Monday, June 29, 2015

Global Decentralization and the Rise of Warlord States

This post will be the first in a series of posts (probably consisting of 2-3 posts) about market-states and the mechanisms of market-states, which have embedded in them market states. The topic of this particular post will be about the occurring global decentralization and the shift of the decentralization in the functions and organization of governments or states along with the rise of warlord regimes across the world. It will be split up into five sections:
1. Introduction
2. Basic Organizational Structure
3. Geopolitical Financial Organization of Warlord States
4. Fragility of Regions Controlled by Warlord States
5. Conclusion

Over the past 200-400 years (depending on how you wanna define things), we've had a world that's effectively been industrializing, a world that has through various cycles become more centralized, and we've seen the rise of nation-states. However, this process has effectively come to an end. Across most of the world, centralized governments are ruling ineffectively. Nowhere is this process more obvious than in regions like Arabia, North Africa, Sub-Saharan Africa, and Central Asia. Even in other places like India or even China and the US, we've seen lots of decentralization over the past 20-30 years.

In the poorer regions of the world, this decentralization process (via the incompetence of centralized governments) has effectively led to failed states or soon to be failed states. However, many of these regions like Angola, Nigeria or Iraq do have lots of natural resources while developed countries like the US, much of Europe along with developing countries like China and India have a need to import natural resources to sustain economic production and economic development, whether this production or development is good or bad is another question all together.

Due to the demand for natural resources in the large powers and the luxurious loot that can come from the extraction of natural resources, there has been a rise of institutions in natural resource rich places of the world that allow for the buying and selling of critical economic inputs. This has led to the rise of what I like to call warlord states, where we're seeing the rise of regimes that extract natural resources in one area to sell them to someone else, collect the revenue, and organize some structure to take advantage of power vacuums. In virtually all of these cases, what we have are warlord states embedded as a part of new market-states (there will be a future post on this topic).

Not only are we seeing the rise of warlord states from unofficial governments looking to seize opportunity, but we're seeing it from--for lack of better words--"official" or "internationally recognized" governments. What are these examples of these types of governments? It's governments like Nigeria, Saudi Arabia, Angola, and other similar places. In other words, it's not some nationality that's holding these states together, but the market for natural resources.

Basic Organizational Structure of Warlord States:
There's been a lot of talk about ISIS, Boko Haram, Al Shabaab, and other Islamic Caliphates in other places as places that're primarily driven by religious ideology, but these false assumption leads to erroneous conclusions. These Islamic Caliphates are really just groups of warlord entrepreneurs seizing profit opportunities via:
1. collecting booty and loot
2. extracting natural resources or commodities
3. selling vital economic inputs to economic actors in need of such inputs

These Islamic Caliphates are not rooted in Islamic tradition and care little for Islamic tradition. The role of ideology in the operations of these groups is primarily designed to:
1. garner public support
2. make the initial objective of seizing profit opportunities easier via social structures
3. to gain international support from sympathizers
4. gain financing from sympathizers
5. more technological or physical support (ex. fighting) from international actors, including governments

If we look at the way in which these groups operate, we will see little difference between a group like ISIS, Boko Haram, or Al Shabaab and actual governments like Nigeria or Saudi Arabia. However, these warlord states or official governments are only the representations in the Islamic world. In other similar regions of the world, we see the same patters, although we see different ideologies to make things happen.

In other places like Latin America, we see the same thing happen. Places like Venezuela and Argentina have historically been great for the extraction of natural resources. It seems difficult to notice much of a difference between the structure of Angola, Nigeria, or Venezuela vs ISIS, Boko Haram, or Al Shabaab when we remove the Islamic banner in the latter group. If we use the procedure and logic outlined in this post, we'll see that there really is no difference between these official governments in Africa, Latin America, or the Middle East and the new rise of warlord states.

Geopolitical Financial Organization Structures of Warlord Enterprises:
True to all of the warlord regimes and governments I've listed above, almost all of their revenue comes from natural resources or commodity extraction. Government revenue resulting from rent extraction is critical to the functioning of these states. Due to the fact that most of these states or regimes gain primary financing from rent extraction, the most important thing is to maintain the revenue that comes from the extraction of rent, even though the process is unsustainable.

In order to maintain the revenue, it's common for the leaders at the top to have ties to large companies, multi-national corporations, or similar entities across the globe. For this revenue to be protect, the first objective must be to make sure no one else can extract the natural resources or commodities in question. In other words, these groups must maintain their monopolies at all cost for their very survival. In order to do so, these groups must hierarchical from the top-down.
Note: Not only must these groups have top-down hierarchies, but rebellion at any level of the hierarchy cannot be tolerated because it threatens the necessary hierarchy. These types of systems can be split into roughly three kinds of systems: (1) patronage systems, (2) vertically integrated organizations that function like mafias, or (3) bureaucratic systems involving a military, "regulation", or some form of state monopoly.
1. In patronage systems, the money flows from the top to the bottom. The guys at the top receive the cash flow directly and distribute it to those who have supported them. In patronage systems, the initial cash flow is centralized to the guys running the show, usually by links to multinational corporations or by ties to natural resource producers or whatever the revenue source may be. Examples include countries like Afghanistan
2. In the case of vertical organization, we see money flow from the bottom to the top whereby the guys at the bottom level of the hierarchy extract some form of rent or bribery from the regular populace, tourists, governments, or whatever the cash flow mechanism is. Then, the hierarchical layer above the bottom layer takes a cut from the bottom layer. This mechanism continues up until the guys at the top. A classic example would be a country like Afghanistan.
3. Bureaucratic systems involve systems where the rule of law favors extremely wealthy elites. This can be run via the military to "fund programs" where most of the funding is stolen by the elites. It can also be run via regulatory or tax collection agencies that use regulations to penalize people who don't do what they want.

