The Heinz Journal Volume 15, Issue 1 by The Heinz Journal

Volume 15, Issue 1 · Spring 2017

journal.heinz.cmu.edu

Editor in Chief Payce Madden Managing Editor Emily Rosen Acquisitions Manager Anna Vande Velde

Editors Laura Calloway Joe Caruso Niles Guo Christie Joesbury Linda Kuster Rondell Jordan Jessie Lamb Shidong Li Stephen Munchel Alex Romoff Andres Salcedo Noguera Ela Sehic Emily Shawgo Anna Vande Velde Yiwen Wu Victoria Zuber

Opening Borders Between India and Pakistan: Developing Trade and Increasing Economic Interdependence to Ensure Sustainable Development and Peace

Tahir Habib Cheema

Need for Strengthened Fiscal Decentralization as a Tool for More Equitable and Balanced Urban Development in Ghana

Deme Yoo

How the Kremlin Justifies Its Engagement with Its Periphery: The Russian Annexation of Crimea

Courtney Kayser

Achieving Sustainable Food Production: Assessing the Viability of “Eating Local” as National Policy

David Guyott, Qinqi Dai, and Shinai He

Role of Private Sector in Climate Change Adaptation Naila Rafique

The Heinz Journal is a student-run publication of the H. John Heinz III College at Carnegie Mellon University, dedicated to publishing works that link critical and theoretical analysis with policy implementation.

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We accept submissions from professionals, policy school graduate students, and members of the Pittsburgh community. Submissions and inquiries can be emailed to TheHeinzJournal@gmail.com.

The Heinz Journal

Opening Borders Between India and Pakistan: Developing Trade and Increasing Economic Interdependence to Ensure Sustainable Development and Peace Tahir Habib Cheema Carnegie Mellon University – H. John Heinz III College Open and transparent regional trade plays a significant role in economic development, although trade in the developing parts of the world is hardly free. South Asia has been struggling to match the level and pace of economic growth and development in the developed parts of the world. India and Pakistan, the most critical regional players, have been following restrictive trade regimes, in turn capping the growth potential of the whole region. This reluctance to bilateral trade has not only placed the region in a disadvantaged economic position but has also hindered the path towards peace and stability. Fragile relations and short-lived policies based on weak political relations between the two nuclear powers have attracted international security concerns. There is international interest in improving economic cooperation between the two countries. This paper uses liberal theory and emphasizes the importance of economic interdependence as a mean of avoiding inter-state conflicts. The paper starts with a discussion on the economic structures in India and Pakistan, followed by a critical analysis of their bilateral trade. Later, the paper identifies the two countries’ complementary strengths that can be matched for mutual and regional economic benefits. To propose a practical solution, the last part of the paper points towards specific economic development opportunities that can utilize these strengths and allow both nations to experience the positive effects of open and free bilateral trade. The paper concludes by stating that borders which are designed to facilitate bilateral trade and investment, specifically in the form of joint ventures and knowledge or technology exchange, are expected to foster noticeable positive outcomes for regional development and global peace.

I. Introduction Following the mercantilist approach, most developing countries strive to increase their exports while restricting imports, fearing unknown effects linked to trade deficit. However, many economists believe that over-protecting domestic markets is not a correct approach.1 The World Trade Organization strongly recognizes the central role of international trade in economic development. Despite an established link between higher trade and better development, there is a clear reluctance to reduce barriers to trade in the developing countries. One of the major factors contributing to the slow pace of development in these countries is restrictive trade policy. Moreover, developing countries often avoid opening borders for each other, instead preferring 1

Pakko, M. (1999, September 1). The U.S. Trade Deficit and the "New Economy." Federal Reserve Bank of St. Louis Review.

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to improve trade with developed countries, either as a result of concerns of insufficient economic competitiveness, political conflict, or both. In the case of India and Pakistan, weak economic cooperation and underutilized trade potential have both economic and political causes. Both India and Pakistan have been pursuing policies that restrict trade – reducing transparency and increasing transactional costs. South Asia, where India and Pakistan are the major regional players, houses 42% of the world’s poor population,2 and would gain from a freer trade environment. The fragile relationship between these hostile neighbors has been discouraging to the free flow of goods and services. This trade restrictiveness has kept both nations from the benefits of a huge economic 2

South Asia Regional Brief. (n.d.). Retrieved April 17, 2015, from http://www.worldbank.org/en/news/feature/2014/03/24/southasia-regional-brief.

Opening Borders Between India and Pakistan development opportunity. The tone for economic cooperation is most often set by the prevailing political climate, ignoring development needs. The unpredictable nature of this relationship has branded the region with a high-alert designation, spreading economic and security ramifications beyond the region. Various studies and surveys have found that trade between India and Pakistan is of a larger regional interest. Availability of a long shared border, existing historical trade routes and vast unexplored resources have increased the critical importance of bilateral trade.3 The international significance of the region underscores the importance of achieving “reliable" peace. There is a need to emphasize peacebuilding, which could be achieved by mobilizing respective economic resources.4 Reaching a high level of economic cooperation through unrestricted bilateral trade could help resolve the conflicting and long-standing issues of mistrust between the two countries. German sociologist Erich Weede’s theory of international security, in which states "promote free trade to achieve prosperity which will lead to peace,” becomes quite relevant in this situation.5 The liberal peace approach says that liberal states do not fight wars with each other because of their economic stake in one another’s jurisdiction. Increasing these stakes by enhancing bilateral trade between India and Pakistan is an effective strategy to ensure security and peace in the region and the world at large.6 Most relevant literature on the topic focuses on the importance of political issues between the two countries, and suggests that unless political conflicts are settled, the hope for higher economic cooperation is very dismal. This paper emphasizes the concept of economic interdependence and argues that increased economic cooperation would

Taneja, N. (n.d.). India - Pakistan Trade. Retrieved April 17, 2015, from http://icrier.org/pdf/WP182.pdf. 4 Heathershaw, J. (n.d.). Unpacking the Liberal Peace: The Dividing and Merging of Peacebuilding Discourses. Millennium - Journal of International Studies, 597-621. 5 Weede, E. (1995). Economic Policy and International Security: Rent-Seeking, Free Trade and Democratic Peace. European Journal of International Relations, 519-537

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decrease the impact of political tensions and allow for mutually beneficial international trade. The purpose of the study is to look closely at the economic structures of both countries to find shared developmental goals. Emphasizing bilateral trade growth, rather than political and military perspectives, allows both countries to gain from involvement in trade agreements. This study does not intend to ignore these important players in defining the relationship between the two countries. It rather proposes a scenario with higher economic dependence that will reduce the role and impact of these sources of conflict. This study tests the liberal approach as a solution to the prevalent political and security issues between India and Pakistan. It draws attention to exploiting respective areas of specialization and complementary strengths to achieve shared economic and development benefits based on commercial liberalism.7 These broader development and security outcomes are critical not only for India and Pakistan but for the region and the world at large. Beneficiaries of bilateral trade, both in India and Pakistan, have been advocating economic interaction outside political tensions. This paper highlights potential effects of removing trade barriers of all kinds – tariff as well as non-tariff including infrastructural, procedural and operational. It analyzes expected gains from liberalizing and increasing the level of bilateral trade. It identifies areas of common interest, joint venture possibilities, and exchange of knowledge and technology to support growth of bilateral trade. The paper also discusses the regional impact of better economic relations between India and Pakistan. The regional approach towards growth has shown significant results in other parts of the world like East Asia, Middle East, Europe and North America. A concerted effort towards 6

Owen, J. (1997). Liberal peace, liberal war: American politics and international security. Ithaca, N.Y.: Cornell University Press. 7 Moravcsik, A. (1997). Taking Preferences Seriously: A Liberal Theory of International Politics. International Organization, 51(4), 513-553.

The Heinz Journal strengthening the economies in the region, based on a higher level of economic cooperation, mutual trade and exploiting respective strength is a formula that India and Pakistan must use for larger developmental interests. There is a need for further studies and empirical research to test this hypothesis as a method for improving economic development for both India and Pakistan.

II. History: 1947-2000 Drawing a border between India and Pakistan in 1947 did not end the plight of people of the subcontinent. The demarcation actually gave rise to contentious issues between the two countries, which have made the rivalry an enduring one, due to persistent, fundamental, and long term incompatibility of goals between the two states.8 Issues related to territorial jurisdiction, national identity, and power position in the region have been the foundation of this decades-long conflict.9 Severity and longevity of this rivalry has made the border between India and Pakistan the worldâ&#x20AC;&#x2122;s most dangerous border.10 World peace cannot be assured without a serious international effort to resolve this conflict.

conditions, and using outdated maps and unauthentic data on population demographics.12 The mismanaged partition resulted in more than a million casualties13 and set the two countries on a path of mutual animosity right from the beginning. The second year of independence brought about war, as the two newly established countries engaged in territorial dispute over princely state of Kashmir. The conflict was resolved by UNsponsored ceasefire in January 1949 but the issue led to three more wars and is still the primary source of regional tension.14 The two countries took opposite positions internationally during the Cold War. Pakistan joined the Southeast Asia Treaty Organization to show its inclination towards anti-communism efforts, while India refused to join the United States of America and its allies.15 This international lobbying further polarized the two countries. India and Pakistan are quite disproportionate in terms of geographic area and economic activity, but the race to acquire modern weapons and manipulatively use international strategic ties kept both countries at par.

Early years of independence were full of problems for both countries. It was hard for India to accept the partition, and Pakistan struggled with a lack of resources to set up a completely new state. Britain failed to fulfill its supporting role in partitioning the subcontinent, leading to further complications that were evident early on.11 The border was drawn without taking into consideration the local

The roots of the Kashmir dispute can also be linked to the race for water source control. The importance of water distribution in the Indus basin was paramount even preceding the partition. Following the demarcation and given the role of agriculture in both nationsâ&#x20AC;&#x2122; separate economies, the issue grew in international significance.16 The discontinuation of water flow from Indian Punjab in 1948 gave birth to the Indus basin water dispute. Technical and professional support from the World Bank helped

Maoz, Z., & Mor, B. (2002). Bound by struggle: The strategic evolution of enduring international rivalries (p. 5). Ann Arbor: University of Michigan Press. 9 Paul, T. (2005). Causes of the India-Pakistan Enduring Rivalry (p. 8). Cambridge: Cambridge University Press. 10 The World's Most Dangerous Border. The Economist. (2011, May 21). Retrieved January 26, 2015, from http://www.economist.com/node/18712525. 11 Ahsan, T. (n.d.). History of the India. Retrieved January 28, 2015, from http://coat.ncf.ca/our_magazine/links/issue47/articles/a02.htm . 12 Bates, C. (2011, March 3). The Hidden Story of Partition and its Legacies. Retrieved January 28, 2015, from http://www.research.ed.ac.uk/portal/files/12562933/BATES_ The_Hidden_Story_of_Partition_and_it_s_Legacies.pdf.

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Military. (n.d.). Retrieved January 28, 2015, from http://www.globalsecurity.org/military/world/war/indo-pakpartition2.htm. 14 Ganguly, S., & Kapur, S. (2010). India, Pakistan, and the bomb debating nuclear stability in South Asia (p. 9). New York: Columbia University Press. 15 India and the Cold War. (1955). Retrieved January 28, 2015, from http://www.jstor.org/stable/4322720?seq=1#page_scan_tab_c ontents. 16 Wolf, A. (n.d.). Case studies | Water Conflict Management and Transformation at OSU. Retrieved January 28, 2015, from http://www.transboundarywaters.orst.edu/research/case_studi es/Indus_New.htm.

Opening Borders Between India and Pakistan settle the issue in the form of Indus Water Treaty of 1960. Following this agreement, there have been occasional instances of mutual cooperation and peaceful problem-solving between the hostile neighbors. One of such event was the settlement of a dispute over salt marsh of Rann of Kutch in 1965. A special tribunal was used to resolve the issue by giving the small piece of disputed territory to Pakistan. India tested its nuclear capability in 1998, becoming the sixth nuclear state in the world. Pakistan responded by displaying its nuclear strength through tests, becoming the seventh nuclear state.17 Both countries remained stubborn and ignored any kind of international influence. Since then, the two nuclear neighbors have posed a serious threat to regional stability and world safety. So far this nuclear capability has mostly played a deterrent role. There is less likelihood of direct confrontation according to the stability-instability paradox.18 The two nations are at a standstill given the high stakes of crossing the nuclear threshold, as neither nation could afford to escalate the conflict to nuclear level. Though there were threats of serious escalation from both sides in the years 1987 and 1990, the same mutual restraint prevented it.19 The arms race between India and Pakistan indicates a security competition. Both countries are spending increasingly greater amounts on their militaries, reducing any hope for a stable and peaceful relationship in near future.20 17

Ten Years of Instability in a Nuclear South Asia S. Paul Kapur, International Security 2008 33:2, 71-94 Retrieved from: http://www.mitpressjournals.org/doi/abs/10.1162/isec.2008.3 3.2.71#.WOiVffmGPIW. 18 Montgomery, E. (2014). Rethinking Stability in South Asia: India, Pakistan, and the Competition for Escalation Dominance. Journal of Strategic Studies. Retrieved January 28, 2015, from http://www.tandfonline.com/doi/abs/10.1080/01402390.2014. 901215#preview. 19 Ganguly, S. (1995). Indo‐Pakistani Nuclear issues and the stability/instability paradox, Studies in Conflict & Terrorism, 18:4, 325-334. Retrieved January 28, 2015, from http://www.tandfonline.com/doi/pdf/10.1080/1057610950843 5989. 20 Dalton, T and J. Tandler. (2012). Understanding the arms “race” in South Asia. Carnegie Endowment for International Peace. Retrieved January 28, 2015, from http://carnegieendowment.org/files/south_asia_arms_race.pdf. 21 Shah, A. (n.d.). The Most Dangerous Place: Pakistan's Past, Pakistan's Future. Retrieved January 28, 2015, from

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Though Pakistan was economically stronger than India in the 1970s and 1990s, India’s 1991 economic reforms opened its economy to tremendous growth which overpowered Pakistan.21 In addition to economic challenges, Pakistan experienced political instability since its independence. Frequent military interventions led to weak diplomatic relations with India. Limited democratic rule and weak institutions resulted in short-lived policies.22 Despite India’s apparent successes, including the development of an improved and strengthened democracy, the nation has been facing domestic instability that threatens to complicate regional issues.23 Separatist movement by Sikhs in India has kept the relations between India and Pakistan tense with India blaming Pakistan’s support of the separatist Sikhs.24 Centralizing tendencies in Indian politics are a primary source of these domestic conflicts.25 Threat of domestic conflicts is enticing both countries to make strategic moves towards the regional conflict. Despite their huge trade potential, India and Pakistan are contributing only minimally to the economic development of the region, making South Asia the least integrated region in the world. The early years of the partition saw a healthy trade relation between the two countries which started to deteriorate over time due to other political issues. The trade corridors started narrowing after the 1965 http://www.worldaffairsjournal.org/article/most-dangerousplace-pakistan’s-past-pakistan’s-future. 22 Ganguly, S. (1995). Indo‐Pakistani Nuclear issues and the stability/instability paradox, Studies in Conflict & Terrorism, 18:4, 325-334. Retrieved January 28, 2015, from http://www.tandfonline.com/doi/pdf/10.1080/1057610950843 5989. 23 Brown, M. (n.d.). The Importance of Internal Conflict. Retrieved January 28, 2015, from https://books.google.com.pk/books?hl=en&lr=&id=xDCpQq Od31wC&oi=fnd&pg=PR9&dq=The+Importance+of+Interna l+Conflict,+Brown&ots=8gpnbfmHCn&sig=Byj2jKEqIjX4Z Jru6psIt5X_E38#v=onepage&q=The%20Importance%20of% 20Internal%20Conflict%2C%20Brown&f=false. 24 Kaufman, M. (1988, June 19). India Blames Pakistan In Sikh Conflict. Retrieved January 28, 2015, from http://articles.philly.com/1988-0619/news/26265748_1_indian-pakistani-india-and-pakistansikh. 25 Harrison, S. (1999). India and Pakistan: The first fifty years (p. 157). Washington, D.C.: Woodrow Wilson Center Press.

The Heinz Journal war.26 Pakistanâ&#x20AC;&#x2122;s exports to India dropped from 50.6% of its total exports in 1949 to 0.06% in 1976.27 A deep-rooted trust deficit and fragile relationship prevented progressive policies from gaining strength. Today, Pakistan is still not in favor of open trade with India based on its miscalculated trade imbalance risk. India granted Most Favored Nation (MFN) status to Pakistan in 1996, whereas granting MFN status to India has become a political rather than economic issue for Pakistan. The real trade potential is ten times the current figures of bilateral trade between India and Pakistan.28 The current trade is highly restrictive owing to many tariff and non-tariff barriers. Restrictive and discouraging policies on both sides have increased the transaction cost to trade. Both countries do recognize the availability of this mutual economic opportunity, but misplaced government priorities on both sides have left the Indian and Pakistani people and economies to suffer. The continued struggle with developmental issues such as poverty, illiteracy and unemployment is a clear consequence of having intentionally forgone the the mutual benefits of being natural trade partners.

III. Economic Structures: India India started off by emphasizing improved economic and social prospects as major goals of its development plan. Such an approach was expected to raise the overall living standard of the masses offering them a wide range of opportunities to grow financially. Factors like technological development, public-private partnerships, regulated investments and international trade were believed 26

Kugelman, M. (n.d.). The Pakistan-India Trade Relationship: Prospects, Profits, and Pitfalls. Retrieved January 29, 2015, from http://www.wilsoncenter.org/sites/default/files/ASIA_121219 _Pakistn India Trade rptFINAL.pdf. 27 Trade Relations between India and Pakistan. (2012) Pakistan Institute of Legislative Development and Transparency. (n.d.). Retrieved January 29, 2015, from http://www.pildat.org/publications/publication/FP/TradeRelati onsbetweenPakistanAndIndia_IndianPerspective_Jan2012.pdf . 28 Taneja, N. (n.d.). INDIA â&#x20AC;&#x201C; PAKISTAN TRADE. Retrieved January 28, 2015, from http://icrier.org/pdf/WP182.pdf. 29 Srinivasan, T., & Narayana, N. (2001). Economic policy and state intervention: Selected papers of T.N. Srinivasan (pp. 230-269). New Delhi: Oxford University Press.

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to be critical for real economic growth. This development approach was then followed by a policy-based push for industrial growth and strict import substitution.29 Right after its independence, India took the course of fiscal activism as an economic strategy. Huge government investments were made in long-term development projects. Easy access to cheap capital was seen as a driver of growth. However, the policy of low interest rates resulted in a loss to government as cost of debt was much higher than the return on funds.30 For a while, the policy focus remained socialistic with a preference for state ownership and excessive regulations.31 The reform measures of the 1990s primarily targeted strong government controls on industry and trade, discretionary controls on industrial investments, and restrictive access to foreign capital investment. These bold economic reforms provided the Indian economy with an opportunity to achieve its real growth potential. Encouraging entrepreneurship and allowing foreign direct investment were two distinct features of these reforms. The new economic reform agenda addressed issues related to the development of industry, trade and the financial sector by allowing market forces to play their role. The industrial deregulation helped increase competition and efficiency. Transparent processes, lower tariffs and flexible exchange rates encouraged international trade. Liberalization in the financial sector increased the efficiency of resource allocation and mobilization.32 India has a marked regional inequality with a clear distinction between rich and poor states. Gross Domestic Product of states ranges from $60 million 30

Reddy, Y. (2002). Lectures on economic and financial sector reforms in India (p. 178). New Delhi: Oxford University Press. 31 Goswami, V. (n.d.). Indian Economic Structure-: A View Point. Retrieved February 9, 2015, from http://www.shodh.net/index.php?option=com_phocadownloa d&view=category&download=198:19-indian-economicstructure--a-view-point-dr-v-k-goswami&id=41:vol4-issue1&Itemid=101. 32 India's Economic Reforms. (n.d.). Retrieved February 9, 2015, from http://indiainbusiness.nic.in/newdesign/index.php?param=eco nomy_landing/217/2.

Opening Borders Between India and Pakistan to $233 billion.33 Wide growth disparities have been statistically tracked across different states in India. Economic performance and social mobility, perhaps as a result of financial policies, is evident in changes throughout the country - not all wealthy states remained rich, and not all impoverished states remained poor.34 There have been serious problems in implementing policies as the basic policy design lacks a proper attention to implementation mode. An overly focused macro-economic approach has compromised the strategy of dealing with the micro issues affecting the economic growth and development of the country.35 Regional disparities remain a great development challenge for the Indian economy given its large size and huge population. This keeps the federation in a weak economic situation.36 In spite of low and high phases, good and bad experiences, right and wrong policies, the Indian economic structure is currently stepping towards a more stable and growth-centric development phase. The current economic policy is showing a reasonable tilt towards a free market economy and global trade. A shift from government-led growth to market-led growth has shown significant impact on efficiency and economic development.37 India was fortunate to open its economy at the right time to take advantage of globalization. The end of the twentieth century saw the phenomenon of globalization surfacing while India was opting for economic reforms. The country has experienced a rapid growth in its exports and foreign direct investment. Bilateral trade and investment agreements have resulted in a greater outreach for Indian businesses in recent years.38 This export-led growth has directly impacted the growth of employment opportunities for Indian labor. India has taken a significant position among cheap and

Gross State Domestic Product at Constant 2004-05 Prices. (n.d.). Retrieved February 10, 2015, from http://planningcommission.nic.in/data/datatable/data_2312/Da tabookDec2014 59.pdf. 34 Bandyopadhyay, S. (n.d.). Rich States, Poor States: Convergence and Polarisation in India. Retrieved February 10, 2015, from http://personal.lse.ac.uk/BANDYOPS/RichPoorIndiaStates_S BMarch09.pdf. 35 Reddy, Y. (2002). Lectures on economic and financial sector reforms in India (p. 2). New Delhi: Oxford University Press.

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skilled labor sources among which businesses use to outsource.

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IV. Economic Structures: Pakistan Pakistanâ&#x20AC;&#x2122;s economic challenges are on par with some of the worldâ&#x20AC;&#x2122;s least developed countries. In the early years after its independence, Pakistanâ&#x20AC;&#x2122;s economic focus was on encouraging import substitution, improving agricultural capacity and strengthening its social sector. At the time of the partition, Pakistan was primarily an agrarian economy with stark inequality. The agriculture was mainly dependent on irrigation system. The country lacked proper infrastructure for transportation and trade of crops. There was no large-scale industry in Pakistan, but the country held important and abundant raw materials to complement industries in India. A protective industrial regime, high tariffs and better trade prospects stimulated the shift of a significant amount of investment from agriculture to industry in the 1950s. Contrary to the expectations of the majority, government spending did not take into account any welfare provisions, instead ignoring the health and education of the rural and low income population. The political elite of the country, comprised of large landowners, were successful in obstructing land redistribution. The simultaneous push for economic growth and the disregard for resulting inequity and its related challenges did not prove to be a smart economic development approach.39 During the second decade of independence, the country experienced a significant industrial expansion with a 72% growth in industrial production. During the same time, the government tried to liberalize trade both for imports and exports. There were several regulatory relaxations and eased procedures related to international trade. 36

Mooij, J. (2005). The politics of economic reforms in India (pp. 322-348). New Delhi: Sage Publications. 37 Hope, N. (2013). Economic reform in India: Challenges, prospects, and lessons (pp. 33-89). New York: Cambridge University Press. 38 Chatterjee, S. (n.d.). Globalization in India: Effects and Consequences. Retrieved February 10, 2015, from http://www.daldrup.org/University/International Management/Globalization in India.pdf. 39 Noman, O. (1988). The political economy of Pakistan 194785 (pp. 6, 15-20 & 35). London: KPI.

The Heinz Journal Imposition of high tariffs was used as a policy to check volume of imports. High levels of protection for domestic industry kept it uncompetitive in international markets.40 This phase of economic growth was short-lived due to political inefficiency and rapidly increasing inequality. Negative growth of per capita output and a shift from military rule to that of a democratically-elected political government led to economic reforms based on the nationalization of industries, land redistribution and social sector development.41 These reforms failed to achieve the goal of real economic growth and development. Emigration and significant foreign remittances from expatriates also played a noteworthy role of contributing to the national economy in later years. Corrective actions were taken by subsequent governments to move towards macroeconomic stability founded on a market-led economy.42 Imprudent policies and internal instability have kept the savings-investment gap wide. International borrowing and foreign remittances have been used to narrow the gap but only on a temporary basis. A large emerging middle class is another factor that has kept the economy mobilized based on a high consumption rate. Economic policies have been neglecting human capital development, leaving a huge growth source untapped. The flawed economic structure of the country has made it dependent on international financial institutions, compromising its independence in setting policy goals. Like other borrowing nations, Pakistan is caught in an asymmetric power relationship with the International Monetary Fund. The financial focus of these international lending institutions is evident in their economic policies and priorities, such as increasing federal revenues through

Noman, O. (1988). The political economy of Pakistan 194785 (pp. 6, 15-20 & 37-43). London: KPI. 41 Zahoor, A. (n.d.). A Critical Appraisal of the Economic Reforms under Zulfikar Ali Bhutto: An Assessment. Retrieved February 8, 2015, from http://www.nihcr.edu.pk/Latest_English_Journal/8.pdf. 42 Husain, I. (2003). Economic management in Pakistan, 1999-2002. Karachi: Oxford University Press. 43 Ibid. 44 Economy Watch - Follow The Money. (n.d.). Retrieved February 6, 2015, from http://www.economywatch.com/world_economy/pakistan/stru cture-of-economy.html.

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policies that affect economic activity in the country, resulting in a slow pace of development.43 Pakistan’s territorial disputes with its economically strong neighbor, India, have serious implications for the country’s economic growth. This enduring confrontation has resulted in huge spending on defense, adding to Pakistan’s financial plight.44 For decades, spending on defense has remained more than double that spent on development, which has resulted in an exceptionally skilled army and a much lower literacy rate.45 Pakistan has been facing low growth, high inflation, increasing unemployment and falling foreign direct investment in recent years.46 This difficult economic situation has resulted in decreasing foreign exchange reserves and increasing fiscal deficit. Pakistan’s weak economy is slightly recovering by a push from manufacturing and service sectors, but unstable political and security conditions in the country keep the risk of foreign investment high. The poor energy situation and lack of planning has further exacerbated the lack of confidence from investors.47 Long-term structural reforms and a focus on improving tax administration is expected to get the country back on the track of economic development.48

V. Bilateral Trade: 1947-2000 Restrictive Trade Regimes: 1947-90 The Indian subcontinent enjoyed status as one of the major trading markets in the world prior to when the region was partitioned to make two new independent states. It was quite unexpected that the region would become the least economically integrated region after the division, losing its economic strength almost immediately. Both India 45

Noman, O. (1988). The political economy of Pakistan 194785 (p. 19). London: KPI. 46 Pakistan Economy Profile 2014. (n.d.). Retrieved February 10, 2015, from http://www.indexmundi.com/pakistan/economy_profile.html. 47 Pakistan Development Update. (n.d.). Retrieved February 10, 2015, from http://wwwwds.worldbank.org/external/default/WDSContentServer/WD SP/IB/2014/04/08/000456286_20140408124206/Rendered/P DF/Pakistan0Development0Update0April02014.pdf. 48 Pakistan in a difficult situation: IMF official. (2013, September 7). Retrieved February 10, 2015, from http://www.dawn.com/news/1041067.

