Links provide access to full documents over at Wikileaks:

September 30, 2008

Under the agreement, the Government will
purchase 75 percent of Glitnir at roughly $878 million.  This is the
first significant government intervention in the Icelandic economy
during the recent crisis and comes after a week of harsh criticism
for perceived inaction -- in particular, for not managing to include
Iceland in the 24 September exchange agreement between the U.S.
Federal Reserve and the central banks of the other Nordic countries
and Australia. 

October 8, 2008

Sturla Palsson, Director for International Affairs and Markets
at the Icelandic Central Bank told EconOff that the 4 billion Euro
loan offered by the Russians is 95 percent certain to happen.
October 8, 2010
The Icelandic economic crisis continues with no end
in sight.  The possibility of a Russian loan bailout as well as
concerns voiced by some American bankers raise the question of
whether greater USG involvement in the crisis is merited.

The U.S. has strategic interests in the high north and a
sturdy security relationship with post-Keflavik Iceland that both
sides have labored to develop.  Today the Embassy urged senior reps
in the PM's office and elsewhere to at least explore what
confidence-building cooperation (other than the credit swaps the Fed
turned down) may be possible to develop.  We doubt that it would be
in the interest of the U.S. or NATO for the Icelanders to be beholden
to Russia, however "friendly" the loan terms may be. 
October 9, 2008
The Russian loan is still part of Iceland's plan.  Prime
Minister Haarde said last night that the loans from the IMF and
Russia "are not mutually exclusive" though the government had not
asked IMF for a standby loan or an economic program.  He repeated
that statement in a press conference today.  Questions about the
influence the loan might give Russia continue to be met by assertions
that finances and foreign policy can and will be kept separate. 

6. (C) Minister of Finance Arni Mathiesen travels to Washington
tonight for World Bank meetings.  Post persuaded the Minister to
agree to meet with senior Treasury officials while in the U.S.
Mathiesen will meet with Treasury A/S Clay Lowery on October 10.  We
would hope this meeting will help the Icelanders think their way
through the present crisis and move from a stopgap reactive approach
to a durable comprehensive plan.  It should also make clear to them
how the U.S. can and cannot be of assistance and point them in the
direction of other options.
October 10, 2008
Two Icelandic bankers met with Econoff today to emphasize that
the Icelandic authorities have chosen the wrong path out of this
crisis and appealed for Washington to provide guidance to the GOI.
The bankers shared a graph that showed of the 11 billion euro
Landsbanki debt, 31 percent belonged to the U.S. and Canada.  They
emphasized that Landsbanki had the smallest foreign debt of the three
banks in Iceland and that American investors will lose billions.
They outlined a plan emphasizing the importance of bringing the
creditors to the table, getting the IMF involved and finding a
resolution through a multilateral approach.  They stressed the need
for the U.S. to become involved both to encourage the Icelandic
authorities to "be rational and swallow their pride" and for the U.S.
to build consensus within the IMF to allow Iceland access to the
supplemental reserve facility such as Korea, Turkey and Russia have
used in the past.  They believe that the IMF stamp of approval will
help bring creditors to the table and what is needed the most is a
coordinated multilateral approach.
October 20, 2008
Sturla Palsson, Director of International Affairs and Markets
at the Icelandic Central Bank and leader of the recent Icelandic
delegation to Moscow to negotiate a 4 billion Euro loan from Russia,
told Econoff that the Russian loan was still very much on the table
and that both sides are keeping in telephone and email contact.
Palsson said the two sides might meet possibly this week, and thought
that the loan could be finalized by Friday.  He said before the
Icelandic delegation left for Moscow, they had been told by the
Russian Ambassador to Iceland that the Russian Prime Minister had
signed off on the loan.  The discussions in Moscow centered around
details such as whether the money would be given as a bond or loan,
and what the maturity dates would be, etc.  The loan would be coming
from the Russian Development Agency.  Palsson said that Iceland is
considering IMF assistance and that initially the Russians had been
against Iceland involving the IMF "because of the Russians' own
negative experience with the IMF in 1997." 
Comment: Icelanders are aware that a loan from the Russians
may have implications.  The fact that they are proceeding anyway is
an indication of the seriousness of the financial situation here.
October 30, 2008
SUBJECT: ICELAND'S REQUEST FOR A LOAN:  WHAT'S IN IT FOR US
1.(C) The brutally sudden collapse of the Icelandic banking system
earlier this month threatens severe economic hardship for the
citizens of this import-dependent economy.  The government has
reached a tentative agreement with the IMF for a USD 2.1 billion
loan, but must raise an additional USD 4 billion from other sources
to conclude the arrangement.  They have asked us to join what they
hope will be a consortium of lending countries by providing USD 1
billion.  Despite the obvious hurdles - Iceland's status as a
developed European economy, the extent of its need, our own limited
resources - this request deserves the most careful consideration: we
have long-term national interests in the North Atlantic that a
negative response would jeopardize.  These include: 

2.(C)Iceland's strategic importance to U.S. security.  Iceland has
hosted an important American military outpost since World War II.
During the years before we redeployed our forces in 2006, the U.S.
poured a quarter of a billion dollars annually into our base at
Keflavik.  We turned the base over to Iceland's custody in September
2006, handing over responsibility to Iceland as NATO host nation for
maintaining the airport and long-range radar installations on behalf
of the alliance.  In the subsequent two years, the Icelanders have
provided outstanding support to two large multination NATO exercises,
two U.S. naval visits, and several deployments of NATO air policing.
French, Norwegian, and U.S. fighters have shadowed Russian bombers
and fighter planes from Keflavik.  Because the Icelandic government
has maintained the facilities at top-notch operational standards, the
base is immediately usable should circumstances warrant.  A nation
crushed by economic depression cannot be the self-sufficient partner
we have spent decades and huge amounts of U.S. taxpayer dollars to
develop. 

