The Dull Compulsion of the Economic (#5)

by Dollars and Sense

A series of blog entries by D&S collective member Larry Peterson.

Note: After a month of (utterly futile) job-searching, I am ready to resume my blog responsibilities. As usual, I am going to be aiming for one 700-1,000 word entry a week.

The stock market sell-offs in all the major markets of last week appear to be tapering off. The New York indices, having taken their worst two-day hit for five years, made reasonable gains on Monday, and are continuing their halting advance as I write at noon on Tuesday. The Dow is leading the pack, with GM posting stellar second-quarter earnings; the S&P (being a broader index than the Dow) is finding the earnings momentum from GM somewhat more diluted; and the NASDAQ, more exposed to creative financing and, hence, continuing worries about the sub-prime debt situation, is more or less standing still (but that's better than being knocked down). The reasons for recovery? Commentators are focusing today on earnings strength and consumer resiliency (consumer confidence hit a 6-year high). Needless to say, the story is far more complex than that.

First of all, the underlying chaos in the sub-prime market is far from even showing a recognizable pattern, never mind sorting itself out. More and more hedge funds are following two of Bear Sterns' hedge funds into insolvency, and confusion about the pricing of many assets held by large investors (or of the identity of counterparties to sales of the assets, for that matter) will only grow as time goes on. In a strange twist, such confusion may, far from prompting further sell-offs, be serving as a very delicate, if not potentially perverse, safety valve in this case: given the lack of hard information about underlying values, large selling moves can only lead to further sales. And, as the Economist noted last week, one thing that distinguishes the present conjuncture is the existence of huge profits and, correspondingly, cash piles, on the part of many investment funds; and even funds that have taken significant losses, like Bear Sterns, are finding it worth their while to eat the losses with their retained profits rather than risk unwinding even larger positions by selling.

So an even greater source of worry right now appears to be the chilling effect the confusion will have on merger-and-acquisition activity and share buybacks, both of which have accounted for much of the rises on Wall Street for some time. At this point, several deals have been postponed, and a rise in corporate debt yields almost assures a more forbidding environment for some time to come. Such worries will only cascade if long-term interest rates are forced up by further post-subprime rises. Still, as Anatoly Kaletsky of the Times has noted, U.S. price-earnings ratios, buoyed by bloated profits, remain much lower than they were during the waning days of the Internet bubble. And with European, Chinese and even Japanese economies enjoying cyclical upturns, the outlook for US exports remains good, and gets even better as the dollar continues its slide. But then there's the question of how low the dollar can go before its losses begin to hurt, rather than help, the profitability outlook for U.S. corporations. And here, the data again yield no clear pattern.

The Economist has also noted (in this week's issue), that, to a certain extent, the much-feared central banks of China, Russia, and the others, including the OPEC countries, have not been the big sellers of the dollar during this period of weakness; instead, U.S. mutual funds have been the ones diversifying into foreign assets and taking the currency down to record lows versus the Euro and generation-long depths against the pound sterling. And here is where things get really interesting: U.S. overseas earnings have been outperforming those of foreigners' U.S. holdings for some time; and this provides an offset of sorts against American economic weakness (as foreigners' dollar claims on the U.S. decline with the currency). It's hard to say exactly how important things like this, and the "carry trade" (borrowing in low-cost yen, say, and investing in high-yielding New Zealand dollar or even Icelandic kroner—15% interest rates!—denominated assets), have had on corporate profits in the last few years, but it is clear that the benefits have been considerable.

And, then, of course, many governments have reduced corporate taxes considerably (one of the effects of globalization and financial liberalization) in the last few years, which has played no small part in keeping profits high. But, inasmuch as further financial deal-making is threatened, clouds will hang over the horizon. One other safety-valve, though, consists of investments by the Chinese and other foreign investors who are looked at with some wariness by Americans; for, if dealmaking in the West dries up for lack of liquidity, it may be that these investors, flush with cash, could provide a vent for M&A activity, if only U.S. and Western regulators—not to mention politicians—are ready to sell to them. This would be a strange reversal (probably on a much smaller scale, as it is clear the Fed will drop interest rates at the first hint of big-investor distress in the United States) of what happened in much of the Far East in the late 'nineties.

Barring this somewhat fanciful outcome, and returning to the more visible effects of earnings and consumer confidence, some troubling things lurk behind today's seemingly good news (for investors, anyway). Regarding profits, forecasts of 5% for the year are becoming increasingly popular after years of double-digit gains. But, as second-quarter GDP surprised on the upside, and as earnings have done so often in the last few years, it is possible that further streamlining of production and outsourcing will continue to contribute (along with the murkier sources noted above) to outsized profits. Productivity appears to be recovering a bit, and this will only be helped as huge bonuses cease to be awarded to corporate dealmakers, helping to take overall unit labor costs down as the rest of us continue to get squeezed by the bosses. But consumers my be a bit over-optimistic: a few weeks ago, one of the major outsourcing consutants (I think it was Challenger, Gray and Christmas), put out a report in which they showed that the temporary-employment market has seized up significantly. Since this is often considered a proxy of hiring capabilities in the economy, such a situation may offset the decent jobs gains posted in June. Friday's employment report could be pivotal if stocks are to recover from the losses of last week fully. 

