Saturday 23 May 2009 - SUMMARY of the meeting of the Economics and Security Committee, Sal C, Kongressenter, Oslo, Norway
I. Opening Remarks
1. The Chairman, Hugh Bayley (UK), opened the meeting by welcoming the members and speakers and thanking the Norwegian hosts for their efforts in preparing the session.
The draft Agenda [080 ESC 09 E] and the minutes of the meeting held in Valencia, Spain, on Saturday 15 November 2008 [239 ESC 08 E] were adopted without comment.
2. Josette Sheeran brandished a small red cup from Rwanda to illustrate how much food is needed each day to sustain a human life. “To feed the hungry – a number that is now more than a billion, or one out of every six people on earth – is the greatest peace and security issue of our time. Without food, people do one of three things: they revolt, migrate or die,” she said.
3. In fact, some 20 million school children are receiving a full cup of food each day through the WFP’s many programmes. As these efforts have both humanitarian and security dimensions, Ms. Sheeran emphasized, the aid and security communities need to synergize their respective efforts. Here is where NATO has an important role to play.
4. Ms. Sheeran pointed to several NATO operations in which feeding hungry communities has been integral to ensuring that security crises do not evolve into humanitarian catastrophes. NATO assistance to refugees in Kosovo helped contain violence and instability in the 1990s. Today, Alliance support to Afghanistan helps sustain WFP school feeding programmes in 6,000 schools, reaching 2.2 million school children. It is doing similar work in Pakistan. For those sceptical of the integral links between food availability and security, Ms. Sheeran cited cases in Liberia and Haiti, where hunger-fuelled revolts toppled governments.
5. Ms. Sheeran further explored the humanitarian and political fallout from last year’s food price spike, which triggered riots in over 30 countries and cut in half the WFP’s capacity to distribute food aid. Falling food stocks, exacerbated by national policies to hoard grain, created desperate conditions throughout much of the developing world and immediately raised justified concerns about the political stability of many fragile countries. Although global food prices have since eased, Ms. Sheeran warned that conditions in many of these countries remain dire. “Food prices in 89% of sub-Saharan African countries are higher than they were one year ago”, she noted, and the global financial crisis has already pushed 115 million into the ranks of the hungry.
6. Ms. Sheeran suggested that coping with this crisis will require concerted international attention and action, and NATO will have a central role to play here. Indeed, by protecting food shipments off the pirate-infested waters of Somalia, Allied navies are keeping open vital food supply routes to all of East Africa. The WFP, United Nations Children's Fund (UNICEF) and the Red Cross/Red Crescent could not provide life-saving relief if those essential supply routes were cut off.
7. Ms. Sheeran concluded by acknowledging the long-standing contributions that many NATO member countries have made to the WFP and emphasizing their significance for preventing a breakdown in many communities. This year, the WFP, which relies exclusively on voluntary contributions, is asking for some $6.4 billion, and parliamentary support is again essential to meeting this objective. “Rising costs for security, local purchase and longer feeding periods, as well as a historically high caseload, mean that we have significant funding requirements”, Ms. Sheeran said.
8. The presentation stirred a vibrant discussion with a number of members inquiring about concrete action that can be taken at the national and global level to ensure food security. In response, Ms. Sheeran emphasized several points. On the issue of balancing supply and demand of food, she noted the continued importance of maintaining supplies, particularly in the context of climatic changes. She also spoke of the very close links between food and fuel markets, due partly to the emergence of biofuel demands. It has become very difficult to predict supply equations and there is now the real potential that fuel shortages and price rises can lead to reduction in national food stocks. While admitting to the pertinence of the question of absolute supply, Ms. Sheeran nevertheless placed much greater emphasis on providing access to food as the key measure for ensuring global food security.
