NORTHWORLD: ON THE ASCENDANT
THE ARCTIC ECONOMIC ZONE
Greenland’s Place In The World of the Future.
GREENLAND occupies an unusual position in the global economy for a number of reasons, ranging from the unpromising - at three times the size of Texas, it remains the least inhabited country on the planet ( 56,370 people in 2013,total) - to the underexplored, underexploited…and simply unknown. For now, that is - but not for long. First: take Greenland’s location, right in the center of the maritime region, the Arctic Ocean, mooted to become one of the greater, if not greatest, growth stories of the next fifty years and thereafter.
It is widely expected that, as a consequence of climate warming and the attendant melting of the ice cap surrounding North Pole, the entire circumference of the Arctic region will experience a boom - a rush for commodities, including oil and gas, driven by unprecedented global demand and the ambitions of a dawning space age. The coming boom concerns nothing less than the pursuit of large-scale extraction of natural resources which for centuries have been inaccessible, lying as they do beneath a polar ice cap which shielded them from extraction - either physically or economically - until the last decade.
The expense of such extraction through the ice is so steep that, however high the price of oil may be or however advanced technology becomes, its pursuit would still remain an unprofitable enterprise. Largely for this reason Greenland has a population of only 60,000 and something like one per cent of its Middle Earth-style landmass is the extent to which man's footprint has so far trod there…
Until now. Today, for the fifth or more summers in a row, broad patches of open Arctic seawater have been revealed by satellite and navigated whilst seasonal temperatures reached their peaks. Thereby proving the viability of the once-mythical ‘Northwest Passage’, the sea route through the Arctic Ocean connecting the Atlantic and Pacific oceans - proof of which has massive implications for trade, shipping and geopolitics.
In November 2008 the Canadian Coast Guard reported that the first commercial ship had sailed through the Northwest Passage. Satellite imagery confirmed numerous passages through the Arctic Ocean at certain times of year, open-water passages growing ever wider, at accelerating speed and with annual frequency. Growth in the number of trouble-free commercial navigations through the Arctic, with the vaunted promise of its revolutionizing world trade by providing an alternative route to the choked-up Panamanian and Suez Canals, has been observed every year thereafter. Data roundly confirm not the reality of multiple new shipping lanes but increasing non-military marine traffic in the region. Even one or two cruise ships had run the route by 2012.
Presently, only one of the seven northern-hemispheric nations which claim shared territory with Greenland maintains any military presence in the Arctic - and that's Russia. At least, that's how it looks upon the surface of the Arctic… Who knows how many submarine craft are actually exploring or patrolling the waters, safe from view beneath the shrinking ice cap? Economically, Russia will be by a huge gap the great inheritor of the Arctic region in the future: its Far North regions surround the Arctic Ocean to a 1:3 span of the earth's surface.
The annual increase in Arctic temperatures has, since 1980, been double the rate of the rest of the world’s. Not only is this trend well established, it is picking up speed exponentially. These probable new trade routes are admittedly still confined, temporally, by the summer\fall season, and spatially, by hazardous ice lining newly revealed shipping lanes. However, this is nothing. It is in fact a near certainty that the Arctic region will be entirely ice-free by 2050. A rebalancing of world trade no less - driven by the creation of new trade routes and micro- and macro-economic implications provoked by such a game changer to the global infrastructure as the one that's already coming down the line. Or so goes the hype. If anything, climate change forecasts err on the conservative side, so it may well be that, long before 2050, large corridors in the Arctic Ocean will be ‘open for business’ for most of the year. Certain nation states - above all China, the USA, Canada, Norway; and Russia - will find great economic advantages in the retreat and eventual disappearance of Arctic ice. Within a decade it is anticipated that there will be navigable, seasonable sea-lanes ready for service.