3.(C)A well-positioned friend in the High North.  If the U.S. doesn't
help out Iceland when it is flattened by the worst financial crisis
in its history, we shouldn't expect the country to see it our way
when we ask - as we undoubtedly will -- for cooperation in furthering
our own security and economic aims in this increasingly vital region. 
 The NATO conference that Iceland is hosting to discuss High North
issues this coming January underlines the uncertain implications of
the environmental changes occurring in Iceland's North Atlantic
neighborhood.  The melting Arctic ice means new trade routes and
increased competition for gas, petroleum, and other resources.  The
Russians - who are discussing a loan with the Icelanders - have
already signaled their interest in exploring and exploiting Iceland's
potential undersea oil and gas fields.  The Chinese - whom the
Icelanders are also approaching for a loan - will be big users of the
new sea lanes. Iceland may be small but it is valuable real estate in
a region that will only become more important to our economic welfare
and our national security.  We want a firm friend and a stable ally. 

4. (C) Clean energy partner and economic investment. Iceland is a
world leader in renewable energy and stands to play a significant
role in U.S. efforts to become energy independent.  They have
know-how and enterprise and their experience in harnessing
geo-thermal energy is second to none.  American firms are
capitalizing on Iceland's abundant clean energy and technical
expertise by investing close to USD 4 billion in the aluminum sector
here.  We want Iceland to be in a position to attract foreign
investment and continue to develop its energy sector outreach.  A
bankrupt economy would set our partnership back for years just when
we need Iceland's technical skills and entrepreneurial drive most. 

5.(C) Iceland is reaching out with increasing desperation to any
available source of help as it confronts one of the most trying
crises in its history. Assistance from the U.S. at this crucial time
would be a prudent investment in our own national security and
economic well being.  The Icelanders take fierce pride in their
flawless history of paying back their debt. Whatever the financial
turmoil and uncertainty of the moment, it's a good bet that this
economy of highly-educated, imaginative, and sophisticated people
will take off again.  And when it does, and when the competition in
the High North really gets underway, it may be more important than we
can yet suppose to have the Icelanders remember us as the kind of
friend who stands by in fair weather and foul. 

November 10, 2008
1.  (C/NF) Summary:  Public support for Iceland's government has
fallen below 50 percent in the wake of the financial crisis here, and
cracks are beginning to widen between the two coalition parties as
weekly demonstrations grow in size and fervor.  PM Haarde's
Independence Party (IP) has taken the brunt of criticism for the
failed economy, while Foreign Minister Gisladottir's Social
Democratic Alliance is polling higher than its election results last
year.  In the short term, a lack of viable (i.e., pro-EU) partners
and Gisladottir's good relationship with Haarde will likely keep the
FM from breaking up the coalition in the hope of new elections.
However, Gisladottir has said publicly she is pushing within the
cabinet for Iceland to explore EU membership, and polls show a
majority of the public agree with her.  Securing a $6 billion package
of IMF and bilateral financing will buy the government some time, but
if Haarde cannot convince his party to go along with exploring EU
membership we could see early elections called for the first time
since the 1960s.  Some form of reshuffle is almost inevitable,
however -- Haarde will not be able to answer the growing pro-EU group
in his party without lots of blood on the floor and the rousting of
several old IP chieftans (including the Minister of Justice and
Central Bank Chairman David Oddsson).  End Summary. 

2.  (SBU) Following the economic disaster of October and the collapse
of the country's banking sector, the government continues to take a
beating in the polls.  Public support for the government fell to 46
percent by the end of October, down 30 points from the beginning of
the year.  While support for the Social Democratic Alliance (the
junior coalition partner) has held steady or increased slightly,
Prime Minister Haarde's Independence Party (IP) has been hammered.
The IP, after nearly two continuous decades as Iceland's largest
political party, is now third behind the SDA and the opposition
Left-Greens, pulling only 22 percent in the polls.  The opposition
parties and a growing portion of the electorate are now calling for
elections before the current term ends in 2011.  A poll at the end of
October showed 60 percent support for early elections, and the
Chairman of the Left-Greens showed up at the Embassy's Election Night
event gleefully working the room with that encouraging datum.
Demonstrations calling for -- among other things -- a new government
continue to grow, with the latest protest on November 8 drawing over
3000 participants. 

3.  (C) That the public blames the IP specifically for the economic
crisis is no coincidence -- the Prime Minister and Minister of
Finance are both from the party, and the IP's 2007 campaign was based
on the notion that only the Independence Party could be counted on to
maintain Iceland's then-world-beating prosperity and quality of life. 
 More significantly, many domestic and international observers blame
former PM and Grand Old Man of the Independence Party David Oddsson
for Iceland's stunning loss of credibility in the financial world.
Oddsson has served as the highly controversial Chairman of the
Central Bank since 2005.  He made a number of ill-considered
statements to the media early in the crisis, and many suspect it was
at least partially due to his wounded pride that Iceland did not
immediately seek IMF assistance.  Haarde's apparent inability to
"control" or remove his predecessor as IP Chair has led many to blame
the Independence Party for the continuing economic bad news. 