9. In this respect, she agreed with members on the important impact of trade liberalization on food security. Ms. Sheeran saw rising protectionism as fundamentally contradictory to guaranteeing food availability. She criticized national policies premised on food self-sufficiency principles and underscored the need to foster greater national, regional and global market integration. She further pointed to the need to establish safety nets that could be mobilized in conditions of crisis, particularly in the countries that do not have the resilience and safeguards to adjust to food price shocks – currently 80% of the world.
10. In the discussion, Ms. Sheeran urged national parliaments to provide continued support for the WFP which has managed to achieve tangible results and avoid major social volatility in more than 40 nations during the recent food crisis. In response to a question about EU agricultural policies, she explained that in the ‘post-supply’ environment, in which we find ourselves today, the EU needs to realize that all food production will find a market. The supply-demand balance has altered significantly over recent decades and, given current global demand caps on production, does not necessarily make sense. The WFP has set up a number of programmes to connect farmers to markets and thus to help guarantee that trapped agricultural production would reach destinations where it is most needed.
11. In response to a question about ways to maintain supply given the forces at work in global food markets, Ms. Sheeran noted the potential contributions by science and technology transfers that can help farmers in the developing world by improving seed variety and making agriculture economically viable. Responding to a question about the role of support for farmers in Afghanistan as a counter-narcotics measure, she elaborated on some of WFP’s successes in diverting farmers around the world to legitimate agricultural production as part of a sustainable long-term effort in economic reconstruction. She also noted important strides recently made in Afghanistan where a rise in wheat prices has already begun to stimulate growth in agricultural development.
12. Another focal point of the discussion was the broader security and human rights implications of food scarcity. Ms. Sheeran directed attention to the troubling phenomenon of parents sending their children to extremist schools in exchange for food and clothing. One member noted that such practices are particularly worrisome in countries such as Pakistan where 70% are living on less than $2 a day. Ms. Sheeran emphasized that in such circumstances the food programmes of the WFP have become a vital tool against extremism and radicalisation by ensuring that no child goes to school hungry. It also helps foster greater gender equality; the WFP guarantees that Pakistani families send their daughters to study and ensures 50% female attendance in schools. By using local produce, the WFP is also stimulating demand for local produce and providing farmers incentives to increase production.
13. The question of the government’s role in food security also drew attention. On the issue of WFP’s activities in the Democratic People's Republic of Korea, Ms. Sheeran cautioned that WFP is not a political organization with a mandate to interfere in internal state affairs and override national food policies. Therefore, WFP has few tools in the face of poor domestic governance. In such cases, a concerted stance from the international community can be helpful. She suggested that it is ultimately the government’s responsibility to ensure that its people are fed. Governments should be accountable for production and trade policies and for ensuring access to food. Ms. Sheeran strongly agreed with two members that no actor should be allowed to use food as a weapon and that greater awareness must be raised of contemporary practices to manipulate access to food for political purposes.
14. Members also noted the interconnectedness between climate change and food security. Ms. Sheeran drew attention to the disruptive effect of climate change on traditional patterns of production and urged the adoption of community-based adaptation strategies. Responding to concern members expressed about the balance between food security and biofuel production, Ms. Sheeran once again noted that WFP does not have a policy mandate to instruct countries in the proper balance between food and energy production. She pointed out, however, that there is awareness in the food security community of the importance of energy production, the common stance being that both issues should be properly accommodated so that they are not competing for inputs and resources. On the issue of market speculation with food, Ms. Sheeran clarified that it only has a second tier effect. Speculation was not the reason for the initial spike in prices. It was only after food supply tightened up that speculators entered the market.
15. Ms. Sheeran concluded that she is a short-term pessimist but a long-term optimist on food security. Her primary source of pessimism is the lack of significant political attention which is preventing the international community from developing a global food security strategy. The highly unpredictable nature of WFP’s funding reflects this. Ms. Sheeran, however, expressed confidence that once food security is made a political priority, the ready availability of know-how, technology and global capacity would help transform the issue into a source of great prosperity for all.