No wonder interest has picked up in recent years, fanned by headlines announcing the arrival of the ‘final frontier’. Arctic nations have made various territorial claims to the seas and to whatever resources lie beneath, spurred on by the awkward fact that no single country owns the North Pole, nor the Arctic Ocean region - although Moscow will predominate culturally and economically. Five ‘Arctic nations’ surround the North Pole - the USA, the Russian Federation, Canada, Norway and Denmark (via Greenland) - and these five (or six) nations enjoy an exclusive economic zone (EEZ) stretching 200 nautical miles off their coasts. Some disputes amongst all five have lingered, especially regarding the drawing of lines of international versus internal waters, and rights to passage along certain ‘international seaways’.
The bigger driver behind the expected boom described is the proliferation of new trade routes. However, another much-anticipated Arctic boom - the pursuit of commodities - may well eclipse the transport & shipping revolution which is imminent. The two go hand in hand. The natural resources boom is restrained only by the size of upfront investment in infrastructures necessary for existing shipping lanes to be re-routed, so that ships such as ultra-large crude carriers may be serviced and berthed and so on, and at world-class, competitive standards. The Panama Canal is in fact upgrading its own infrastructure, and widening its banks already; as opposed to starting from zero. Nonetheless, open seas would ultimately win over a heavily backed-up canal, one assumes. It costs nothing for ice to melt. Similarly, on the other hand, a new oil and gas boom got underway in the USA in the early 2010’s, driven by the technological breakthrough of fracking - meaning the supply in the Occident will grow much more abundant and possibly reduce the demand for extraction from the Arctic just as it becomes viable. It is at any rate a question of when and not if.
Our evaluation of the country of Greenland, and of its potential (and at this stage, purely hypothetical) growth story, will hinge on its access to - and management of - its own natural resources. It is in this sector where the stakes are the highest, where the risks and the rewards are equally outsized and unpredictable. Nonetheless, the possibility of Greenland (along with a fortunate trading partner; even a strategic ally like the UK or Iceland) discovering an oil field, say - in the manner that Brazil discovered its own, stunningly large offshore oil reserves in 2007 -- well, this possibility is real. Tantalizingly real. And it is in regard to the business of commodities, and thereafter to the potential influence of Greenland upon global macroeconomics - Greenland’s management of the access it permits to the super-abundant natural resources it may own, as much it will transport - logistics - is precisely where this study focuses.
The story discusses the various scenarios wherein Greenland - a member of ‘the Next Eleven’ global player nations, or else a niche economy like Brunei - will benefit from global warming and then gradually transform itself into an economy of some importance. Whatever the future of Greenland, similar questions regarding macroeconomic tendencies, growth models and management issues will arise there just as they continue to arise in the world’s highly-developed economies.
Where does Greenland fit in?
Greenland is, to begin with, no straightforward nation. First, it belongs to another country: the Kingdom of Denmark. Nonetheless, it is officially an ‘autonomous country’ within the kingdom of Denmark. In 2008 the Greenlandic people carried a referendum favouring greater autonomy by 3:1. In terms of area, and despite claiming the smallest of its populations, Greenland is the world’s largest island, 75% of which lies beneath the only contemporary ice sheet outside Antarctica.
The result of the referendum over autonomy contributed to Greenland’s assuming self-determination in 2009, responsible thereafter for self-governing its natural resources - tellingly - along with its judicial affairs. The plan as it stands now is for Denmark to keep paying Greenland its annual subsidy of 3.2B Danish kroner (roughly US$650M); though as Greenland starts collecting revenues derived from natural resources, the subsidy will reduce accordingly. Total independence from Greenland is desired by many in the ‘Greenlandic movement’ though, as we will see, Greenland is not running headlong from Danish protection or at least support. It may well need their support when dealing with jurisdictions and multinationals. Greenland, unlike Denmark, departed the European Economic Community. Jurisdiction of E.U. law mostly excludes Greenland, although it does notably apply in the area of trade.
With a workforce of only 40,000 as of 2012, Greenland relies on the fishing and fisheries business as the primary driver of total GDP, estimated at $2.133B (PPP), according to the CIA factbook. The country is, despite being the world’s largest non-continental island, far from being of macroeconomic significance today. Around 70% of employment is in the services sector, a great deal of it related to aqua- (as opposed to agri-) business, a vital sector of the economy - constituting 89% of total GDP in 2011. The Danish subsidy accounted for approximately 56% of government revenues in 2012. The country’s growth rate contracted to 2% in 2009-10, due to the global crisis, but grew 2% then 3% in 2010 and 2011.