4.  (C/NF) Indeed, Haarde missed a key opportunity to gain political
support by not replacing Oddsson early in the crisis.  Even among IP
stalwarts, Oddsson's standing has never been lower, with the party's
younger, more business-oriented members asserting to Emboffs and
journalists that it was time for Oddsson --rabidly anti-EU membership
for Iceland -- to finally exit the stage.  Only Haarde has the
authority to replace the Central Bank Chair, and speculation around
town is that the PM has not pulled the trigger thus far out of a deep
sense of personal loyalty to his old mentor.  The result is that
demonstrators now excoriate Haarde as well as Oddsson, the initial
target of public ire.  While Oddsson remains in the picture, it will
be almost impossible for Haarde to start his party and his country
moving towards the EU. 

5.  (C) Other IP members, however, are proving much more open to EU
membership, and are finding support from those who previously stayed
out of the debate.  IP Vice Chair and Minister of Education
Thorgerdur Katrin Gunnarsdottir, though cautioning that she was not
making any sort of leadership challenge, said in a highly publicized
late October interview that the her party had always pledged to take
the most pragmatic stand on EU membership in terms of what was best
for Iceland's interests.  Given that both the global and domestic
economic situation has changed so dramatically in recent months,
Gunnarsdottir continued, it is only logical that the IP reexamine its
stand.  Bjarni Benediktsson, Chair of the Althingi Foreign Affairs
Committee, quickly echoed this argument.  PolOff has heard separately
from IP sources that Benediktsson sees the party's old guard as
standing in the way of not only serious consideration of EU
membership for Iceland, but also Benediktsson's personal ambitions of
a cabinet post. 

6.  (C/NF) Foreign Minister Gisladottir's Social Democratic Alliance
(SDA), however, has become increasingly strident in its calls for
serious exploration of EU membership as well as the dismissal of
Central Bank Chair Oddsson.  Gisladottir said in a press interview
that she is pressing Haarde for a new policy on the EU, and other SDA
ministers have been equally active on this front.  However, to our
knowledge, she has not made the leap to a push for early elections,
though her party would be likely to benefit.  There may be a
practical explanation here, as Gisladottir's recovery from brain
surgery in September has kept her away from work for much of the
tumultuous fall.  Some here also credit her personal relationship
with the Prime Minister as a brake on a move to change the coalition.
 The two party heads have developed an unexpectedly close and
collaborative working relationship and clearly both like and respect
each other. Gisladottir may view Haarde as a useful ally in the
future should she be able to convince him to reexamine the EU
question. 

7.  (C/NF) Most probable, however, is the explanation that
Gisladottir simply does not see a viable alternative to the IP as a
coalition partner at the moment.  The Progressive Party -- Iceland's
only other pro-EU party -- has seen only marginal gains over the last
month, and would in all likelihood still be too small to form a
two-party coalition with the SDA.  The Liberal Party is even smaller,
leaving only the Left-Green Movement.  Although the Left-Greens have
polled significantly higher of late, they still do not endorse EU
membership for Iceland.  Gisladottir seems unwilling to go into
coalition with yet another party that is against joining the EU.
However, as with the IP, the Left-Greens are locked in an internal
struggle over their EU policy; the party's Vice Chair told PolOff
over the summer that she was sympathetic to the growing pro-EU wing
of the party and that she expected a reevaluation of the party's EU
policy by the end of 2008.  This dynamic may be what FM Gisladottir
meant in an interview when she said early elections would be a
distraction to the government now, "but then a new year is coming,
and people will have to assess the situation then." 

COMMENT
------- 

¶8.  (C/NF) In the short term, the Icelandic Government desperately
needs to finalize the $6 billion loan package with the IMF and other
bilateral donors.  If the IMF loan fails to come through, the
government will lose what little remaining credibility it has on the
economic front and may very well find it impossible to stay on.
Despite the protests and the speculation around town, however, we
note that there is little tradition here of disgraced politicians or
governments -- even those convicted of crimes -- resigning from their
posts.  Early elections have not been invoked since the 1960s, and
then only because a three-party coalition dissolved and no
replacement could be created.  No-confidence votes are virtually
unheard of. 

9.  (C/NF) If the IMF loan comes through, a likely scenario is that
after the new year SDA Chair Gisladottir and a group led by IP Vice
Chair Gunnarsdottir present the Prime Minister with their own
ultimatums, both calling for a serious look at EU membership, and
explicitly (SDA) or implicitly (IP) calling for Oddsson's removal.
In any event, a cabinet reshuffle -- either to give the SDA more
power over economic policymaking, to sweep out the IP old guard, or
both -- seems inevitable once the fate of the IMF loan is clear.