Opening Borders Between India and Pakistan and Pakistan had benefitted from their complementary economic potential and the vital infrastructural links that had been serving the region for several decades. The trade interdependency was visible in the first years postindependence, but was lost shortly thereafter owing to political and military conflicts.49 Since then, there have been more efforts from the two nations to keep one another economically disadvantaged, a break from initiatives designed to uncover mutual economic benefits. From the beginning, restrictive policies based on tariff and nontariff barriers led to a negative trend in balance of trade, keeping economic growth slow for both countries. The policy of discouraging bilateral trade resulted in larger consequences for economic development of the region, with India and Pakistan accounting for more than 90% of the regional GDP and only 20% of the trade in South Asia. The South Asian countries have always been in a state of struggle economically owing to the issues between India and Pakistan. India established a democratic political system, but initial governments focused more on socialist policies. The economic development plans followed a protectionist approach, which was founded on import substitution, public sector driven industrialization, over-regulated businesses and economic interventions. These policies resulted in tough controls on the growth and development of the private sector, and kept the Indian economy closed. On the other hand, Pakistan experienced bureaucracy and military-led trade policies that lacked consistency and stability. These policies restricted trade, keeping the focus on import substitution based on high tariffs, differentiated tax structure for imports and exports, and excessive trade controls.50

countries also experienced a downward trend in industrial growth during this period, while the service sector showed a higher level of growth in India as compared to Pakistan. The major reason behind these protectionist policies was more political than economic. Both countries took a hesitant approach towards encouraging economic relations in order to avoid the negative domestic perception of having compromised on national security issues. The issue of Kashmir has often been used to justify unfriendly economic relations between the two countries. It can be stated that the border between India and Pakistan experienced more exchange of bullets than exchange of goods. The intentional restriction of bilateral trade was performed under the veil of public policy by using measures to avoid the due tariff benefits under international agreements and commitments. Discriminatory treatment of foreign goods was performed through behind-the-border measures.51 Loosening Borders and Economies: 1990-2000 In the last decade of the twentieth century, there have been changing trends for both countriesâ&#x20AC;&#x2122; economies, and encouraging prospects in the realm of bilateral trade. One such shift was the transformation undergone by the Indian economy to open its previously protected economy. Indiaâ&#x20AC;&#x2122;s macro-policy direction switched from the socialist to capitalist model, owing to the emergence of a unipolar world after the fall of Russia. Indiaâ&#x20AC;&#x2122;s move in the early 1990s to open its economy for private and international players is believed to have been the turning point for the economic growth of the country, though this is still being debated among various economists who believe that the journey towards development began in the 1980s.52

The agriculture sector, which employed the majority of working population in both India and Pakistan, would not grow more than 3 to 4 percentage points in those first four decades. Both

In contrast to India, Pakistan had already associated itself with the capitalist world. As a part of its trade policy reforms, Pakistan significantly reduced import tariffs to encourage trade. These broader changes in Pakistani economic policies also had a

Pasha, Hafiz A. (2012) The Prospects for Indo-Pakistan Trade. Lahore Journal of Economics, 2012, 17, 293-313. 50 Butt, M., &Bandara, J. (2009). Trade liberalization and regional disparity in Pakistan. London: Routledge.

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World Trade Report 2012. (n.d.). Retrieved February 21, 2015, from http://foreigntrade.polpred.com/upload/pdf/wto1.pdf. 52 Panagariya, A. (n.d.). India in the 1980s and 1990s: A Triumph of Reforms:. Retrieved March 4, 2015, from https://ideas.repec.org/p/wpa/wuwpit/0403005.html.

The Heinz Journal trickledown effect on the bilateral trade between India and Pakistan.53 Local initiatives related to trade liberalization were complemented by certain international obligations. On the regional level, the South Asian Free Trade Agreement (SAFTA) was a first move towards establishing and strengthening trade ties between India and Pakistan. Trade liberalization and national treatment were the primary features of SAFTA. Also, both countries were pushed to enact trade liberalization measures after becoming members of the World Trade Organization in 1995. India extended MFN status to Pakistan in 1996. Pakistan has refrained from reciprocal action based on the argument that the favor from India never benefited Pakistan, due to a number of remaining non-tariff barriers imposed by India to restrict exports of Pakistani goods. This lack of trust between the countries hindered the creation of any kind of regional or international agreement or commitment to bring real benefits of mutual economic growth. This fact has not only harmed the Indian and Pakistani economies but has also kept the region economically underdeveloped as compared to other regional economic groups like the Association of South Asian Nations (ASEAN). The intraregional trade share of the East Asian countries has remained more than thirty percentage points higher than that of the trade share of South Asian countries. The rifts and conflicts between India and Pakistan have lessened the region’s potential of becoming a strong economic block.54,55 Regardless of this environment of distrust, a new direction of economic policy measures continued to impact trade. This effect was multiplied to some ]Husain, I. (n.d.). PAKISTAN’S TRADE LIBERALIZATION EXPERIENCE LESSONS AND WAY FORWARD. Retrieved March 4, 2015, from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source =web&cd=1&cad=rja&uact=8&ved=0CB4QFjAA&url=http:/ /ishrathusain .iba.edu.pk/speeches/New/PAKISTAN%27S%20TRADE%2 0LIBERALIZATION%20EXPERIENCE.doc&ei=HLr2VJTs JeH9sATl04KQBw&usg=AFQjCNFvv. 54 Economic integration and trade liberalization in South Asia | Asia Pathways. (2013, August 26). Retrieved March 2, 2015, from http://www.asiapathways-adbi.org/2013/08/economicintegration-and-trade-liberalization-in-south-asia/. 53

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extent by the liberalization of the economy and a move towards freer trade in both India and Pakistan, as well as the political stability that Pakistan experienced during this period. One of the milestones that both countries achieved during this time was the lowering of tariff rates from 225% to 45% and the abolishment of quota restrictions related to imports. Still, Pakistan kept its trade with India restricted through a list of tradable goods. Trade statistics between the two countries remained weak, with Indian imports from Pakistan making up 0.5% of its total imports, and Pakistani imports from India making up 1.65% of its total imports in 1998.56 On the other hand, an encouraging trend was visible in the growth of bilateral trade volume which jumped fourteen times in a decade from 1988 to 1999.57 The decade of the nineties saw a reduction in export bias in all primary sectors of the economy – agriculture, manufacturing and services. Agricultural produce, especially vegetables from both countries, was traded across the border, dependent on the countries’ respective crop seasons. In 1998 through 1999, total agricultural trade stood at $163 million with an almost 70% share in the total bilateral trade between India and Pakistan. Pakistan’s agricultural exports to India were almost $23 million more than that of Indian agricultural exports to Pakistan. In addition to agricultural produce, India’s major exports during this period were industrial goods, such as chemicals and petroleum products. Given the rapid economic growth in India and infrastructural development, there was a huge demand for cement, Pakistan’s major export to India. The balance of trade, dominated by agricultural products, saw a

Sridharan, K. (n.d.). Regional Organisations and Conflict Management: Comparing ASEAN and SAARC. Retrieved March 4, 2015, from http://www.grammatikhilfe.eu/internationalDevelopment/rese arch/crisisStates/download/wp/wpSeries2/wp332.pdf 56 Sridharan, E. (n.d.). Economic Cooperation and Security Spill-Overs: The Case of India and Pakistan. Retrieved March 4, 2015, from http://www.stimson.org/images/uploads/researchpdfs/sridharanpdf.pdf. 57 Chengappa, B. (n.d.). India-Pakistan Trade Relations. Retrieved March 4, 2015, from http://www.idsa-india.org/anjun9-7.html.

Opening Borders Between India and Pakistan significant shift from negative to positive from early 1990s through the latter half of the decade.58

benefits for both countries in the form of higher government revenues and rapid industrialization.60

The trade between India and Pakistan is unique in many ways but one of the exceptional characteristics of this trade is the existence of different policies and regulations for different trade routes. This fact has made trade management and facilitation quite complex and placed certain trading communities at a higher disadvantage based on their location. Depending on feasibility, traders have needed to use almost all modes of transportation to utilize the available air, sea, land and rail routes.

Both countries have a strong agricultural base and growing industries. Rather than carrying out duplicate efforts, synergistically planned business and trade strategies can maximize the use of the countries’ respective potentials. The current restrictive approach towards mutual trade is not only hindering freer trade but also requiring the channeling of goods through informal methods, making the trade costlier. At present, both countries are receiving only the minimal benefit of each other’s potential – exports to Pakistan only form 0.56% of total exports of India, and Pakistan has only 0.15% share in total Indian imports.61

The period of confidence and optimism during this decade was shattered, however, near the very end of the 1990s when both countries tested their nuclear capabilities – once again moving from cooperation to hostility, affecting the pace of trade development. The Lahore Declaration of 1999 once again laid some foundation for future cooperation in issues related to trade and mutual economic cooperation.59

VI. Bilateral Trade Since 2000 Economic Compatibilities: Areas of Common Interest India and Pakistan enjoy a distinct status in the South Asian region – they not only share a common border but also a historic social, cultural and economic kinship. This association is so entrenched that any regional development discussions must consider the two countries’ connection. Economic cooperation between the two countries is expected to result in a huge market for inputs (i.e. raw material, labor, skills and technology) and for outputs (i.e. goods and services). A higher level of bilateral trade is promised to bring larger economic 58

Chand, R. (2014). Bilateral India-Pakistan Agricultural Trade: Trends, Composition and Opportunities. Indian Council for Research on International Economic Relations. Retrieved March 4, 2015, from http://icrier.org/pdf/Working_Paper_287.pdf. 59 The Lahore Declaration. (1999). Ministry of External Relations, Republic of India. Retrieved March 4, 2015, from http://www.usip.org/sites/default/files/file/resources/collectio ns/peace_agreements/ip_lahore19990221.pdf. 60 Trading with India: Implications for Pakistani businesses. Dawn (2014, April 21). Retrieved March 19, 2015, from http://www.dawn.com/news/1101252.

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Informal Trade and Smuggling At present, there is more than $10 billion of informal trade taking place between the two countries.62 This informal approach is occurring in the form of circular trade, in which Pakistan and India are using other countries and ports as transits. Major routes that are used for this informal and costly movement of goods employ the free ports in Dubai and Singapore, Afghanistan, or Iran as the primary destinations. A major portion of informal trade moves from India to Pakistan through these longer and costlier routes. Since 2008, Cross-Line of Control (LOC) Trade was started to benefit the two parts of Kashmir. This type of trade describes a duty movement of goods between the Indian part of Kashmir and Azad Kashmir on the Pakistan side. It was initiated as a confidence-building measure, and was perceived as a step towards peace for the region. Unfortunately, the route used for the Cross-LOC Trade has been actively used for informal trade between India and Pakistan instead. While the volume of informal 61

India's Trade - Exports & Imports. (n.d.). Government of India, Department of Commerce. Retrieved March 19, 2015, from https://docs.google.com/spreadsheet/ccc?key=0AonYZs4Mzl ZbdGRTUWtSWlRsenMxTTNqRzlyNXgyWmc&usp=sharin g#gid=0. 62 Acharya, Loknath and Ashima Marwaha. (2012). Status Paper on India-Pakistan Economic Relations. Federation of Indian Chambers of Commerce and Industry. Retrieved April 7, 2015, from http://www.ficci.com/spdocument/20183/StatuspaperonIndiaP akistan.pdf.

The Heinz Journal trade is not as high as of the trade through Dubai, Iran and Afghanistan, it does discourage formal trade, because duty-free movement of goods through Cross-LOC Trade is much more competitive than the formally traded goods that include direct and indirect taxation. Frequently traded goods through the major and minor informal routes include textile products, spare parts, artificial jewelry, cosmetics, medicines, betel leaf, tea and spices.63 Cross-border smuggling is the third method of movement of goods between India and Pakistan. Passengers and border security agencies on both sides are actively involved in smuggling both tradable goods and contrabands. Strict visa policies and other restrictions have resulted in exploitation of the poor, who become involved in smuggling, placing their finances and lives at risk. The major reasons for this informal trade are higher tariffs and selective trade, which result in a revenue loss to the governments and higher costs for the consumers in both countries. This informal trade and cross border smuggling is a clear indication that there is in fact high demand for one anotherâ&#x20AC;&#x2122;s products. Business communities on both sides of the border are asking for more open and stable trade policies to cut the cost of doing business and to take advantage of the full potential of local markets. Policies that could catalyze formal trade and discourage informal trade and smuggling are of mutual benefit. Recent Trade Pattern: Unstable but Growing Unfortunately, the trade pattern between India and Pakistan has always fluctuated. Lack of stability and consistency is not an economic outcome but instead due to political issues. With much control in the hands of political and military stakeholders, it has not been possible for economic players to plan for the long term. There has been an overall improvement in bilateral trade after 2004, but 63

India Pakistan Trade: Changing Trends & Emerging Scenarios. (n.d.). Retrieved March 18, 2015, from http://www.slideshare.net/vahmed/india-pakistan-tradechanging-trends-emerging-scenarios. 64 Trading with India: Implications for Pakistani businesses. Dawn. (2014, April 21). Retrieved March 19, 2015, from http://www.dawn.com/news/1101252. 65 Developed by using data from Taneja et al. [2011b].

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trends in trade since then have experienced dips and humps. Between 2000 and 2004, the bilateral trade between India and Pakistan remained below $500 million. The next three years increased it to $2 billion. Since this time, there have been a couple of negative growth periods. These phases were shortlived, and commitment to economic cooperation helped recover every time. Currently, bilateral trade between the two countries stands at $3 billion, an encouraging figure.64 This amount is five times the level of trade in 2004, marking an increase of 500% in a mere decade.65 Low-Trade Versus High-Trade: Factors and Efforts Between 2000 and 2004, bilateral trade between India and Pakistan was marked by very slow, and sometimes negative, growth. The major reason for this low-trade period was Indiaâ&#x20AC;&#x2122;s stopping of trade through air and land routes, a reaction to attacks on Indian parliament. Trade relations started improving in 2004 with the opening of the restricted trading routes by India, and the addition of more than one thousand items to the positive list by Pakistan.66 A joint statement on cross-border truck movement at the Wagha-Attari border (the only active land border between India and Pakistan for cross-border movement of goods and passengers) in 2008 boosted the trade volume between the two countries. Later that same year, the terrorist attacks in Mumbai slowed the process of bilateral trade but did not lead to any stringent anti-trade measures like those taken during 2001. Still, it took almost three years to rebuild trade confidence between the two countries. In 2011, there were major breakthroughs in trade negotiations. Since then, major efforts that have contributed to the growth of bilateral trade include the establishment of an integrated check-post at Wagha-Attari border, authorization of containerized cargo through land and rail routes, and the opening of new trade routes.67

Naqvi, Z. F. and P. Schuler. (2007). The challenges and potential of Pakistan-India trade. World Bank, Washington, DC, 6. 67 Taneja, N., & Pohit, S. (2015). India-Pakistan trade: strengthening economic relations. New Delhi: Springer. http://www.springer.com/la/book/9788132219484.

Opening Borders Between India and Pakistan Fulfilling its commitment to the joint statement of 2011, Pakistan took a step towards welcoming bilateral trade by shifting from a positive trade list to a negative list of 1,209 items. The negative list is expected to discourage smuggling of goods from India to Pakistan. However, for road-based trade Pakistan is still using a positive list. Pakistan also changed its stance on granting India MFN status based on the presence of non-tariff barriers on Indian side. There have been serious and continuous negotiations on the issues of visa relaxations, trade dispute arbitration and customs cooperation.68 One outcome from recent trade negotiations was the creation of a Customs Border Liaison (CBL) committee, formed at Wagha-Attari border between the customs officials of both countries in 2011. The committee has been successfully conducting bi-monthly meetings since its establishment in order to resolve any issues related to trade, and to support and facilitate further trade. With the efforts of this committee, a dedicated trade gate at the border was established in 2012. This has not only increased the confidence of all stakeholders, but has also played a vital role in increasing trade volumes. Politics and Economy Despite strong fundamental complements between the economic strengths and potential of India and Pakistan, bilateral trade is still occurring at a much lower level than desired. Underutilization of this great economic development opportunity for both countries is not a result of any economic factors, but is rather purely political. The trading environment is dependent on political events, making bilateral trade risky and unsustainable. Sometimes, these political forces directly stop trade. At other times, indirect methods are used with the help of non-tariff barriers like contradictory transaction values, classification disputes, delays in customs clearance, licensing requirements, and other monetary measures related to international trade. Allowing Cross-LOC Trade and ignoring smuggling through the Cross-LOC route is also based on political objectives of both countries, 68

India-Pakistan: Trade Perception Survey. (n.d.). Retrieved March 19, 2015, from http://indiapakistantrade.org/pdf/TPSIndia-Pakistan.pdf. 69 India and Pakistan are united by language and history, divided by commerce. (2011, February 19). Retrieved April 6,

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which affects the economy of both countries. The uncertainty surrounding unfavorable political events has increased the risks for business communities in both countries. Unless economic and trade decisions are delinked from political issues, the real potential of economic strength of the region cannot be realized.

VII. Economic Development Opportunities A Bilateral Trade Outcome Pakistani fear of India’s economic dominance has been preventing trade opportunities between the two countries. This reason for the status quo lacks empirical evidence.69 Pakistan’s overly cautious approach towards opening trade, combined with India’s complex trade regime based on industryspecific non-tariff barriers, is preventing the two countries from exploring and benefiting from their huge economic potential. Use of indirect restrictive measures like Pakistan’s positive list and India’s sensitive list clearly suggests the unreceptive intent of both regarding improving the bilateral trade. It is of interest and, at the same time, disappointment to note that there is only one border opening at Wagha-Attari along the 1,800 mile-long land border that India and Pakistan share. This circumstance and the lack of formal trade opportunities has led to significant increases in informal trade and smuggling. The lack of will and initiative from both sides is keeping the region less developed and economically underutilized. Countries like China and Taiwan, with even more challenging political relations, have kept their economic cooperation based on bilateral trade as a separate matter. India and Pakistan have a similar potential to become top trading partners for each other, provided serious efforts are made to normalize trade. Normalized Trade Scenario If trade is normalized between the two countries, it is expected to grow to a level of $40 billion from the current position of less than $3 billion. This will

2015, from http://www.washingtonpost.com/wpdyn/content/article/2011/02/19/AR2011021901138_2.html?si d=ST2011021901156.

The Heinz Journal not only be reflected in the growth of the two economies, but will also significantly impact the overall development both nations. Freer and enhanced trade will result in cheaper raw materials, lower transportation costs, lower insurance costs, shorter cash cycles, and a significant increase in market size. Consumers in both countries will have easier access to a large variety of goods at competitive prices. In addition to consumers’ gains, higher volumes of trade are expected to have longterm benefits for other stakeholders such as manufacturers and traders due to market growth, and for governments due to larger collections from trade-related revenues.70 The joint efforts of 2011 and 2012, which focused on trade normalization, have proven that policies supporting trade do result in mutual benefits. In 2012, Pakistan’s exports to India increased by 28%, and Indian exports experienced a 19% growth.71 Strengths: India After opening its economy in the 1990s, India has positioned itself as a knowledge economy by making huge investments in modern technology and higher education. This laid the groundwork for India’s future growth in the information technology sector. In addition to becoming one of the leading destinations for technology-related outsourcing, India has also gained competitive advantage in manufacturing related to pharmaceuticals, chemicals, iron and steel, automotive products and agricultural machinery.72 Strengths: Pakistan Pakistan has a comparative advantage in textile products and clothing industry. Additionally, there is a high trading potential for Pakistan to export a wide variety of products (i.e. fresh fruits, raw materials and cement, light engineering goods,

Ahmad, Manzoor, Nadia Rehman, and Sohaib Shadid. 2012. Pakistan India Trade Normalization: Opportunities and Challenges for Pakistan. Trade Development Authority of Pakistan. Retrieved April 4, 2015, from http://www.ficci.com/spdocument/20183/StatuspaperonIndiaP akistan.pdf. 71 Trade between India and Pakistan surges 21% to $2.4 billion. The Express Tribune. (2013, May 13). Retrieved April 6, 2015, from http://tribune.com.pk/story/548768/tradebetween-india-and-pakistan-surges-21-to-2-4-billion/.

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surgical instruments, sports goods, leather products, and chemicals such as caustic soda).73 Shared Strengths Both countries have gained efficiency in their agricultural, pharmaceutical and chemicals industries. Sharing knowledge and experience can improve processes and production further. The free flow of technology and expertise is expected to contribute by increasing the competitive advantage of these sectors, making them even more attractive for the global market. Still, the primary beneficiary of this normalized trade would be both countries’ local consumers who would experience a significant drop in the costs of traded goods. Opportunities Both India and Pakistan are making efforts to develop competitive products for the global market; there is a huge potential to complement one another’s shortcomings in order to create the most cost-effective and high-quality products. The high rate of economic growth in India, supplemented by a rapidly developing and modernizing industry, has clearly strengthened the nation. However, a booming economic supply requires larger markets with higher demand for balance. Furthermore, India has provided Pakistan with a great opportunity to utilize their close-proximity skilled workers and technology, allowing the spillover benefits to spread throughout the region. There are many opportunities available for the two countries to become stronger trading partners in a liberal economic relationship. Investment Opportunities: Joint Ventures There are ample investment opportunities in both countries, but Pakistan is a more feasible option for Indian investment particularly with regards to production of food, chemicals, pharmaceuticals, and automobile components as well as in the 72

Nabi, I. (n.d.). Pakistan's Trade with India: Thinking Strategically. Retrieved April 6, 2015, from http://www.wilsoncenter.org/sites/default/files/ASIA_121219 _Pakistn India Trade rptFINAL.pdf. 73 Normalization of Trade with India: Opportunities and Challenges for Pakistan. (n.d.). Retrieved April 4, 2015, from http://indiapakistantrade.org/resources/Pakistan India TDAP Report Final.pdf.

Opening Borders Between India and Pakistan information technology sector. A study by Federation of Indian Chambers of Commerce and Industries has identified various areas of potential joint ventures between India and Pakistan, including software exports, processed seafood, healthcare products, pesticides, dyes and pigments, auto components, LPG cylinders, and value-added leather products.74 Joint ventures would help both countries to benefit from complementary advantages and intra-industry trade. Stressing mutual economic advantage will also result in low cost of freight for raw materials and semi-processed goods. Bilateral investment would also result in better security conditions for both countries. With higher financial stakes on both sides there will be a natural development of lobby groups, which will discourage frequent political and military interventions from hindering trade, as well as promote peace and cooperation between the two countries. Technology Transfer Opportunities: Knowledge Sharing Instead of looking towards the more advanced countries, India and Pakistan can take advantage of technological development gained by the other country over the years. An unrestricted flow of knowledge among the skilled workforce and technology driven industries holds extraordinary mutual economic and development benefits. The countries should work to encourage bilateral knowledge sharing through conferences, joint research efforts, and development of informal support networks. Educational Opportunities: Exchange Programs The universities and institutes in India and Pakistan are very competitive and have been producing exceptional graduates. Both countries are spending a lot of foreign exchange reserves to send students to Western countries for higher education. This usually results in brain drain, depriving the nations of their most capable professionals. While there is currently negligible student exchange between the 74

Acharya, Loknath and Ashima Marwaha. (2012). Status Paper on India-Pakistan Economic Relations. Federation of Indian Chambers of Commerce and Industry. Retrieved April

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two neighboring countries, encouragement of knowledge sharing could help end this brain drain. Communication Opportunities: Media and Entertainment In recent years, there has been better cooperation between the media and entertainment industries of the two countries, which is a very positive sign. Mass communication can help develop a positive perspective for analyzing bilateral issues, perhaps leading to development of effective and mutually beneficial solutions. The role of media is no longer limited to politics and entertainment, and can instead be used as a powerful economic development tool in the current world of technology. Energy Opportunities: Unconventional Fuels and Electricity Given the global energy situation, there is a great opportunity for India and Pakistan to seriously consider energy cooperation. Both countries are dependent on foreign fuel supplies and are facing a fast and large increase in local energy demands. Pakistan has a very promising opportunity to become a transit route for energy flowing from Iran and other Central Asian states towards India and other South Asian countries. Additionally, both countries can explore the possibilities of implementing joint LNG terminals in order to save costs and make energy supply more economical for local industrial needs. The development of power infrastructure can assure quick transfer of electricity in both directions depending upon supply-demand situation. Regional Opportunities: Transit Trade The geographical position of the two countries, especially Pakistan, provides an opportunity to act as a connector of regional economies, for both the South Asian Region and the Central Asian states. Developing trade policies to support facilitation of regional trade can result in developing a stronger regional block. This regional integration is very critical to improve economic prospects and general prosperity at a larger inter-regional scale.

7, 2015, from http://www.ficci.com/spdocument/20183/StatuspaperonIndiaP akistan.pdf.

The Heinz Journal The development of infrastructure to facilitate this trade presents many economic development opportunities for both countries. It would introduce a significant number of jobs for the local skilled and unskilled workforce. Also, it would have a direct impact on the local manufacturers of construction material and machinery.

VIII. Conclusion India and Pakistan share language, culture, history and a sizeable border, but do not engage in much trade due to weak political support for economic integration.75 Impeding behavior from both sides is the primary factor behind the opaque, overly regulated, and costly trade between the two otherwise optimal trading partners. Composing South Asiaâ&#x20AC;&#x2122;s largest economies, Pakistan and Indiaâ&#x20AC;&#x2122;s anti-economic cooperation approach and actions have affected the development of the entire region, keeping it behind other regions of similar and identical strengths. India and Pakistan have the

Brylliard, K. (2011, February 20). A push to open up trade along the India-Pakistan border. Retrieved April 27, 2015, from http://www.washingtonpost.com/national/on-the-long-

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ability to unleash the economic potential of South Asia, based on the respective strengths in their multiple sectors. At present, this ideal situation cannot be fully exploited due to constant political interventions that have historically altered the path of any kind of progress achieved by the trading partners on both sides. Unless this negative impact of administrative conflicts is blocked permanently, no future efforts can guarantee sustainability of bilateral economic cooperation and development. Implementing the central tenets of the liberal theory and increasing mutual economic stakes would help develop and strengthen strong lobbies against this excessive political involvement, reducing its impact on trade and other economic cooperation efforts and initiatives. Increased levels of trade and investment would support prosperity and peace for the two nuclear nations that have often been at the center of international security attention. There is a need for further studies and empirical research to test this hypothesis as a scenario for improving economic development for both India and Pakistan.

india-pakistan-border-a-shortage-oftrade/2011/02/19/ABY5ttH_story.html.

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Need for Strengthened Fiscal Decentralization as a Tool for More Equitable and Balanced Urban Development in Ghana Deme Yoo Carnegie Mellon University – H. John Heinz III College Nana Akufo-Addo, the leader of the New Patriot Party (NPP), was elected as Ghana’s president on December 9, 2016. Defeating an incumbent president for the first time in history, Akufo-Addo’s victory was hailed by analysts as a shining light for democracy in Africa. However, the peaceful transfer of power is also representative of the deep dissatisfaction Ghanaians feel regarding their nation’s economic development. All too aware of the higher living standards found abroad, Ghanaians – particularly those in urban areas – are demanding more from their leaders than ever before to address urban development issues. This paper will provide a broad overview of Ghana’s urban policy challenges under the framework of productivity, inclusion, and institutions. It will analyze the different mechanisms used to fund community development, and will recommend the strengthening of fiscal decentralization as the way to address the issues identified.

