajan Gupta of the Los Alamos National Lab. His slides with some interesting data are here. And an interview here.

One question is: what happens to China’s manufacturing prowess if the costs of health care and illness (among others) from environmental degradation are not addressed? What are the costs of the burden of air and water pollution — economically, politically, and socially? Cleaner, smarter infrastructure choices are just one of many decisions to be made by Beijing. CEO Jennifer Warren has published recent research on the topic of addressing cleaner energy and water infrastructure in China and India.