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7/31/2007 01:27:00 PM 0 comments

 

Econ-Utopia: The Bloodless Revolution, part 1 of 2: A review of Peter Barnes' CAPITALISM 3.0

by Dollars and Sense

Econ-Utopia: The Bloodless Revolution, part 1 of 2: A review of Peter Barnes' CAPITALISM 3.0
by Jonathan Teller-Elsberg, CPE Staff Economist

An Econ-Utopia, brought to you by the Center for Popular Economics.

A few weeks ago, CPE Staff Economist Jerry Friedman wrote an Econ-Atrocity reviewing Bill McKibben's new book, Deep Economy. Though he says McKibben "has written a clear attack on much of what ails us," Friedman nonetheless criticizes McKibben for approaching the environmental and social problems of the day from an individualist perspective. For all that McKibben wants to promote and revive "community," he has the attitude (says Friedman) of a "personal Salvationist... [who thinks that] the enemy [is] ourselves: we use too much, waste too much, want too much; and the only salvation for the environment is to change our preferences, use less, recycle more, and choose to live simply." What McKibben misunderstands or ignores, Friedman argues, is the power of social institutions to drive behavior, regardless of the desires and seemingly free choices of individuals.

I think that Friedman will find solace in Peter Barnes' recent book, Capitalism 3.0: A Guide to Reclaiming the Commons, since Barnes' approach is definitively institutional. The problem, according to Barnes, is that the structure of the economy and society leave too much power in the hands of corporate capitalism. Even if all the CEOs and boards of directors and politicians were replaced with kind-hearted souls like McKibben, we would still face pretty much the same issues of environmental decay, economic inequality, and other social ills—the logic of capitalism and the legal structure of private property rights force the leaders of corporations to do what they currently do. He learned this from personal experience as co-owner and manager of several business ventures, most famously Working Assets (a telephone and credit card company that donates one percent of gross revenues to progressive charitable organizations). "I'd tested the system for twenty years, pushing it toward multiple bottom lines [that consider social and environmental impacts in addition to profit concerns] as far as I possibly could. I'd dealt with executives and investors who truly cared about nature, employees, and communities. Yet in the end, I'd come to see that all these well-intentioned people, even as their numbers grew, couldn't shake the larger system loose from its dominant bottom line of profit." (Ironically, Bill McKibben is quoted on the front cover of Capitalism 3.0 helping to promote Barnes' book.)

While the government is necessary, in Barnes' view it is incapable of successfully addressing these big problems because "most—though not all—of the time, government puts the interests of private corporations first. This is a systemic problem of a capitalist democracy, not just a matter of electing new leaders." (Emphasis in the original.) Having realized that neither the market economy nor the government has any likelihood of halting global warming or reducing inequality, Barnes began to wonder "Is there, perhaps, a missing set of institutions that can help us?"

He's been thinking about it for ten years, and he has a positive answer: the commons, which Barnes defines "as a generic term, like the market or the state. It refers to all the gifts we inherit or create together... The commons designates a set of assets that have two characteristics: they're all gifts, and they're all shared. A gift is something we receive, as opposed to something we earn. A shared gift is one we receive as members of a community, as opposed to individually. Examples... include air, water, ecosystems, languages, music, holidays, money, law, mathematics, parks, the Internet, and much more."

In his previous book, Who Owns the Sky?, Barnes was already on this track. He then argued that the solution to global warming is to establish the atmosphere as a legally recognized commons, owned by all of humanity, now and into the future, and managed by trustees. This "Sky Trust" would be legally obligated to protect the atmosphere on behalf of those innumerable future generations. It could do so by establishing sustainable limits on the amount of greenhouse gases emitted into the atmosphere by human activity, and then auctioning off these permits. Because all people share the atmospheric commons equally, the money from this auction would be distributed on an equal basis. The result would be a slowing and eventual halt to global warming and a simultaneous reduction in economic inequality.

This time Barnes has widened his vision beyond any particular social problem. His hope is that the establishment of an entire commons sector (of which the atmospheric Sky Trust commons is only one example), alongside the government and private, corporate sector, will create an institutional framework that makes it possible to address a wide array of social problems that result from capitalist profit-seeking and government's systemic inability to be fully representative.

[To be continued in the next Econ-Utopia...]