I. Introduction Over the past three decades, rapid GDP growth in Ghana has coincided with the transformation of Ghanaian society from that of a rural, agricultural one to one that is now rapidly developing and urbanizing. Between 1984 and 2013, the urban population has increased threefold, while the proportion of the country’s urban population has risen from 31% to 51%.1 Though Accra – the capital – remains the preeminent urban metropolitan area with over four million inhabitants, all regions of Ghana have experienced steady and rapid urbanization. Between 2000 and 2010, the number of medium (20,00-50,000) and large-medium (50,000-100,000) sized towns quadrupled and tripled, respectively.2 Meanwhile, Accra’s share of the total urban population has decreased from 24.4% in 1984 to 16.6% in 2010, representing a more balanced urban growth.3 During the same period, GDP growth has averaged 5.7% between 1984 and 2013 and 7.8% between 2005 and 2013 – an impressive feat considering the erratic global economy.4 Encouragingly, this growth has been coupled with the reduction of 1

World Bank (The International Bank for Reconstruction and Development). 2015. Rising through Cities in Ghana: Ghana Urbanization Review. Washington, DC: The World Bank Group. 2 Ibid. 3 Ibid.

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poverty and development of human capital: the total poverty incidence has dropped below 25% overall in 2013 and below 11% in urban areas.5 Access to education has increased, with the shares of the population with secondary and tertiary education respectively doubling and tripling between 2000 and 2010.6 Along with this reduction in poverty, quality of life has risen. For instance, while only 30% of households used electricity in 2000, by 2010, 70% of households did.7 Though Ghana’s impressive urbanization has successfully improved livelihoods, reduced poverty, provided greater access to social services for inhabitants through economies of scale, and even boosted rural development, many challenges – both issues associated with rapid urbanization worldwide and those specific to Ghana – remain. According to the International Bank for Reconstruction and Development at the World Bank, the urbanization challenges confronting Ghana can be identified as a trifecta of productivity, inclusion, and institutions.8 This paper surmises that strengthening institutions and governance – in particular, the strengthening of fiscal 4

Ibid. Ibid. 6 Ibid. 7 Ibid. 8 Ibid. 5

Need for Strengthened Fiscal Decentralization decentralization – will lead to more equitable and sustainable urban growth and development in the realm of productivity and inclusion.

dispersion of manufacturing activities, and uncoordinated spatial expansion and limited connectivity.12

II. Productivity

Worldwide, the manufacturing sector tends to grow as a share of GDP until urbanization reaches 60%.13 At that time, manufacturing peaks at approximately 15% of the economy on average.14 In Ghana, the opposite has occurred: as the country became more urban, manufacturing has declined as a share of GDP to just 5.8% (though Ghana’s manufacturing sector remains stronger than others in the region).15 There are many structural reasons for this. According to the World Bank’s Enterprise Survey 2014, manufacturing firms in Ghana are constrained by lack of electricity, high tax rates, lack of access to finance, custom and trade regulations, and corruption.16 The survey results indicate that a much higher proportion of manufacturing companies, 75% in Ghana compared to 24% in Kenya and 9% in Vietnam, consider finance a major constraint.17 Meanwhile, Ghana’s erratic and inconsistent power supply has caused manufacturing to shrink further in recent years.18 During the fourth quarter of 2014, Ghana’s manufacturing sector growth decreased by an unprecedented 8% as manufacturers could not run generators at a level necessary for economic profit.19 Other indicators are not encouraging: 58% of manufacturing companies consider corruption a major constraint, as opposed to just 26% in Kenya and 5% in Vietnam.20 Likewise, Ghana ranks 111th out of 144 countries in the World Economic Forum’s Global Competitiveness Index (GCI), an index that measures the dynamism of the manufacturing sector.21 This indicates that businesses in Ghana are operating in a much more

Ghana’s urbanization has facilitated enormous productivity gains, as workers transition from the agricultural sector to more productive economic sectors in urban areas. However, productivity gains through labor reallocation are not a sustainable source of long term growth. Though the migration from rural to urban areas was the dominant factor in the early phase of urbanization, the natural increase in the cities has become key for rapid population increases in recent years.9 In the long term, gains in efficiency must be achieved to combat diminishing returns of growth. Between 1992 and 2006, total factor productivity – the variable that accounts for effects in total output growth relative to the growth in traditionally measured inputs of labor and capital – decreased.10 Unfortunately, most urban jobs are concentrated in low-value added informal and small-scale household enterprises, and there are simply not enough formal jobs available, nor the human capital to service them. Particularly, the slow-growth of manufacturing in Ghana – an indicator of development – has been cited by economists as an impediment to productivity growth. In Ghana, most manufacturing establishments employ less than 10 workers and are typically comprised of immediate household and nonpaid family employees.11 This has been compounded by several factors, including globalization and deregulation, the lack of manufacturing in Ghana generally, the 9

Bertrand, Paul, and Monique Yankson. 2012. The Mobile City of Accra: Urban Families. Dakar, Senegal: CODESIRA. 10 World Bank (The International Bank for Reconstruction and Development). 2015. Rising through Cities in Ghana: Ghana Urbanization Review. Washington, DC: The World Bank Group. 11 Ibid. 12 Ibid. 13 Nti, Kofi O. 2015. Diagnostic Study of Light Manufacturing in Ghana. Accra: African Center for Economic Transformation. 14 Ibid. 15 Ibid. 16 n.d. World Bank Enterprise Survey. Accessed May 9, 2017. http://www.enterprisesurveys.org/. 17 Ibid.

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Caterina Clerici, Marisa Schwartz Taylor, Kevin Taylor. 2016. Al Jazeera Interactive: Dumsor - The electric outrages leaving Ghana in the dark. Accessed April 15, 2017. http://interactive.aljazeera.com/aje/2016/ghana-electricityoutage-dumsor/. 19 AGI demands power; manufacturing sees negative 8% growth in 2014. 2015. "Ghana Web Newspaper." February 5. Accessed April 6, 2016. http://www.ghanaweb.com/GhanaHomePage/NewsArchive/A GI-demands-power-manufacturing-sees-negative-8-growthin-2014-345354. 20 n.d. World Bank Enterprise Survey. Accessed May 9, 2017. http://www.enterprisesurveys.org/. 21 Schwab, Klaus. 2015. The Global Competitiveness Report 2014-2015. Insight Report, Geneva: World Economic Forum.

The Heinz Journal difficult environment than counterparts in similarly developed countries such as Kenya and Vietnam. Politicians have taken notice of these challenges; during Ghana’s presidential election in 2016, President Nana Akufo-Addo’s election win was partly attributed to his campaign commitment to move Ghana to the “forefront of industrialization efforts in West Africa.”22 He specifically pledged to establish at least one factory in each of the 216 districts across the country, though it is unclear how the projects proposed will be financed.23 Ghana’s cities have grown in an unplanned manner with little regard for the provision of services and/or zoning, contributing to inefficiencies in manufacturing, transportation, and business. According to the World Bank, the dearth of manufacturing is connected to the uncoordinated spatial expansion and limited connectivity of Ghanaian urban areas: “Good economic geography matters for urban development, and Ghana’s stunted industrial development highlights the need to pursue spatially sensitive policies. Local unplanned urbanization has reduced efficiency.”24 Additionally, urbanization has not resulted solely from higher density growth in cities, but rather from sprawl.25 In many cases, slums and informal communities are denser than the cities themselves.26 For instance, between 2000 and 2010, many inhabitants of Accra moved to surrounding municipalities and districts, where land is available more cheaply.27 As a result, population growth in the Accra area increased by 50% but the urban extent increased by 160% between 1984 and 2010.28 This combination of urban sprawl and the lack of transportation services has become a major impediment for growth. For instance, Ghana ranks 22

Schneidman, Witney. 2016. "Ghana's new president: Jobs, jobs jobs." Brookings, December 13. 23 Ibid. 24 World Bank (The International Bank for Reconstruction and Development). 2015. Rising through Cities in Ghana: Ghana Urbanization Review. Washington, DC: The World Bank Group. 25 Ibid. 26 Ibid. 27 Ibid. 28 Ibid. 29 n.d. World Bank Logistics Performance Index. Accessed May 9, 2017. http://lpi.worldbank.org/.

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100th out of 160 countries in the Logistics Performance Index, an interactive benchmarking tool that measures the challenges and opportunities countries face in their performance on trade logistics.29 Rapid urban growth and unplanned spatial expansion of metropolitan areas without the necessary expansion of transportation networks has created enormous inefficiencies in the ability of people, services, and goods to move across the region.30 Urban sprawl has made commuting between suburbs and cities a part of daily life for many Ghanaians. However, public transportation is erratic at best in Ghana. Even in Accra, only 0.3% of commuters use public buses while only 3% of households have the means to commute using private cars.31 According to researchers at the Kwame Nkrumah University of Science and Technology, an effective transportation system is key to sustaining economic growth by linking people to jobs, products to markets, and by enabling domestic and international trade.32 Improvements in transportation efficiency have a spillover effect on the cost of doing business, and for some businesses that require just-in-time delivery, productivity is undermined if transportation networks are inefficient.33 Ultimately, effective transportation systems increase productivity through job creation, reduced business operation costs, improved output, expanded markets, and increased economic competitiveness.34 In Ghana, more can be done to meet these objectives.

Reno, Glen, and Arlee Weisbord. 2009. Economic Impact of Public Transportation Investment. Washington, DC: American Public Transportation Association. 31 World Bank (The International Bank for Reconstruction and Development). 2015. Rising through Cities in Ghana: Ghana Urbanization Review. Washington, DC: The World Bank Group. 32 Takyi, Harriet, Kofi Poku, and Emmanuel Anin Kwabena. 2013. "An Assessment of Traffic Congestion and its Effect on Productivity." International Journal of Business and Social Science 225-234. 33 Ibid. 34 Reno, Glen, and Arlee Weisbord. 2009. Economic Impact of Public Transportation Investment. Washington, DC: American Public Transportation Association.

Need for Strengthened Fiscal Decentralization III. Inclusion According to the World Bank, limited and unequal access to basic urban services and the growing strains on housing are the most urgent issues that need to be addressed for more inclusionary development.35 Though Ghana’s poverty incidence by locality has declined overall, poverty incidences in urban coastal (outside Accra) and urban forest regions have increased.36 Similarly, as a share of the urban population, the proportion of residents in large metropolitan areas with access to piped water have decreased: between 2000 and 2010, Accra saw a 22.2% decline while Kumasi, the second largest city, saw a 7.7% decline.37 The lack of effective maintenance and insufficient investments to expand services to meet demand are negatively affecting city residents, disrupting growth opportunities, and creating more inequality between socioeconomic classes.38 Other barometers of basic essential services are not encouraging; between 2000 and 2010, the proportion of households without toilet facilities have increased.39 Smaller cities like Tamale (-0.8%) and Tema (-7.3%) saw the worst decreases, while in major metropolitan areas like Accra and Kumasi the lack of toilet access is more prevalent in suburban areas rather than the central city, suggesting service provisions have not kept up with spatial expansion.40 Throughout Ghana, most households continue to use public dumps; in 2010, 37.7% did so in open spaces.41 The lack of solid waste disposal and sewage is associated with increased health risks and environmental damages. In low-income areas of cities such as Accra and Kumasi, the challenges are especially acute.

respondents living in urban areas of Ghana had piped water in their homes and a similar number purchased water from a public tap or neighbor’s residence.42 Additionally, certain areas of Accra and Kumasi have less access to safe water than others.43 Finally, while nearly all urban residents must pay for water, those without access to household water supply pay the most; while families with household water connections are either metered and charged based on consumption, the urban poor have to purchase water from a vendor or other middleman.44

Among the urban poor, water is also a critical resource in short supply. Only four of every ten

Finally, the growing inequality of access to sound, safe and clean housing is a barometer for inequity in Ghana’s urban areas. In urban Ghana, housing remains largely informal and about 90% of housing in urban Ghana is built without local authority control.45 Less than 25% of households own their own housing, and approximately 60% of households occupy only a single room for the entire family.46 Though the per capita income of Ghana as of 2014 is $3,500, yearly housing costs exceed $3,700 on average.47 According to the World Bank, this is because there is an enormous gap between supply and demand. Ghana has a housing deficit of 70,000 to 120,000 units per year.48 It is anticipated that by 2020, Ghana will need a total of 600,000 new units of housing per year to meet demand, with the units required especially high in Accra and Kumasi.49 According to UN Habitat, housing in Ghana is very unaffordable and only the top 2025% of urban households can afford the formal housing stock available, even with housing payments set at one third of income.50 Land prices across Ghana have increased; for instance, in Accra and Kumasi, land prices increased an astounding 460-1300% from 1995 and 2005, figures that

World Bank (The International Bank for Reconstruction and Development). 2015. Rising through Cities in Ghana: Ghana Urbanization Review. Washington, DC: The World Bank Group. 36 Ibid. 37 Ibid. 38 Ibid. 39 Ibid. 40 Ibid. 41 Ibid. 42 Ibid. 43 Ibid.

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Taylor, Patricia, Carla Boussen, and Joan Awunyo-Akaba. 2002. Ghana Urban Health Assessment. Accra: USAID/Ghana. 45 World Bank (The International Bank for Reconstruction and Development). 2015. Rising through Cities in Ghana: Ghana Urbanization Review. Washington, DC: The World Bank Group. 46 Ibid. 47 Ibid. 48 Ibid. 49 Ibid. 50 UN-Habitat. 2009. Ghana: Accra Urban Profile. Nairobi, Kenya: United Nations Human Settlements Programme (UNHabitat).

The Heinz Journal cannot be explained by normal economic growth.51 It is no wonder a clear majority – 90% – of housing is informal.52

IV. Institutions Ghana’s productivity and inclusion problems are occurring under the context of decentralized governance. Ghana has implemented a comprehensive decentralization and local governance plan since the 1992 Constitution.53 The plan targets four areas of decentralization: administrative, political, planning, and fiscal.54 Currently, Ghana’s administrative structure consists of ten regions divided into 216 municipal districts. Beyond the municipal districts there are 58 towns or area councils, 108 zonal councils, and 626 area councils dispersed throughout the country. Adding to this decentralized structure is the institution of Chieftaincy, Ghana’s most enduring socio-cultural institution.55 Since the colonial era, the political elite of Ghana have “sustained mechanisms to enable regulation of customary law and its representatives.”56 The institution of Chieftaincy is guaranteed, and it is important to note that Ghana balances a policy of engaging traditional authorities while trying to discourage official participation by chiefs in political life or government.57 Though an analysis of the role of Chieftaincy in urban policy and community development cannot be covered within the scope of this paper, it still should be taken into consideration.

and Afutu Kotey, “advocates (of decentralization) argue that because decentralization brings government closer to the governed both spatially and institutionally, government will be more knowledgeable about and responsive to the needs of urban people.”58 Decentralization has brought issues such as the structures and processes of city governance to the forefront, which have important ramifications for how urban poverty is defined and addressed.59 The United Nations Development Program suggests that to tackle anti-poverty efforts in urban areas of Ghana, economic development strategies must formally incorporate the issue of governance.60 Regardless of high growth rates and well-researched strategic and development plans, all activities will fail to materialize any long-lasting benefits without good governance.61 Though the idea of allocating society’s power and authority to lower units makes sense in theory, implementation in a country like Ghana is challenging.

V. Fiscal Decentralization

The linkages between decentralized governance, urban development, and policy need to be researched in greater detail. According to Owusu

One challenging aspect of governance has been the issue of fiscal decentralization. The Local Government Act of 1993 authorizes district assemblies to generate internal revenues such as fees, fines, and licenses to help finance community development projects in their areas of authority.62 However, the effectiveness of the districts in doing so has been mixed thus far. According to the World Bank, effective and transparent fiscal management is at the core of any efforts to reform the public sector.63 In the context of decentralization, this

Ibid. Ibid. 53 World Bank. 2015. "Ghana Country Summary Brief." World Bank Group, June 19. 54 Abdul-Rahim, Abdulai. 2013. Fiscal Decentralization in Ghana: Challenges and Way Forward. Term paper, Kwame Nkrumah University of Science and Technology. 55 Panyin, Osagyefo Amoatia Ofori. 2010. "Chiefs and Traditional Authorities and their Role in the Democratic Order and Governance." In Constitutional Review Series 9. Accra: The Institute of Economic Affairs. 56 Schleef, Rasmus. 2014. State Actors and Traditional Authorities in Ghana: Collaborative Provision of Peace and Security. Policy Brief, Kofi Annan International Peacekeeping Training Center. 52

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BBC News. 2004. "Should traditional rules be in government?" BBC News, February 13. Accessed April 15, 2017. http://news.bbc.co.uk/2/hi/africa/3473501.stm. 58 Owusu, George, and Robert L. Aufutu-Kotey. 2010. "Poor Urban Communities and Municipalities Interface in Ghana: A Case Study of Accra and Sekondi-Takoradi Metropolis." African Studies Quarterly. 59 Ibid. 60 United Nations Development Programme. 2014. Governance for Sustainable Development: Integrating Governance in the Post-2015 Development Framework. Discussion Paper, New York City: UNDP. 61 Ibid. 62 2013. "Local Government Act." 63 World Bank. 2000. Reforming Public Institutions and Strengthening Governance. Strategy Report, Washington, DC: World Bank.

Need for Strengthened Fiscal Decentralization means funds must be allocated transparently, predictably, and with weight given to local authorities regarding how to utilize the funds.64 Additionally, the central government could provide local governments with an indication of how the funds are to be allocated in a multi-year planning cycle, so policymakers would then be able to strategically exercise their authority to benefit communities. Unfortunately, district assemblies face a myriad of challenges. Poor databases on revenue/ratable items, inadequate number of revenue collectors, high rates of tax evasion due to corruption and the informal economy, inadequate logistics, lack of education of internal auditors and inspectors, and inadequate ability to mobilize revenue collection are some of the challenges cited by those on the ground.65 Local governments are also over-reliant on central government transfers, which are unpredictable in timing and magnitude.66 These challenges seriously impede the ability of local authorities to develop and implement successful urban policies.67 In Ghana, district assemblies have three sources of fiscal revenue to carry out urban policy: internallygenerated funds (IGF), intergovernmental transfers, and other â&#x20AC;&#x153;financial arrangementsâ&#x20AC;? as described by Kazentet.68

VI. Internally Generated Funds

on businesses, the self-employed, and property, as well as user fees and charges, licenses, permits, and royalties. Ghanaâ&#x20AC;&#x2122;s Ministry of Local Government and Rural Development provides guidelines for standard rates across the country, but district assemblies have latitude to collect and use the funds in accordance with their own development policies. However, there are significant variances in the levels of revenues generated by district assemblies due to different revenue-generating potentials. According to Inanga and Osei-Wusu, there are an array of design problems with IGF.69 First, districts are having enormous trouble expanding the tax base due to weak databases and technological tools to manage revenue collection.70 Effective collection requires districts to have up-to-date information of the properties and businesses they depend on for revenues.71 Without effective databases, district assemblies cannot maximize their revenues.72 Second, districts have a complicated governance structure that makes strategic planning for revenue collection difficult.73 Third, districts are inefficient at collection.74 Property rates are much too low because they are not valued properly, and tax collectors must visit each property individually to collect revenues.75 Other issues include the lack of house numbering and street naming, even in Accra, and the general lack of a tax-paying citizenry.76 Many residents simply do not feel obligated to pay taxes at all.77 Therefore, it is no surprise that the Ghanaian government reports IGF only cover about 16% of total local government expenditures on average as of 2004.78

Internally Generated Funds (IGF) are revenues generated directly by district assemblies for use with their constituency. IGF consist of income taxes 64

Ibid. Kazentet, Maeregu Habtemariam. 2011. An Assessment of Internally Generated Fund and Its Contribution for District Development Expenditure: A Case of Asutifi District, Ghana. Thesis, Kumasi: School of Graduate Studies, Kwame Nkrumah University of Science and Technology. 66 Inanga, David, and Eno L. Osei-Wusu. 2004. "Fiscal Resource Base of Sub-national Governments and Fiscal Decentralization in Ghana." African Development Bank Review (African Development Bank) 72-114. 67 Ibid. 68 Kazentet, Maeregu Habtemariam. 2011. An Assessment of Internally Generated Fund and Its Contribution for District Development Expenditure: A Case of Asutifi District, Ghana. Thesis, Kumasi: School of Graduate Studies, Kwame Nkrumah University of Science and Technology. 65

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Inanga, David, and Eno L. Osei-Wusu. 2004. "Fiscal Resource Base of Sub-national Governments and Fiscal Decentralization in Ghana." African Development Bank Review (African Development Bank) 72-114. 70 Ibid. 71 Ibid. 72 Ibid. 73 Ibid. 74 Ibid. 75 Ibid. 76 Ibid. 77 Ibid. 78 The Common Fund Newsletter: District Assemblies Common Fund (DCAF). 2014. "Sustainable Fiscal Decentralisation Going Beyond DACF Funding." December.

The Heinz Journal VII. Intergovernmental Transfers Due to the inconsistency of IGF throughout Ghana and the fact that they do not yield much revenue, intergovernmental transfers are the most important sources of income for the districts. These transfers are given primarily through the District Assemblies Common Fund (DACF) mechanism, which was introduced along with Ghana’s 1992 Constitution to serve as a mechanism for the transfer of resources from the central government to local governments.79 According to Ghanaian law, the national government must allocate no less than 5% of its total revenue to districts.80 The funds are dispersed to the districts on a quarterly basis based on a legislated weighted formula.81 According to a study by the Integrated Social Development Center (ISODEC), the DACF is a suitable mechanism for “providing resources to the district to provide basic infrastructure in the field [sic] of education, health and water that hitherto have been neglected. Indeed, physically, it has caused an incremental access of people living in the district to governmental resources and services.”82 However, the overreliance of the districts on DACF funding can have a detrimental effect on the fiscal independence of local governments; according to the Common Fund, between 80-90% of annual expenditures are covered by DACF in some districts.83 Furthermore, most funding received via central government transfers is already earmarked in some way, and thus district assemblies have little flexibility on how the funding can be spent.84 The earmarked proportion accounts for about 50% of all DACF funding on average.85 For instance, expenditures on district-level facilities and services has been around 50%, which places Ghana as one of the top countries in terms of fiscal decentralization of health.86 However, more than 50% was already earmarked before being given to 79

Bazanaah, Prosper. 2012. Nature of Ghana's Intergovernmental Revenue Transfer. Cape Coast: Institute for Development Studies. 80 Ibid. 81 Ibid. 82 King, Rudith, Vitus Azeem, Charles Abbey, Samuel K. Boateng, and Donkris Mevuta. 2003. Tracking of the District Assemblies Common Fund. Accra: ISODEC. 83 Ibid. 84 Ibid. 85 Ibid.

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the districts.87 This seriously impacts a district’s ability to pursue urban policies that are appropriate for the local context, and has led to a myriad of problems when expenditures exceed the available funding.

VIII. Results According to Owusu and Afutu-Kotey, the failure of local districts to collect revenues, and by extension, to provide urban services to keep pace with rapid urban growth has forced urban governments to shift from directly providing public services to private-public partnerships that involve local communities and the private sector in the management of services.88 The two approaches pursued – contracting out services to private companies and engaging community organizations in sanitation and maintenance of public toilets and sanitation services – are a good idea in theory.89 However, implementation has not proceeded smoothly. Though contracts for services are meant to be procured with entities that demonstrate capacity, the most frequent beneficiaries of contracts are assembly members and others associated with political party leaders and affiliates.90 According to a case study in Sabon Zongo, Accra, respondents to Owusu’s and Afutu Kotey’s focus group discussions indicated that a change in the position of an assembly member or another official implied a change in the business entity or individual managing the public toilets in the community.91 The central government’s reluctance to give cities and local districts financial autonomy perpetuates a dual dependency within local investment financing:

Couttolenc, Bernard F. 2012. Decentralization and Governance in the Ghana Health Sector. Washington, DC: World Bank Publications. 87 Ibid. 88 Owusu, George, and Robert L. Aufutu-Kotey. 2010. "Poor Urban Communities and Municipalities Interface in Ghana: A Case Study of Accra and Sekondi-Takoradi Metropolis." African Studies Quarterly. 89 Ibid. 90 Ibid. 91 Ibid.

Need for Strengthened Fiscal Decentralization the localities’ dependence on transfers and the central government’s dependence on donors.92

IX. Conclusion Development practitioners and donors such as the World Bank and the United States Agency for International Development have trumpeted decentralization as a key component to bring better community development in both urban and rural areas of Ghana. Supporters rightly claim that decentralization brings governance closer in proximity to the people and that municipal governments, which are more informed and responsive to local people, should take the lead in formulating urban policy, such as the provision of basic services including waste management and sanitation. However, the lack of internally generated funds (IGF) and local governments’ corresponding dependence on funding from the central government impedes their ability to make strategic plans and follow through on them. Often, capacity building and decentralization programs are time-limited, and donor-funded programs are funneled by the central government. Furthermore, political patronage and perceptions of widespread corruption of local governments, along with complications with the position of Chieftaincy, add further challenges to developing a well-rounded urban policy that addresses poverty reduction and inequality.

spatially integrated urban centers, improve the environmental quality of urban life, improve access to affordable housing, and strengthen urban governance, among other goals. Unfortunately, these policy initiatives are hampered by a lack of funding at both the central and local levels and are too general to be put into practice in a transparent and accountable manner. Additionally, the policy initiatives focus mostly on promoting urban economic development through formal means, while often ignoring informal enterprises and their need for services, capacity building, and funding. Thus, more research needs to be conducted to examine the linkages between decentralization – particularly fiscal decentralization – and an urban policy that addresses the informal economy. Furthermore, more research needs to be conducted to examine inequitable growth in Ghana. While there is a great deal of research on the urban and rural divide and the regional divide, there appears to be less research conducted on the formal and informal urban divide.

Ghana’s national government has introduced a series of reforms and national policies and frameworks to address urbanization and its associated issues. For instance, the Ministry of Land and Natural Resources, the Ministry of Environment, Science, Technology and Innovation, the Town and Country Planning Department, and the National Development Planning Commission jointly outlined the Ghana National Spatial Development Framework (2015-2035).93 Meanwhile, the Ministry of Local Government and Rural Development has introduced the National Urban Policy Framework. This framework outlines policy initiatives to facilitate a balanced redistribution of the urban population, promote 92

Ibid.

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n.d. Ghana National Spatial Development Framework 2015-2035. Accra: Ministry of Land and Natural Resources, Government of Ghana.

The Heinz Journal

How the Kremlin Justifies Its Engagement with Its Periphery: The Russian Annexation of Crimea Courtney Kayser George Mason University – Schar School of Policy and Government The Russian Federation stunned the international community when it annexed the Crimean Peninsula in 2014, executing the first land annexation in Europe since 1945. While in March of 2014 it seemed as if the Russian Federation would expand further into Ukraine and recreate Novorossiya, the Kremlin’s expansion ended with Crimea, even as it continued its support of separatist groups in Eastern Ukraine. Before this the Russian Federation had not annexed regions of the former Soviet Union, and this unprecedented break with international norms mandates exploration. Why Crimea was annexed and how the Kremlin justified its actions affects how policymakers interpret current and future developments in Russian foreign policy and will directly influence the United States and its allies. Prior work has cited geopolitics and revanchism as explanations for the annexing of Crimea, yet both rationales leave many questions unanswered. The Kremlin’s focus on legality and Western political norms generates a third, exceedingly odd justification: Crimea’s right to self-determination. Identifying the interactions between these rationales and the degree to which the Kremlin utilized them is important in discerning the Russian government’s views of its actions and predicting its future actions.