Related posts:

1. Situation in Iceland – The Fourfold Dilemma
2. Ross Beaty’s Perilous Situation
3. The Icelandic Situation Now

Times are changing in the world of development assistance. Agents and institutions with their roots in Western liberal democracy have traditionally lead the way in global development , but nations  of emerging market economies are now playing a larger role than hitherto.  Brazil, Korea, Venezuela and Saudi Arabia are amongst those countries who have increased their aid to poorer countries. But it is China’s approach which has really ruffled some feathers in established aid circles. With eminent change in global power structures, are the poorest countries in the world stuck between a world order dominated by the United States and its Western democratic allies and one where wealth and influence originates from various power centers with diverse emphasis on values and human rights?

The IMF estimates that Sub Saharan Africa’s economies will expand 4.3% in 2010 and 5.5% in 2011, more than 1% higher than the global average.[1] Are China and other emerging market economies positioning themselves as the preferred trading partners of upcoming economies? Or are there bigger interests at stake? If so what does it mean for traditional donors and traditional approaches in aid?

A realist approach to aid

The concept of foreign aid emerged in the aftermath of World War II. In the 1949 inaugural adress, United States president Harry S. Truman claimed it was necessary for governments to provide poor nations with development assistance[2]. Although previous examples of development aid had included British aid to colonies, the Marshall plan to restore Europe was unprecedented in size and scope as American leaders had to justify spending billions of their taxpayers‘ money abroad.

Influenced by economist John Maynard Keynes‘ damning verdict of the horrible effects of the Treaty of Versailles in Germany after World War I, the plan was aptly named the European Recovery Program. Its aim was to stabilize Europe  to create strong allies for the US at the doorstep of the Soviet Union.  This was also the time when international institutions like the United Nations, International Monetary Fund and the World Bank saw the light of day.

Those institutions were quickly and have remained since under US dominated Western influence  and have shaped the dominant theories and policies of foreign aid. But while some consider foreign aid to be part and parcel of Western liberal democracy politics, one does not have to dig deep to find realpolitik beneath the surface. In 1962 realist Hans Morgenthau claimed that “It is in fact pointless to even raise the question whether the United States ought to have a policy of foreign aid. For the United States has interests abroad which cannot be secured by military means and for the support of which the traditional methods of diplomacy are only in part appropriate.”[3]

Morgenthau said that the United States had not put together a coherent strategy for foreign aid and suggested that the motives behind such a plan had to be of benefit to the donor as much as the recipient. According to him it follows from the political nature of foreign aid that it is not a science but an art which requires a political sensitivity to the interrelationship amongst the facts, present and future, the ends and means. Morgenthau wanted the US to ask itself questions like whether the receiving country would be likely to exchange political advantages for economic favors or whether the military interests of the US would be served by assisting other countries’ militaries through foreign aid?[4] This was particularly important during the Cold War when alliances could be formed and loyalty won through foreign aid and nations were clearly defined by associations with the East or the West.

With the advance of libertarian politicians such as Ronald Reagan in the United States and Margareth Thatcher in the United Kingdom in the seventies and eighties, dominant policies in foreign aid moved towards a mantra of “stabilizing, privatizing and liberalizing”. According to John Williamson who coined the phrase The Washington Consensus it became “the conventional wisdom of the day among the economically influential bits of Washington, meaning US government and the international financial institutions”.[5] Williamson maintained in 1993 that the superior economic performance displayed by the countries which followed these disciplines offered proof that was was sufficciently well established, albeit not as conclusive as that the Earth is not flat, that sensible people should find better things to do than challenge their veracity.[6]

Williamson’s musings coincided with the late eighties and early nineties, the timeperiod US historian Francis Fukuyama labelled the “end of history”. “What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history of such, that is the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.”[7] Fukuyama’s assertion captured the euphoria of Western powers at the fall of the Soviet Union and communism in Eastern and Central Europe. The ideological battle of the 20^th century was deemed to be over, and some hyperbole could be forgiven on the winning side.

In reality the consensus turned out to have its fair share of problems. Latin American nations followed the advice of the World Bank and the IMF better than other parts of the developing world. Nations in the Sub-Saharan Africa towed along hesitantly as markets were freed and trade liberalized. But growth remained by most parts elusive and success stories were few and far between. Worse still was the depth of the “transition crisis” experienced by former socialist nations which wasted no time in following the lead of the Western institutions. Joseph Stiglitz described the desperate state of post-communist Russia in the 1990’s in his book Globalization and its discontents and observed similar failures in the economic crisis of South East Asia late in the decade[8].

As early as 1998, Stiglitz who received a Nobel Prize in economics for his work on information assymetry maintained that the three pillars of the Washington Consensus were all important for markets to work well but that the policies advanced by it are incomplete and in some cases misguided. Efficient markets require sound regulation, competition policy and policies to transfer technology and encourage transparency, all issues irrevelant to the consensus. Stiglitz claimed that the understanding of well-functioning markets had improved and that included the importance of sustainable, egalitarian and democratic development.[9]

In the post-Cold War era, the United States credited a unipolar system with the greater efficiency of its policies abroad. The absence of a rival increased the coercive power its economic influence attempts.[10]

But in the first decade of the new century, merely a decade since the proclamation of the “end of history”, even John Williamson did not believe in the Washington Consensus anymore and joined the world’s foremost economists and thinkers on development in seeking its possible replacements.[11] Suggestions were made for increased attention to strenghtening international and national institutions and forty years after Morgenthau called for a cohesive strategy to foreign aid, the international community repeated the call. Different approaches were tested, such as the debt relief initiative heralded by the Jubilee 2000 campaign and forwarded by the HIPC initiative. Some advances have been made in development as is evident by the raising of living standards in several South East Asian countries and the rise of the BRIC[12] nations from definite third world status to emerging economic powers. Yet most experts agree that the slow progress of the Sub-Saharan countries and parts of Latin America indicates that Western foreign aid has not delivered on its promises to eradicate poverty in its most abject forms. Meanwhile the global economic crisis and its aftermath suggests that change might be coming to the international power structure which has survived since World War II. The United States, having gotten used to a unipolar system, now has several rivals, including one with power potential unknown since the demise of the Soviet Union.