Sources:
Gerald Friedman, "Econ-Atrocity: The economics, and the politics, of environmentalism," April 20, 2007, http://www.fguide.org/?p=86.

Peter Barnes, Capitalism 3.0: A Guide to Reclaiming the Commons. Berrett Koehler Publishers, Inc., 2007. The book is available at no charge as an Adobe Acrobat PDF file at http://www.capitalism3.com/downloadbuy.

© 2007 Center for Popular Economics

Econ-Atrocities and Econ-Utopias are the work of their authors and reflect their author's opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.

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Labels: Books, Class, Commons, Econ-Atrocity, Econ-Utopia, energy, Environment, Inequality, News, Political Economy, Politics, Social/Solidarity Economy

 

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7/12/2007 03:02:00 PM 0 comments

 

The Dull Compulsion of the Economic (#4)

by Dollars and Sense

A series of blog entries by D&S collective member Larry Peterson.

Note: I am currently experiencing some job dislocation, and, being right smack in the middle of the resume-writing, job-searching roller coaster ride, am unable to compose these entries as regularly as I would like. I'm posting an unpublished piece I did last October, which I feel is still of interest, in lieu of a new entry. I hope to be back on schedule by the middle of this month.

Oh, to Be Self-Underemployed...

Britain's Guardian newspaper had a small piece recently on its online version ("Workforce Turns to Self-employment," October 10th, 2006), which reported on a study commissioned by the telecoms company Vodafone. According to the study, 12% of the working population of the UK have set up their own businesses, and another 6% were in the process of doing so. This is truly an impressive statistic, but what really bowled me over was the forecast that followed: the researchers believe the ranks of the self employed may swell by another ten million by 2011! That's close to an astonishing two fifths of the twenty six million working Britons identified by the Office of National Statistics in the UK; and that's in a mere five years' time. Now in an age characterized by the wholesale bastardization of research by corporate and political interests and their well-financed front—organizations, flak machines and "independent" foundations, one hardly needs to be counseled to take prognostications of this nature with a heavy, indeed overwhelming, dose of skepticism. And in this case, the motivation of Vodafone in supporting such a study is so obvious that it can hardly fail to suggest itself: after all, who is supposed to provide these new entrepreneurs with that now indispensable lifeline in setting up a small business, namely, a wireless telecommunications suite, if not the largest (by revenue) mobile telecoms company in the world? But what troubles me is that many people uncritically accept the assumption that self-employment will provide sufficient opportunities for those pushed out of firms due to technological advances, outsourcing and increasing competitive churn in many industries. Given an atmosphere as hostile to labor as the last couple of decades has been, putting one's trust in anything is perhaps not the most appropriate way of looking at labor issues in general; but in this case, the main motivations mentioned by most in the study for going independent, namely the desire to flee the tyranny of the boss or simply to preempt eventual redundancy, could, if somehow acted on en masse, bring about a number of problems that would cause many to pine for the days of wage slavery and the invisible fisticuff known as the threat of the sack. Workers should, in other words, be careful, very careful, of what they wish for.

First and foremost, the central fact surrounding new, particularly small businesses is that large numbers of them will fail rather quickly. One study in the US at the University of Michigan by Hart Posen and a colleague claims that 80% of new small businesses go out of business within five years, and 10% of all firms in the US do so; Business Week ("What's Behind High Small Business Failure Rates," 9.30.99) puts the figure at 64.2% in a ten-year period, and notes that over their lifetimes, some 40% are profitable, 30% break even, and 30% lose money (Business Week also notes that the data are vague and sometimes contradictory in some cases, and indirect in virtually all, inasmuch as privately—held companies are not required to report financial results). This failure rate would surely be too small if anything close to the enormous numbers suggested by the Vodafone study were to enter the market in such a short period of time; many of these people, with no special experience in marketing, administration, management, technology, law or finance—or, rather, all of the above—and with little by way of reliable supplier or financial contacts, would find themselves quickly overwhelmed, regardless of whether or not their business plans had any viability whatsoever—and that's a big if. The mere size of the inrush would be sufficient to guarantee a truly astonishing degree of duplication in regard to output: ten million people are surely not going to colonize ten million durable market niches overnight. The amount of waste and the extent of unanticipated bottlenecks associated with such a shift would almost certainly be monumental. Far be it from me to flirt in public with undesirable economic doctrines like the lump of labor fallacy, but it seems that only a certain amount of pet-groomers, yoga studios and latte bars are needed in most markets.