I. Introduction The Russian annexation of Crimea shocked the international community. Despite international outcry against Russia’s annexation, Crimea’s desire for autonomy, denoted by its status as an autonomous republic in Ukraine, and its ties with Russia, not Ukraine, are well documented. While the Kremlin has the military capability to annex several regions in its near periphery, it has thus far only seized Crimea.1 Understanding the justification of this by the Kremlin is crucial, as it could indicate the direction of Russian policy toward other states on its Western border. This analysis is primarily concerned with the Kremlin’s justification of its actions to the Russian public. Two common interpretations of this justification, geopolitics and revanchism, are first discussed. Then, an argument for a third possible explanation, self-determination, is provided. Revanchism, a political ideology centered on a need to regain formerly held territories, focuses on the 1

The Kremlin, in this case, refers to the seat of the Russian government. This study assumes the majority of decisions regarding Crimea and the Ukrainian conflict were made by the Russian President, Vladimir Putin, and his ministers, rather than the Russian Parliament (Duma) – ‘the Kremlin’

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illegality of Crimea’s initial transfer to Ukraine in 1954, attempting to prove the legality of its claim to the peninsula. A second legal argument for revanchism, based on self-determination principles and the legacy of Kosovo’s independence, has overlooked geopolitical implications for both the West and the Russian Federation. Asserting that it is supportive of the right of Crimean citizens to choose their leadership and citing both international law and precedent, the Kremlin contends that it would be acting against international norms if it were to deny the referendum results and refuse to incorporate Crimea. While geopolitics and revanchism play a role in Russia’s justification, these legalistic arguments are crucial to the Kremlin’s conceptualization the annexation of Crimea. This paper begins with a brief history of Crimea and the Ukrainian conflict. This study will then provide an examination of the predominant perspectives used to rationalize the Kremlin’s foreign policy through a content analysis of Putin’s speeches on refers to this group of individuals. This assumption is viable, as Bobo Lo writes in Vladimir Putin and the Evolution of Russian Foreign Policy that since the death of Stalin, no single person has had the degree of influence over Russian policy that Vladimir Putin wields.

How the Kremlin Justifies Its Engagement with Its Periphery and around the day Crimea was annexed by the Russian Federation, March 18th, 2014. Finally, this study will look at the implications of the Kremlin’s argument in support of the right of unilateral selfdetermination on future policies.

II. A Brief History of Crimea Crimea was part of the Russian Empire, and later, the Soviet Union, until 1991. On February 19, 1954, Crimea was transferred from the Russian Soviet Socialist Republic (SSR) to the Ukrainian SSR; this was mainly seen as a symbolic gesture of goodwill at the time. The Kremlin contested the legality of this transfer in 2014, arguing that the Soviet Premier did not have the constitutional right to change the borders of republics within the USSR.2 When the USSR dissolved, Crimea became an autonomous republic within Ukraine, despite the Russian Federation’s objections.3 In 1994, the Russian Federation, the United States, and the United Kingdom signed the Budapest Memorandums on Security Assurances with Ukraine, which provided Ukraine with assurances that these states would honor Ukraine’s territorial integrity in exchange for the surrendering its nuclear arsenal and signing the Nuclear Nonproliferation Treaty as a non-nuclear state.4 In 2014, the peninsula returned to Russia, which has now controlled Crimea for three years.

III. The Ukrainian Conflict On November 21, 2013, protesters took to the streets of Kiev, Ukraine to protest President Yanukovych’s refusal to sign an Economic 2

Paul Goble, "Moscow's nullification of 1954 transfer of Crimea to Ukraine a dangerous precedent, Sokolov says," Euromaidan Press: News and Views from Ukraine, June 30, 2015, http://euromaidanpress.com/2015/06/30/moscowsnullification-of-1954-transfer-of-crimea-to-ukraine-adangerous-precedent-sokolov-says/. 3 Serhii Plokhi, The Last Empire: The Final Days of the Soviet Union, New York: Basic Books, 2014. 4 "Budapest Memorandums on Security Assurances, 1994." Nonproliferation, Arms Control, and Disarmaments; Primary Sources, Council on Foreign Relations, 5 Dec. 1994, www.cfr.org/nonproliferation-arms-control-anddisarmament/budapest-memorandums-security-assurances1994/p32484. Accessed 16 Nov. 2016. 5 David M. Herszenhorn, "Facing Russian Threat, Ukraine Halts Plans for Deals with E.U.," The New York Times,

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Association Agreement with the European Union (EU). In the same month, The New York Times reported that Ukraine had decided to enter into agreements with the Russian-led Eurasian Economic Union (EAEU) due to threats of crippling trade sanctions from Russia if Kiev continued to pursue the EU Association Agreement.5 The EAEU was intended to become a competing bloc to the EU. The EU Association Agreement would have brought Ukraine into the EU’s economic structures as part of the EU’s Eastern Partnership, preventing the country from doing the same with the EAEU. The agreement would have also incorporated Ukraine into some of its security provisos, including cooperation on migration, asylum, and border management.6 This would not only have precluded Ukraine from joining the EAEU, but would also have potentially threatened Russia by removing the physical and economic buffer Ukraine provided between Russia and the EU. The general population in Ukraine noticed the Kremlin’s coercion, and protests broke out the same day Yanukovych announced his rejection of the deal with the EU. These protests became known as “Euromaidan,” “Euro” for the protesters’ desire to be more closely integrated with Europe and “maidan” for the Ukrainian word referring to the city squares in Kiev. This was not a new practice; Ukrainians have protested the Kremlin’s influence over their government in the past, and the Kremlin has been quick to blame the West for any Ukrainian protests.7 In the final days of the Euromaidan protests, government security forces fired live and rubber ammunition rounds into the crowds. Between February 18 and 20, 2014, the violence November 21, 2013, sec. Europe, http://www.nytimes.com/2013/11/22/world/europe/ukrainerefuses-to-free-ex-leader-raising-concerns-over-eu-talks.html. 6 Elias Gotz, "It's Geopolitics, stupid: explaining Russia's Ukraine policy," Global Affairs 1, no. 1 (January 28, 2015). ; European Commission: European Union External Action, "EU-Ukraine Association Agreement: "Guide to the Association Agreement"," https://eeas.europa.eu/images/top_stories/140912_eu-ukraineassociatin-agreement-quick_guide.pdf. 7 In 2004, the Orange Revolution resulted in a presidential revote, wherein the pro-Russian candidate, Yanukovych, who won the initial vote, did not win the re-vote, and Yushchenko, the pro-Western candidate, assumed the presidency. The Kremlin blamed Europe, the United States, and the West in general for the results of the Orange Revolution.

The Heinz Journal killed approximately a hundred people.8 While the protesters and Yanukovych looked prepared to sign an agreement following this violence, Yanukovych fled the country for Russia on February 22. On February 23, the Ukrainian parliament approved a law stating that the official language of the country was Ukrainian, eliminating the rights afforded to minority languages, such as Russian. Four days later, unmarked soldiers, theorized and later confirmed to be Russian, seized Crimean government buildings.9 On March 11, the Crimean government declared itself an independent republic. On March 16, Crimean citizens voted to reunify with the Russian Federation; Russia annexed Crimea on the March 18. The Organization for Security and Co-operation in Europe (OSCE) did not send election observers to the referendum in Crimea despite an invitation to do so, citing that the referendum was illegal, as Russia remained the only country to recognize Crimea’s independence.10 Many sources claim massive voter fraud permeated the referendum results.11 While the Kremlin continues to assert the legality of this annexation, much of the international community disagrees, enacting sanctions against Russia for its actions.

IV. Three Reasoning

Perspectives

Russia’s

The three major schools of thought utilized by the Kremlin, geopolitics, revanchism, and self8

Andrew Wilson, Ukraine Crisis: What It Means for the West, New Haven and London: Yale University Press, 2014. 9 Alan Taylor, "'Believed to Be Russian Soldiers'," The Atlantic, March 11, 2014, sec. In Focus. ; "Putin acknowledges Russian military serviceman were in Crimea," Russian Times (RT), April 17, 2014. ; "Putin reveals secrets of Russia's Crimea takeover plot," BBC News, March 9, 2015, sec. Europe. 10 Redrik Dahl and Mark Heinrich, "Crimea referendum illegal, no OSCE monitoring – Swiss," Reuters, March 11, 2014, sec. World News, http://uk.reuters.com/article/ukukraine-crisis-referendum-osceidUKBREA2A1RD20140311. 11 Bellinger III, John B, (Adjunct Senior Fellow for International and National Security Law) “Why the Crimean Referendum Is Illegitimate,” Interview by Jonathan Masters, Council on Foreign Relations, March 16, 2014. 12 Transcripts of these speeches are available at http://en.kremlin.ru/events/president/news/, the Official Internet Resources of the President of Russia. The titles of the speeches are as follows: “Address by President of the Russian Federation.” (March 18, 2014), “Executive Order on recognising Crimean military service members’ ranks,

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determination, are supported to varying degrees by statements made by the Kremlin following the annexation. The Kremlin’s assertion of the Crimean citizens' right to self-determination is the most significant, as it is the one that breaks with past Russian policy to the greatest degree. To demonstrate this point, this study provides an analysis of Putin’s speeches that occurred on and around March 18, 2014, and the “Presidential Address to the Federal Assembly” from December 4, 2014.12 This study selected certain keywords from Putin’s speeches most commonly utilized to denote the different rationales and analyzed them to identify which rationale Mr. Putin was using to justify the actions taken in Crimea.13 These words were chosen based on the vocabulary of the literatures on the three rationales, and the Kremlin’s past language on breakaway regions. Geopolitics Those who subscribe to geopolitical theory argue that geography shapes politics; regional blocs, resources, security, and cultural regions are the fundamental drivers of political decision-making.14 Crimea, energy, and the Black Sea fleet are all interconnected under this ideology, and the annexation of the peninsula provides the Russian Federation with greater energy resources.15 President Putin does not often use rhetoric directly related to resources, but this ideology indirectly underpins the Kremlin’s decisions.16 documents on education and military service,” “Laws on admitting Crimea and Sevastopol to the Russian Federation,” “Meeting in support of Crimea’s accession to the Russian Federation “We are Together!”,” “Meeting with permanent members of the Security Council,” “Presidential Address to the Federal Assembly.” (December 4, 2014), “Telephone Conversation with President of Belarus Alexander Lukashenko,” and “Vladimir Putin answered journalists’ questions on the situation in Ukraine.” 13 This collection and their categories can be found in Appendix A, Table 1. 14 John Biersack and Shannon O’Lear, “The Geopolitics of Russia’s annexation of Crimea: Narratives, Identity, Silences, and Energy,” Eurasian Geography and Economics 55, no. 3 (December 3, 2014), 258; Elias Gotz, "It's Geopolitics, stupid: explaining Russia's Ukraine policy," 4; Thomas Ambrosio, "Insulating Russia from a Colour Revolution: How the Kremlin Resists Regional Democratic Trends," 245. 15 Ibid. 16 Vladimir Putin, “Address by President of the Russian Federation,” ; “Executive Order on recognising Crimean military service members’ ranks, documents on education and military service,” ; “Laws on admitting Crimea and

How the Kremlin Justifies Its Engagement with Its Periphery Two aspects of geopolitics – maintaining physical and economic control over a given power bloc – complement one another. The Kremlin’s bloc consists of countries near its borders, such as Belarus, Ukraine, Georgia, and Kazakhstan. Many of these states have already joined the Eurasian Economic Union,17 and the Kremlin was keen to have Ukraine play a role in the EAEU. In his speech accepting Crimea into the Russian Federation on March 18, 2014, President Vladimir Putin states, “We understand what is happening; we understand that these actions were aimed against Ukraine and Russia and against Eurasian integration.”18 Western observers, however, did not perceive Ukraine as attempting to integrate with Eurasia, considering the protests following Yanukovych’s rejection of the EU Association Agreement. While the Ukrainian government would have likely made steps to integrate with Eurasia instead of the EU following Yanukovych’s rejection, a large portion of the population favored the EU Agreement. Putin’s statement ironically disregards the wishes of the Ukrainian people, despite his insistence on complying with the ‘will’ of Crimean citizens. From a geopolitical standpoint, both the EU Association Agreement and the Euromaidan protests threatened the viability of the EAEU, and therefore the Russian Federation’s control and influence over its near periphery. Another geopolitical consideration of the Kremlin regards the Russian naval base located in Crimea, Sevastopol. While the Kremlin maintained its access to this base through treaties with the Ukrainian government, it feared that an agreement Sevastopol to the Russian Federation,” ; “Meeting in support of Crimea’s accession to the Russian Federation “We are Together!”,” ; “Meeting with permanent members of the Security Council,” ; “Presidential Address to the Federal Assembly.” ; “Telephone Conversation with President of Belarus Alexander Lukashenko,” ; “Vladimir Putin answered journalists’ questions on the situation in Ukraine,” Speech, Moscow, Official Internet Resources of the President of Russia. http://en.kremlin.ru/events/president/news/page/160. 17 Mikhail D. Suslov, ""Crimea Is Ours!" Russian popular geopolitics in the new media age," Eurasian Geography and Economics 55, no. 6 (May 11, 2015). ; Eurasian Economic Union, "EAEU Member-States," http://www.eaeunion.org/?lang=en#about-countries. 18 Vladimir Putin, “Address by President of the Russian Federation,” Speech, Moscow, March 18, 2014, Official Internet Resources of the President of Russia, http://en.kremlin.ru/events/president/news/page/160.

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between Ukraine and the EU would threaten its access to Sevastopol.19 The new Ukrainian parliament and president, coming to power in late February 2014, endangered the future of this naval base as well. Putin addressed this in his speech on December 4, 2014, declaring, “I’d like to say once again that our priorities are... the guaranteed security of Russia and the protection of its legitimate interests.”20 This ideology assumes international relations operate on a zero-sum scale, justifying the Kremlin’s claims that it is acting in its national interest and ignoring potential arguments grounded in morality.21 Putin’s concerns for his country’s “legitimate interests” do not conform to Western norms or values, nor are they required to do so. With zero-sum politics, it is advantageous to Putin to gain influence at the cost of Western powers. Words such as resources, the Commonwealth of Independent States (CIS), integration, NATO, and especially Sevastopol denote geopolitical concerns.22 As illustrated by Figure 1, Putin does not often mention many of these keywords in his speeches. NATO and integration are the most frequently mentioned, but do not appear more than seven times each. The outlier is Sevastopol, which Putin mentions thirty-six times. The actual number of times Putin mentions the city is higher than this, but references to the city when in conjunction with Crimea (“the Republic of Crimea and the city of Sevastopol”) were eliminated, as Sevastopol was incorporated into the Russian Federation as a federal city and not as part of the Republic of

Elias Gotz, "It's Geopolitics, stupid: explaining Russia's Ukraine policy." 20 Vladimir Putin, “Presidential Address to the Federal Assembly,” Speech, Moscow, December 4, 2014, Official Internet Resources of the President of Russia, http://en.kremlin.ru/events/president/news/page/160. 21 Mikhail D. Suslov, ""Crimea Is Ours!" Russian popular geopolitics in the new media age," Eurasian Geography and Economics 55, no. 6 (May 11, 2015), 598 22 The Commonwealth of Independent States is comprised of several former Soviet Republics, including Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, and Uzbekistan. Georgia was a member until 2008, withdrawing due to the Russo-Georgian War. Ukraine was an associate member-state until 2014, at which point the new government announced that the country would cease its involvement with CIS.

The Heinz Journal Crimea.23 Putin’s repeated, explicit separation of Sevastopol from the rest of Crimea demonstrates the importance of the naval base to the Kremlin. The number of mentions Sevastopol received in his speeches, however, does not reflect the Kremlin’s geopolitical concerns, as Putin was merely mentioning the title of the annexed region and not its importance. Regardless, Sevastopol’s importance as a key Russian warm water naval base should not be discounted, and Putin’s mentions of the city still far outpace any other keyword analyzed in this category by nearly twenty mentions.

While the annexation of Crimea seems to be in line with previous Russian policies, it is still the first time since 1945 that there has been a land annexation in Europe. If geopolitics were the modus operandi for Russian leaders, the Russian Federation would have annexed other regions in the Post-Soviet era, something well within their ability. In Georgia in 2008, for example, the Kremlin did not annex the breakaway regions seeking autonomy; rather, it recognized the independence of these breakaway regions. Geopolitical considerations do not account for many of the peculiarities of Crimea’s political situation prior to its annexation by Russia. If geopolitics were the sole concern of Russian politicians, the Kremlin would not treat Ukraine differently now than was done in the past.

While integral to Russia’s foreign policy, geopolitics alone is not a sufficient explanation for the annexation of Crimea. The Kremlin has supported breakaway regions in the past (Abkhazia, South Ossetia, etc.), but it has never formally annexed these territories and granted them status as federal republics within the Russian Federation. Sevastopol and other geopolitical concerns played a distinct and critical role in its calculus and justification, but they do not wholly explain the events of 2014. Moreover, geopolitics is not the sole rationale, or even Putin’s most cited reason for the annexation.

Revanchism Another prevailing rationale for the Kremlin’s behavior is revanchism. This ideology is based on the need to retaliate, often due to a sense of loss; it most commonly manifests as an effort to regain formerly held territories, linking power and influence with territorial acquisition.24 Revanchism resembles geopolitics in its insistence on zero-sum politics.

Figure 1: Use of Geopolitical Words

Geopolitics Sevastapol NATO CIS Buffer Protection Eurasian Union/integration Resources Geopolitics 0

"Crimea Referendum: What does the ballot paper say," BBC News, March 10, 2014, sec. Europe, http://www.bbc.com/news/world-europe-26514797.

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Deliagin, Mikhail. "Crimea," 11.

How the Kremlin Justifies Its Engagement with Its Periphery Revanchist thinkers argue that the Soviet government should not have transferred Crimea to the Ukrainian Soviet Socialist Republic (SSR) from the Russian SSR in 1954, as Khrushchev did not have the constitutional authority to complete the transfer.25 Consistent with this perspective, the Kremlin asserts it is within its rights to retake the peninsula.26 As with geopolitics, revanchist statements were featured in Putin’s speech on March 18, 2014. Putin addressed both the transfer of parts of Russia to Ukraine during the Soviet period and the loss Russians felt when Crimea permanently became part of Ukraine in 1991; he states: “After the revolution, the Bolsheviks, for a number of reasons – may God judge them – added large sections of the historical South of Russia to the Republic of Ukraine. It was only when Crimea ended up as part of a different country that Russia realized that it was not simply robbed, it was plundered.”27 Religion serves as another justification for revanchist undertakings: Russian orthodoxy, one of the foundations of Russian civilization and cultural identity, originated in Crimea. Likewise, the cultural identity of Southeastern Ukraine aligns in many ways with that of Russia, as this region was often a part of the Russian Empire and did not consider itself Ukrainian prior to the Soviet period, in stark contrast to the more European-oriented Western portions of the country. Another key component of this argument focuses on how Russia’s weakness on the international stage compelled the Kremlin to tolerate Ukraine’s claim to Crimea during the 1990s and early 2000s. Putin states: “The then President of Ukraine Mr[.] Kuchma asked me [Putin] to expedite the process of delimiting the Russian-Ukrainian border… Russia seemed to have recognized Crimea as part of Ukraine, but there were no negotiations on delimiting the borders,” indicating that not only was 25

Then premier of the USSR. Mikhail Deliagin, "Crimea," 7. 27 Vladimir Putin, “Address by President of the Russian Federation,” Speech, Moscow, March 18, 2014, Official Internet Resources of the President of Russia, http://en.kremlin.ru/events/president/news/page/160. 28 Ibid. 29 Thomas Ambrosio, "The Rhetoric of Irredentism: The Russian Federation's Perception Management Campaign and 26

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the 1954 transfer illegal, but also that Russia’s recognition of Ukraine’s borders in the 2000s was not legitimate.28 In adherence with revanchist thought, the Kremlin publicly claimed that Ukraine should never have had control over Crimea, should not have control over the peninsula now, and would not have controlled it if the Soviet collapse and subsequent reforms had not curtailed the Kremlin’s ability to assert its claim over Crimea in the 1990s. Rather than being an affront against international norms, the incorporation of Crimea into the Russian Federation rights a long-standing wrong of the Post-Soviet era. A third element includes both Russia’s historical and cultural roots in Crimea, which link Kievan Rus’ conversion to Orthodoxy and the peninsula’s large ethnic Russian population today.29 At a meeting in support of the annexation entitled “We Are Together,” Putin addressed this: “Russia and Ukraine. I would again like to thank the residents of Crimea and Sevastopol for their courage and persistence, for staying true to the memory of their heroic ancestors and for carrying their love for our motherland, for Russia over decades.”30 In a 2001 census taken in Crimea, a little under 60% of Crimea’s population was ethnically Russian, only around 25% was Ukrainian, and around 13% was Crimean Tatar.31 This ethnic distribution enables the Kremlin to claim its historical roots in Crimea are still valid, though this claim only finds salience with segments of the Russian public and not with the international community. Putin delves into the specifics of this during his speech on December 4, 2014: It [the Russian annexation of Crimea] was an event of special significance for the country and the people, because Crimea is where our people live, and the peninsula is of strategic importance for Russia as the spiritual source of the development of a multifaceted but solid Russian nation and a centralized the Annexation of Crimea," Small Wars and Insurgencies 27, no. 3 (April 25, 2016), 465. 30 Vladimir Putin, “Meeting in support of Crimea’s accession to the Russian Federation “We are Together!”,” Speech, Moscow, March 18, 2014, Official Internet Resources of the President of Russia, http://en.kremlin.ru/events/president/news/page/160. 31 "Is Crimea's referendum legal?" BBC News, March 13, 2014, sec. Europe, http://www.bbc.com/news/world-europe26546133.

The Heinz Journal Russian state. It was in Crimea … that Grand Prince Vladimir was baptized before bringing Christianity to Rus. In addition to ethnic similarity, a common language, common elements of their material culture, a common territory, even though its borders were not marked then, and a nascent common economy and government, Christianity was a powerful spiritual unifying force that helped involve various tribes and tribal unions of the vast Eastern Slavic world in the creation of a Russian nation and Russian state.32 Putin and many of those influential to his decisionmaking exploit this historical connection; if Russia did not have a long history with Crimea, the Kremlin would not have the same grounds to argue that Ukraine does not have the same right to the peninsula. For much of its history, Crimea has been part of the Russian Empire, not any Ukrainian state; the Kremlin attempts to exploit this in its argument. Taken together, words associated with revanchism, such as “illegal,” “ethnic Russian,” “history,” and “together,” received fewer mentions than the selected words associated with geopolitics, but Putin distributes his utterances of the various words in the revanchist category more equitably

throughout his speeches. “Ethnic Russians” and “Russian nation” receive the most mentions, with “together” and “history” following closely behind; these revanchist keywords are pictured in Figure 2. While the words in the geopolitics category receive more total mentions, without the inclusion of ‘Sevastopol’ this total falls far below mentions of revanchist keywords. The range in the revanchist category is sixteen, compared to thirty-six in the geopolitical category, demonstrating the narrower spread among revanchist keywords. This indicates that Putin utilizes revanchist rhetoric more consistently than geopolitical rhetoric. Geopolitical justifications also carry less emotional weight and do not motivate the general populous in the same way calls to protect ethnic Russians or calls to recreate past Russian greatness do, which may explain Putin’s more consistent use of revanchist rhetoric. Geopolitical concerns pertaining to NATO and EU expansion further into post-Soviet space are motivational factors for Russian involvement in the Ukrainian conflict, yet the more equitable dispersion of Putin’s use of the words in the revanchist category indicates Putin and his advisors prefer to justify the annexation of Crimea using revanchist reasoning rather than geopol

Figure 2: Use of Revanchist Words

Revanchism Together Russian nation History Reunite/reunify Ethnic Russians Russia's Illegal Novorossiya 1954 0

Vladimir Putin, “Presidential Address to the Federal Assembly,” Speech, Moscow, December 4, 2014, Official 32

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Internet Resources of the President of Russia, http://en.kremlin.ru/events/president/news/page/160.

How the Kremlin Justifies Its Engagement with Its Periphery geopolitics.33 Therefore, Putin and his advisors do not often mediate concerns over NATO and EU expansion through geopolitics, which is what one would expect from a discussion on competing power blocs, but through revanchist arguments The argument about the legality of Crimea’s transfer to Ukraine in 1954 and Russia’s historical connections with the peninsula indicate that this theory carries significance with Russian officials in their justification of the annexation. Similar questions arise with the revanchist perspective to those that arise when considering the geopolitical standpoint. Why would Russia not annex other parts of Ukraine as well? If the goal were to regain ‘lost’ territory, why would it not seek more, particularly if regions were already seeking to break away from the central Ukrainian government? Moreover, why did Russia not annex Abkhazia and South Ossetia in 2008 from Georgia if its goals have been solely to regain territory in the postSoviet era? While a combination of geopolitics and revanchism does account for a large percentage of the Kremlin’s rhetoric, these justifications do not resolve the above questions. Self-Determination There is a secondary argument addressed at times with revanchist assertions that Ukraine should never have controlled the Crimean Peninsula. While the primary revanchist argument is indicative of revisionist thought and would connote a highly aggressive and expansionist Russia in the future, the secondary argument is entirely different and must be addressed separately. Mikhail Deliagin, a Russian author, politician, economist, and expert of the Valdai Discussion Club, demonstrates the conceptual overlap between revanchism and selfdetermination with his arguments; his argument follows revanchist thought for the most part, but he cites the precedent of Kosovo without distinguishing this from the argument about Russia’s greater right to the peninsula.34 This entanglement of the two arguments has resulted in the significance of the Kremlin’s argument in favor 33

Post-Soviet space refers to the countries that were once part of the Soviet Union, but have since gained their independence. This includes: Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. To a lesser extent, this term also refers to former Warsaw Pact members in Eastern and Central Europe.

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of self-determination remaining largely overlooked. While some argue that the annexation of Crimea was not a break with past Russian policy, this legalistic argument in favor of selfdetermination most markedly is. This argument has roots in events prior to the referendum in Crimea. According to the Russian government, it did not annex Crimea from Ukraine, as Crimea declared its independence from Ukraine on March 11. Crimea had the right to do so, Putin argues, because the Soviet government did not ask the Crimean citizens whether they wanted to be part of the Ukrainian state in 1954.35 This is a vastly different claim than saying Khrushchev did not have the right to transfer Crimea to Ukraine; Putin is arguing the citizens of Crimea were not consulted about the transfer and were thus denied the right to select their political leadership. The Kremlin often cites Kosovo as a precedent for this: in his speech on March 18, 2014, welcoming Crimea to the Russian Federation, Putin references Kosovo six times. In one such utterance, Putin states: “When they [the West] agreed that the unilateral separation of Kosovo from Serbia, exactly what Crimea is doing now, was legitimate and did not require any permission from the country’s central authorities,” the West set the precedent for other regions, including Crimea, to do the same. Declarations of independence, Putin argues, often violate domestic legislation but not international law.36 Putin is reneging on nearly two decades’ worth of denunciations of Kosovo’s separation from Serbia. Putin’s actions demonstrate a dramatic break from the former position of the Kremlin on Kosovo and unilateral declarations of independence. The text of the Treaty between the Russian Federation and the Republic of Crimea on the Acceptance of the Republic of Crimea into the Russian Federation and on Creation of New Federative Entities within the Russian Federation reads:

Mikhail Deliagin, "Crimea," 7. Vladimir Putin, “Address by President of the Russian Federation,” Speech, Moscow, March 18, 2014, Official Internet Resources of the President of Russia, http://en.kremlin.ru/events/president/news/page/160. 36 Ibid. 35

The Heinz Journal Recognizing and confirming the principle of equal rights and self-determination of peoples contained in the United Nations Charter and in accordance with which all peoples have the right to freely determine, without external interference, their political status and to pursue their economic, social and cultural development, and every State has the duty to respect this right.37 It is now written into a Russian treaty between two entities that recognize each other as independent countries, even if the rest of the international community did not recognize Crimean independence, that the Russian Federation recognizes the right to self-determination, a right the Russian Federation does not recognize for Kosovo. Moreover, it is telling that no memberstate of the Commonwealth of Independent States (CIS) recognizes Kosovo at this time, nor do Ukraine and Georgia. This should not be surprising, though, as the Kremlin supports the efforts of certain regions to secede from both states; recognizing Kosovo would threaten its own territorial integrity.38 The Russian Federation shared similar concerns in the 1990s and early 2000s, yet recognized Crimean independence in 2014.