According to the same source, the relative ease with which Greenland has weathered the economic crisis is due to “increased hydrocarbon and exploration and extraction activities, a high level of construction activity in the Nuuk area and the increasing price of fish and shrimp”. This observation sums up get neatly the economic situation in Greenland. To put it another way: It's as if Congolese Republic had drifted into the northern Atlantic Ocean, at two o'clock to North America and 19:30 to the UK.
Foreign direct investment (FDI) will no doubt grow along with the race for Arctic resources, and the economy should benefit accordingly. It may well turn out that the proportion of FDI versus the fisheries business distorts the country’s economy before too long (it would only require around $2B in FDI per annum). This was also the case, only in a different sector, when Iceland went from being a country of fishermen to a country of financial services; and then shortly back again with the financial crash of 2008.
In Greenland’s case, such an abrupt reversal should ideally not occur, and not least because the investment will in any case be of a more tangible and material quality than the pure capital inflows and outflows. The model is imperial trading, in other words, plus financial services inevitably - as seen growing so spectacularly in Iceland (and blowing up even more spectacularly [see the account in ‘BOOMERANG’ by “economic disaster tourism author” Michael Lewis, pub. Penguin Allen Lane, 2012]). ‘Never say never’.
It certainly is the case that the world’s biggest oil explorers have already been to Greenland to survey the potential, and it looks like they plan on staying. The arrival of international consortia on its Western coast has only recently begun for Greenland. Their focus on the Northern and Northeastern regions of Greenland is growing as we speak. Gold mining is underway, after a hiatus, as of 2013 in the south; rare-earth extraction is planned elsewhere on the island.
Where next exactly for Greenland?
The Smith School of Enterprise and the Environment at the University of Oxford published a report on the Arctic which included the following observation:
The primary drivers [for the Arctic economy] can be summarised quite simply: the increase in enterprise activity is being driven by the global demand for resources and logistical efficiency. Secondary drivers are sovereignty and territory issues, governance and regulations, issues for indigenous communities, and pollution and biodiversity loss.
The report concludes that:
… It is unclear, whether and how fast new forms of enterprise, such as bio-prospecting, deep ocean mining or renewable energy, might enter into the region. There is a lack of shared and systemic understanding of the complex interplay of changes unfolding in the region.
Over the next 20 years, shipping, oil and gas, mining, tourism and aquaculture will be the key sectors of economic activity. Furthermore, there are synergies in the development of individual sectors, most notably in linkages between shipping and other sectors.
To summarise: the resources are there, enterprises are in preparatory stages and will duly accumulate before, at some point, accelerating sharply - in a new and different kind of a “race for the [North] Pole”. In the meantime, one additional activity - which is not listed above - will surely expand in the region. An activity without which none of the aforementioned commerce can be organised, nor national and business interests protected. The absent mention concerns the expected increase in military activity; especially of the submarine variety. Is it a coincidence that the global submarine-manufacturing sector is thriving at this time?
Greenland therefore has the opportunity, as do all the other Arctic nations (including Sweden, Finland, Iceland and Norway), to take the lead in creating a more integrated, systemic approach to economic and socio-economic exigencies which forecast-based planning may not account for. Issues, or ‘hot spots’, such as sovereignty or immigration are bound to flare up (the governance of international shipping lanes through the Arctic, to name one).
Speaking purely in terms of geographical weighting, Russia, Canada and the US are the counterweights to Greenland in the region.
Greenland is obviously the ‘odd one out’, economically and spatially. A weakness? No, it can be a strength (like Switzerland).
This fragmented picture of future economic activity in the Arctic creates already-visible problem areas, just as it contains areas of conspicuous advantage. For instance, Russia and the US have possibly the most to gain from the size their strategic locations combined with their economic needs and desires. It might be easy for Greenland to get lost, so to speak, amongst these first-rank (and heavily militarized) macroeconomic players. (Fortunately peace is the ally of open trade, so hype about Arctic wars should be seen as such). Yet the principal way for Greenland to avoid the fate of getting lost, of not having its voice heard beside these giants’, is for it to make excellent tactical and strategic alliances with key multinationals and consortia, which in any case function like small countries and have the flexibility in doing business that real countries do not possess (see tax exemption).