China in Africa

The current picture is vivid and it is broadcast across the world which is conflicted on how to react. Chinese contractors and workers ascend on Africa en masse to build railroads, bridges and dams where Western donors hesitate to tread. Venezuela under socialist president Hugo Chavez rivals the United States in providing aid to Central American and Caribbean nations[13]. Hit with its worst financial crisis ever, even the developed nation of Iceland hesitantly turns towards the IMF, but seriously ponders help from Russia[14] and finds China the most eager to engage in currency swap deals with its damaged krona.[15] The reaction is mixed, from praising the emerging donors’ efficiency where the established ones have produced scant results to a suspicion of the aid carrying a toxic tang.  While development aid from the DAC[16] nations rose in 2009 and most appear set to meet their targets for 2010[17] Europe and the United States struggle with the aftermath of the global financial crisis and its effects in their own backyards.

For the sake of brevity this paper will focus on the issue on most minds, China’s involvement in Africa. While Brazilian, Indian, Russian, Venezuelan and Arab initiatives deserve attention, the sheer size and scope of Chinese investment in Africa has the potential for altering the world as we know it. Chinese interests in the continent range from copper mines in Zambia to iron ores in Gabon and oil refineries in Angola as well as trading and investment in nations with fewer natural resources.  Insisting that they do not intend to dominate Africa, Chinese companies say they come for profits instead of top down aid projects. “China consistently respects and supports African countries,” says Yan Xiao Gang, economic attache to Ethiopia. “It never imposes its own will on African countries, nor interferes in the domestic affairs of African countries”.[18]

Yet that is exactly where the established aid community pauses for concern. Western development aid has traditionally had conditions attached to it, whether it is DAC supported debt relief or mulitlateral assistance prescribed through the Washington Consensus by international organizations. The history of bilateral aid is similarly littered with special favors. “China is not the first country to rely on aid as a tool to advance its interests abroad”, says Moises Naim the editor in chief at Foreign Policy magazine.  “The Soviet Union and the United States spent decades giving “development aid” to dictators in exchange for their allegiance. Even today, American largesse to Egypt and Pakistan is rooted in geopolitical calculations”[19]. An interesting study on the United Nations’ Security Council by Ilyana Kuziemko and Eric Werker of Harvard University revealed that “a country’s U.S. aid increases by 59 percent and its U.N. aid by 8 percent when it rotates onto the council. This effect increases during years in which key diplomatic events take place (when members’ votes should be especially valuable).”[20]

Development aid appears a realists game. Naim claims Chinese development aid is toxic[21]. He recalls a story from Nigeria where the World Bank lost out on a major railway clean-up project when the Chinese government rolled in and offered an immense deal to rebuild the whole railway. The difference appeared to be that while the World Bank negotiated its terms they included tackling Nigeria’s rampant corruption. To China, that was a non-issue. The Asian Development Bank is facing the same situation, losing out on projects in the Philippines because of the no strings attached approach by the Chinese government[22]. An authoritarian government has fewer qualms dealing with such regimes, while Western democracy in theory demands transparancy and greater observance of human rights and eschews corruption.

Oxford professor of international political economy, Ngaire Woods explains that the established multilateral system is not laden with enough incentives for emerging donors to participate as their influence is minimal to be worth it. Not having been members of the G7/G8 and OECD’s DAC and with Cold War power alignment still prevelaint at the IMF and the World Bank excludes the recently emerging economies from active participation. Additionally “the development assistance offered by established donors has become less generous and less attractive (on its own terms), while emerging donors’ aid has become more generous and more attractive. Since the 1980s most established donor aid has failed to address developing countries’ demand for aid and investment which expands the productive parts of poor countries’ economies. Recent trends seem only to have increased donor deafness to this call”.[23] China’s willingness to engage in business with Sudan and Zimbabwe certainly creates goodwill towards Bejing in those nations. But recalling Morgenthau’s assertions of donor interests guiding foreign aid, goodwill is most likely not the main motivating factor behind China’s foreign aid policy.

Moises Naim sums China’s intent up in three short answers: money, access to raw materials and international politics[24]. While much of the developed world is faced with massive sovereign and private sector debt following the global financial crisis, China sits atop foreign reserves which have grown from $1.1 trillion in 2007 to $2.4 trillion in 2010[25].  It has the money and foresight to invest in the future where natural resources will be the ultimate source of power globally.