16. Neil Davies explored how today’s financial and economic crisis might affect the demand for global and national security, and hence defence, and the supply of resources for defence. These tensions will be apparent across a range of finance and fiscal issues, labour and recruitment and retention matters and defence industrial and supply chain considerations.
17. Mr Davies began by outlining the potential impact of the crisis on global security and the security of NATO countries in the context of changing internal and external threats. He registered possible challenges coming from a resurgent or destabilized Russia, and/or economic collapse and social volatility in Eastern Europe or the Balkans. Worsening economic conditions, Mr Davies noted, could even undermine the internal stability of many Western states with rising unemployment creating favourable conditions for organized crime, anti-capitalist and antigovernment sentiment, and even extremism and terrorism.
18. Potential waning support for the NATO effort in Afghanistan, or alternatively an increase in international demand for heroin, could adversely affect conflict resolution efforts in that war torn country. Sub-Saharan Africa and other parts of the developing world would also suffer from a global downturn in aid and investment. In the Middle East and North African regions, on the other hand, a prolonged drop in oil prices would dramatically lower government revenue and exacerbate instability in that already precarious area of the world.
19. Mr Davies noted that defence had not been identified anywhere as a candidate to benefit from increased spending as part of targeted fiscal stimuli. In fact, as pressure to find savings builds, defence spending is likely to be challenged. In all countries protecting high priority areas of spending such as health will make prospects for defence, frequently seen as a lower priority among some voters, substantially worse. On the more positive side, military recruitment and retention are expected to improve as unemployment rises. This provides an opportunity to make savings in recruitment costs and from lower increases in pay and allowances.
20. The question of how the Allied commitment in Afghanistan might be affected by the crisis drew central attention in the discussion that followed the presentation. Mr Davies said he foresaw significant reductions in defence programmes which are being politically out-competed by the health and education sectors. Nevertheless, expectations are that commitments in Afghanistan will be maintained, with reductions in support costs only. The best way forward, Mr Davies noted, would be to improve efficiencies. One member added that through burden sharing, cooperation and greater emphasis on diplomacy, the Allies would be able to maintain the scale of their commitment in the country.
21. Several members noted that it would be useful to have a more detailed assessment of envisioned defence spending and cuts in NATO countries in the coming years and wondered how these cuts would be managed. Mr Davies explained that while few countries are making real cuts at present, expenditures would soon have to be reduced. Modest real term growth can be expected this and next year. However, beyond 2011, as inflation bears down, cuts in real defence spending will likely be implemented.
22. Currently, most Western governments today are pushing up public spending and slashing taxes. Fiscal positions, however, will eventually have to be brought back into balance. When governments start reducing spending again, many would not choose to see health or education funding cut at the expense of defence. While ultimately this will be a national decision, the expectation is that the defence sector will bear a large share of the cuts in government spending. Mr Davies reiterated that the more favourable labour market, as well as the drop in fuel prices, are factors that will allow for some compensation of reductions in defence budgets.
23. One member wondered if deferring spending on large military programmes might help ease fiscal burdens. The speaker suggested that the current fiscal position in which NATO countries find themselves has long term implications, well beyond a three to four year time frame. In the UK, for example, overall debt has already grown from just under 40% of GDP to around 59% this year and is expected to reach 79% by 2013-2014. In other countries, the impact of the crisis is even deeper. In the face of such a prolonged period of downturn, a time lag in large programme procurement will not help resolve underlying fiscal tensions. Indeed, the modernization and acquisition of new equipment poses an array of difficult challenges, and some important programmes such as the Eurofighter are already undergoing delivery delays.
24. The Chairman suggested that it would be worthwhile to collect data on defence spending trends in Allied countries and invited the delegates to obtain information on the issue from their national governments and forward this information to the Secretariat.
25. In his presentation, Dag Harald Claes focused primarily on oil market trends and the debate among experts about the availability of oil resources. He began by discussing the so called “peak oil” argument – a popular scientific conclusion that oil resources are reaching their peak, have already peaked, or will peak in the near future. This argument was first brought forward by King Hubbert with reference to US oil availability, and was later reaffirmed by Colin Campbell with regard to global oil resources.