March 18, he states: “Nationalists, neo-Nazis, Russophobes and anti-Semites executed this coup.”39 These assertions carry significant weight in the regions of Ukraine that tend to be more proRussian, such as Crimea and the Donbass region in Eastern Ukraine.40 This was exacerbated when the Ukrainian parliament, or Verkhovna Rada, moved to repeal the 2012 law On the Principles of the State Language Policy. This law established Ukrainian as the language of the state but allowed for the increased use of regional languages provided speakers constituted 10 percent or more of the population of a region.41 According to the Ukrainian census in 2001, 77 percent of the population’s native language is Russian in the Autonomous Republic of Crimea, while the percentage of the population speaking Ukrainian as their native tongue amounted to a mere 10.1 percent.42 Putin directly cites the Rada’s potential repeal of the language law in his speech on March 18, 2014.43 It is on the grounds of discrimination against ethnic Russians that the Kremlin further draws parallels to Kosovo in the 1990s, and reference to this resonates with the population of Crimea and Eastern Ukraine, as demonstrated by the continued conflict in Ukraine.

The similarities drawn between Kosovo and Crimea do not end with the recognition of people’s right to self-determination, as both cases have overtones of ethnic-based discrimination and violence. Putin’s denunciation of the Ukrainian government as fascist also demonstrates this. In his speech on

Mr. Putin specifically singles out the issue of language several times in his speech announcing Crimea’s integration into the Russian Federation, stating: “Time and time again attempts were made to deprive Russians of their historical memory, even of their language and to subject them to forced assimilation.”44 Through his wording and phraseology in these speeches, Putin and other

Anatoly Pronin, "Republic of Crimea: A Two-Day State," Russian Law Journal 3.1 (2015), 138. Unofficial English translation of the Treaty Between the Russian Federation and the Republic of Crimea on the Acceptance of The Republic of Crimea into the Russian Federation and on Creation of New Federative Entities Within the Russian Federation; much of the wording of this is pulled directly from the Declaration on the Principles of International Law Concerning Friendly Relations and Co-operation among States in Accordance with the Charter of the United Nations (1970). 38 Kosovo has a website wherein the government thanks all the countries that have recognized Kosovo in their native languages. It can be found at: http://www.kosovothanksyou.com/ 39 Vladimir Putin, “Address by President of the Russian Federation,” Speech, Moscow, March 18, 2014, Official Internet Resources of the President of Russia, http://en.kremlin.ru/events/president/news/page/160.

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The Donbass region contains the regions of Donets’k and Luhans’k, which are the two regions pushing the most strongly for independence/autonomy from the central government in Kiev. 41 Natalia Kudriavtseva, "Ukraine: What's a Language For?" Kennan Cable 15 (March 23, 2016), https://www.wilsoncenter.org/publication/kennan-cable-no15ukraine-whats-language-for. 42 State Statistics Committee of Ukraine, "All Ukrainian population census 2001," http://2001.ukrcensus.gov.ua/eng/results/general/language/. 43 Vladimir Putin, “Address by President of the Russian Federation,” Speech, Moscow, March 18, 2014, Official Internet Resources of the President of Russia, http://en.kremlin.ru/events/president/news/page/160. 44 Ibid.

How the Kremlin Justifies Its Engagement with Its Periphery Russian officials elevate the actions of the Ukrainian parliament, a law this parliament never truly enacted, and the possibility of ethnic discrimination to the level of genocide.45 Despite the fact that this maneuvering has failed to convince many in the West, the Kremlin utilizes this language to provide a veil of legitimization for its actions domestically.

there is no guarantee these regions will remain calm in the future. Yet, the Russian Federation seems willing to break with their previous refusal to recognize self-determination as a legitimate right for Crimea. In this analysis, words like “legal,” “referendum,” “democracy,” and “Kosovo” denote use of this legalistic argument for self-determination. Just as there is a more equitable distribution in the revanchist category compared to the geopolitical one, the words denoting self-determination possess a more even spread than revanchism. Putin uses the top word in the revanchist category (Russian nation) more than he verbalizes the top word in the self-determination category (referendum), but words pertaining to self-determination receive more overall mentions than either those related to geopolitics or revanchism. The range of this data set is only ten, compared to sixteen and thirty-six for revanchism and geopolitics respectively. From this analysis, Putin’s rhetoric uses the argument in favor of self-determination most consistently and most often of the three arguments used by the Kremlin as justification for its actions.

In December of 2014, Putin reaffirmed that “every nation has an inalienable sovereign right to determine its own development path, choose allies and political regimes, create an economy and ensure its security. Russia has always respected these rights and always will.”46 Contrary to Putin’s claims, prior to the Kremlin’s affirmation that people have the right to self-determination, Russian leaders repeatedly claimed that Kosovo did not have the right to declare its independence from Serbia under international law.47 Recognizing Kosovo would set a precedent for Russia’s own internal populations to make similar claims for independence, an action the Kremlin could not risk while actively fighting separatist groups in the North Caucasus, Chechnya in particular, in the 1990s. While these conflicts are subdued at present, Figure 3: Use of Self-Deterministic Words

Self-Determination People's will Kosovo International norms Democracy/democratic Self-determination Vote Referendum Choice Legal 0

Vladimir Baranovsky, "From Kosovo to Crimea," The International Spectator 50, no. 4 (December 2015), 278. 46 Vladimir Putin, “Presidential Address to the Federal Assembly,” Speech, Moscow, December 4, 2014, Official Internet Resources of the President of Russia, http://en.kremlin.ru/events/president/news/page/160.

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George Friedman, "Kosovar Independence and the Russian Reaction," Stratfor, February 20, 2008, sec. Geopolitical Weekly, https://www.stratfor.com/weekly/kosovar_independence_and _russian_reaction.

The Heinz Journal The Kremlin’s support for Crimea could be viewed as opportunistic, using a Western precedent to its advantage, and Russian officials made similar rhetorical moves for Abkhazia and South Ossetia in 2008. The Russian Federation, however, did not stop with the recognition of the Republic of Crimea as an independent state, as a mere five days after Crimea declared its independence, citizens voted to rejoin either Ukraine or the Russian Federation.48 While there are claims of widespread voter fraud and the results of the referendum are not internationally recognized, it allowed the Kremlin to claim it is acting in compliance with Crimea’s right to self-determination. Additionally, it enabled the Kremlin to dodge, at least rhetorically, claims that it violated the Budapest Memorandums.49 The Russian Federation did not annex Crimea from Ukraine: it incorporated an independent state into the Federation – according to the Kremlin. Again, these rhetorical moves do not convince most Western observers, but they do make Russia’s actions appear more legitimate to the Russian public. Furthermore, when the West objects to Russia’s actions, Putin can claim the West is acting hypocritically and Russo-phobically.

V. Implications Neither geopolitics nor revanchism can account for the existence of the argument in favor of selfdetermination or fully explain the Kremlin’s justification for the annexation. If the Kremlin merely justified its actions through geopolitics and manifested its geopolitical ambitions through annexations, then the Russian Federation would have incorporated other regions of its near periphery prior to 2014. More importantly, from this perspective, one would assume Putin and other Russian officials would have advocated for control of a land route to the peninsula, the lack of which 48

See Figure 1 of Appendix B for the ballot; "Crimea Referendum: What does the ballot paper say," BBC News, March 10, 2014, sec. Europe, http://www.bbc.com/news/world-europe-26514797. 49 The Budapest Memorandums are an agreement focusing on respecting Ukraine’s independence, sovereignty, and existing borders, along with refraining from the use of force against them. "Budapest Memorandums on Security Assurances, 1994," Nonproliferation, Arms Control, and Disarmaments; Primary Sources, Council on Foreign Relations, 5 Dec. 1994, www.cfr.org/nonproliferation-arms-control-and-

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hampers Russia’s ability to hold the peninsula if another military force were to make a concentrated effort to forcibly take Crimea. Operating solely from the revanchist perspective has similar flaws. While Russia has substantial cultural claims to Crimea, it has claims to other portions of Ukraine as well. Putin’s rhetoric, though, barely references other parts of Ukraine in the same way as Crimea, and his few, sporadic mentions of Novorossiya quickly tapered off as the conflict in Eastern Ukraine wore on. Perhaps Russia was merely acting opportunistically in its annexation of Crimea, and the cost of annexing and pacifying further regions in Eastern Ukraine was too high, deterring the Kremlin from taking further regions. Putin’s language, however, reaffirms concepts of self-determination, and even after the Minsk agreements, the Kremlin has pressed for greater autonomy in the Eastern regions of Ukraine, a policy that mirrors what it pursued in 2008 in Georgia to a great degree.50 This type of rhetoric poses the greatest potential threat to the Kremlin. Firstly, the Kremlin is negating its own position from earlier conflicts: Russian officials claimed Kosovo’s independence was invalid due to NATO military actions, but the Kremlin has used its military now in both Georgia and Ukraine, undermining and later eliminating its previous protests.51 In the case of South Ossetia and Abkhazia, there were references to the precedent of Kosovo, but the treaty between the Russian Federation and the Republic of Crimea codified this argument in Russia’s international political literature in ways its past position did not. From this analysis, one can observe that all three rationales have precedent in Russian foreign policy to various degrees, but they have become more intense than their past iterations. It does seem that disarmament/budapest-memorandums-security-assurances1994/p32484. Accessed 16 Nov. 2016. 50 The Minsk Protocol (2014) and Minsk II (2015) are ceasefire agreements negotiated by Ukraine, Russia, France, and Germany for the conflict in Eastern Ukraine. Minsk II was negotiated after the collapse of the Minsk Protocol in January of 2015. The new agreement was critiqued for being too complicated and to fragile. Simon Tisdall, "Ukraine Peace Deal Looks Fragile in the Extreme," The Guardian, February 12, 2015. 51 Vladimir Baranovsky, "From Kosovo to Crimea," The International Spectator 50, no. 4 (December 2015), 280.

How the Kremlin Justifies Its Engagement with Its Periphery the convergence of the two legalistic arguments – the first being revisionist and expansionist, focused on Russia’s superior claim to the peninsula stemming from the illegality of the Soviet transfer, and the second focused on Crimea’s right to selfdetermination and the legality of the Kremlin’s actions based on Western norms – are the foundation of the Kremlin’s justification. The uniqueness of how these two arguments operate together means it is highly unlikely the Kremlin will use this justification in the same manner in the future. This is not to say the Kremlin will not engage in expansionist policies in the near future or cite the right to self-determination if it suits its goals; however, these arguments will most likely be used to justify the increased autonomy for breakaway regions rather than their annexation. Even if the Kremlin continues to use similar arguments, the recognition of self-determination as a legitimate reason for declarations of independence has the potential to severely damage domestic Russian politics. Some, like Dr. Baranovsky, member of the Russian Academy of Sciences and professor at the Primakov National Research Institute of World Economy and International Relations (IMEMO), may argue Russia no longer has to balance its international policy with internal secessionist demands, and “Putin’s ‘vertical power’… has made it possible to back secession/separatism elsewhere without feeling vulnerable inside the country.”52 However,

52 53

Ibid. Such as Ramzan Kadyrov in Chechnya.

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this reasoning disregards that Putin’s ‘vertical of power’ and his relations with local strongmen are inherently unstable, reliant on tenuous loyalty.53 Chechnya and other potential breakaway regions within Russia now have a legal precedent to cite from the Kremlin itself. As Hill and Gaddy assert in their preeminent psychological profile of Putin, Mr. Putin: An Operative in the Kremlin, his thinking, and by extension that of the Kremlin, is quintessentially tactical and not strategic. The Kremlin sets clear, short-term goals and initiatives, but it lacks distinct long-term objectives and plans.54 Putin’s actions in Crimea were tactically sound for the Kremlin’s short-term goals and opportunistic in nature, as was his justification. These actions are, nevertheless, not strategic if one takes a long view of politics. The recognition and any future reaffirmations of this position serve only to weaken the cohesiveness of the Russian state. While recognizing self-determination expanded Russia’s borders in 2014, other groups, individuals, and regions can utilize the same arguments the Kremlin used to annex Crimea as justification to shrink those borders. Whether the Russian Federation’s borders change again or not, the decision to justify its expansion with affirmations of people’s right to self-determination can only cause greater instability and conflict within the Federation in the future.

Fiona Hill and Clifford Gaddy, Mr. Putin: An Operative in the Kremlin, 2nd ed, Washington DC: The Brookings Institute Press, 2015, 81.

The Heinz Journal Appendix A Table 1: Content Analysis of Speech Transcripts55 Geopolitics Geopolitics Resources Eurasian Union/Integration Protection Buffer CIS NATO Sevastopol

1 2 5 1 0 3 7 36

Revanchism 1954 Novorossiya Illegal Russia’s Ethnic Russians Reunite/Reunify History Russian Nation/Nation Together

1 1 2 3 13 2 5 17 6

Self-Determination Legal Choice Referendum Vote Self-determination Democracy/Democratic International norms Kosovo People’s will

10 3 13 6 3 8 6 7 6

The information for this table was generated from a content analysis of the transcripts of the following speeches, all of which can be found at http://en.kremlin.ru/events/president/news/, the Official Internet Resources of the President of Russia: “Address by President of the Russian Federation.” (March 18, 2014), “Executive Order on recognising Crimean military service members’ ranks, documents on education and military service,” “Laws on admitting Crimea and Sevastopol to the Russian Federation,” “Meeting in support of Crimea’s accession to the Russian Federation “We are Together!”,” “Meeting with permanent members of the Security Council,” “Presidential Address to the Federal Assembly.” (December 4, 2014), “Telephone Conversation with President of Belarus Alexander Lukashenko,” and “Vladimir Putin answered journalists’ questions on the situation in Ukraine.”

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How the Kremlin Justifies Its Engagement with Its Periphery Appendix B

The two ballot measures, written in Russian, Ukrainian, and Tatar, are: 1) Do you support reunifying Crimea with Russia as a subject of the Russian Federation? and 2) Do you support the restoration of the 1992 Crimean constitution and the status of Crimea as a part of Ukraine?56

"Crimea Referendum: What does the ballot paper say," BBC News, March 10, 2014, sec. Europe, http://www.bbc.com/news/world-europe-26514797.

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Achieving Sustainable Food Production

Achieving Sustainable Food Production: Assessing the Viability of “Eating Local” as National Policy David Guyott, Qinqi Dai, and Shinai He Carnegie Mellon University – H. John Heinz III College Agricultural production and food distribution are increasingly important policy and sustainability issues. “Eating local,” or locavorism, is a popular proposed solution to many food sustainability issues. This paper establishes a framework that defines the social, economic, and environmental components of agricultural sustainability for investigating the effectiveness of locavorism as a policy solution. Given this framework, it is found that locavorism is a useful but incomplete solution. Utility and sensitivity analysis of relevant stakeholders shows that incentivizing and enabling innovative sustainable practices and technologies in agricultural production, such as precision agriculture, is the preferred solution for the majority of stakeholders. However, development of infrastructure for a local food economy is innovative and is recommended as a complementary action given its similarly high utility value and lack of implementation conflict.

I. Introduction A wide range of approaches have already been suggested, and often implemented at municipal and state levels, to address the question of feeding the future. One of the most talked about in recent years has been locavorism: the practice of “eating foods grown locally whenever possible.”1 Local options are becoming increasingly available to consumers, whether in specially marked sections of ordinary supermarkets, or through newly popular marketing methods such as farmers’ markets and community supported agriculture (CSA) programs. Local production and consumption is also being picked up as a policy objective by municipal governments all over the world, as exemplified through commitment vehicles such as the Milan Urban Food Policy Pact.2 But is local food a viable solution to the world’s food problems, or is it just a marketing gimmick and consumer trend? Should national policymakers in the United States follow the lead of municipal and state leaders in promoting local agriculture and locavorism? Our paper seeks to address these questions by applying a sustainability goals framework of our own design; this approach Merriam-Webster, s.v. “locavore,” 17 Mar. 2017, https://www.merriam-webster.com/dictionary/locavore. 2 “Milan Urban Food Policy Pact,” Milan Urban Food Policy Pact, 2015, http://www.milanurbanfoodpolicypact.org/. 1

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broadens the definition of sustainability, which has traditionally been used narrowly to refer to environmental goals, to also include economic and social priorities. The results show that local food is by no means a panacea which will solve all aspects of the U.S.’s food problems. However, there are benefits to increasing local food production and consumption, especially with regard to economic goals. Furthermore, because of locavorism’s correlation with other positive changes to the food system, such as encouraging people to eat fresher, less processed meals,3 promotion of local food can create synergies with other progressive food system policies. This paper is organized in seven sections. We begin with Context, to give a sense of the importance and urgency of food system issues. We then categorize the major Stakeholders involved in the food system and explain their roles and priorities. That information is used as the basis for our sustainability framework, found in Goals and Indices of Performance (IPs). We present Data which measures the performance of the current food system against those goals, and from there posit Alternatives: policy options which could potentially address the deficits of the current Roslynn Brain, “The Local Food Movement: Definitions, Benefits, and Resources,” Utah State University Extension Sustainability, Sep. 2012., 2. 3

The Heinz Journal system. Finally, we present the results of our Analysis and make Recommendations.

range, antibiotic-free, non-GMO, organic. For the purposes of this paper, we are interested in one of these labels in particular: “local.”

II. Context The industrial food system, the roots of which can be traced back to the implementation of agricultural commodity subsidies in the 1930s,4 is a highly resource-intensive industry with negative consequences. For example, Michael Brownlee, a locavorism advocate, notes that the industry “burns about 23 percent of global oil and gas supplies, and is apparently responsible for more than half of global greenhouse-gas emissions and 80 percent of fresh-water resource use.”5 He additionally points out that it contributes to topsoil depletion, “half of which has been lost in the last 150 years,”6 thus affecting the availability of high-quality soil for agriculture. Even critics of locavorism, such as James McWilliams of Texas State University, acknowledge the destructive nature of industrial agriculture; referring to problems like the use of growth hormones and antibiotics and management of waste, he writes “there’s no defending these methods.”7 This information has been popularized in a variety of media, including widely-watched documentaries such as Food, Inc. and best-selling popular journalism such as Michael Pollan’s The Omnivore’s Dilemma and Eric Schlosser’s Fast Food Nation. Spreading awareness has led to action and activism on an individual level. One of the most common reactions has been making changes to diet. In response to industrial meat production, some have given up consuming animals and their derived products, adopting a vegetarian or vegan diet. Others, looking for a more moderate solution, have looked for proof that their food had been produced “sustainably,” the legacy of which is the variety of labels seen in any supermarket: grass-fed, free4

R. Pirog, C. Miller, L. Way, C. Hazekamp, and E. Kim, “The local food movement: Setting the stage for good food,” MSU Center for Regional Food Systems, 2014, 2. 5 Michael Brownlee, The Local Food Revolution: How Humanity Will Feed Itself in Uncertain Times (Berkeley: North Atlantic Books, 2016), 5. 6 Ibid., 6. 7 James E. McWilliams, Just Food: Where Locavores Get It Wrong and How We Can Truly Eat Responsibly (New York: Little, Brown and Company, 2009), 219.

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Rich Pirog, of Michigan State University, traces the local food movement back about 20 years, to the mid-1990s. Since that time, growth in consumer demand has fueled an increase in local supply, including striking growth in the number of farmers’ markets, community supported agriculture (CSA) programs, farm-to-school programs, and urban agriculture projects.8 Our paper references a variety of such locavore concepts, some of which are less well-known and worth explaining: ●

●

A CSA is a form of direct-to-consumer marketing where consumers sign up for a CSA “share,” or a portion of a farm’s seasonal harvest. These shares are typically paid in advance and are received on a weekly or biweekly basis over the course of a season. Farm-to-school programs are one form of institutionalizing local food. Schools participating in such a program increase their purchase and usage of locally-sourced, inseason foods. Funding for such programs is already available in the form of U.S. Department of Agriculture (USDA) grants.9 Urban agriculture is the practice of growing food within cities and other urban or peri-urban areas. The most common and well-known form of urban agriculture is the “community garden.”10 Food hubs aggregate and distribute local food.11 They are a larger scale option, relative to farmers’ markets or CSAs, for small farmers to market their product while still being separate from the industrial food system and associated massive distributors like Wal-Mart and Whole Foods.

Pirog, “The local food movement...,” 8-9. “Community Food Systems | Food and Nutrition Service,” USDA FNS, 27 Nov. 2016, http://www.fns.usda.gov/farmtoschool/farm-school. 10 Pirog, “The local food movement...,” 8. 11 Winona Hauter, Foodopoly: The Battle Over the Future of Food and Farming in America (New York: The New Press, 2012), 2. 8 9

Achieving Sustainable Food Production Yet, despite all of this innovation and momentum, locavorism is not without its critics. McWilliams, for example, states bluntly that “eating local is not, in and of itself, a viable answer to sustainable food production on a global level.”12 Critics argue that local does not equate to sustainable, and that we must move beyond consideration of where our food came from to how it was produced. Some innovative methods proposed to increase the sustainability of agriculture include precision agriculture and management intensive grazing, which also bear explanation: ●

●

Precision agriculture refers to the “efficient resource management and persistent and timely monitoring of crop health,”13 with benefits including reduced usage of water, fertilizer and pesticides.14 It is a technological approach to sustainable agriculture, enabled by cuttingedge sensor suites that can be drone- or shoulder-mounted15 or even built into nanotechnology.16 Management intensive grazing uses thoughtful planning and management, as opposed to technology, to achieve more sustainable production. This practice has been exemplified by Polyface Farm in Virginia, whose story Michael Pollan recounts at length in The Omnivore’s Dilemma.17 The idea is to raise crops and animals together in a holistic cycle where no unusable waste is produced.

Big Agribusiness The large corporations involved in food production and processing are typically referred to as “agribusiness.” These companies include input suppliers, like Monsanto, and crop buyers/processors, like Pepsi, Tyson, Cargill, and a few others.18 These corporations have benefitted from the industrialization, consolidation, and subsidization of the American food system. As Timothy Wise of Tufts University describes, Government subsidy checks are written to farmers, but they aren’t the true beneficiaries of U.S. farm programs. Agribusiness is. Input suppliers… benefit from the increased production—and demand—the subsidies encourage, and agribusiness buyers… reap the benefits of the lowered prices that result. Farmers remain squeezed between these oligopolies, paying dearly for inputs and getting lower prices for what they produce.19 Thus, these companies have a vested interest in maintaining the status quo. They benefit from commodity subsidies (for corn, soy, and wheat especially) appropriated in the Farm Bill and will not want to see those go away. That said, agribusinesses are, by necessity, responsive to consumer demands, as exemplified by their new organic lines of products.

Our argument is further founded on an understanding of food system stakeholders. We have identified six stakeholder groups that have particular interest in the form and function of the food system. These are:

Farmers Small-scale food producers control over 80% of U.S farms20 and they are of great importance in transforming agricultural behaviors and practices. However, they are also the most vulnerable stakeholder to market conditions. They experience financial losses almost every year according to USDA statistics.21 They are inherently disadvantaged in market contexts, both because they face climate risks and physical labor not endured by other players in the system and because

McWilliams, Just Food: Where Locavores…, 2. Jnaneshwar Das, Gareth Cross, Chao Qu, et al., “Devices, Systems, and Methods for Automated Monitoring enabling Precision Agriculture,” 2015 IEEE International Conference on Automation Science and Engineering (CASE), (2015): 462. 14 Ibid., 462. 15 Ibid. 16 Hongda Chen and Rickey Yada, “Nanotechnologies in Agriculture: New Tools for Sustainable Development,”

Trends in Food Science and Technology 22, no. 11 (Nov. 2011): 585-594. 17 Michael Pollan, The Omnivore’s Dilemma (Penguin, 2006), Chs. 8-14. 18 Hauter, Foodopoly: The Battle Over…, 40-43, 293. 19 Ibid., 293. 20 “Farm Income and Wealth Statistics,” USDA ERS, 30 Nov. 2016. 21 Ibid.,

We consider all of these various approaches in the section on alternatives.

III. Stakeholders

12 13

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The Heinz Journal they have significantly less market power than those players (see Hauter for details on how food distribution and processing are small oligopolies22). Public policy has a role to play in compensating for these disadvantages. Large-scale farmers, too, are faring poorly under the current system. Michael Pollan tells the story of George Naylor, an industrial monocrop corn farmer in Iowa: “though [his] farm might feed 129, it can no longer support the four who live on it.”23 Farmers like Naylor survive mostly only by government subsidy, which, according to Pollan, can account for up to $5 billion of the federal budget annually for corn alone.24 Farmers, then, are particularly concerned about economic factors. Staying in business is a constant struggle due to low market power relative to other players like agribusiness. They are not necessarily fans of the status quo, but many are dependent upon it; the government needs to enable them to make a change in the same way they enabled the current system through subsidies. Food Distributors In the conventional food market, every aspect of production and distribution is followed closely and measured with the aim of increasing efficiency and lowering costs. However, the effects of negative externalities, such as pollution and other hidden costs, are not accounted for in the price of goods found in conventional retail centers.25 Distributors thus focus on boosting market share and cost management efficiently, including transportation costs, marketing strategies, and consumers’ willingness to pay. Food distributors have shown mixed feelings about local food in recent years. On the one hand, giant distribution companies have been gradually encouraged by public awareness to make efforts to support local economies, cut shipping costs, and 22

Hauter, Foodopoly: The Battle Over…. Pollan, The Omnivore’s Dilemma, 34. 24 Ibid., 54 25 P. Kotler and G. Armstrong, Principles of Marketing, 11th Ed. (Pearson Education, Inc., 2006). 26 Ariel Pinchot, “The Economics of Local Food Systems: A Literature Review of the Production, Distribution, and Consumption of Local Food,” University of Minnesota Extension, Sept. 2014. 23

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provide fresh food offerings. The Local Food Impact Report 2013 carried out by Iowa University suggests that distributors, restaurants, and conventional retail and independent stores are showing increasing interest in purchasing locallyproduced foods.26 For example, Walmart announced its commitment to source more local fruits and vegetables to keep produce prices down and provide affordable selections that are fresh and healthy in 2008.27 On the other hand, barriers still exist impeding distributor adoption of local foods, including the need for consistency of supply and descriptive product information/produce labels, high demand of product volume, streamlined logistics, and finding the means to connect with new suppliers. Consumers There are two main concerns for consumers: expense and health. Low margins on the part of big agribusiness generally reduce cost to consumers; however, the monopsony power held by large distributors and agribusiness over farmers tends to hold retail food prices higher than they would be in a more competitive environment. Further, the great size and narrow commodity focus of some of the larger firms may limit consumers’ access to a balanced diet. Small and medium-sized firms can potentially act more proactively to health demands and the ongoing trend of local and regional food demand among consumers, as verified by a USDA report.28 However, lack of relevant market infrastructure in their supply chains limits the volume of such purchases and prevents greater penetration of locally-produced food in conventional markets. Moreover, consumers have a strong need to see product identity—such as origin, variety, and production practices—within local food supply chains.29

"Walmart Commits to America's Farmers as Produce Aisles Go Local," Walmart, 1 Jul. 2008. 28 Sarah A. Low, Aaron Adalja, Elizabeth Beaulieu, Nigel Key, Steve Martinez, Alex Melton, Agnes Perez, et al., “Trends in U.S. Local and Regional Food Systems: A Report to Congress,” USDA ERS, Jan. 2015. 29 Adam Diamond and James Barham, "Moving Food Along the Value Chain: Innovations in Regional Food Distribution," USDA Agricultural Marketing Service, Mar. 2012.

