Earth Security CEO Alejandro Litovsky discusses political risk and resource scarcity for Project Syndicate, outlining how resource risks in emerging economies pose challenges to investment and growth and knock-on effects on global investors. The full article has been reproduced below with the permission of Project Syndicate.

Jul 14, 2014 ALEJANDRO LITOVSKY

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Competition for scarce resources is sorely testing global governance and cooperation. But even in the absence of overarching global legal frameworks, it is possible to maintain a sense of common security if the terms of resource investments are founded on long-term political understanding and commercial relationships.

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LONDON – The proclamation of a new Cold War, following Russia’s annexation of Crimea, turned out to be alarmist and premature. However, it reflected the anxiety of today’s decision-makers in the face of a crumbling global order. With emerging economies far from committed to established norms in international relations, many governments and multinational companies are feeling vulnerable about relying on others for vital resources – the European Union’s dependence on Russian gas being a case in point.

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Competition for scarce resources is sorely testing our assumptions about global governance and cooperation, at a time when collective leadership is becoming ever more necessary. But even in the absence of overarching global legal frameworks, it is possible to maintain a sense of common security if the terms of resource investments are founded on long-term political understanding and commercial relationships, rather than short-term competition. 

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The stakes are high. Resource scarcity is closely linked to political risks. Consider, for example, the drought that decimated Russia’s 2010 wheat harvest. In response, Russia imposed export restrictions to shore up its domestic supplies, sending food prices soaring in its main export markets, especially Egypt. This in turn helped spark the political uprisings that spread rapidly across North Africa and the Middle East. Climate change is expected to trigger many more such chains of events.

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One test case for such cooperation is the potentially explosive issue of the Nile Delta’s water resources. Britain’s colonial-era treaty has, since 1929, given Egypt a veto over any upstream river project that might affect the country’s water supply. Several Nile Basin countries, including Sudan and Ethiopia, have now ratified a new, Nile River Basin Cooperative Framework agreement, which Egypt has yet to sign. Given Egypt’s concerns about potential water shortages arising from Ethiopia’s new upstream hydropower plants, its assent is far from assured.

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Indeed, in Egypt’s febrile political atmosphere, its newly elected president, General Abdul Fattah el-Sisi, may be tempted to escalate the threat of military action in response to Ethiopia’s hydropower projects. Such a move would send shockwaves through a region already reeling from conflict in South Sudan, Syria, Iraq, and Lebanon. 

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To avoid another dangerous political-environmental chain reaction, nudging all sides toward agreement will require achieving mutual recognition of resource concerns. Ethiopia must credibly guarantee the supply of water downstream, for example, by establishing a water-replenishment rate at its dam reservoirs that does not threaten the onward flow of water to Egypt. At the same time, Egypt, while retaining the fundamental right to protect its water supply, must recognize the interests of its upstream neighbors and be ready to negotiate in good faith a new Nile Basin treaty.

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Multinational companies and sovereign investors like China, which have financed hydropower projects upstream, will come under increasing pressure to adopt a position. They, too, can play a positive role by considering the cross-border investments that will address critical interdependencies, like Egypt’s wasteful agricultural irrigation practices.

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Similar resource-related tensions are surfacing in other parts of the world. Water stress and food security threaten to constrain India’s economic promise, as increasing coal-powered electricity generation diverts water resources away from agriculture. The political risks of investing in Nigeria’s agriculture sector are also rising as a result of the country’s demographic explosion, high inflation, weak rule of law, and insecure land rights, with wider political consequences. 

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These resource strains are aggravated by foreign investments that seek to meet developed-country consumers’ voracious demand for resources without attention to their impact on sustainability in the host countries. This virtual outsourcing of the industrialized world’s environmental impacts, apart from being hypocritical, is no basis for building a strategy for global environmental sustainability.

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Instead, the world needs to invest in sustainable agriculture, renewable energy, and green infrastructure. To be sure, the most promising efforts by leading multinationals today must confront entrenched subsidies and vested political interests. Unless the necessary policy frameworks are put in place green investment initiatives will continue to struggle to achieve a meaningful scale. Moreover, developed and developing countries seem unable even to agree on a fair division of environmental responsibilities, even though they have become increasingly interdependent in trade, investment, and the supply of natural resources.

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These difficulties should not stop us from trying. The Earth Security Initiative is working with the BMW Foundation to develop global roundtables on resource security over a two-year period, starting in Hangzhou, China, on July 17- 20. These high-level, informal meetings will bring together leaders from politics, business, and civil society in Europe and emerging economies in an effort to bridge just such differences.

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We know what needs to be done, why it is important, and who must be involved to secure our planet’s long-term future. We must now address the equally vital question of how this will be achieved.