And then there is the little problem of start-up capital. Both the US and the UK are characterized by extremely high levels of consumer debt and low (in the case of the US, negative) savings. Many of the aspiring entrepreneurs would no doubt commence their independent careers already saddled with considerable debts. This will make lenders reluctant to extend credit lines to them, even assuming that financial products continue to develop which would allow for the repackaging and slicing and dicing of risk levels in a way that would match the demand of a growing number of investors. Some of those unable to tap credit may continue to finance their ventures with expensive consumer debt, after the fashion of those who pay for college or their homes with a credit card, but these people will surely be putting themselves at an extreme disadvantage to those who can attain funds at substantially lower rates of interest or who can invest larger amounts of personal savings into their ventures. Many would have to finance their activities by taking out multiple mortgages (while, in many cases, continuing to operate the business out of the same house). With housing markets in both countries at extremely sensitive points right now, who knows what havoc additional strains of this magnitude could wreak in a few years time? In addition, both the US and the UK are facing potential crises in paying off pensions and providing healthcare to aging (the UK to a greater degree than the US in this regard) populations; and any misallocation of capital to small businesses with high failure rates will surely have knock on effects in these, and other areas of public provision, as well: the corporate taxes likely to be collected from these small ventures will probably not be enough to make up for the deficits that will swell elsewhere in the economy, especially if many of the entrepreneurs end up having to reschedule tax and other payments due to eventual bankruptcy. In addition, entrepreneurs are the very sort of people who tend to delay retirement savings, or, in the case of the US, healthcare spending (though the employment of many of them in healthcare will tend to keep costs in that sector down).

The same sort of thing can be said about training: many workers look to their employers to provide, if not lifelong employment anymore, at least the training requisite to keep them up to snuff when their period of employment with a specific employer is over. But self—employed workers will be required to finance and implement all training schemes by themselves (there may be tax advantages). Many will no doubt postpone investment in this area as well, if only because the demands on their time will tend to be so great that they will simply not have the luxury to upgrade their skills in a consistent way; this is all the more so when one considers that many of them will have family and other commitments (conflicts of this sort will no doubt tend to have negative effects on operations as well). And though there is a kind of unique learning—by—doing that characterizes entrepreneurial activity, much of this is of a decidedly vague quality, or is simply difficult to transfer to other activities if the venture doesn't last long. Compared to the cumulative learning that established firms offer their employees, utilizing more widespread technologies and over longer periods of time, generic self-employment must, ceteris paribus, reduce returns on "human capital."

What about the macro effects? Wouldn't such a surge of entrepreneurial vigor simply shake the rest of the economy into the stratosphere? Here one needs to be reminded that the paltry levels of capital brought to the table by the entrepreneurial reserve army will ensure that the new ventures will be overwhelmingly concentrated in services, and less—capital intensive ones at that. And while the medium—term outlook, given the fact that societies are aging, suggests the emergence of some large and sustainable pockets of growing demand (not to mention supply: many older workers will be among those who choose or simply have to try to make a go of it on their own), the fact remains that services, relatively protected from competition (you can't source your barman, nurse or teacher from distant markets, nor would you want to, to use simple cases), and insulated from pressure to economize (most people want the job done right, if not special treatment: you don't want your waitress to serve so many tables that you don't get your meal while it's hot, again using a simple case), are less able to realize productivity gains than manufacturing or IT intensive services. And the more we substitute such services for manufacturing and even more capital intensive services, productivity—and hence average living standards—will tend to stagnate or even decline. IT widening-and even deepening—throughout the economy will no doubt serve as a countervailing force here, as will the considerably longer hours put in by the new entrepreneurs; but considering that the new entrepreneurs will be hard pressed to devote the requisite funds or time to successful uptake, real productivity gains will, quite probably, retain the relative evasiveness they always have had with regard to services in general.

Indeed, other possible ramifications of such a huge shift in the workforce as that envisioned by the Vodafone researchers, from sunk cost losses involved in the exodus from large companies to property market dynamics in an environment of reduced demand for commercial property (especially of the downtown variety), and on to issues of congestion and even environmental degradation (one assumes a large number of the new entrepreneurs will require their own, decidedly large vehicles, especially if the competition turns out to be as endless as the Vodafone study suggests) in formerly strictly residential areas (and then there's the awkward issue of crime), can be seen to sketch a rather frightening picture, indeed. Fuel prices could turn even more volatile, and the entire delivery system for fuel and other essential commodities might have to be substantially reconfigured. And, all the while, the ultimate irony would probably remain: successful small ventures would continue to be bought up by established companies and either integrated in order to take advantage of the economies of scale and scope that small firms simply can't capitalize on, or simply put out of business to reduce the threat they pose.