Conclusion – stuck in between

The United States is responsible for 21.7% of the world petroleum consumption, the most of any nation while China comes second with 10.4%. It is therefore important to note that in 2009, oil consumption in the US receded by 4.9% while most European nations dramatically cut theirs as well. That same year, China’s annual oil consumption grew by 6.8%.[26]

China’s emergence in Africa is no coincidence and as much based on realist self interest as it is at the forefront of a worldwide investment of tens of billions of dollars which has gone into tapping the continent’s natural resources, especially oil, minerals and basic infrastructure such as internet and cell phone service. [27] China is not alone in this, European and US businesses have been scouring Africa for decades, but the dominant powers of the 20^th century are still trying to find their new voice after the end of history and the death of the Washington Consensus and attempting to do so through increased liberal mulitlateral cooperation (European Union, DAC for example).

China on the other hand can and does go it alone without having  to ask anyone’s permission, least not its own citizens through democratic process.  Small wonder that academics, journalists and pundits line up to declare that the new century will belong to China the way that the 18^th and 19^th centuries belonged to Britain and the 20^th to the United States in their ability to shape the world.  “What is the prospect for the dollar? That depends on China. The euro? China. The oil price? China. Industrial commodities? China. Global equity markets? China. Bond prices? China. World trade? China. World growth? China.”[28]

A Chinese century succeeding an American one has serious implications for development. Those who have the ability to shape the world we live in, have the power to reshape it into something different. Naim sounds a warning about the implication of undemocratic emerging economies pushing responsible and well meaning aid organizations from where they are most needed.  He maintains that Rogue aid providers could not care less about the long-term well-being of the population of the countries they aid. [29] Ngaire Woods suggests that hitherto dominant Western nations must change the existing system.[30] By not bringing the emerging nations into the fold and increase their voice and a seat at the table at the most important international institutions they risk losing cooperation with them in risky times.  Extension of the G7 up to G20 might be viewed as a credible attempt.

Harvard professor Alberto Alesina and the World Bank’s David Dollar found considerable evidence that “the direction of foreign aid is dictated as much by political and strategic considerations as by the economic needs and policy performance of the recipients”.[31] Currently the prospects of Sub-Saharan Africa’s development might just be stuck between the 20^th century and the 21^st, between the United States and China, between history.

[2] Riddell, Roger C: “Does Foreign Aid Really Work?“ Oxford University Press. Oxford. 2007

[3] Morgenthau, Hans: “A Political Theory of Foreign Aid“. The American Political Science Review, Vol. 56, No.2. June, 1962. Page. 301.

[4] Same source. Pages 308-309.

[5] Williamson, John: “Development and the “Washington Consensus”. World Development. Vol 21.1993. Page. 1329.

[6] Same source: Page 1330.

[7] Fukuyama, Francis: The End of History and the Last Man. Penguin. 1992.

[8] Stiglitz, Joseph: Globalization and its discontents. WW Norton. New York. 2002.

[9] Stiglitz, Joseph: More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus. The World Bank Group. A speech given in Helsinki, Finland, January 7, 1988.

[10] Collins, Stephen D: The Emerging Pluralism of Economic Statecraft and its Impact on American Foreign Policy. Paper Presented at the 2007 Annual Meeting of the International Studies Association, Chicago, IL, Feb. 28 – March 3, 2007.

[11] Kuczynski, Pedro-Paul, and John Williamson, eds., After the Washington Consensus: Restarting

Growth and Reform in Latin America, Washington, DC, Institute for International Economics,

2003.

[12] BRIC: A common description of the economic emergence of Brazil, Russia, India and China.

[13] Ellsworth, Brian: “Venezuela rivals U.S. in Central America, Caribbean.” Reuters.com. September 2, 2008.

[14] Rozhnov, Konstantin: “Russia’s role in rescuing Iceland.” BBC.com. November 13, 2008.

[15] Ward, Andrew: “Iceland secures currency swap deal“. Financial Times Online. June 9, 2010.

[16] DAC: The OECD‘s Development Assistance Committee

[17] OECD: “Development aid rose in 2009 and most donors will meet 2010 aid targets“. OECD.org. April 14, 2010.

[18] Blenford, Adam: “China in Africa: Developing ties”. BBC.com. November 26, 2007.

[19] Naim, Moises: “Rogue Aid“. Foreign Policy. March/April 2007.

[20] Kuziemko, Ilyana and Werker, Eric: “How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations.” Journal of Political Economy. Vol. 114. No. 5. 2006.

[21] Naim, Moises: Same source

[22] Naim, Moises: Same source.

[23] Woods, Ngaire: “Whose aid? Whose influence? China, emerging donors and the silent revolution in development assistance”. International Affairs. 84:6. 2008.

[24] Naim, Moises: Same source.

[25] State Administration of Foreign Exchange: “Monthly Foreign Exchange Reserves 2010“ SAFE.gov.cn. 2010.

[26] BP: Statistical Review of World Energy 2010. Excel document available at http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622.

[27] Delevigne, Lawrence: “The Joy Of Doing Business In Africa: How Senegalese Politicians Tried To Shake Down Millicom For $200 million.” Business Insider.com. February 4, 2010.

[28] Rees-Mogg, William: “This is the Chinese century“. Times Online. January 3, 2005.

[29] Naim, Moises: Same source

[30] Woods, Ngaire: Same source. Page 17.

[31] Alesina, Alberto and Dollar, David: “Who Gives Foreign Aid to Whom and Why?“ Journal of Economic Growth. 5: 33-63. March 2000.