26. The speaker countered the premises of the “peak oil” view on energy resources by citing data in the British Petroleum Statistical Review of World Energy which suggests that the oil reserve to production (RP) ratio increased from 25 years in 1980 to 40 years in 2006. According to Professor Claes, there are a number of restraints on production due to government policies, particularly in the OPEC countries, where investment and production in the oil industry are held back in order to maintain price levels. This has also restricted research for new oil fields in many of the most promising regions of the world.
27. Professor Claes went on to examine the recent spike in oil prices, and particularly the $120 per barrel price increase between 2003 and 2004. He noted that this market panic was unrelated to demand shifts. It was rather a consequence of politically induced market distortions related to conflict and cartel behaviour. Thus, the volatility of oil prices had very little to do with the real oil reserve base. Oil production costs are a much more reliable marker for reserve shortages. Citing International Energy Agency estimates, Professor Claes noted that, disregarding recent market distortions, the past 20 years had seen a steady decline in production costs for oil.
28. Looking deeper into the political side of oil supply and demand, Professor Claes observed that, regardless of the type of political structure, all countries in possession of oil resources are interested in placing the commodity on the international market rather restricting access to it. From this perspective, Norway does not differ much from OPEC countries; national control over oil is the rule in both cases. Professor Claes suggested that many nationally owned oil companies behave essentially as commercial enterprises and are more inclined to bring oil to the market rather than restrict production. He also discussed the growing significance of Brazilian oil deposits, which are likely to be substantial and potentially could erode the market power of OPEC.
29. Professor Claes concluded with several remarks on the potential of liquefied natural gas (LNG) to create a global gas market as opposed to the more regionally confined gas pipeline market. In the foreseeable future, however, Professor Claes noted that pipelines would remain the primary means of transport with all ensuing implications.
30. Several parliamentarians expressed bewilderment at the speaker’s optimistic evaluation of the oil reserve base which they found contradicted reports given to the Committee by the IEA. Professor Claes explained that there is indeed fundamental disagreement among analysts on the issue. In his view, the bleaker perspectives given by some are the result of underestimating nonOPEC countries’ potential and failing to account for the fact that some of the most promising areas of the world have not yet been explored.
31. The possibility for alliances among energy producing countries, similar to OPEC, also drew great attention. Members also broached the possibility for the formation of gas cartels potential organization among non-OPEC oil producers. Professor Claes explained that Europe’s key gas suppliers – Norway, Russia and Algeria – had already tacitly divided the European gas market among themselves. However, with Norway being a part of the EU internal market through the EEA agreement, a formal cartel between the three is not possible. In terms of non-OPEC cooperation, past attempts to form an organization had failed. Today, non-OPEC countries tend to operate individually.
32. In response to a question about the effect of speculation, Professor Claes noted that this had added a significant element of market unpredictability. Factors far removed from the oil market were thus having an effect on oil prices. Yet, removing oil from financial markets would only politicize its price and render it equally unstable. The solution lies in better regulating financial and oil markets.
33. In response to another question, Professor Claes suggested that only significant political interference in markets would render alternative energy sources competitive with oil. He agreed that although coal could have detrimental environmental consequences, it would invariably play an important role in meeting global energy demands.
34. The question was raised whether oil resources were a curse or a blessing for a country’s stability. Professor Claes acknowledged the oppressive and destabilizing effects that oil endowments can have. Oil riches can enable and sustain autocratic regimes, and even become a source of conflict. Yet, Norway offers a positive counter-example; it has enjoyed a democratic tradition and has managed to save oil revenues rather than underwrite consumption.
35. John Sewel (UK) summarised the Sub-Committee’s recent visits to Washington DC and Ottawa during which members had the opportunity to meet with officials from the World Bank, the IMF, and the Canadian Parliament and discuss the global financial crisis, climate change, food security and energy. With regard to future initiatives, the Sub-Committee is currently planning a visit to Italy where the themes of food security and the financial crisis will be under discussion.