The biggest wild card of all, though, would undoubtedly be the labor market itself. And here speculative trajectories regarding the impact of an historic surge towards self—employment go all over the place. Job vacancies in established firms would presumably swell, raising—finally—the cost of labor to a point, unseen for some time now, at which it consistently approaches its true cost, or productivity levels. But will this then induce firms to substitute capital for labor as unit labor costs rise? Will they redouble their outsourcing efforts? Or will they prefer to subcontract to some of their old employees, and rely on attrition to pad the bottom line until capital and organizational restructuring efforts bear fruit? The fact that firms have so many more options when faced with such deliberations even now is reason enough to be skeptical of seeing a silver lining in this kind of scenario. But it doesn't take too much imagination to render even this more labor—friendly picture threatening again. Assume companies choose to hire in large numbers: they may succeed in luring back some experienced workers who, attracted by the increase in pay (and remember: the monetary authorities-especially here in the US— tend to become very jittery at the thought of rapid real wage increases), can succeed in liquidating their businesses quickly, efficiently and painlessly. But many, many others would be so tied down, especially if they were using home equity to finance their ventures, or as collateral against them, that a quick move back would simply be impossible. That being the case, established firms will find themselves desperate to hire much less experienced or even qualified workers; productivity levels would continue to level out; and training costs would soar. In macro terms, foreigners financing our deficits (I'm assuming that will be one of the variables that doesn't change very much) will be more reluctant to do so: after all, our famed productivity levels are what most mainstream economists point to when attempting to explain how these deficits can be run up to such levels in the first place. If these become threatened, even to a relatively small degree, the fact that we continue to increase our deficits will shrink potential returns on US—and even UK—assets, and many foreign investors, some with a lot of infrastructure building to be done at home, may finally decide to go elsewhere. Of course, there is the option of recruiting immigrant labor, particularly of the highly qualified variety, but that remains a political minefield. And birthrates in the US, even, aren't sufficient to keep up with the kind of shift the Vodafone researchers are talking about.

To me, though, the most disturbing thing about this kind of shift, and of the fact that people don't tend to view it as the disaster it could well become, consists of something else altogether. One of the most underappreciated aspects of the expansion of an already services—saturated economy involves the differential benefit accruing to different classes from the services themselves. Many services will be designed at least to some degree with an eye towards expanding or maximizing sales to those who can afford to pay more, especially given advances in transportation and communications that make access to them relatively costless and friction-free. But with intense and growing competition, it will be increasingly difficult for small entrepreneurs to retain their choice customers without having to pander to them to a debilitating degree. So consumer surpluses will tend to grow for those who have already attained high incomes, asset—ownership and job security, while remuneration to hard-pressed entrepreneurs will be subject to the operation of a considerable and ongoing check. Under such conditions, many of the latter, especially those who provide the wealthy with childcare, healthcare provision and elder-care, private transportation, education, research, security, entertainment, fitness training, construction, maintenance and cleaning are effectively giving the privileged the means to increase their already considerable competitive advantages over everyone else (at the same time as public provision of many of these types of services is curtailed, or, in the case of many immigrants, even denied). In a sick historical twist, many of us are, like our forebears in late Victorian and Edwardian England, finding ourselves undergoing a kind of deindustrial enclosure which results in masses being recruited into an altogether obscenely large contingent of what can only be seen as glorified domestic servants. And while the aristocrats of that period didn't work, many of our present-day service workers cater to the best educated and most productive workers in the economy (never mind their hyper—achieving, super-privileged kids). For such workers to provide the means whereby competitive advantage of the super-wealthy can be expanded is insane: do such workers really want to form the backbone of an economy that is in this sense more regressive than that of Victorian England?

And yet, economists, policymakers and ordinary people persist in thinking that the switch to services, especially self—employed ones, constitutes a kind of improvement in the condition of labor, if not a kind of cabin upgrade in the journey from the realm of necessity to the realm of freedom. Indeed, certain economists, like Princeton's Alan Blinder (see his "Offshoring: the Next Industrial Revolution" in the March/April edition of Foreign Affairs), have seemingly resorted to the Malthusian idea that spending by the wealthy on luxuries is the only means to avoid glutted labor markets in the current configuration of the economy. But workers must be careful to see the glorification of services as part of the general assault on labor; this is no innocent fairy tale about the future like the paperless office: it is part and parcel of the war on labor that has been fought with such tenacity and effectiveness for a generation. And masses of people forced to assume the designation of being "self employed" while lacking meaningful or reliable access to capital would constitute a suitably absurd backdrop for yet another big battle in this struggle. The world may, in certain ways, and to certain people, look to be flat, as Thomas Friedman thinks; but you simply can't have a new class of capitalists characterized precisely by their lack of significant amounts of capital (especially given the huge and widening income disparities that have characterized the last decade, not to mention, in the US, the differential effects of the Bush tax cuts); and workers should perhaps concentrate on organizing to protect their present jobs and living standards, rather than engaging-enabled by far-fetched studies like Vodafone's or not-in fantasies of self-ownership.