Achieving Sustainable Food Production Government An important role of government is to ensure that markets operate efficiently so that societal welfare is maximized—that is, ensuring that all people have access to food. Although unregulated markets can maximize aggregate welfare in theory, the conditions under which they are inefficient may warrant state intervention.30 The government tries to prevent or address specific conditions that can lead to or sustain inefficient markets, including failure of competition, negative externalities, and asymmetry of information, among others. The government is also very concerned with the unemployment rate. The following are some stylized facts about the consolidated food system in U.S. Firstly, external costs arise from more than $1 billion of dollars in taxpayer subsidies (directed to commodity crop producers) that are allocated annually to support that system31. Secondly, the annual derived cost of environmental and health externalities in the United States from agricultural production is estimated between $5.7 billion and $16.9 billion.32 Lastly, the current U.S. food system has increased consumer access to some fruits and vegetables for high and middle-income people; however, these products remain under-consumed.33 Government can thus seek public support for local food systems, and develop opportunities to provide regional jobs, reduce America’s environmental footprint, encourage greater consumption of healthier diets, and maintain the agricultural trade surplus.

imported foods. So from the environmentalists’ perspective, eating and buying locally would avoid long-distance travel of food by planes, trains, trucks, and ships, which all consume energy and create pollution that contributes to global warming and unhealthy air quality. Lobbying governments to change the consolidated subsidy system and facilitate local food is environmentalists’ main task.

IV. Goals and Indices of Performance (IPs) We argue that the aggregate goal of all stakeholders is to build a food system that will be sustainable in the long term, even in the face of challenges such as a growing global population, fixed land and water resources, and climate change. However, as shown in the previous section, there are significant differences in the way each group defines “sustainability” and the actions they prioritize. Based on the varying interests of the six stakeholders, we have identified three categories of sub-goals: social, economic, and environmental. All of these are necessary for achieving sustainability and together they create a holistically-defined framework. This framework is utilized throughout the analysis to evaluate the completeness and viability of suggested food policy solutions. Goal: Develop a food system (production, distribution, consumption, and disposal) that will be sustainable in the long term

Environmentalists Environmentalists are concerned that agricultural behavior creates over 20% of greenhouse gas (GHG) emissions in the atmosphere.34 The way food is grown, stored, transported, processed, and cooked can influence how it impacts climate change and the environment. Transportationrelated impacts are particularly important for

Category 1: Social Subgoal 1: Promote public health IP: Rates of diet-related chronic disease (%) Explanation: Obesity, diabetes, heart disease, food poisoning (e-coli, BSE), etc. are all preventable chronic diseases linked to diet, nutrition, and food processing. Subgoal 2: Ensure the security of the food system IP: Food source distribution (%) Explanation: As discussed later, an identified risk to all populations is losing access to their

Joseph E. Stiglitz, Economics of the Public Sector, 3rd Ed. (W. W. Norton & Co., 2000). 31 Database, EWG's Farm Subsidy. "EWG's Farm Subsidy Database." 32 Erin M. Tegtmeier and Michael D. Duffy, "External Costs of Agricultural Production in the United States," International Journal of Agricultural Sustainability 2, no. 1 (2004): 1-20.

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Hodan Farrah Wells and Jean C. Buzby, “Dietary Assessment of Major Trends in U.S. Food Consumption, 1970-2005,” USDA Economic Research Service, Mar. 2008. 34 “Global Greenhouse Gas Emissions Data,” US Environmental Protection Agency, 9 Aug. 2016, https://www.epa.gov/ghgemissions/global-greenhouse-gasemissions-data.

The Heinz Journal food source (by climate change, natural disaster, war, etc.). Food should be sourced from a variety of locations and producers so that loss of access, whether temporary or permanent, to any one source is not catastrophic. There should also be a degree of food self-sufficiency. Subgoal 3: Distribute food equitably IP: Food insecurity rates (%) Explanation: This goal has to do with poverty alleviation generally. Food insecurity, as defined by the USDA, is “a household-level economic and social condition of limited or uncertain access to adequate food.”35 Countries (or states, counties, and cities) that have high populations experiencing food insecurity are likely to be unstable. Category 2: Economic Subgoal 4: Benefit the local economy IP: Annual regional agriculture-sector income ($) Explanation: Regional agricultural gross output subtracting business costs. Farmers cannot continue to incur financial losses every year. Subgoal 5: Increase employment IP: Agriculture-related employment rate (%) Explanation: Job creation as the result of food production, processing, or utilization. Subgoal 6: Maintain current trade surplus IP: Annual National Agricultural Trade Surplus ($) Explanation: The long-standing trade surplus for the U.S.A. should be maintained, but more competitive and fair trade surplus remains a concern. Category 3: Environmental Subgoal 7: Reduce energy input IP: Energy input to field operations (units/acre) Explanation: Energy sources cover a variety of inputs that can include: gasoline, diesel, natural gas, electricity, LP gas, pesticides, irrigation, fertilizer, and field machinery. As energy is costly (financially and environmentally), reducing the amount

required for food production is of immense benefit. Subgoal 8: Decrease GHG emissions IP: Carbon intensity of food (kg CO2 equivalent/kg of product) Explanation: Carbon footprint values are very dependent on what is included; in this case, we will include GHG emissions throughout the production process and food transportation. Subgoal 9: Optimize land use IP: Agricultural land/total land (%) Explanation: This goal is to measure the land use of different agricultural activities, such as crop production, livestock, fish farming and forest management. Ideally, we would achieve higher yields with the same amount of land. Since land is limited, planning to indefinitely expand onto new lands for more production is not sustainable.

“Definitions of Food Security,” USDA Economic Research Service, 4 Oct. 2016.

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V. Data Social Subgoal 1: Promote Public Health It is commonly believed that local food solutions can address obesity and other diet-related issues. On the surface, the logic behind this belief makes sense. For example, Indiana’s state government, in an employee newsletter, made several arguments in favor of local foods’ health value. The article pointed out that “fruits and vegetables lose their optimal nutritional value as soon as they are picked,” and that “other factors such as the exposure to air, artificial lights, and temperature changes can also contribute to the decrease in nutritional value.”36 The argument is thus A=B, B=C, so A=C: local foods are fresher and fresher foods are more nutritious, so local foods are more nutritious. However, while we can verify the higher nutritional content of fresher foods, it cannot be said that local foods are always fresher. As Edwards-Jones points out, “the time from harvest to consumption is not necessarily related to distance from field to fork […] at some times of the year, the nutritional quality of stored local food may be lower than that of freshly picked foods from distant “Eating local produce has great benefits,” The Torch: The official newsletter for Indiana state employees 9, no. 7 (Jul. 2012): 1.

Achieving Sustainable Food Production places.”37 Because the nutritional benefits of food have more to do with growing conditions and storage than they do with distance travelled, we cannot make a general statement that local will always be a better health option than global food, and thus there is no reason to believe local food solutions will address obesity or other dietary issues. Still, research shows that local foods can be beneficial to the public health in other ways, such as greater control and reduced incidence of foodborne illnesses. Michael Pollan has written at length about how the modern, industrialized food system has led to the rise of a variety of novel pathogens in the livestock which become our food, and how the concentration of slaughter and other processing facilities has made it easier for these pathogens to spread quickly through large swaths of the population. Much of this has to do with Concentrated Animal Feeding Operations (CAFOs). At a CAFO, for example, it used to be common practice to feed “rendered cow parts back to cows,” until this was found to be “spreading bovine spongiform encephalopathy (BSE), more commonly known as Mad Cow Disease.”38 Though this was discontinued by the FDA, it is still legal (and common) to feed animals to other animals, thus raising concerns that feeding cows chickens which were fed cows could lead to a similar incident.39 E. coli 0157:H7 is another serious pathogen commonly associated with CAFO operations and feeding grain to cattle. Pollan additionally considers the “cost to the public health of antibiotic resistance,”40 which is developing on account of antibiotics being used to treat these animal-related pathogens. Local foods, by their very nature, avoid the sort of massive, industrial-scale operations associated with these kinds of public health risks. A farmer raising livestock with an emphasis on the local market can unlikely afford to raise 10,000 cattle because few local markets demand that much beef. Consumers demand a variety of foods, and a farmer selling Gareth Edwards-Jones, “Does eating local food reduce the environmental impact of food production and enhance consumer health?” Proceedings of the Nutrition Society 69, (10 Aug. 2010): 588. 38 Pollan, The Omnivore’s Dilemma, 75. 39 Ibid., 76. 37

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directly to local consumers, rather than to large food aggregators and processors, will accommodate that varied demand. Therefore, while the benefit of local food solutions in this case is not necessarily what people expect, reducing foodborne illness and slowing the development of antibiotic resistance are clearly worthy outcomes. Local food can be said to be a useful solution from the public health standpoint. Subgoal 2: Ensure the Security of the Food System Local food can also be of benefit in strengthening the overall security of the food system. Referencing Denver, which, like many large cities, “has only an estimated two days’ supply of food”41 (meaning that if food supplies entering the city were to suddenly cease, there would only be enough food in storage to feed the city’s full population for two days), and to the fact that few Americans have gardens or know how to grow food, Brownlee argues “we have given up our food security.”42 He envisions a crisis similar to the 1973 oil embargo, but with food: a situation in which a massive shortage develops because supply lines are suddenly cut. Climate change could be one cause; much of America’s produce comes from California, which has recently experienced historic drought and frequent wildfires. Brownlee has made the argument that just such a historic drought between 2006 and 2010, and its associated food shortages, was a major factor leading to Syria’s civil war.43 An international crisis or embargo could have similar effect, given that around 20% of food consumed in the U.S. was imported as of 2013 (up from about 11% in the early ‘90s).44 Given these external dependencies, it seems wise to have a baseline level of local agricultural production and marketing infrastructure which could be expanded quickly in the event of a supply crisis. While some observers have pointed out that it is highly unrealistic (and more environmentallydamaging) for most countries to seek to achieve

Ibid., 83. Ibid., 7. 42 Ibid., 7. 43 Ibid., 17. 44 “Import Share of Consumption,” USDA Economic Research Service, 3 Nov. 2016. 41

The Heinz Journal 100% food self-sufficiency,45 expanding local food production and distribution in the United States could be a useful move in diversifying the food portfolio to insulate against climate change and other crises. We clearly have room for growth: as Brownlee points out, “less than 1 percent of Colorado’s food is now produced within this supposedly ‘agricultural’ state.”46 Local food could thus be said to be of benefit to enhancing food system security. Subgoal 3: Distribute Food Equitably While a local food solution likely would be of some benefit to the other two social subgoals, local food cannot be said to reduce food insecurity. Slate author Heather Gilligan argues against the idea that food deserts (areas where access to fresh, healthy food is lacking due to distance, lack of transport, or other issues) and dietary choices are the causes of food insecurity, saying “researchers who focus on health disparities have suspected for decades that people who live in poverty die early because of the stress of poverty itself rather than (…) poor health choices.”47 Eric Gimenez, Executive Director at Food First, the Institute for Food and Development Policy, similarly argues that “hunger is caused by poverty and inequality, not scarcity.”48 These arguments are bolstered by the lackluster results of recent political action on this front, such as the Healthy Food Financing Initiative spearheaded by First Lady Michelle Obama. Gilligan points out that such initiatives have increased local food access points (more markets with fresh, healthy, local options) without actually reducing food insecurity.49 Hence, local food cannot be said to achieve equitable food distribution, which seems to be more related with Edwards-Jones, “Does eating local food…,” 588. Brownlee, The Local Food Revolution, 7. 47 Heather Tirado Gilligan, “Food Deserts Aren’t The Problem: Getting fresh fruits and vegetables into low-income neighborhoods doesn’t make poor people healthier,” Slate, 10 Feb. 2014. 48 Eric Holt Gimenez, “We Already Grow Enough Food for 10 Billion People—and Still Can’t End Hunger,” The Huffington Post, 2 May 2012. 49 Gilligan, “Food Deserts Aren’t The….” 50 Albert Myles and Ken Hood, “Economic Impact of Farmers' Markets in Mississippi,” Mississippi State University Extension Service, 11 Dec. 2016. 45 46

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people’s financial (in)ability to purchase food than with the physical proximity of food sellers. Economic Subgoal 4: Benefit the Local Economy Research on the economic implications of localized food production indicates that local food systems provide substantial economic benefits to communities and regions. The economic benefits come from direct sales of products, indirect purchase of appliances from local suppliers, and other induced consumption expenditures of employees. Myles and Hood,50 Otto,51 Henneberry, Whitacre, and Agustini,52 and Hughes53 have estimated the statewide economic impact of farmers markets in Mississippi, Iowa, Oklahoma, and West Virginia. The increase in gross output was $2.4 million, $5.9 million, $59.4 million, $1.6 million, respectively, while the increase in personal income was $0.7 million, $2.2 million, $17.8 million and $0.2 million. In terms of GDP growth in a whole, the multiplier to Oklahoma’s local economy was 1.78 and to Iowa’s 1.55. All the studies confirm that farmers’ markets have positive statewide economic impacts. Other studies examined the sector-specific economic impact presuming increasing demand for locally-produced food. These studies have shown that there would be positive economic impacts in fruit- and vegetable-producing regions if consumption were to align with dietary recommendations, and the impacts would be even greater if the produce were sold through direct consumer marketing channels.54 Swenson estimated the economic impacts of increasing the seasonal production of fresh fruits D. Otto, “Consumers, Vendors, and the Economic Importance of Iowa Farmers Markets: An Economic Impact Survey Analysis,” Leopold Center Pubs and Papers, 2005. 52 S. R. Henneberry, B. Whitacre, and H. N. Agustini, “An Evaluation of the Economic Impacts of Oklahoma Farmers Markets,” Journal of Food Distribution Research 40, no. 3 (Nov. 2009). 53 D. W. Hughes, “Policy Uses of Economic Multiplier and Impact Analysis,” Choices, 2003. 54 O’Hara, “Economic Impacts of Local….” 51

Achieving Sustainable Food Production and vegetables in Illinois, Indiana, Iowa, Michigan, Minnesota, and Wisconsin on existing corn and soybean cropland and calculated that the total economic output of six regions would be $1.027 billion, with 6,694 jobs requiring $284.61 million in labor income producing $519.4 million in valueadded (or GDP) based on the value of the fruit and vegetable sales and concomitant indirect and induced activity that would be supported.55

Local food systems in Oklahoma and Iowa generated annual employment increases of 11358 and 57659 jobs. As Iowa facilitated its local food system, the new jobs created included farmers, sales managers, greenhouse and food educators, marketing staff, cider makers, delivery drivers, chefs/cooks, and more, which shows that some local food jobs involve part-time and seasonal work while high-quality FTE jobs are also included.60

Besides the economic effects on local revenue via existing marketing channels, the business innovation and entrepreneurship fostered by local food systems have not yet been quantified but are also a factor in future revenue prediction.56

Subgoal 6: Maintain Trade Surplus There is no direct relationship between local food and trade surplus, although the sustainable food system is more resilient when faced with global trade fluctuations.

Subgoal 5: Increase Employment A local food system can also be a vital driver in creating new jobs.

Since 2000, developing countries, led by China, have been the main drivers of U.S. export gains. After 5 years of steady growth, U.S. agricultural exports declined in 2015 to $133 billion (Graph 1) due to slower world economic growth, a strong U.S. dollar, lower exports of high-value agricultural products, and falling prices for bulk commodities.61 Graph 2 shows that horticultural exports were the only product group to grow in 2015, up about $266 million, which increased their share of total U.S. agricultural exports to about 25 percent. In fact, horticultural products, including fruits, vegetables, tree nuts, wine, essential oils, nursery stock, cut flowers, and hops, have become the largest share of any group, surpassing livestock products, grains/feeds, and oilseed and oilseed products, which had combined losses in 2015 that accounted for nearly all of the decreases in export values. As discussed earlier in the fourth IP (benefit the local economy), while fruit and vegetable products have great potential for benefitting the local economy and consumer health, they are also more resilient in the face of global market fluctuations.

The opportunity presented by new consumer demand and the infrastructure required to meet that demand translates into new farm jobs managing, producing, processing and marketing food. Low and Vogel found that produce growers selling into local and regional markets generate thirteen fulltime equivalent (FTE) jobs per $1 million in revenue earned.57 In addition to creating new jobs, a strong local food system drives growth in related businesses: equipment manufacturers, processors, cold storage facilities, food hubs, transportation networks and retailers. And community planning efforts to develop local food markets can pull together not just producers and food businesses, but also land use groups, economic development and food policy councils, food access advocates, local schools, and residents interested in improving quality of life in the community. 55

Dave Swenson, "Selected Measures of the Economic Values of Increased Fruit and Vegetable Production and Consumption in the Upper Midwest," Iowa State University Leopold Center for Sustainable Agriculture, Mar. 2010. 56 S. Martinez, M. Hand, M. Da Pra, S. Pollack, K. Ralston, T. Smith, S. Vogel, et al, “Local Food Systems: Concepts, Impacts, and Issues,” USDA ERS, May 2010. 57 Sarah A. Low and Stephen J. Vogel, "Direct and Intermediated Marketing of Local Foods in the United States," USDA ERS, Nov. 2011. 58 S. R. Henneberry, B. Whitacre, and H. N. Agustini, “An Evaluation of the Economic Impacts of Oklahoma Farmers

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Markets,” Journal of Food Distribution Research 40, no. 3, Nov. 2009. 59 D. Otto, “Consumers, Vendors, and the Economic Importance of Iowa Farmers Markets: An Economic Impact Survey Analysis,” Leopold Center Pubs and Papers, 2005. 60 C. Bregendahl and A. Enderton, "2012 Economic Impacts of Iowa’s Regional Food Systems Working Group," Iowa State University Extension, Oct. 2013. 61 "U.S. Trade Surplus Smallest since 2007," USDA ERS, Apr. 2016.

The Heinz Journal

Graph 1: US Agricultural Trade 2000-2015

Graph 2: US Agricultural Exports 2000-2015

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Achieving Sustainable Food Production Environmental Subgoal 7: Reduce Energy Input Research shows that energy input is primarily related to crop type and geographic location. Local food doesn’t play an essential role in cutting down energy input. The method of using energy is different in each sector of agricultural industry. It is unique to each crop type and geographic location.62 The timely production of perishable food, such as vegetables, requires higher energy use, especially under conditions where the natural circumstances are not ideal for growth. To significantly save energy, the best solution is to grow seasonal crops in their natural season. “Crops which can be stored for a long period of time or easily transported over a long distance tend to require lower energy inputs, as time can be taken to grow them in places where the sun will do the work of the energy inputs for an agricultural operation.”63 Comparisons of the relative energy efficiency of various segments of the agricultural industry can be made between similar agricultural operations conducted in different regions of the United States. The less suitability of the region for that operation, the more energy will be used. For example, due to the low suitability of growing cereal grains in the Southwest, the agricultural operation consumes a high volume of electricity and No.2 distillate to use irrigation equipment.64 Subgoal 8: Decrease GHG Emissions Local food supporters always claim that food grown locally can slow global warming since the reduced need for transportation eliminates a large amount of GHG emissions. However, scientific studies show that buying local is not able to generate a significant impact on reducing emissions. “Energy | NRCS,” USDA Natural Resources Conservation Service, 4 Dec. 2016: 3, https://www.nrcs.usda.gov/wps/portal/nrcs/main/national/ener gy/. 63 Ibid., 3 64 Ibid., 3 65 Renee Cho, "How Green Is Local Food?" State of the Planet: Columbia University Earth Institute, 4 Dec. 2016, http://blogs.ei.columbia.edu/2012/09/04/how-green-is-localfood/. 66 Ibid. 62

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The production of food accounts for 83 percent of emissions generated by agriculture, and can vary according to the means of production.65 Food grown in heavily fertilized fields with extensive plowing, or with intensive use of irrigation and pesticides, will generate more GHG emissions. In contrast, the transportation of food only accounts for approximately 11 percent of emissions.66 While buying local food could reduce the average consumer’s greenhouse gas emissions by 4-5 percent at best, replacing the red meat or dairy products in that consumer’s diet with vegetables, eggs, or fish once a week would achieve larger GHG reductions. Therefore, eating foods that are in season and eating organic and less processed foods would be more effective means to reduce GHG emissions than eating local.67 Subgoal 9: Optimize Land Use Currently in the U.S., agricultural land is not efficiently used to produce agricultural products. According to data from the World Bank, agricultural land occupies 44.5% of the total land in U.S.,68 which is relatively large compared to the rest of the world. Not all of this agricultural land is being used to grow products in a sustainable manner. On 349 million acres of cropland, feeder corn (80 million acres), soybeans (75 million acres), alfalfa hay (61 million acres) and wheat (62 million acres) constitute 80 percent of total crop acreage. Among all of them, only wheat are primarily used to feed livestock.69 The overproduction of these crops generates unintended harm to the environment. Firstly, overuse of fertilizers causes environmental degradation. Secondly, grain-fed cattle is higher in unhealthy saturated fats than its grass-fed counterpart,70 which can cause health problems for consumers.

Ibid. "Agricultural Land (% of Land Area)," The World Bank, 11 Dec. 2016. 69 George Wuerthner, "The Truth About Land Use in the United States," Watersheds Messenger 9, no. 2 (2002). 70 Cynthia A. Daley, Amber Abbott, Patrick S. Doyle, Glenn A. Nader, and Stephanie Larson, "A review of fatty acid profiles and antioxidant content in grass-fed and grain-fed beef," Nutrition Journal 9, no. 1 (2010). doi:10.1186/14752891-9-10. 68

The Heinz Journal VI. Alternatives

protect

We here suggest four policy options for meeting the goal of developing a sustainable food system. These alternatives are rated using utility analysis from the perspectives of each of the six stakeholders in the next section and compared with the status quo as a baseline measure. The first two alternatives are specific to local food. Given our finding that local food is not a panacea which will alone address all of our subgoals, we then present two alternatives which suggest different approaches. These are presented both as a point of reference by which we can measure the effectiveness of local food promotion, and as possible supplements to local food policy.

Aiming to overcome these barriers, we would support, first and foremost, investment in infrastructure to support local and regional food systems to break the scale limitations. Innovations such as “food hubs”—locations at which farmers can drop off locally produced food and distributors and consumers can pick it up—are promising options but also need basic construction and facilities.

Alternative 1: Local Food Infrastructure Promote and develop local food marketing infrastructure, such as farmers’ markets and food hubs; maintain or increase the funding for programs that support local and regional food systems; and foster local capacity to help implement local and regional food system plans. Reasoning: A 2011 USDA ERS study argues “for local foods production to continue to grow, marketing channels and supply chain infrastructure must deepen.”71 An estimation from the Union of Concerned Scientists suggest that reauthoring the USDA’s Farmer Market Promotion Program alone has the potential to provide between 1,200 and 13,500 jobs, and supporting other local foodsystem programs has the potential to create thousands more.72 However, local food markets are currently facing four main barriers: 1) consumption and production restricted by geographic limitations; 2) logistical and accessibility challenges to consumers resulting from the uncoordinated nature of these markets;73 3) existing institutions, infrastructure, or regulations that are geared to the consolidated food system;74 and 4) deficient financial safety nets to Hauter, Foodopoly: The Battle for…, 3. O’Hara, “Economic Impacts of Local….” 73 Alan R. Hunt, "Consumer Interactions and Influences on Farmers' Market Vendors," Renewable Agriculture and Food Systems 22, no. 1 (Mar. 2007): 54-66. 74 C. Brown and S. Miller, “Impacts of local markets: A review of research on farmers markets and community 71 72

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farmers

from

adverse

situations.

We also encourage programs that offer assistance to farmers’ market managers and local food system administrators to pave the way for bottom-up market construction. To ensure the integrity of the direct-to-consumer marketing system, farmers’ market administrators should be given support to develop certification standards for farmers’ markets. This will provide confidence to consumers that vendors are undertaking environmentallysustainable production practices, which can remove the hidden danger of suspicion and the tendency towards backlash. Alternative 2: Federal Food Assistance Modify federal food assistance programs (such as SNAP) to incentivize beneficiaries to purchase local food, encourage SNAP-eligible vendors to stock local food, and enable the use of SNAP benefits for local marketing options like farmers’ markets and CSAs. Reasoning: 2014 USDA data shows that the Supplemental Nutrition Assistance Program (SNAP) benefits participants, local farmers, and the nation in various ways. Firstly, SNAP enables participants to purchase more fresh vegetables and fruits directly from farmers at over 5,000 farmers’ markets and pick-up-your-own operations across America. These fresh foods provide a foundation for a healthy diet. Secondly, “on average, about 20 cents of every SNAP dollar spent on food ends up in the pockets of American farmers.”75 The supported agriculture (CSA),” American Journal of Agricultural Economics 90, no. 5 (2008): 1298-1302. 75 "SNAP Benefits Now Used to Purchase Local Food Directly from Farmers in More than 5,000 Locations," USDA Food and Nutrition Service, 5 Aug. 2014.