36. Petras Austrevicius (LT) presented the draft General Report and drew attention to the security implications of the recent food crisis that had wide-ranging destabilizing effects in much of the developing world. He cautioned that although the current financial crisis had forced down prices for many commodities, the underlying causes for rising food demand and supply constraints have not yet been adequately addressed.
37. The speaker suggested that traditional government approaches to dealing with food security issues such as imposing tariffs or export restrictions were counterproductive and detrimental to global food security. Instead, he recommended opening access to world agriculture markets with the goal of bolstering productivity, allowing for diversification and specialization and ultimately empowering the developing world to make strides in poverty alleviation.
38. Mr Austrevicius outlined some of the approaches to be followed in tackling contemporary food security issues. In addition to trade liberalization, he recommended research and development of new agricultural technologies and embracing recent scientific advances in crop development, developing second-generation biofuels that do not compete with food for land and water, and pursuing sustainable agricultural practices to preserve the long-term availability of global water supplies.
39. The question and answer session focused primarily on the issue of biofuels and how to resolve the inherent tension between food and energy security. In the United States biofuels have been identified as a crucial component of national energy security policy. Biofuels’ contribution to offsetting green house gas emissions is also of critical importance. However, the implications of biofuel production for food security had also been recognized. Thus, the US Energy Independence Act mandated the development of biofuels not from food sources. Similarly, President Obama has called for replacing ethanol with second-generation fuels. Mr Austrevicius pointed to switchgrasses and low quality woods as possible friendly solutions.
40. In a discussion several members noted that second-generation sources might provide a better balance between food and energy security. Members also discussed how to create the necessary incentives for the development of new biofuel sources. There was general agreement that distorting the market would not be the right approach. Mr Austrevicius, however, noted that if oil prices remained low, incentives to produce alternative fuels might diminish, which is why government intervention would be necessary to drive the development of new technology. Improved food security, in his view, will require greater commercialisation of farms, the development of new technologies, and government support for advanced biofuel developments.
41. Attila Mesterhazy (HU) focused on the current energy vulnerabilities in Europe and discussed possible scenarios for diversifying suppliers on the European market that would reduce dependence on Russian gas. The presentation took note of the recent Russian-Ukrainian gas crisis, as well as current projections that gas demand in Europe will increase in coming years.
42. He also addressed the challenges to broadening gas supply sources in Europe by examining the current state of play of the Nabucco project. He identified and elaborated on several main obstacles for the future of the pipeline – first, Moscow’s determination to control the supply and transit of Central Asian gas; second, the inaccessibility of Iranian gas due to UN sanctions; third, China’s emergence as a resource competitor; and the unresolved legal status of the Caspian Sea.
43. Mr Mesterhazy concluded that fitting Central Asia into the Euro-Atlantic energy security equation would require a set of complex and multifaceted complementary measures, not least the creation of a single, competitive European gas market that would provide alternatives for Europe’s more vulnerable and exposed countries. Thus, a fundamental reform of the current system would be essential for ensuring that European citizens are not held hostage to political disputes, political manipulation or infrastructure mismanagement.
44. The presentation was followed by a discussion of the issue of gas supply diversification and availability of resources. Russian and Ukrainian delegates entered into a debate regarding the winter gas stand-off between the two countries and its political underpinnings. The Russian delegate suggested that his country had the necessary capacity to meet EU gas demand and stressed that his country supported strongly all ongoing pipeline projects, including Nabucco, South Stream and North Stream. The Ukrainian delegate sought to assure delegates that, as recognized by the Brussels declaration, Ukraine was a reliable intermediary in gas supply and urged greater transparency in gas shipments to avoid unfounded accusations of Ukrainian infrastructure mismanagement. He further demanded that future diversification projects should not leave Ukraine stranded.