But, hey, maybe history will prove to be, as she tends to do, more cruelly playful: The New York Times (unfortunately, this option is not available to our godless UK counterparts) has recently dedicated a series of articles to documenting ways in which religious professionals and organizations take advantage of loopholes in the tax code to realize savings unavailable to everyone else, even to persons engaged in essentially the same pursuits. One of these allows ordained clergy an exemption from housing payments. Perhaps one way to postpone the class war would be for all the new entrepreneurs to become clergy in some religion (many charge a nominal fee, maybe a dollar, to partake in holy orders) and monetize the tax exemption to fund their entrepreneurial activities. Now there's an access to capital even the financiers haven't thought of: faith-based fraud for the masses, rather than confined to the Republican Party elite! 

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7/02/2007 10:29:00 AM 1 comments

 

Challenging Coke's thirst for water: The Apizaco story

by Dollars and Sense

By Marie Kennedy and Chris Tilly
June 28th, 2007

This is the fourth in a series of posts by D&S comrades Marie Kennedy and Chris Tilly, who are spending six months in Tlaxcala in central Mexico. Their first posting was about the recent increases in the price of tortillas in Mexico.

Photo captions: (1) Javier, a small farmer behind the Coke plant; (2) a well in Apizacito; (3) Reyes Ruíz; (4) smelly water discharged from Coke plant; (5) a shoeshine stand in Apizaco: "Where water goes, so goes life." Photo credits: Marie Kennedy and Chris Tilly.

"A few days a week, foul-smelling black mud comes out of the plant," Javier told us as he sat a short distance downstream from the Coca-Cola plant in Apizaco, Mexico. Javier, a small farmer getting on in years, has been tending his cows along the Apizquito River for decades. "The spring is about four kilometers up to the east. The water comes out sweet and clean there, but by the time it gets here it's polluted."

Coca-Cola has run a bottling plant in Apizaco, a regional transportation hub in the central Mexican state of Tlaxcala, for 25 years. Only recently has it begun to attract controversy, largely because a combative mayor, Reyes Ruíz Peña, has challenged Coke's voracious consumption of water to supply "the real thing" to Tlaxcala and three larger neighboring states. So far, the mayor says, the mega-corporation has been slow to respond—as well it might, since due to quirks in Mexican law, Ruíz has no legal power to regulate the plant, and the final months of his term are winding down.

Global glutton

The Apizaco dispute is a window on a global phenomenon: to serve billions of Cokes every year, Coca-Cola must extract billions of gallons of water (according to Indian activist Vandana Shiva, it takes 9 gallons of water to produce a gallon of Coke!), and dump enormous amounts of toxic wastes. To reap economies of scale, the Cola giant does not sip a little water here and a little there; its bottleries sink roots into a few water-rich areas, and over time literally suck them dry. Peasant women in Kerala, India camped out in front of the local Coke plant for two years to defend their water supply. They ultimately triumphed: the plant was closed and the state passed a law banning sales of Coke and Pepsi, and Coke- and Pepsi-free zones have since sprung up all over India.

Mexico consumes more Coke per capita than any other country in the World, 483 8-ounce portions of the beverage a year per person, well over one a day. Coca-Cola FEMSA, Mexico's Coke bottler (a joint venture between Coca-Cola and the giant Mexican corporation that runs one of Mexico's two main beer companies and the Oxxo chain of convenience stores), was recently fined 10.5 million pesos (about 1 million dollars) for monopolistic practices. In San Cristóbal de las Casas in the southern state of Chiapas, a campaign spearheaded by environmentalists has called for a Coke boycott to protest the depredations of the local bottling plant that is putting the lush region's aquifer in danger. On the whole, however, refresco-crazy Mexicans have so far not embraced the issue. Even the militantly anti-capitalist Zapatista movement, based nearby in Chiapas, has not joined the boycott. "We have a way to get rid of Coke," joked the voluble Zapatista spokesman Subcomandante Marcos, "We will drink every last bottle."

Dry times in Apizaquito

The recent stirrings in Apizaquito promise to open a second front in Mexico's soda skirmish. The central figure, Reyes Ruíz, is a charismatic and blunt-spoken political maverick, who ran on the ticket of the tiny Workers' Party and defeated the candidates of Mexico's three major parties. "They call him the ‘globafóbico' (antiglobalization) mayor," commented one reporter, "because he's always criticizing corporations or the government." According to Ruíz, he took note of the Coca-Cola plant during his campaign when residents of the Apizaquito barrio where the bottler is located, began complaining to him. They grumbled about traffic congestion, damage to the roads by Coke's heavy trucks, pollution, but above all, a shrinking of the water supply. "They said, "Help us make sure the company either leaves, or helps us." related Ruíz.