It has been asked already whether, with just 60,000 inhabitants, Greenland is even big enough to be a nation-state? Its weak point is indeed its low population, especially when contrasted with the vast landmass. One Arctic commentator, Anne Sibert, an academic who is currently a member of the Monetary Policy Committee of the Central Bank of Iceland (having predicted Iceland’s own financial meltdown), points out that there are ways of getting around the problems of a small population. A country can, for example, bring in, and/or retain, expertise from the rest of the world (discussed more specifically below). Sibert notes that “residents of a country with variable output can [also] smooth their consumption across states of nature by holding a diversified portfolio of home and foreign equity." The US state of Alaska follows this exact method: see the “Alaska Permanent Fund”.
This may be the appropriate place to mention one last, not yet mentioned, piece in the macroeconomic puzzle that is the Arctic. The piece is China. Its economy depending so much on foreign trade, major commercial implications come into play if shipping routes are soon to be reduced (during the warm months of the year). Just under half of China’s GDP is thought to rely upon shipping. The trip from Shanghai to Hamburg, via the Northern Sea Route - following the north coast of Russia from the Bering Strait in the east to Novaya Zemlya in the west - works out at 6,400 kilometres shorter than the route via the Strait of Malacca and the Suez Canal. China has already sent a few thousand contract labourers into Greenland, a move which caused a stir in Arctic country. Yet whether the Arctic peoples like it or not, China may be the greatest single beneficiary on the planet, when the Arctic sea lanes open up to commercial shipping in serious volume. Whether it is directly visible, such as sending cheap workers into the country, or indirectly - through alliances with Russia, at both company and government level - China’s demands and its economy’s needs have a clear and present influence on the definition of the Arctic trading bloc - assuming it can form itself into a bloc, via the Arctic Council (established 1991) perhaps; which is another discussion.
The Chinese reaction is revealing:
The prospect of the Arctic being navigable during summer months as a result of climate change has impelled the Chinese Government to allocate more resources to research in the High North... Several Chinese academics have encouraged their government to be aware of the political, economic and military implications of shorter shipping routes and untapped energy resources.
China’s insistence on respect for sovereignty as a guiding principle of international relations deters it from questioning the territorial rights of Arctic states. Furthermore, China is aware that its size and rise to major power status evoke jitters, but at the same time it is striving to position itself so that it will not be excluded from access to the Arctic.
Smaller Arctic Council members [Norway, Greenland/Denmark, possibly Iceland?] have an opportunity to lay the foundation for a unique relationship with China by engaging Chinese officials...on Arctic issues—ranging from commercial shipping routes [to] resource exploration.
Their position is so clear, it allows for no doubt whatsoever.
The ‘Singapore of the Arctic’?
Greenland has been compared by some as “the next Iceland”. However this is to understate the strategic possibilities Greenland might conceivably grab, seeing as it has no need to grab land - possessing it in great quantity, and being positioned so that shipping routes will flow along both its shores; a point of difference to be taken into account. Under the management of a visionary government and advisers, the author would suggest that Greenland might become a ‘Singapore of the Arctic’, a territory (like the ‘island state’ once) that may not yet be a fully-fledged nation but could well become such - specifically by following the Singaporean model.
After World War Two, Singapore was little more than a semi-urbanized, post-colonial “swamp” to its detractors. And Greenland today could easily be derided as a barren island full of shrimp catchers and eskimos. Under the leadership of the brilliant Lee Kuan Yew, Singapore has gone from strength to strength to super-strength, currently representing the number one offshore destination for one third of China’s capital outflow today. The latter point is due to a savvy mixture of singular tax-engineering appeal and world-beating financial services, with the full support of government. These national ‘skills’ of Singapore’s were the product of excellent planning and education and of powerful, forward-thinking government. Yet they were also, crucially and indeed for the larger part, imported into Singapore: to great effect. The result was no less than turning an outpost into an epicentre - and all within two generations. This tiny city-state is one of the most cosmopolitan place on earth: because it is the landing-point from, and the springboard to, all of East Asia. It is unique.