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A comment from this post expressed wonder at the current situation in Iceland. Somehow many people expected things to be much worse for the general population by now. People are still going to coffee shops even if the latte is approaching the price of a pre-crash beer, there are still suspiciously many black Range Rovers in Reykjavik for a municipality outside Moscow and the homeless population still appears to find warm places to sleep. Children are going to school, playing football and teenagers are buying designer jeans for the pre-crash price of a banker’s suit.

So why do we need the EU? Isn’t everything running smooth in the state of Iceland without those pesky foreigners who apparently want our money and resources?

Peek below the surface and you might find ominous signs. More than 1.000 electricians have left Iceland for employment abroad. Most of the construction business has been wiped out. The largest construction firms which have been able to cut their staff by half and have had jobs until now are facing an alarming shortage of work as winter approaches. The financial sector is hopelessly overblown with perhaps up to 30% of the current staff basically there on an employment program. Wait for them to lose their jobs and see the effects it will have but it is estimated that each job lost in the financial sector leads to 6-7 jobs lost in other sectors.  The household debt has not gone anywhere either and while some might see relief in inflation above 5-6% it still contributes to suffocating increases in debt. Wages have gone down and so has the purchasing power. Icelandic households are playing the role of Indiana Jones running madly for the decreasing gap in the sliding door, hoping to be able to jump through with their hat before it locks them in the darkness.

It takes time for the full blown effects of an economic collapse to be realised. And things might be so much worse…were it not for the nations of the EU and the big, bad IMF.

A few things done by the government in the event of the collapse actually prevented a much greater crisis. One was the emergency law separating the banks local debts from the foreign debts and leave the foreigners hanging while guaranteeing all deposits in Iceland. This has lead to the tedious IceSave saga but it could have been so much worse for the Icelandic public if the emergency law had not been enacted. Another thing the government did was seek the help of the IMF, a great source of shame as it was the first for a “western democracy” in more than thirty years. And severe currency restrictions were implemented, allowing the Central Bank to build up its currency reserves and maintain a false exchange rate for the ISK. If you think 150 for the Euro is bad then imagine what it would be without the restrictions. Icelandic households and businesses would be cast into an eternal darkness of debt and the state’s foreign debt would rise to the levels of full-blown national bankruptcy.

But why the ignominy of the IMF? Why not borrow directly our friends in the States, the Nordics, the EU? Well, they were approached by the Icelandic government and Central Bank in 2007-2008 without any success. It basically means that the nations we consider friends did not trust the Icelandic political elite to wind down the problems without the oversight, checks and balances of the IMF.

That opens the doors to all sorts of conspiracy theories. Isn’t the IMF and other nations just after Iceland’s natural resources? Yes, the IMF still has some left-overs ideologies of the Washington Consensus, and its record in different areas of the world is worthy of all the criticism it deserves. But it did not need to come to Iceland. It was the Icelandic government which asked for its help after burning all other bridges to safety. And the fund is very adamant about the fact that it is here as an advisor. It is up to the Icelandic government to follow its advice. And when Steingrimur J. Sigfusson listens to the IMF then you know that other possibilities have probably been exhausted.

Let’s recap. The IMF is in Iceland because the nation’s democratically elected government asked for its help.

Without the IMF, Iceland would be closer to the I am legend economic landscape some were expecting in 2008. But such a disaster has been averted by its presence and the conditional loans it has facilitated from the very nations accused of evil intentions by those who prefer playing victims instead of facing reality.

When Ogmundur Jonasson, Lilja Mosesdottir and the rest of their followers in the Left Green party and the Independence Party are shouting for the departure of the IMF and against EU membership they are doing two things that are to the detriment of their nation. They are firstly biting the hands that currently keep it fed and are willing to help after an almighty havoc wrecked by the democratically elected political elite in Iceland. And secondly they offer no realistic, alternative options as far as future plans go.

The IMF is offering Iceland a lifeline, as is the EU by looking past the currency restrictions which are in breach of the four freedoms on which the economic cooperation of European nations are based on.  And despite what some may maintain, Iceland is not realistically a self-sustainable country which can go it alone. Alone it lacks the resources needed to benefit from its natural resources. Trawlers need oil and hydro-plants need steel. Any food made in Iceland costs the public considerably more than what is imported.

And someone must be willing to buy Icelandic products and trade with the country. Currently the bulk is with Europe, but you may guess twice whether Europe needs Icelandic trade more than Iceland needs European trade? Oh, and the money currently coming from the IMF…is provided by European countries, so far despite delays on the IceSave affair being resolved.

So Iceland needs the EU for stability in trade and currency. There are several more considerable benefits, but these far outweigh any other as they will help the fallen get back on its feet.

Alternative options of shelter being discussed in Iceland are interesting to say the least.

Some people seriously claim in public that they want to explore NAFTA membership, confusing it with the much more advanced form of the European Union.

Others want to crawl back into the arms of the United States, despite the total lack of interest of the US. Bilateral agreements with nations of overwhelming strength are favourable to corrupt regimes which divide and conquer the wealth it generates. It happened in Iceland before and those who benefited find it hard to let go.

So China is also being touted as a realistic option. And it makes sense in many ways for those who want to align themselves with rapid economic growth provided through dictatorship and less concern for human rights than the pesky EU.