Over its 25 years of operation in Apizaco, the Coca-Cola plant has expanded constantly. "That area used to be all farmland," Ruíz said. "They started by drilling one well, really just for exploration. Now, I don't know how many wells they're exploiting." What he does know, he said, is that the water level in the aquifer that supplies the bottler had dropped considerably.

Coca-Cola FEMSA (which responded to our request for an interview by setting up a meeting with four executives as well as providing written answers to questions) denies Ruíz's charges. Referring to figures from Mexico's National Water Commission (CNA), they claim that industry accounts for only twelve percent of water use in the region (and their bottlery for just over one percent). A CNA study, they note, reports "that the aquifer is recharging adequately"—in fact, according to this study, 22 more water users the size of the Coke plant could be added before the aquifer would begin to be drawn down. Coke would not give us a precise figure for their water use, but stated that they remain within the 450 million gallons per year allotted to them by the CNA. "We comply with the law," Marco Antonio Dehesa, project engineer with Coca-Cola FEMSA, repeated to us over and over.

Ruíz maintains that the CNA's public figures cannot be believed. He says he asked Coke for water use figures two years ago, was promised a response, but has still not received one. The city government has little leverage over the corporation, because the CNA grants permits for water extraction. (Ruíz also asked the Commission for water use statistics, but again says he has gotten the runaround.) "I told FEMSA, "You're not going to have an ‘arrangement' with me," he declared, hinting that the Commission may have worked out such a pact. So he has contracted the city's own water use study, to be completed by late summer 2007.

Javier, the neighboring farmer, agrees with Ruíz's assessment: "The springs are going down because they just take, take, take." In fact, the impact of increased water consumption by the bottler and other users (Coke is the city's largest business, but another water sponge is Procter & Gamble's paper mill) appears to extend beyond the Apizaquito neighborhood. Gloria Estudillo, a resident of central Apizaco, reported that over the years the water supply there, as well, has become irregular. She commented, "We haven't had water for 8 days, and that never used to happen." In fact, even Coke's Dehesa conceded that, official figures or not, it's clear the water level has fallen: "Twenty years ago, water rose to the surface in springs—you didn't even need to drill a well here. Now you have to drill a well and pump it up."

"It sometimes needs adjustment"

Then there's the pollution. Coke runs a water treatment plant to purify its wastewater. "But they're still polluting," said Ruíz. Javier agreed, "Many trees have been dying along the river because of the contamination. Even though they say they have a treatment plant, they're not actually purifying the water." Indeed, though we did not see the "black mud" described by Javier, on one day we visited, the water discharged from the plant came out milky white with a strong, unpleasant smell (on another day the smell was gone). Coca-Cola FEMSA stated that discharged water "is always 100 percent treated," but when we mentioned our observations, plant manager Juan Carlos Lucio acknowledged that, "Like any industrial process, it sometimes needs adjustment."

In Kerala, India, tests done on the waste from the Coke bottling plant showed high levels of cadmium and lead, which are linked to cancer, kidney and liver disorders. Closure of the plant there was initially ordered because of contamination of drinking water from Coca-Cola's toxic waste, not because of water depletion. Mexican Coke spokespeople were unaware of the Kerala case, but noted that "the production process is essentially the same all over the world," a not very comforting point.

Coke has given Apizaco a number of concessions: a new pump and other improvements in the city's nearby well, some paving materials, jobs (again, Ruíz and the corporation disagree on how many), and contributions to some community events. Still, said Ruíz, with Coca-Cola FEMSA earning an estimated $500,000 a day in profits from the plant, "We think they need to take more responsibility than that."

Leverage points

Apizaco itself issues an annual operation permit to the bottler, but as the mayor explained, "As long as they pay their 10,000 pesos (about $900) each year, we can't take away the permit. We don't have the legal power to close the plant." In any case, his government would prefer to keep the plant functioning—but with a sustainable level of water use.

Octavio Rosas, an economist at Mexico's national university (UNAM), observed that Apizaco's problem is far from unique: "When municipal governments want to defend their own people, they must confront legal obstacles that prevent them from acting because the issues fall under federal jurisdiction—as in the case of water." In the long run, Ruíz argued, "We need laws that would permit us to do things in an honest manner. The law should require employers to be socially responsible. If they take water from the community, they should give something in return to improve the quality of life—jobs, help with education and health services. And the extraction of water would be controlled, limited to a fixed amount."

But for Ruíz as mayor, there is no long run. His term of office ends in January 2008 (Mexican mayors are elected for three years, without the possibility of re-election). With no legal leverage, what options are left? "The citizens would have to shut down the plant," is Ruíz's blunt response. To be sure, such dramatic action takes more than an outspoken mayor and a disgruntled population. So far, no serious grassroots organization has stepped forward to take the lead. But Mexicans have a long tradition of taking direct action, such as sit-ins and land occupations, to press their demands. In late June, a day-long Environmental Monitoring Caravan for the states of Tlaxcala and Puebla, joining together an unprecedented 27 citizens' organizations, made a special stop in Texcalac, the community next door to Apizaquito, to highlight the water issue. If Apizaco activism emerges to join forces with the Chiapas boycott, Coca-Cola's Mexican bottling operation could well find itself capped. 