Greenland has too much land and not enough people. Like Singapore, it can judiciously import, just as it can cultivate people with the expertise required. It could make the most of what virtues it has by, for example, taking foreign investment to create the premier, or the only, Arctic trans-shipment hub (again like Singapore, in the shipping sector; whose growth and success fueled and capitalized today’s financial services sector).
If the next generation of Greenlandic population could be educated to possess the skills required in financial services as axiomatically as they acquire the skills required by the fisheries business, why not?
When inevitable future immigrants to Greenland, should a spectacular boom (or less so) take place, but a boom in the short- to medium-term at least - in this case Greenland should ensure it attracts the highly-skilled, the ‘white collar’ workers as opposed to the ‘blue collar’ workers imported solely for cheap labour. This is a controversial point as it brings up parallels with Chinese manual labourers imported into Africa in recent years, with negative effects on the local population. Greenland would do better to copy Iceland, which in turn had copied New York and London; only on a more sustainable path than that of a financial bubble.
How to manage the growth, when it comes
Greenland currently maintains 20 or so licenses, to international consortia or oil companies such as British (Scottish) company Cairn Energy, who have found no oil so far after drilling four wells, Exxon Mobil and Chevron of the US, or a proposed alliance between BP and Russia’s Rosneft. However, in March 2013 the Greenlandic government suspended a number of licenses, and has been reluctant to issue any more, due to a number of reasons including the ecological and the question of best practices - for instance, the ability of these oil companies to clean up devastating oil spills and the possession of high levels of insurance to ensure this.
This move by Prime Minister Jakob Edvard Kuupik Kleist of Greenland bodes well for Greenland. If the country chose to issue licenses to the highest bidder and engage in ‘rent seeking’ behaviour at the highest, most lucrative level, the lack of governance that might accompany this behaviour could inflict damages both foreseeable and unforeseeable upon the country, and would also limit its credibility at the negotiating tables of politics and commerce. Some critics have voiced concern as to whether Greenland is fit to take on these corporate superpowers but the Greenlandic government is intent upon winning back more and more political leadership and, according to Prime Minister Kleist, such actions as the suspension of drilling licenses proves their capability and watchfulness. Yet only Alaska and Russia have so far pursued as much oil exploration as Greenland: the country is at the forefront of the trend. Perhaps it is putting on the brakes at just the right moment, before any game-changing oil discovery or indeed catastrophe takes place.
In their paper, The economy of the circumpolar Arctic, Gérard Duhaime and Andrée Caron note that the population of the entire Arctic region was estimated at 9.9 million in 2002. This “represented 0.16% of the world population and two per cent of the total population of the countries covered by the study,” according to the authors. Consequently, the Arctic GDP represented 0.44%of the global economy, which is greater than its demographic weight of 0.16%, they deduced. This interval suggests income production is “more concentrated” in the eight countries of the Arctic than in the rest of the world. On the other hand, they observe, “Arctic GDP includes resource rents from extraction of non-renewable resources, parts of which should rather be viewed as replacement of wealth from one asset into another asset than income generation”.
This is sound advice. It might also be remembered that not all non-renewable resources bear positive rents: Norway (rich) and Nigeria (poor) each show “a negative average effect of resources on economic growth”, as cited by Halvor Mehlum of Department of Economics, University of Oslo in his, and this combination of countries used to illustrate the rents point shows that the effect has nothing to do with the wealth of a country, nor of corruption Mehlum and his co-authors point out.
The incentive falls clearly upon the leadership of Greenland to avoid the ‘curse of natural resources’ and enjoy the best kind of a boom, with raw resources coming out of the earth and the seas plus a sizable proportion of the world’s trade and transport passing through its gateway position - or taking better advantage of its resources than Greenland does so far, with commercial freighters bypassing it completely.