Achieving Sustainable Food Production increasing consumer base for local food raises the farmer’s income simultaneously. Thirdly, healthy eating cuts the nation’s health costs over the long run. Given all of those benefits, we believe that SNAP has the potential to further support local food and eliminate unhealthy dietary choices across the nation. To modify SNAP, we suggest improving SNAP benefit levels so people can afford adequate diets, including healthier foods.76 The price of the local food could be set more flexibly according to the different conditions across the nation in order to expand the consumer base and the benefits to participants. In addition, due to the insufficiency of farm-to-consumer venues like farmers’ markets, we also propose encouraging SNAP-eligible vendors to stock local foods, and enable the use of SNAP benefits for local marketing options like farmers’ markets and Community Supported Agriculture (CSAs). Alternative 3: Sustainable Production Practices Create a system to incentivize and reward sustainable agriculture practices, such as polyculture, composting, precision agriculture, and management intensive grazing, by modifying USDA Farm Loan Programs (especially Beginning Farmer loans), facilitating research & development and implementation of new technologies (such as nanosensors), and changing buying standards for government food programs (including the military and school lunch programs). Reasoning: Food insecurity is still a top concern for sustainable agriculture in the U.S. According to data collected by Feeding America, in 2014, 54% of people in the U.S. were below the SNAP threshold of 130% of poverty, with the situation being especially severe in southern states, such as Mississippi, Alabama, New Mexico.77 To capitalize on the inherent potential of those states to provide more food on their own, we recommend making modifications to the USDA’s Farm Loan Program to better incentivize local people to start and expand their business in agriculture, to include changes to Farm Ownership Loans, Operating Loans, and “A Review of Strategies to Bolster SNAP’s Role in Improving Nutrition as well as Food Security,” Food Research and Action Center, Jan. 2013. 76

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Microloan Programs. These changes could include providing loans with lower interest rates to local farmers who agree to adopt environmentally sustainable agriculture methods, such as organic farming. Ensuring that farmers selling green commodities with a better resource utilization rate can have access to more affordable credit, either from the existing Farmer Ownership system or from local financing authorities, should allow them to develop and expand their sustainable business. Secondly, we recommend facilitating research and development for new technologies that will enable more sustainable methods such as precision agriculture, which requires complex and precise sensor networks. Thirdly, the government should use its market power to promote sustainability by purchasing more local food that is produced through sustainable methods. Programs like the USDA’s National School Lunch Program and government agencies like the military already purchase sizable quantities of food, and by changing their standards could potentially affect production. Alternative 4: Farm Bill Subsidies Phase out Farm Bill crop-specific subsidies for industrial crops produced to excess (such as corn), and phase in subsidies for desirable ranges of crops or methods of production (i.e., organic, polyculture, locally-adapted crops, etc.). Reasoning: The USDA spends $25 billion or more a year on subsidies for farm businesses, which result in the overproduction of agricultural products, especially of certain commodity crops such as corn and wheat. In 2010, U.S. farmers produced 32% of the world corn supply on 84 million acres of farmland.78 The overproduction caused by subsidies brings unintended harms to the environment and public health. Firstly, the overuse of fertilizers and pesticides in farmland causes environmental degradation. For example, studies have found that the degradation and water contamination in Florida’s Everglades is largely attributed to the overuse of fertilizers. 77

"Map the Meal Gap," Feeding America, 11 Dec. 2016. Amelia Urry, "Our crazy farm subsidies, explained," Grist, 20 Apr. 2015. 78

The Heinz Journal Secondly, most of the excess of these crops is distributed to non-food sources, which raises eyebrows among nutritionists and environmentalists. Health experts represented by the Union of Concerned Scientists and the University of California, among other groups, point out that grain-raised beef is higher in unhealthy saturated fats than its grass-fed counterpart. Additionally, it’s more likely to contain musclebuilding hormones whose safety for humans remains under debate.79 Thus we recommend phasing out Farm Bill cropspecific subsidies for industrial crops and phasing in subsidies for crops produced through sustainable methods.

VII. Analysis Based on our stakeholder analysis and the data gathered for the status quo, we conducted a utility analysis of the aforementioned alternatives, using the status quo as a baseline figure. We assessed how much utility, on a scale of 0 to 1, each stakeholder might derive from the adoption of each alternative according to each sub-goal metric. These sub-goal values (weighted differently based on stakeholder preferences) were then combined into a weighted average utility value for each alternative, which was then re-standardized to a 0 to 1 scale and added together across all stakeholders.

To illustrate this process, consider the agribusiness utility calculation for Sub-goal 7 (Reduce Energy Consumption). This sub-goal was weighted fairly high (.7 on a scale of 0 to 1) because it factors into agribusiness’ main concern—profits—relatively more than the other sub-goals; reduced energy usage would mean reduced cost of production for farmers, which should translate into reduced input costs for agribusiness and higher profits. In considering the alternatives from agribusiness’ perspective, we determined that Alternative 4 would score a 0; as explained earlier, agribusiness derives immense profits from, and may even be dependent on, federal subsidies to commodity crops, so any change to these would be seen as anathema. The other alternatives, none of which would be as detrimental to agribusiness, scored at least .7 to demonstrate their preference of these to Alternative 4. From there, thought was given to which of these preferred alternatives would best achieve the sub-goal; Alternative 3 best met that standard, so it scored a 1, and Alternative 1 was second best, so it scored .85. This process was repeated for each of the other 8 sub-goals, and then the values were combined into a weighted average. In Table 2 we present a summary of this detailed analysis, showing only the final standardized weighted average utility values each stakeholder would derive from each alternative as well as the total sum utility across stakeholders. Individual

Table 1: Results of Utility Analysis Alternative

Agribusiness

Farmers

Distributors

Consumers

Government

Environmentalists

Total Utility

.726

0.093

.253

.026

0.000

0.062

1.161

0.808

0.749

.813

.896

0.810

0.482

4.558

0.741

0.664

.629

.492

0.543

0.516

3.584

0.983

0.970

.647

.775

0.694

0.953

5.022

0.000

0.764

.402

.624

0.607

0.907

3.305

Karen Eisenbraun, "Corn-Fed Vs. Grass-Fed Beef," Healthy Theory, 22 Jan. 2010.

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Achieving Sustainable Food Production values take a range of 0 to 1 and the totals take a range of 0 to 6, with low values being worse than high values. Sensitivity Analysis Our recommendation is fully robust to a 10% sensitivity analysis. When all six stakeholders are considered together, sensitivity analysis does not change the overall utility-maximizing alternative. Similarly, this alternative does not change when considered individually: government, consumers, and food distributors always prefer Alternative 1, and environmentalists, agribusiness, and farmers always prefer Alternative 3. It should be noted that the most impactful factors on overall total utility belong to government and consumers. Therefore, were a more sophisticated analysis to be done, efforts should be made to hone in more specifically on government and consumer preferences. For government, this could include analysis of political positions. For consumers, it would be worthwhile to divide the group into different classes (by socioeconomic status or geographic location, for example), as each group might have slightly different preferences.

VIII. Recommendations Based on our analysis, we argue that Alternative 3, the incentivization and enabling of more sustainable agricultural production practices, should be the first priority for policymakers. Across all of our sub-goals and given the priorities of all six stakeholder groups, this alternative promises to deliver the most utility. However, it should be noted that one of the local food alternatives, Alternative 1, is a close contender (~.45 less utility on a scale of 6), and, for half the stakeholders (government, consumers and food distributors), is the preferred alternative. We therefore argue that efforts should be made to develop local food infrastructure as a complementary action. Strategies for Implementation We recommend implementing two solutions rather than one because there is not unanimity amongst the stakeholders regarding which is best. Because there

is no overlap between the solutions (implementation of the one has no effect on the feasibility and implementation of the other), we believe the most effective implementation approach would be to pitch individual solutions to the stakeholder group that most favors that solution. Alternative 3 would best be implemented by the private sector, whereas Alternative 1 would ideally take the form of public sector action. Strategies for implementation are listed below in order of priority. Alternative 3: Innovation in Sustainable Production Energy- or environment-related NGOs would likely be willing and able to offer financial support for research, development, and adoption of updated technologies that promote precision agriculture or other sustainable production practices. Foundations would therefore be a strong partner for implementing this alternative. One example is the Breakthrough Energy Coalition (BEC). BEC, founded by some of the most influential entrepreneurs across the world, was established with the vision of zero emissions in various economic sectors, such as transportation, industry, and agriculture. Investing in new technologies that will reduce GHG emissions around the world is their primary principle.80 Thus, BEC would likely be receptive to Alternative 3. They could provide researchers with financial investment for developing key technologies such as nanosensors, high precision positioning systems (like GPS), and automated steering systems. Once these technologies have been developed, other NGOs or university extension services could provide technical training and assistance to speed their adoption. The biggest risk in implementing this alternative stems from the fact that its two biggest supporters are agribusiness and environmentalists. Generally, these two groups view each other with animosity, and getting them to work together may prove difficult. Many of the most passionate food policy activists within the environmentalist group frequently advocate a complete revolution in the food system which would entail the â&#x20AC;&#x153;overthrowâ&#x20AC;? of agribusiness. Michael Brownlee is one such

"Introducing the Breakthrough Energy Coalition," Breakthrough Energy Coalition, 11 Dec. 2016.

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The Heinz Journal example, advocating for just such a change in his book The Local Food Revolution.81 We are not advocating banning monocropping, factory farming, or other frequently villainized agribusiness practices, but rather championing practices and technologies which would reduce the food system’s negative impacts. Given that this alternative is not revolutionary so much as it is incrementalist, fervent activists like Brownlee may oppose implementation, especially if groups like BEC decide to bring in partners like Monsanto, Tyson, or other such “villains” of agribusiness. Similarly, those agribusiness partners may oppose NGOs or other activists if implementation of this solution is seen as trying to undermine their industrial model in the long run. This risk should be addressed by stressing the universal applicability of sustainable innovation, as evidenced by the fact that both groups, though opposed, rated this alternative as the most desirable. Precision agriculture technology can benefit both small organic farmers and large industrial farms. By focusing on the commonalities rather than the points of difference, it should be possible to get these groups to work together, or at the very least to work in separate spheres with foundations like BEC as a common partner.

government agencies responsible for food policy (typically this is the Department of City Planning or the Department of Sustainability) and to local advocacy organizations (such as food policy councils) and advise them to collaborate with community partners to steadily promote local food and develop a local food support infrastructure. Suggestions include developing local food hubs, designing (or redesigning) certification standards for farmers’ markets, coordinating stakeholder planning meetings, developing and maintaining websites to promote local food initiatives, and implementing school and community gardens. Furthermore, state and city governments, together with academic and other policy institutions, should raise the level of research on the impact of local and regional food systems, which would illuminate the supply-demand situation (mentioned in the section on stakeholders) and the economic benefits generated by such systems. Cities can also pass a range of policies to support markets, such as offering affordable and dedicated market space on public land, ensuring that zoning codes allow and protect markets, and offering free parking, electricity, and signage for markets.82

Local governments are one such vital actor in laying the foundations of local food infrastructure. We recommend that advocates reach out to

Community organizations and market facilitators can take the lead in expanding the customer base of existing markets. Workplaces or universities can organize on-site farmers markets, which allow students, faculty, employees and community members to purchase fresh nutritious foods without leaving campus, reducing their ecological footprint.83 Health care facilities throughout the country are also rapidly organizing efforts to rework hospital food to encompass social, ecological and health dimensions. The HCWH Healthy Food in Health Care Pledge, a platform of implementation goals that nearly 240 facilities have committed to, suggests a growing number of hospitals across the country in both urban and rural regions are also launching local and sustainable sourcing projects.84 Thus, policy opportunities can also be sought where the Healthy Food in Health Care campaign is active, which includes California,

Alternative 1: Local Food Infrastructure Though it lags slightly behind Alternative 3 in overall utility values, Alternative 1 is the preferred option for government, consumers, and food distributors, demonstrating its huge potential for policy implementation. It also has a potential advantage for implementation over Alternative 3; while only a few, well-funded actors can immediately strive to implement Alternative 3 because of its focus on technology development, action towards implementing Alternative 1 can be taken by many parties simultaneously.

Brownlee, The Local Food Revolution. Ceri Jenkins and Satya R. Conway, "Promoting Access to Healthy, Local Food: A Guide for Local Governments," Mayors Innovation Project, Oct. 2012. 82

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Foodlink Waterloo Region, 2 Dec. 2016, http://www.foodlink.ca/. 84 “Healthy Food in Healthcare,” Health Care Without Harm, 11 Dec. 2016, www.healthyfoodinhealthcare.org.

Achieving Sustainable Food Production Massachusetts, Vermont, Pennsylvania, Minnesota, Maryland, Oregon and Washington. The implementation advice above would help make Alternative 1 more resilient and sustainable. Indeed, there are many more ways local government can provide support for efforts to increase access to healthy, local foods. Favorable land and market policies, for example, open the door to sustainable urban agriculture, which can offer communities food self-sufficiency. While the implementation of Alternative 1 is likely to be less contentious than the implementation of Alternative 3, some policymakers, in communities that do not trust their governments, may run into problems. For example, while working at the Pittsburgh Department of City Planning, one of this paper’s authors has seen that many community food advocacy groups do not trust the city government and frequently exclude them from conversations. This is counterproductive, as most of the actions these advocacy groups want to accomplish (redesign of city-owned farmers’ markets, building community gardens on city-owned land, etc.) require the participation of government. In such situations, advocates and policymakers should use one of two approaches. One would be to pursue actions with community partners that do not require government input. For example, this could include bringing food advocacy groups into contact with private sector partners in food distribution for the purpose of developing food hubs. Another approach would be to get advocacy groups and government together in the same room to take action on some “easy win” projects that could build trust. This approach might be especially applicable following an election in which a new administration comes to power, as the new mayor or city council would likely be seeking to make visible changes to justify their election.

sense, policymakers should be wary of advocates proposing it as the “only” or “best” solution. Food system advocates, similarly, must work to change the conversation regarding the environmental sustainability of agriculture, as we have seen that local foods, so frequently touted as the solution to the GHG emissions impact of agriculture because of “food miles,” actually have little capacity to solve current environmental crises. We have also used that sustainability framework to conduct a utility analysis of four potential policy solutions from the perspectives of six stakeholders, recommending two solutions and offering policymakers and advocates strategies for implementation. These two solutions – supporting sustainable innovations in agricultural production and developing a local food infrastructure – are likely to draw broad support from a range of stakeholder groups. Furthermore, they are complementary and can be implemented simultaneously by different groups. Production innovation, especially with regards to technological development, can be supported by private foundations and other NGOs, as well as agricultural extension services. Local food infrastructure can be implemented by actors ranging from city government policymakers and food policy advocates to business owners, hospitals, and schools. This analysis makes clear the importance of changing the current food system and the lack of a “universal” solution. Agriculture and food are two of the major policy challenges of the 21st century, and achieving sustainable food production will demand more of both policymakers and advocates than simply telling people to “eat local.”

IX. Conclusion We have shown, through a sustainability framework including social, economic, and environmental goals, how local food is by no means a panacea that will solve all of the sustainability issues in the food system. While promotion of local food does have value, especially in the economic

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The Heinz Journal

Roles of Private Sector in Climate Change Adaptation Naila Rafique American University, School of Public Affairs Climate change-induced events continue to impact and cause significant decline in sectoral outputs, which in turn can have cascading effects on both economic growth and poverty. The adaptation discussions both inside and outside official climate negotiations have surprisingly little business engagement. The force behind climate change adaptation thus far has been entirely on the government’s agenda. As a result, the private sector should take an active role in pursuing climate change adaptation techniques. This paper addresses the private sector’s involvement in climate change adaptation, disaster risk reduction, and climate resilience building. This validates that the private sector is involved with initiatives to promote adaptation, but it is not happening at the necessary scale. The paper then examines the barriers to private sector involvement in climate change adaptation, disaster risk reduction, and climate resilience building. By understanding barriers and, more importantly, how to remove these barriers, the private sector can be encouraged to scale up adaptation actions and investments. Understanding these barriers can also help the public sector engage the private sector in making vulnerable communities more climate resilient. Lastly, the paper presents an action plan for barrier removal. This paper establishes three critical points: that climate change and climate-induced disasters will continue, that the relation between the public and the private sector is complex, and that what is required is no less than a paradigm shift in the involvement and importance of the private sector towards climate change and climate change adaptation.

I. Introduction Climate change and the impacts of climate-induced extreme weather events (floods, droughts, landslides, mudslides, and sea level rise) are rapidly increasing. According to the Intergovernmental Panel on Climate Change (IPCC), there will be over 150 million people displaced due to climate change in various regions around the world. If not acted upon, the situation will get even worse. By 2050, millions of people will experience flooding due to sea level rise alone.1 Climate change impacts are being experienced more severely in developing countries, because developing countries lack the required capacity to anticipate, reduce, and manage climate risks and impacts. Uneven development of countries is clearly depicted in climate change and human development. Populations of developing 1

Bronen, R. (2009). 4.1 Forced Migration of Alaskan Indigenous Communities Due to Climate Change: Creating a Human Rights Response. Linking Environmental Change, Migration & Social Vulnerability, 68. 2 O'Hara, P.A., 2009, Political economy of climate change, ecological destruction and uneven development: Ecological Economics, 69, no. 2, p. 223-234. 3 Ibid. 4 Ibid.

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nations have been affected by climate disasters between 42 and 114 times more than those of the developed nations, and this figure is generally increasing over time.2 Furthermore, climate change-induced disasters have increased, leading to uncertain rainfall, drought, and flooding.3 Climate change and climate-induced extreme weather events have worse effects on the populations of the least developed nations (LDCs); many of these nations depend heavily on climate-sensitive sectors such as agriculture for livelihoods, income, and employment.4,5,6 Climatic impacts could cause significant decline in sectoral outputs which in turn can have cascading effects on both economic growth and poverty. By reducing poor individuals’ livelihood assets and altering the path and rate of economic growth due 5

Seaman, J., Sawdon, G., Acidri, J., & Petty, C. (2014). The Household Economy Approach. Managing the impact of climate change on poverty and food security in developing countries. Climate Risk Management, 59-68. 6 Dulal, H., & Shah, K. (2014). ‘Climate-smart’ social protection: Can it be achieved without a targeted household approach? Environmental Development, 16-35.

Roles of Private Sector in Climate Change Adaptation to changes in natural systems and resources, climate change may cause reductions in economic growth. Models project losses of ~4% of GDP for Africa.7,8 With agriculture accounting for about 20-40% of GDP in most Sub-Saharan African countries, and much of it rain-fed, the impact of drought on GDP growth in the region can be significant.9 Severe droughts that occurred in 1981-1982, 1992-1993, and 2001-2002 in Malawi, in addition to having a negative effect on the agricultural sector, also had knock-on effect on other sectors, such as manufacturing.10 Severe drought in late 1991 and early 1992 in Zimbabwe had devastating impacts on the agricultural sector, which caused the reduction of real GDP by 9% and a 72% increase in food prices. Impacts will be felt not only by the agricultural sector but also services and industries that depend on the generation of power from hydroelectric sources.11 Using an integrated analytical framework, Thurlow et al. assessed the impacts of climate variability on economic growth and poverty reduction in Zambia. Findings from the economy-wide modeling assessment suggest that climate variability has a pronounced negative effect on economic growth. The study estimates that, on average, climate variability reduces Zambia’s GDP growth rate by 0.4 percentage points per year. Losses reach as high as US $7.1 billion under Zambia’s worst rainfall sequence.12

least 12% to $25 billion, but it still falls short of investment needs in a world on a warming trajectory likely to exceed the 2°C target.13 It is projected that the cost of financing adaptation in developing countries will be in the range of $30230 billion per year by 2030. Foreign direct investment (FDI) in developing countries has only reached $20-$40 billion from 2008 to 2011.14 $100 billion is the current targeted amount for climate funding, but this has not been achieved, mainly because parties have different ideas on the kinds of private flows that should be included.15 Funding that is now being spent on disaster relief is simply not enough. For this reason, a huge gap needs to be filled if the adaptive capacity of people, communities, and businesses in developing countries are to be enhanced. Further, the money that is now being spent is only totaling around $25 billion and needs greater involvement from the private sector. Climate change risks and impacts are increasing and it is evident that public money is not sufficient for the rapidly growing risks and impacts of climate change as they continue to increase.

Given the impacts climate change and climateinduced extreme events have on poverty and growth, it is imperative that we look for ways to fund greater climate change risk mitigation and adaptation activities. Promising results show that from 2012 to 2013 adaptation finance grew by at

Climate change is an opportunity to launch new products and services for climate mitigation and adaptation. Private sector involvement is absolutely necessary to bridge the climate change adaptation financing gap, but it is also in the best interest of the private sector to finance adaptation because of the losses they will incur when climate change and climate-induced extreme weather events continue to grow. Engaging the private sector in identifying climate change risk, response measures, and adaptation needs to be ranked a much higher priority in developing countries.16 Businesses can

Tol, R.S.J. (1999). The marginal costs of greenhouse gas emissions, Energy Journal, 20, 61–81. 8 Nordhaus, W.D., Boyer, J.G., 2000, Warming the World: Economic Models of Global Warming, MIT Press, Cambridge, MA. 1-245. 9 Devrajan, S., Chuhan-Pole, P., Ahmed, H., Angwafo, M., Buitano, M., Dennis, A., Korman, V., Ye, X., M, S. D., and M, R. (2012). Africa’s Pulse: An analysis of issues shaping Africa’s economic future. Washington DC: World Bank. 10 Disaster, Natural. "Disaster Risk Reduction Measures: A Desk Review of Costs and Benefits." DFID and ERM (2005). 11 Devrajan et. al, Africa’s Pulse 12 Thurlow, J., Zhu, T., and Diao, X. (2009). The Impact of Climate Variability and Change on Economic Growth and Poverty in Zambia. International Food Policy Research Institute, 1-71.

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Buchner, B., Stadelmann, M., Wilkinson, J., Mazza, F., Rosenberg, A. and Dario Abramskiehn (2014). The Global Landscape of Climate Finance 2014. http://climatepolicyinitiative.org/wpcontent/uploads/2014/11/A-Closer-Look-at-PublicAdaptation-Finance.pdf (accessed March 16, 2017). 14 Stadelmann, M., Michaelowa, A., & Roberts, J. (2013). Difficulties in accounting for private finance in international climate policy. Climate Policy, 718-737. 15 Ibid. 16 Biagini, B., & Miller, A. (2013). Engaging the private sector in adaptation to climate change in developing countries: Importance, status, and challenges. Climate and Development, 242-252.

The Heinz Journal enhance their own adaptive capacities in multiple ways, including understanding climate, engaging both internal and external stakeholders, and lastly, providing leadership and resources through partnerships with peers, the public sector, and civil society. Table 1 validates that the private sector are involved to promote adaptation, but that it is not happening at the scale necessary.

A majority of the companies generally consider only short-term risks and do not take future climate scenarios and long-term adaptation into consideration. Collaboration between the private sector, government, and regulators can help incentivize and enable adaptation. Companies with less operational flexibility, such as mining businesses, have a particular need to consider future climate change and necessary adaptation measures.17 There needs to be successful private

Table 1: Private Sector Involvements in Climate Change Adaptation Activity Promoted Name of Business Sector Main adaptation Company relevant to case study New weather index insurance product Bio-toilets: Building climate resilience through environmentally friendly sanitation Water Vision Schiphol 2030: Creating a water sensitive airport

Sompo

Country

Property insurance company Waste Management

Insurance, human settlements, Agriculture Transport, infrastructure and human settlements

Thailand

Royal Haskoning DHV

Engineering and Project Management Consulting

Transport, infrastructure and human settlements; Water resources

The Netherlands

Enabling access to weather and climate services in Africa

Ericsson

Telecommunications

Science, assessment, monitoring and early warning

Uganda

Mainstreaming adaptation into projects: the Climate Safeguards System prototype

Global Climate Adaptation Partnership (GCAP)

Consulting and Environmental Services

Science, assessment, monitoring and early warning

Tunisia

The SimCLIM modelling system for climate impact and adaptation assessment Natural disaster insurance protecting Haitiâ&#x20AC;&#x2122;s microentrepreneurs

CLIMsystems Ltd

Information Technology Services

United States of America

Fonkoze (Fondasyon Kole Zepol)

Financial Services

Transport, infrastructure and human settlements; Water resources Business; Education and training; Transport, infrastructure and human settlements

Going beyond offsetting to invest in adaptation

Freshfields Bruckhaus Deringer LLP; UNICEF UK Ecotelhado

Legal Services

Human health; Water resources

Mozambique

Construction and Engineering; Water Management; Energy and Utilities

Water resources; infrastructure and human settlements

Brazil

Green Infrastructure, Waste Water Recycling and Organic Waste Integrated Treatment System

Banka BioLoo Pvt Ltd

India

Haiti

Source: UNFCCC (United Nations Framework Convention on Climate Change). (2007). Investment and Financial Flows to Address Climate Change. Bonn: UNFCCC. (UNFCCC climate change costs). http://unfccc.int/resource/docs/publications/financial_flows.pdf (accessed March 16, 2017). 17

Agrawala, S., Prudent-Richard, G., Kingsmill, N., Mullan, M., Lanzi, E., & Carraro, M. (2011). Private Sector Engagement in Adaptation to Climate Change: Approaches to

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Managing Climate Risks. OECD Environment Working Papers.

Roles of Private Sector in Climate Change Adaptation sector engagement in adaptation which will catalyze greater investment in vulnerability reduction. This will also accelerate the replication of climate-resilient technologies and services in core development sectors, especially in the developing countries where investment in longlived infrastructure is growing rapidly. This relationship between strong public and private partnerships will also be an important vehicle to enhance climate resilience while at the same time creating business opportunities.18 Private firms will develop low-cost products and services in response to climate change and use them as the basis for growing profitable businesses, but only if these repetitive barriers are addressed.

II. Private Sector Involvement While much of the focus has been on the public sector, the private sector is also considering the financing and implementation of climate adaptation. Businesses that are mostly involved in disaster risk reduction, in particular agriculture, mining, tourism and other companies, will have direct losses from climate change. Some companies are motivated and aware of climate change impacts because they might have previously encountered losses due to adverse climate events. For example, for Réseau de Transport d'Électricité (RTE), their involvement increased after their experiences with extreme events.19 Different business sectors are not equally vulnerable to climate change. Climate change presents business opportunities and motivations to some sectors but not others, which can influence action or inaction for climate change adaptation practices. Public financing and private investments are based on fundamentally different motivations. The former needs to maximize its impact from the amount invested to demonstrate to taxpayers that 18

Biagini & Miller, Engaging the private sector in adaptation to climate change 19 Agrawala et. al, Private Sector Engagement. 20 Christiansen, L., Ray, A., Smith, J., & Haites, E. (2012). Accessing International Funding for Climate Change Adaptation. 21 Pauw, P., & Pegels, A. (2013). Private sector engagement in climate change adaptation in least developed countries: An exploration. Climate and Development, 257-267. 22 Agrawala et. al, Private Sector Engagement.

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funding is being spent wisely. Private investment might have adaptation and mitigation benefits, but its main objective is to have quick and predictable returns with acceptable risks.20 Accordingly, private sector engagement in adaptation is motivated by new business opportunities. 86% of companies that took a “Caring for Climate” survey stated that responding to climate change risks, or investing in adaptation solutions, pose a business opportunity.21 For example, Malmesbury Syrups, a small specialty food company that produces flavored syrups in UK, has been able to develop new recipes and products having realized that the company’s products were linked to cold weather and that temperature increases might dissipate the demand for such products. The company decided to offer new products designed to meet the demand of customers living in warmer temperatures, such as syrup used for milkshakes.22 In addition, private sector investments constitute 86% of global investment and financial flows.23 Furthermore, 90% of the populations in the developing world depend on the private sector for their income.24 Public funding is simply not enough to combat climate change, and private sector engagement is imperative in the adaptation process. Engaging in and publicizing training schemes and awareness campaigns can be a way for companies to illustrate their engagement in climate change issues and may lead to the formation of wider initiatives.25 EDF on their website has included that they are actively involved in fighting climate change. They also mention that they generated close to 98% of their electricity with no carbon dioxide emissions. Furthermore, they present several solutions being implemented within the company to address climate change which simultaneously help their customers consume less electricity, and ultimately reduce their carbon footprint.26 23

UNFCCC, Investment and Financial Flows to Address Climate Change 24 Pauw, W. (2014). Not a panacea: Private-sector engagement in adaptation and adaptation finance in developing countries. Climate Policy, 1-21. 25 Agrawala et. al, Private Sector Engagement. 26 Our solutions for the climate-EDF. (n.d.). https://www.edf.fr/en/the-edf-group/responsible-andcommitted/environment/preventing-climate-change/oursolutions-for-the-climate (accessed April 14, 2017).