Another key aspect is that the local populace must be subdued in whatever manner necessary. A society that's in open rebellion to your regime has an obvious threat to your regime. Not only is there an obvious threat to your regime, but it's an all or nothing situation for the guys in running the show. These regimes end up being extremely repressive of all dissent and ruthlessly wipe out anyone who has any idea or thought of speaking against them.

As I've stated before, all of these enterprises get most of their revenue from the taking loot and the extraction of natural resources or commodities. However, it's important to note that taxation is a minor part of these regimes. Due to the fact that taxation is a minor part of these regimes, there is no economic or financial incentive to support the local populace. Instead, the consent of the governed matters little in governance. Unsurprisingly, this leads to poor governance.

Social, Political, Economic, and Financial Impacts of Warlord States:
Due to the fact that most warlord states rely on rent extraction for revenue and basic financing, these states are inherently unsustainable. Why are the economic and financial structures based on rent extraction unsustainable? Economic rent is defined by economic gain stemming from nonproductive activity. In almost all cases of warlord states, the extraction of rent is not only unproductive, but it is usually counterproductive and almost always destructive (I can't think of a counterexample).

These groups destroy capital in all of the cases where they extract revenue, which are:
1. In the extraction of loot or booty, there is no economic productivity that results from it and there's certainly aspects that destroy capital.
2. In the case of the extraction of natural resources, the result is environmental degradation and the resulting social, political, and economic structures that discourage capital formation and actively seek to destroy the creation of capital (ex. killing those who speak out against what's going on, discouraging qualities like intelligence or education among the populace, etc.)
3. The selling of vital economic inputs to other countries strengthens the financial ties of political actors, increases the geopolitical presence and power of warlord states, and creates international structures that undermine shifts in global incentive structures to create substantial shifts

It becomes important to notice that these warlord states do provide temporary political (pseudo-)stability in some regions by creating monopolies of violence and by violently putting down anyone who threatens their monopoly on violence. It can be argued (usually by those who benefit from warlord states) that these groups do some good by providing "stability", but this is a wrong statement.

The social, political, and economic impacts of these groups are entirely negative in every sense of the word. These groups, in every single case, destroy social, political, and economic capital of the regions they take. They make seem to be providing more "stability", but reduce the ability of these places adapt to future shocks by destroying necessary capital.

It's also important to note that the "stability" provided by these groups isn't actually stability. What they're doing effectively amounts to volatility suppression, whereby any sort of social, political, economic, or financial fluctuations are ruthlessly suppressed because of geopolitical financial incentive structures. Since there are no fluctuations that appear on the surface it appears to most people that the system is stable. However, the lack of fluctuations are a sign of weakness, not a sign of strength.

Everything in the world survives according to one principle: adapt or die. There is only one guarantee: change will happen. In these warlord states, change is not constantly occurring in small, regular intervals (as it does in capitalist republican institutions). So when the change occurs, the changes are sudden, drastic, large, and appear as tail events. In other words, the "stability", or pseudo-stability, provided by warlord states guarantees large blowups with virtually unbounded negative consequences. On top of this, the timing of these blowups is not only unpredictable, but the less often and less likely the blowup, the disproportionately large the consequences.

Fragility of Regions Controlled by Warlord States:
In times of large spikes or collapses in commodity prices or natural resources, these regions become even more sensitive to underlying shocks (whether internal or external). In other words, places controlled by warlord states become much more fragile under periods of high international geopolitical or financial volatility. The chances and costs of a rapid, discontinuous dislocation becomes far more likely.

In periods of high commodity prices, these regions become subject to larger geopolitical pressures and these regions become more valuable. Functional countries, governments, and multinational corporations view these regions as places of opportunity when commodity prices are high. These states become more likely to come under empires or quasi-empires while violence is more likely to break out over locations of natural resource or commodity extraction, over supply lines, over trade routes, and other areas I'm not thinking of.

In periods of low commodity prices, the revenue for warlord states collapses. Financing basic projects of infrastructure or providing social services to prevent populist uprisings becomes far more expensive. Using patronage to bribe or pay those lower in the hierarchy becomes far more expensive and costly. Debt can become heavily used, usually out of necessity, to preserve the regime under these periods of stress.

Basically, any sort of "unpredictable event" makes rapid dislocations in regions controlled by, or heavily influenced by, warlord states extremely likely. Usually, this event is a major geopolitical crisis, financial crisis, or a sudden collapse in commodity prices, but it could be other events as well. Any way you put it, these regimes are extremely fragile and rely on nothing going wrong all the time to sustain themselves. As volatility increases or the size of a shock rises, the harm from a further increase in volatility increases at a faster rate.

Due to the shifts occurring in the world, we're seeing a radical decentralization that is absolutely necessary (some say China is centralizing, but China is decentralizing economically and financially although Xi Jingping is centralizing power politically). While this decentralization removes some risks, it creates others, including opportunities for certain profit seekers in areas with access to rent income, natural resource extraction, and/or in places with power vacuums.

Eventually, we've started to see the rise of warlord entrepreneurs come in to seize these profit opportunities. This can come as "official" or "internationally recognized" governments, but they've started to show up as criminal enterprises, "terrorist organizations", or other similar regimes. These regimes operate as ways to effectively extract rent and end up destroying capital, which makes them horrible at actually governing. These warlord regimes are effectively failed states, whether they're actual governments or not.

Due to the basis and organizational structure of the regimes along with the international basis that allow these regimes to exist, these places become highly fragile where small shifts can end up with massacres or famines. We could end up seeing large population corrections in these areas along with unprecedented levels of environmental degradation that creates environmental risks.

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