45. The lack of a common European position on energy security was a focal point of interest for many of the members. One commented on the need to establish a common strategy on diversification in Europe. Another added that all parties should respect existing agreements such as the Energy Charter and seek greater cooperation with Russia on concrete projects. A Serbian delegate noted that EU failure to send a clear message to Belgrade was among the driving factors in the country’s decision to sell its national oil company to Russia. Mr Mesterhazy suggested that the EU had failed to establish a common energy security policy. Speaking from the perspective of a Hungarian whose country was among the worst affected from the winter gas crisis, he reiterated the need to broaden gas transit supply for Europe. He added that while Nabucco was a priority for his country, it considered South Stream equally important and supported both projects for the sake of diversification. He also noted that even if successful, Nabucco would only service 6% of European gas demand.
46. Considering the complexity of the political debate on gas supply, one member suggested that better data was needed to help depoliticise the issue. The Rapporteur questioned whether political considerations can be avoided nowadays and spoke about the precedence of national interests when dealing with such fundamental issues.
47. Mr Mesterhazy gave an overview of the future activities of the Sub-Committee on East-West Economic Cooperation and Convergence. He gave a briefing on the Sub-Committee’s forthcoming visit to Astana, Kazakhstan in June, to be combined with a Rose-Roth Seminar. A proposed visit to Algeria in November, currently in the planning phase, was also expected to take place with the goal of engaging members of the Mediterranean and Middle East Special Group.
48. In presenting the report, Simon van Driel (NL) pointed to the continuous and rapid evolution of the global economic crisis and noted that the report was completed in April, just before the G-20 summit. He emphasize that the West now confronts the worst global economic crisis since the 1930s. He discussed the origins of the crisis in the United States, and pointed to several of the most important causes for it, namely poorly regulated financials system and the perpetuation of unsustainable spending patterns.
49. The Rapporteur stressed that these dramatic events will not only change forever our thinking about market economy, but also transform profoundly the way relations among states are structured. Mr van Driel noted, however, that there is no way to predict what kind of system will emerge from the ruins of the crisis. What he observed though is that no countries had been immune from its effects which, while they began in the United States, moved into Europe and are now devastating many economies in Central and Eastern Europe. It has even adversely affected more effectively regulated banking sectors such as Canada’s.
50. Finally, Mr van Driel outlined some of the important developments that had taken place since the publication of the report. He commended the G-20 summit for injecting funding into the IMF and the World Bank and giving more leeway to developing countries in international decision-making on the crisis. He encouraged further action on trade and a conclusion of the current Doha Round of WTO negotiations. One member welcomed the report’s conclusions that governments should take countryspecific measures to address the crisis, but at the same time coordinate efforts within a broader international framework.
51. A number of members expressed strong support for the report’s finding. Two members asked that the report strongly endorse the need for global supervision of banks and markets. Another commented that regulation by itself would not provide solutions and suggested a fundamental rethinking of the workings of the financial economy. The Rapporteur responded that it is unrealistic to demand a global supervision system which is also politically unpopular with most governments. He conceded that coordination should take place but suggested that the solution be sought in better, rather than more, regulation. One member lamented the lack of better simulation and prediction mechanisms to give reliable early warning indications of such impeding crisis. Mr van Driel agreed that there is a need to know more but noted that prediction is often difficult and political will is not always at hand to repair what does not yet appear broken.
52. Several members openly questioned the sustainability of the current approach to resolving the crisis which heavily relies on over-financing and over-liquidity, essentially key causes for the financial breakdown. An interesting discussion ensued on the issue of stimulus packages and the inability of many governments to convince their citizens of the necessity for state rescue of the economy. One member noted that had it not been for government intervention, world economy output would have declined by 9% with potentially catastrophic socio-political consequences.
53. The Chairman commended the Rapporteur and the Committee Director for their outstanding report and thanked participants for the excellent feedback. He closed the discussion by noting that given the gravity of the issue and the great interest in the topic, a follow-up report on the subject should be expected.