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7/02/2007 09:52:00 AM 2 comments

 

The Battle of the Horns of Hattin

by Polly Cleveland

July 4, 1187. Two knights stood on the ridge watching the rising sun glint off Lake Tiberias. They were hopelessly trapped, the treacherous old rogue, Raynald de Chatillon and his foolish young protégé, Guy de Lusignan, King of Jerusalem. Below, between them and the water, lay the fortress of Tiberias and the army of Saladin. Behind them lay agonizing miles of dry stony hills, across which they and their army had stumbled the previous day, harassed by Muslim skirmishers. They had run out of water; men and horses were dropping from heat and exhaustion.

The Franks and Normans of the First Crusade had established Jerusalem and three other Crusader kingdoms in 1099. Since then, the Outremer, as it was known, had attracted all sorts of adventurers, especially lower-ranked nobility like Raynald and Guy. Raynald himself, by a series of marriages and alliances, had wound up as Lord of OutreJordain, controlling castles and trade routes to the southeast of the Dead Sea. He used this position to harass Muslim pilgrim caravans traveling down the Red Sea to Mecca. The summer before, Raynald had helped Guy usurp the throne from a more legitimate claimant. Unsure of himself, Guy spoiled for a decisive battle with the Crusader nemesis, Saladin.

Saladin had his own problems. Born in Tikrit north of Baghdad, he was a Kurdish general serving Nur-ad-din, Sultan of Aleppo and unifier of Muslim Syria. Saladin captured Egypt from the Shiite Fatimid rulers and made himself vizier in 1169. After his boss died in 1174, Saladin marched north, seized his empire and for good measure, married his widow. As a Sunni loyal to the Abbasid Caliph in Baghdad, Saladin became a target for the Assassins, Shiite fanatics—the twelfth-century equivalent of suicide bombers. One of them dropped on him from a tree as he rode underneath. As a Kurd, Saladin could not count on the loyalty of his Turkish and Arabic subordinates. And then there was Raynald, who looted neighbors, violated treaties, and enjoyed tossing victims from the walls of his castle at Kerak. Provoked, Saladin declared jihad on the Crusader kingdoms, promising to behead Raynald if he ever caught him. Given his shaky position, Saladin desperately needed a decisive victory over the Crusaders.

The Crusaders, led by Count Raymond III of Tripoli, relied on heavily fortified castles, and avoided direct confrontation with Saladin, effectively practicing a policy of containment. But on July 2, 1187, Saladin besieged the town of Tiberias. Over Raymond’s objections, Guy and Raynald set out with some 1200 knights and 15,000 foot soldiers on a supposed shortcut over the hills, hoping to surprise Saladin. That’s how they found themselves on the Horns of Hattin, a pair of hills with a ravine between—and no choice but to ride down into Saladin’s waiting army.

It was a massacre. While Raymond and a few of his knights broke through, most were killed. Guy and Raynald were captured and brought before Saladin. Saladin handed a goblet of water to Guy, a token of hospitality that meant his life would be spared. Guy drank part and handed the rest to Raynald. See, said Saladin, I have not offered him water myself. Then he whacked off Raynald’s head before the trembling Guy.

Within three months, Saladin captured Jerusalem and its territories except for the fortified northernmost port of Tyre, controlled by Guy’s rival for the throne, Conrad de Montferrat.

The fall of Jerusalem set off the Third Crusade, led by King Richard Lionheart of England, and King Philip II of France, who hated each other. Richard lingered in Sicily, stopped to capture Cyprus from the Byzantines, and didn’t make it to the Levant until 1191. Meanwhile, Saladin released his secret weapon: Guy. Guy promptly besieged the port of Acre, south of Tyre. While Phillip supported Conrad at Tyre, Richard supported Guy--splitting the Crusaders. Richard captured Acre and fought Saladin to a stalemate; in 1192 they signed a treaty in which Saladin kept Jerusalem but allowed pilgrim access. Before returning to England, Richard sold Cyprus to Guy as a consolation prize.

Horns of Hattin established Saladin as the greatest of all Muslim warrior heroes. And it set the pattern of jihad to recover Muslim lands from foreign infidels.

I send Econamici--occasional emails with interesting attachments or links--to
friends who are economists or care about economic issues. Past Econamici are posted to www.georgiststudies.org. polly@mcleveland.org 

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7/01/2007 10:29:00 PM 0 comments