Populist demagogue and still president Olafur Ragnar Grimsson, basking in his newfound glow of global debt fighter,  says on the news today that the stance of the Netherlands and the UK in the IceSave affair begs the question of what kind of club the EU is?

It is a club where different people gather to communicate with each other and look out for each others interests.

It is no wonder that such a concept is extremely hard for an Icelandic career politician to grasp.

By aligning Iceland with Europe, Iceland actually has a say in its future. Realistically its voice might not be as loud as Germany’s in the EU, but bi-lateral agreements offer small states nowhere near the clout which they get as fully fledged members of the EU.

That is why the public in Iceland needs the EU, even if it finds it hard to understand through the political noise.

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Protester arrested following demonstrations outside the IMF’s temporary office in Reykjavik today

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The District Court of Reykjavik yesterday declared that the borrower of a currency loan was responsible for paying his loan fully, even if it had doubled in one year. The Court really had few other options, the agreement between lender and borrower is one where the bank lends foreign currency and it was the customer’s choice whether to take that option or one of a loan in ISK.

So much for the imbalance between the lender who is supposed to know more about finance and the borrower who is not an expert.

The Courts and society has determined that Iceland is a country built for banks, not people.

This probably means that all those who have been waiting to hear about the outcome of this court case and have loans in foreign currency can say goodbye to their former lives. Tens of thousands of Icelanders are going to become bankrupt or heavily strapped.

Meanwhile, us who didn’t take the risk of currency loans even if they were offered are also being thrown to the wolves. What choices did we have? Not choices similar to people in countries around us of loans that go down as you pay.

Force majeure anyone? Is it unfair to compare the financial collapse of Iceland to anything but a natural disaster, an extraordinary event?

Meanwhile the governor of the Central Bank has assured Icelandic MP’s that even if the IMF has come out and said that Iceland’s debts were even larger than 310% of GNP, then it is OK because included in that number are all private foreign debts which are going to be written off, making the picture much brighter.

So the government, the banks and the largest companies will all see write offs that they will not grant to their citizens themselves.

A tragic story has emerged of Olafur Jon Leosson, a roughly sixty year old truck driver who bought himself a new truck on a foreign currency loan when jobs were everywhere for him to put it to use. Then the jobs started disappearing, and then the currency dropped. He tried to negotiate with the banks, the financing company Lysing, everything. He took his own life recently as he had found the door shut everywhere.

Great is the shame of the government, Althingi and the financial institutions. Did they ever read Grapes of Wrath?

Related posts:

1. In All Fairness: The Currency Loans And What Now
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3. Loans of the Icelanders

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Dominique Strauss-Kahn’s letter to Gunnar Sigurdsson.pdf

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There is a a grave misunderstanding in Iceland regarding the IMF, that it is some sort of independent entity which does as it pleases to promote laissez faire capitalism. The truth is somewhat more sober, it is controlled by the member nations and their message is that Iceland cannot expect help without acknowledging its responsibilities in the international community.

Some Icelanders see this as a betrayal from their “cousin” nations, but it is hard to say they didn’t try to sound the warning sirens regarding the banks’ shaky foundations. Besides, while Icelanders still cling onto a dated  image of Nordic cooperation, the other Nordic countries except for Norway are now members of the EU.

Strauss-Kahn also told the group that the roots of Iceland’s problems could be found in the privatization of the banks. So no one is deluding themselves about David Oddson being a great leader in the big world outside our tiny little window.

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What on earth are Sigmundur David Gunnlaugsson and Hoskuldur Thorhallsson of the Progressive Party, doing in Norway?

The official spin is that they are explaining the economic situation in Iceland, and perhaps fishing for a loan without IMF’s conditions.

But why are two managers of a failed Icelandic hedge fund in the podium with them? Boreas Capital which has ties with Landsbankinn and is run by close friends of Bjorgolfur Thor.

And why is the hedge fund registered at the same address as an investment company owned by Sigmundur David’s father?

I heard a disturbing statement on a radio talk show this week where one of the hosts was praising the Progressive Party for having cleaned house the most. Sure does not rhyme with the feeling most people who are familiar with the business sector have. Sigmundur David is just a reincarnation of the old special business interests which the party needs to protect, and the beneficiary of a privatization.

He sure would do well explaining what these men were doing with him in Norway?

Besides, news from Norway state that prime minister Jens Stoltenberg has made Norway’s position clear to the Icelandic government. No loans without the IMF.

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Ms Sigurdardottir said that it was “unfair” that the IMF and Nordic donors had made access to additional aid conditional on Iceland’s resolving the Icesave issue. But the prime minister voiced hope that the IMF review would start “within the next few weeks”.

In written answers to FT questions, she said that the UK and Dutch authorities “cannot wash their hands” of regulatory responsibility for the failures of Icelandic banks that operated in Britain and the Netherlands.

She suggested that the UK was contradicting Mr Brown’s own principles by making Icelanders pay for the mistakes of a private Icelandic bank. “The British prime minister has said that it’s not the general public that should suffer from the wrongdoings of the banks but the banks should compensate the public. Obviously he does not count the Icelandic public in [that].”

From the Financial Times

About time!

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1. Financial Times: Iceland After A Year Of Financial Crisis
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3. Landsbankinn Assured The Dutch That Iceland Would Pay