The Heinz Journal While private engagement is growing in advanced economies, evidence for private-sector activity in developing countries remains weak.27 The first allocated fund for climate change and adaptation was under the 1992 United Nations Framework Convention on Climate Change (UNFCCC), which includes many governmentsâ&#x20AC;&#x2122; obligations to work toward adaptation. Its goal is to manage several concrete adaptation projects in developing countries, using several adaptation funds including the Least Developed Countries Fund, the Special Climate Change Fund, the Adaptation FUND, the Pilot Program on Climate Resilience, and the Green Climate Fund. The Adaptation Fund (AF), which was established in 2001, is used to finance concrete adaptation projects and programs in developing country parties to the Kyoto Protocol which are particularly vulnerable to the adverse effects of climate change.28 Since there is no legally binding quantity obligation to finance adaptation, funds used for adaptation methods are comprised of voluntary contributions.29 The amount of private sector contribution towards adaptation is contingent on the interpretation of the concepts of adaptation.30 Private sectors have a wide range of possible business structures and perspectives, and therefore climate change risks and impacts on different companies may vary.31 Companies in the agriculture, food and beverage sectors relying on water and other raw materials are sensitive to the weather and the natural environment, which increases the unpredictability these companies face in terms of availability, quality, and price.32 In the poorest countries, agriculture and farms typically constitute the largest share of employment and GDP; climate change adaptation in these sectors is therefore closely 27

Pauw, Not a panacea UNFCCC, Investment and Financial Flows to Address Climate Change 29 Bouwer, L., & Aerts, J. (2006). Financing climate change adaptation. Disasters, 49-63. 30 Pauw, Not a panacea 31 Agrawala et. al, Private Sector Engagement 32 Oxfam. (2012). R4 rural resilience initiative (Quarterly Report). http://www.oxfamamerica.org/publications/r4-ruralresilience-initiative-1 (accessed March 16, 2017). 33 Biagini & Miller, Engaging the private sector in adaptation to climate change 34 Begum, R. A., and Pereira, J. J. "The awareness, perception and motivational analysis of climate change and business 28

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linked to the resilience of private entities.33 Small, local business are sometimes better able to respond to the needs of the poorest than governments or NGOs. This may be because of a lack of effective frameworks and policies put into place by governments and NGOs. For example, in Malaysia, many businesses are beginning to recognize that climate change poses risks and opportunities for the business to evolve, but there is a lack of effective frameworks in place to understand and manage these long-term risks and opportunities.34 During the UN climate negotiations in Cancun in 2010, developed countries committed to increase financial resources to assist developing countries with climate change adaptation and mitigation by approximately $100 million per year from 2020 onwards.35 The private sector was included as a key source of finance. However, private sector adaptation is limited and fixated on international companies that are domiciled in developed markets, overlooking smaller, less profitable enterprises, which are more pervasive in developing countries.36 However, many businesses, in particular small enterprises, also lack adequate resources for adaptation. To finance their adaptation activities, farmers and small businesses in developing countries mostly depend on domestic sources.37 Existing international funding to support adaptation needs (primarily through the UNFCCC and official development assistance (ODA)) needs to address its gap in funding to small businesses.38 The largest areas for private sector investments coincide with sectors such as infrastructure, agriculture, water resources management, energy, and coastal zone management, which also happen to be most vulnerable to climate change.39 In perspectives in Malaysia." Mitigation and Adaptation Strategies for Global Change 20, no. 3 (2015): 361-370. 35 UNFCCC. (2010). Report of the Conference of the Parties on its fifteenth session, held in Copenhagen from 7 to 19 December 2009. http://unfccc.int/resource/docs/2009/cop15/eng/11a01.pdf 36 Surminski, S. (2013). Private-sector adaptation to climate risk. Nature Climate Change, 943-945. 37 Pauw, Not a panacea 38 Ayers, J. (2011). Resolving the adaptation paradox: Exploring the potential for deliberative adaptation policymaking in Bangladesh. Global Environmental Politics, 11(1), 62â&#x20AC;&#x201C;88. 39 Oxfam. (2012). R4 rural resilience initiative

Roles of Private Sector in Climate Change Adaptation addition, Oxfam America states that some companies have been improving their overall climate disclosure, although they have disclosed regulatory risks related to their greenhouse gas emissions, rather than risks from physical impacts of climate change.40 The issue with water scarcity and supply issues has made many companies initiate actions to minimize water consumption.41 Companies across almost all industry sectors observe decreases in water allocations, more stringent regulations, higher costs for water usage and increased public scrutiny of corporate water practices. As climate change is likely to exacerbate these existing risks, companies see water scarcity as a key strategic challenge. Many initiatives have been launched to help businesses to identify risks and opportunities related to water use and their impacts, and to help them develop corporate water management plans. The most notable examples of such initiatives include the UN CEO Water mandate, the Water Footprint Network and the World Business Council for Sustainable Development Global Water Tool.42 For example, the Global Water Tool provides free resources for identifying corporate water risks and opportunities and provides easy access to analysis of critical data. The textile sector is also heavily dependent on water and other raw material like cotton for their production. Nike states that climatic events could impact their ability to acquire the raw material necessary to build out product and secure manufacturing.43 These climatic risks and scarcity of products will increase costs of textile manufacturing if more effective adaptation methods are not implemented. To mitigate these risks, Nike developed contingency strategies for identified critical business operations, including a global property protection program that reduces and minimizes the impacts of weather-related events on

Ibid. Agrawala et. al, Private Sector Engagement 42 Ibid. 43 Ibid. 44 Ibid. 45 Surminski. Private-sector adaptation to climate risk 46 IPCC Working Group II: IPCC 2014: summary for policymakers. In Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspects. Contribution of Working Group II to the Fifth Assessment 41

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their physical assets. This includes locating facilities outside of floodplains.44 In 2011 the UNFCCC launched a Private Sector Initiate (PSI), an online database which showcases 88 case studies of private companies undertaking adaptation activities.45 One of the case studies was the Rio Tinto, which included a study of an IPCC assessment reports and an analysis of the impacts of climate events on their business and of the areas of their operations exposed to risk.46 The risk assessments were conducted for each region where the company operates. Similarly, AngloGold Ashanto, which is a South African mining company with global operations, commissioned external consultants to identify and, where possible, quantify the companyâ&#x20AC;&#x2122;s climate change-related risk.47 Through this assessment, a number of key climate risks and challenges the company will face, as well as possible responses, were understood. The risk assessments were conducted for each region where the company operates. This assessments considered both short-term and long-term risk, and it was projected that the Gulf Coast region could accrue more than $350 billion in direct cumulative economic damages by 2030.48 Total direct and indirect impacts could increase the estimated cumulative cost to more than $700 billion over the period from 2010 to 2030.49 Most companies only consider short-term risk and do not take future climate scenarios and long-term adaptation into consideration. Collaboration between the private sector, government, and regulators can help incentivize and enable adaptation. Companies with less operational flexibility, such as mining businesses, have a particular need to consider future climate change and necessary adaptation measures.50 Successful private sector engagement in adaptation will catalyze investments in vulnerability reduction. Report of the Intergovernmental Panel on Climate Change. Edited by Field CB, Barros VR, Dokken DJ, Mach KJ, Mastrandrea MD, Bilir TE, Chatterjee M, Ebi KL, Estrada YO, Genova RC.et al.: Cambridge University Press; 2014: 132. 47 Agrawala et. al, Private Sector Engagement 48 Ibid. 49 Ibid. 50 Ibid.

The Heinz Journal This will also accelerate the replication of climate resilient technologies and services in core development sectors, especially in developing countries, where investment in long-lived infrastructure is growing rapidly. Strong public and private partnerships will be an important vehicle to enhance climate resilience and at the same time create business opportunities. 51 Table 2 shows the

different forms of private sector engagement and the different roles they play both on the international and domestic level. This indicates the important point that focus on private sector development is not new, but that there is now an increased focus from donors on engaging the private sector for development.52

Table 2: Forms of Private Sector Engagement

Source: Byiers, B., & Rosengren, A. (2012). Common or conflicting interests? Reflections on the Private Sector (for) Development [Image, screen capture]. http://ecdpm.org/wp-content/uploads/2013/11/DP-131-Conflicting-Interests-PrivateSector-Development-Agenda-2012.pdf.

III. Barriers to Private Sector Involvement The private sector, particularly more vulnerable small and medium enterprises, often face significant barriers preventing the integration of climate change adaptation in planning and operations. Barriers are defined here as obstacles that can be overcome with concerted effort, creative management, change of thinking, prioritization, and related shifts in resources, land use, and 51

Biagini & Miller, Engaging the private sector in adaptation to climate change 52 Byiers, B., & Rosengren, A. (2012). Common or conflicting interests? Reflections on the Private Sector (for) Development Agenda (ECDPM Discussion Paper No. 131).

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institutions.53 The barriers are diverse, ranging from a lack of information about climate risks and opportunities to business practices that do not encourage adaptation. A small but growing number of companies are addressing climate risk and adaptation methods. However there are a range of barriers which limit wider private sector adaptation efforts, particularly in developing countries. Systematically identifying barriers to adaptation can serve to advance our understanding of the Maastricht: European Centre for Development Policy Management.1-38. 53

Moser, S., & Ekstrom, J. (2010). A framework to diagnose barriers to climate change adaptation. Proceedings of the National Academy of Sciences, 22026-22031.

Roles of Private Sector in Climate Change Adaptation process and assist in decision making and further involvement of the private sector in climate change adaptation. Many companies still do not feel that they need to respond or are unsure of how to respond. Uncertainty is a salient barrier to the private sector’s involvement in climate change adaptation. Policy integration of climate change adaptation needs to address the role of uncertainty. The private sector is accustomed to uncertainty in many forms, including competitors’ actions changing customer preferences and shifts in government policies. Climate variability has long been an uncertainty for business planning as well. The challenge in anticipating climate change is very unique and different from other forms of uncertainty in the marketplace because risks of climate change are higher, as demonstrated by the higher frequency and intensity of climate related events and the economic losses that are derived from them. In addition, these disasters differ qualitatively because a better knowledge of risks will allow more planned and specific prevention measures.54 The planning of the private sector typically occurs on a smallerscale level than can be obtained from current climate science and models presenting an additional barrier to involvement.55,56 Much of the risk of climate change will be seen in the future, which is beyond the timeframe relevant for private sector investment purposes. This should be considered when measuring how private sector companied have mitigated risks, in ways such as energy efficiency improvements and lower emissions. These steps can immediately reduce costs and contribute to profitability. Conversely, a majority of the efforts in regard to climate resilience are risk avoidance and only generate returns if and when an extreme event occurs.57,58 The private 54

Connell, R., Miller, A., and Stenek, V., 2009. Evaluating the Private Sector Perspective on the Financial Risks of Climate Change. West-Northwest Law Journal, 15:133-148. 55 Ibid. 56 Biagini & Miller, Engaging the private sector in adaptation to climate change 57 Ibid. 58 Pauw & Pegels, Private sector engagement in climate change adaptation 59 Buchner, B., Herve´-Mignucci, M., Trabacchi, C.,Wilkinson, J., Stadelmann, M., Boyd, R., . . . Micale, V.

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sector may also defer involvement because they view climate change as a premature issue. Overall, the actions needed to integrate adaptation methods in the business plan are viewed as premature, technically difficult, and too risky for stakeholders in the private sector to pursue. Another important barrier is monitoring and tracking long term adaptation to support climate action. Buchner et al. say that “there is little agreement on what qualifies as adaptation finance or, more narrowly, as an adaptation intervention.” This points to the large knowledge gap about the private sector’s role in financing adaptation.59 Specific investment data on all the investments mentioned above, whether through the UNFCCC or other initiatives, are not available. There have been advanced discussions on how public climate finance, such as grants and loans, is sourced, reported, and accounted for, but the debate on tracking private finance is still at a very early stage.60 One reason for the lack of efficiency is that there is no internally accepted definition of climate finance.61 Furthermore, private flows are defined as finance invested or paid by non-governmental entities. Therefore, finance induced or mobilized by public entities but paid or invested by private entities is counted as private but is not always noted as such. In addition, many disagree on how to record the financing of climate change adaptation. Climate finance can be measured as gross flow or as net flow; net flow is equal to gross flow minus any debt repayments, dividends, and disinvestments. This is an issue for the private sector which expects a return on its investments.62,63 For example, as mentioned above, the 2010 UN climate negotiations in Cancun did not specify whether the $100 billion target was to be measured using gross

(2013). The global landscape of climate finance 2013. Venice: Climate Policy Initiative. 60 Stadelmann, M., Michaelowa, A., & Roberts, J. (2013). Difficulties in accounting for private finance in international climate policy. Climate Policy, 718-737. 61 Haites, E. (2011). Climate change finance. Climate Policy, 963-969. 62 Buchner, et. al, The global landscape of climate finance 63 Biagini & Miller, Engaging the private sector in adaptation to climate change

The Heinz Journal or net flows.64 This problem is exacerbated because there is no established system for measuring, reporting, and verifying, and there is currently no internationally agreed systems for tracking private finance flows.65 Confidentiality is another barrier, since companies may not be willing to share their information with one another, as this may reduce their advantage over competitors.66 Many of the companies that make up the private sector in both the developed and developing world lack the knowledge and capacity to evaluate climate science. The absence of climate experts leads to lack of integration and planning of climate change in future business measures. This worsens the effect on some countries in the developing world, who have limited access to weather and climate information, which may be tightly controlled by the governments, and only available for a substantial fee.67 A lack of reliable climate projections can act a strong rationale for inaction, further perpetuating this barrier. But even if actions have been identified, they can include tradeoffs with shortterm profitability. The final barrier is the relationship between the private and the public sectors. Barriers in the planning phase arise from traits of the governance system which often has the control of the process.68 For example, if the private sector and a government agency both focus on the same thing and are developing adaptation plans, their respective options will differ because these organizations have different missions, political interests, and funding. Furthermore, there are deeply held values and beliefs that influence how people perceive, interpret, and think about risk management, what information and knowledge they value, which influence the decisions and choices made during the adaptation process. Individuals look at new 64

Buchner, et. al, The global landscape of climate finance Biagini & Miller, Engaging the private sector in adaptation to climate change 66 Buchner, B., Brown, J., & Corfee-Morlot, J. (2011). Monitoring and Tracking Long-Term Finance to Support Climate Action. OECD/IEA Climate Change Expert Group Papers. http://www.oecdilibrary.org/docserver/download/5k44zcqbbj42en.pdf?expires=1489757748&id=id&accname=guest&checks um=B0B8FD6150F75EB949DA338181D3D8B2. 65

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problems through the lens of their preexisting values, preferences, beliefs, norms, and experiences. Climate variability and change are likely to be perceived both directly and indirectly through impacts on performance indicators salient to them. 69 There is an erroneous perception among many companies that climate change is primarily an environmental rather than a development issue. Adaptation as a concept seems more important to policy-makers than to businesses. Most businesses probably do not mind whether an activity can be labelled adaptation or not; what matters is the businessâ&#x20AC;&#x2122;s continuity.70 Some elements of climate change adaptation are primarily or exclusively government functions and are likely to remain so, particularly the provision of basic weather and climate information. The UNFCCC includes several articles and subsequent decisions related to adaptation that assign obligations to governments. Yet, even at this early stage of implementing adaptation measures, potential private sector contributions have been identified, and in climate negotiations, public officials have repeatedly emphasized the importance of involving the private sector.71 These barriers will lead to a systematic transformations, which will require different actions and pathways. The political process, including the climate convention and negotiating process, is notably lacking input from private sector perspectives and the only way forward is through the removal of these barriers.

IV. Barrier Removal Options: Action Plan The barriers mentioned will continue to impede the involvement of the private sector in climate change adaptation, and must be removed to enhance the adaptive capacity of people, communities, and 67

Biagini & Miller, Engaging the private sector in adaptation to climate change 68 Moser, S., & Ekstrom, J. (2010). A framework to diagnose barriers to climate change adaptation. Proceedings of the National Academy of Sciences, 22026-22031. 69 Buchner et. al, Monitoring and Tracking Long-Term Finance to Support Climate Action 70 Pauw & Pegels, Private sector engagement in climate change adaptation 71 Biagini & Miller, Engaging the private sector in adaptation to climate change

Roles of Private Sector in Climate Change Adaptation businesses. Several mechanisms to removing these barriers have been proposed, but very few have been implemented. Barriers lead to missed opportunities to generate revenues from emerging business opportunities or to avoid escalating costs due to climate-related impacts. With the use of a “climate expert,” businesses need short to medium term projections of localized climate impacts, commensurate with the scale of business activity, from sources they can trust and understand.72 This will allow private companies to improve short-term forecasts that can immediately ensure future impacts. Furthermore, understanding the vulnerability and risks faced by a community due to the changing climate and its adaptation priorities and actions can provide useful insights to the private sector on its own vulnerability, risks, opportunities and adaptation. Climate change adaptation creates a new source of shared value opportunities between communities and the private sector, and can lead to more trust and assurance from consumers. Several companies worldwide have shown how data and information on community vulnerability, risk, and adaptation can help to build value chain resilience to climate change impacts in the private sector.73 Overall, this perception can create new market opportunities especially in emerging markets. The last barrier mentioned, of the relationship between the public and the private sectors, will be the most difficult to address. This will take the longest to remove, but nevertheless it is possible. The first step is to provide a space for dialogue between the private sector, government, civil society, and academia. Institutions and forums can catalyze to promote private sector adaptation in several countries by integrating the public and the private sectors together in a dialogue that can further information and create understanding for both sides.74 Dialogue will improve understanding 72

Ibid. Stenek, Vladimir, Jean-Christophe Amado, and David Greenall. "Enabling Environment for Private Sector Adaptation." (2013). 74 Ibid. 75 Ibid. 76 International Institute for the Environment and Development (IIED). 2013. “The private sector’s role in low carbon resilient development.” IIED, June 20. 73

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and this can lead to more effective and efficient climate change negotiations with feasible results. This can also be an additional space for the private sector to seek support services to improve their understanding of climate change impact and adaptation and their capability to take action.75 The removal of this barrier will lead to endless opportunities and successes with climate adaptation. One example is in Rwanda, where the government is fostering private sector adaptation through partnerships. The Private Sector Federation, a Rwandan professional body, is working with the government on training smalland medium-sized enterprises across the country on the business opportunities associated with Rwanda’s climate change policies, including funding available through the country’s Environment and Climate Change Fund.76 These institutions and forums also constitute platforms for potential partnerships between the private sector, government, and communities to work on common issues. Working in partnership on climate change adaptation is known to deliver benefits such as reduced demand on resources, knowledge and expertise sharing, improved access to private data and information, and increased resilience outside organizational boundaries and across private sector value chains.77 Private sector operators and development policy makers approach development from quite different angles and need to l understand their respective starting points and ultimate goals before common ground and approaches can be found.78 Overall, these forums on climate change can help to ensure that any actions taken by the government or financial institutions are in line with the concerns of the private sector. This will foster a trusting relationship and will encourage the private sectors to be involved in climate change adaptation.

http://www.iied.org/private-sector-s-role-low-carbonresilient-development (accessed October 30, 2013). 77 Stenek et. al, “Enabling Environment for Private Sector Adaptation” 78 Byiers, B., & Rosengren, A. (2012). Common or conflicting interests? Reflections on the Private Sector (for) Development Agenda (ECDPM Discussion Paper No. 131). Maastricht: European Centre for Development Policy Management.1-38.

The Heinz Journal Another barrier is the uncertainty of profitability in the long term for business practices. A way to remove this barrier is to create concrete rules for infrastructure and business practices that will show the benefits of private long-term investment. Codes and standards incorporating climate change adaptation in infrastructure design can create a range of additional benefits from improving human health, safety, and well-being, to lowering maintenance and repair costs, enhancing property values, and reducing insurance premium costs.79 This will not only result in private sector financial benefits in the long term, but will also enhance the adaptive capacity of people, communities, and businesses. Studies by the UNFCCC and the World Bank have placed the additional annual costs needed to adapt infrastructure anywhere between $8 to $130 billion and $14 to 34 billion by the 2030s respectively.80 Further, the amount of money required to adapt infrastructure remains a small portion of total infrastructure costs. These amounts are considerably lower than future infrastructure damage and loss due to more extreme climate, which ranges from $850 to $1,350 billion each year from 2030 onward.81 This demonstrates that the benefit-to-cost ratio of investing in infrastructure resilience is very considerable and should encourage the private sector to be involved, not only because they will see the long-term benefits of adaptation instantly, but also because adaptation practices integrated into business plans will truly benefit them financially. Another way to decrease uncertainty and initiate long-term action for the private sector is through the pursuit of obtaining development permits and conducting environmental impact assessments (EIAs) and/or social impact assessments (SIAs), which are part of everyday business. This will allow the private sector to understand present and future concerns and the importance of incorporating Stenek et. al, “Enabling Environment for Private Sector Adaptation” 80 Ibid. 81 UNFCCC, Investment and Financial Flows to Address Climate Change 82 Stenek et. al, “Enabling Environment for Private Sector Adaptation” 83 Ibid. 84 Agrawala, S., A.M. Kramer, G. Prudent-Richard, and M. Sainsbury, 2010. Incorporating climate change impacts and 79

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climate change adaptation in their planning, leading to more effective business plans. Most countries have laws and/or regulations in place requiring some form of EIA for projects potentially harmful to communities or the environment.82 Incorporating requirements favorable to climate change adaptation into development permit applications in business terms will make the private sector understand the long term effects more quickly. EIAs and SIAs can play a major role in facilitating successful climate-proofing of projects and avoiding maladaptation practices for both the public and private sectors.83,84 These assessments can be constructed for the private sector’s response to climate change risks on several levels. This will allow businesses to develop a more detailed assessment of the current and potential impacts of climate change for the location and time horizon relevant to that business.85 This will lead to minimal uncertainty and confidence in successful long-term results for any particular business. Trying to mitigate disaster with climate change finances can be quite complex, but short-term measures can be taken to eventually lead to one universal system regulated by a single entity. To fill in the growing gap between finance needs and funding sources, there needs to be both a universal understanding and system for climate change finance. In addition, global, regional, and local financial institutions will have the capacity to provide much needed capital and financial services to finance privately developed climate change projects if this barrier is removed, fostering private participation, whether by private sector capital providers, project developers, or market facilitators in climate change-friendly markets. This can not only address short-term development needs but can also ensure the longer-term viability of these markets and investment opportunities.86

adaptation in Environmental Impact Assessments: Opportunities and Challenges. OECD Environmental Working paper No. 24. Paris, France: OECD Publishing. 85 Biagini & Miller, Engaging the private sector in adaptation to climate change 86 Venugopal, S., Srivastave, A., Polycarp, C., & Taylor, E. (2012). Public Financing Instruments to Leverage. World Resources Institute, (1), 1-61.

Roles of Private Sector in Climate Change Adaptation To remove this barrier, there needs to be an effective method to track funds that are being received for climate change finance. Multilateral institutions and dedicated climate change multilateral funds will have to work towards full reporting of multilateral climate change-related flows to the OECD DAC system or a collective allocation account under the UNFCCC. This would allow for all public climate finance flows, bilateral and multilateral, to be stored on one database, and would allow for mainstreaming of definitions and classifications. Lastly, it would avoid double counting between bilateral and multilateral flows. Another way would be to use credit reporting systems.87 This unilateral system should specify whether it uses net or gross flow, allowing full transparency and little risk in the investment for private sector actors. To remove the barrier of confidentiality, for future data, governments may ask for confidential private data under the condition that data are only published on an aggregate basis, leading to more interaction and participation in the financing of climate change for the private sector, with no risk or exposure to competitors.88 The interaction of private and public responsibility requires close and intensive collaborations between public and private stakeholders and can only be achieved through the removal of barriers. Policies, regulations, and markets that appropriately incorporate climate change information can create environments that stimulate financial, environmental and social sustainability in the private sector through increased resilience and the provision of adaptation solutions for the overall society.

engagement. In many cases, business interests have been viewed only as competition for scarce resources. This sentiment is changing, particularly in the developed world, but not entirely in developing nations where the biggest needs exist. Engaging the business community in climate change risk, response, and adaptation needs to be ranked a much higher priority in developing countries. Adaptation planning must include the private sector. Over the past years, there has been a growing effort to foster private sector adaptation on all levels, but much of this relates to managing the impacts of extreme events. There is no real presence of the private sector in responding to slow processes, such as sea level rise, droughts, and landslides, which are leading to very few initiatives for climate change adaptation. The private sector can better leverage the efforts of the government, which will include engaging civil society and community efforts and developing innovative services and adaptation technologies. Through this, the private sector can also develop and often dominate the design and delivery of many adaptation services. Furthermore, the financial community can help by recognizing the relevance of climate risk as a factor when it evaluates the expected future performances of companies. Overall, the private sectorâ&#x20AC;&#x2122;s participation in disaster risk reduction can enhance climate change adaptation and resilience in the developing world after a climate change-induced disaster.

Climate change and climate-induced disasters are going to increase in severity in most cases. Climate change is now recognized as a serious development challenge. Even though we are still far from achieving the international commitments needed to potentially avoid dangerous climate events, much has been accomplished. However, the adaptation discussions both inside and outside official climate negotiations have surprisingly little business

The goal is to catalyze the involvement of the private sector in the wider adaptation community. Through this involvement, the unique expertise of the private sector and its capacity for innovation help achieve successful climate change actions and adaptations. These adaptation methods will reduce the losses incurred due to climate change and climate-induced disasters and will also prove to be more efficient and innovative in the long-term. The adaptation efforts will lead to effective responses from communities, people, and companies, and these efforts will be more valuable for vulnerable countries and communities around the

V. Conclusion

Buchner et. al, Monitoring and Tracking Long-Term Finance to Support Climate Action

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Stadelmann, et. al, Difficulties in accounting for private finance in international climate policy

The Heinz Journal world that have no other choice but adaptation to climate change. The only way to get to this position is by removing the barriers mentioned above. This will only occur with the growing support of the public sector in encouraging the private sector to bridge the gap in the financing of climate change adaptation.

the involvement and importance of the private sector towards climate change and climate change adaptation from all perspectives, including the private sector itself.

This paper establishes three critical points. The first to note is that climate change and climate-induced disasters will continue. The World Bank estimates that developing countries will need $70 to $100 billion per year through 2050 to alleviate the impacts and to meet current and future climate adaptation needs incurred through climatic hazards.89 It is clear that there have been countless climate change initiates, dialogues, and funds, but different benchmarks and deadlines for funding have yet to be achieved by governments.90 This means that the money allocated from the public sector is simply not enough. The second point to examine is the relation between the public and the private sectors. The private sector is not given the same recognition and power as a public institution, such as a government or a company. This being said, the private sector is less involved and most companies do not see climate adaptation as their duty, preventing the gap from closing. This is also seen in the lack of concern or understanding of the increasing risk of climate change and climateinduced events that will continue to make the private sector the victim if nothing is done. The last point, which is most imperative to understand, is the untapped market for addressing these issues in business practices and plans. This will lead to innovation and potential future profits, and applies to all sectors. Everyone can benefit but this can only be achieved with the effective involvement of the private sector. In closing, it is necessary to have robust involvement of the private sector in managing climate risks in developing countries, which will bring resilience to vulnerable communities and populations as well as systematic, long-term sustainability to private investments. Ultimately, what is required is no less than a paradigm shift in 89

World Bank. (2010). A Synthesis Report Final Consultation Draft Report. August 2010. https://siteresources.worldbank.org/EXTCC/Resources/EACC

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_FinalSynthesisReport0803_2010.pdf (accessed March 17, 2017.). 90 Agrawala et. al, Private Sector Engagement

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