Wednesday, January 13, 2010

Geopolitics of The Nile, Chaos Theory, and the Memory of The Markets (Part 1)

(The River God of the Nile by Michelangelo, Palazzo Senatorio, Rome)

For thousands of years, the fate of Egyptian civilization has been dependent on the legendary Nile River. Two great tributaries, the White Nile and the Blue Nile, converge near Khartoum, Sudan to form the river that we associate with the land of the Pyramids and Pharaohs. The White Nile begins in equatorial Africa, near Lake Victoria (a few years ago I had the opportunity to visit the headwaters of the White Nile, the Ugandan region of Jinja, and was impressed by the extraordinary rapids---the area seems to be a great site for performance kayaking, as well as for fearless locals who offer to swim the rapids in exchange for tourist dollars). The Blue Nile begins at Lake Tana in the beautiful Ethiopian highlands.

The importance of this river to both ancient and modern Egypt cannot be overemphasized, as most of Egypt's 75 million inhabitants live near the river and the majority of the major archaeological sites of Egypt can be found along its banks.

As well as providing the irrigation that allowed for agriculture to support one of the great civilizations of the ancient world, the Nile has, since Biblical times, been known for its tendency to periodically torment Egypt with horrendous floods and equally terrible droughts. It is the tendency of these phenomena to come in clusters---seemingly non-random, consecutive periods of feast and famine---that led to the spooky mathematical discovery that we will soon discuss, a discovery that has been found to also have a great deal of relevance to the financial markets.

The desire to tame this ability of the Nile to occasionally wreak havoc was the driving force behind the construction of the famous Aswan Dam. The project was started by the British, who built the dam now referred to as "Low Aswan". Following WWII and the loss of the British regional protectorate in North Africa, construction of the current, monstrous version ("High Aswan" or simply "Aswan") was overseen by the Egyptian strongman and Arab nationalist Nasser. The superdam opened just after his death in 1971.

The two projects were very different: the British built Low Aswan primarily to prevent disastrous floods. The dam's more modest construction allowed for silt from the Ethiopian highlands to flow down the Egyptian Nile: silt provided nutrients for agriculture along the Nile's banks and acted as a buffer against seawater encroachment from the Mediterranean. However, Low Aswan did not create a truly huge reservoir that would allow for water to be stored during flood periods and later used during droughts. The British hydrologists were very aware of this boom-bust pattern to Nile behavior---we will be discussing the works of a particular British hydrologist very shortly---and intended to deal with shortages by building a series of reservoirs upriver, in Ethiopia and equatorial East Africa, where less water would be lost to evaporation.

From the Egyptian point of view, however, the proposed British upriver reservoir system would place the Nile flow that Egypt received, and thus the fate of Egypt itself, in the hands of foreigners. When Nasser took power in 1952 on a wave of Arab nationalism, one of his very top priorities was the creation of a massive dam at Aswan. As Steve Solomon writes in his highly recommended Water: "As it had been since the time of the ancient Pharaohs, the Nile is still the paramount factor governing the destiny of Egyptian society. But ever since 1971, how the river did so has changed entirely. The giant, multipurpose Aswan Dam utterly transformed the hydrology of the Nile from a miraculous natural phenomenon to a totally managed irrigation channel, and produced copious hydroelectricity for an underpowered nation. The dam fulfilled the dream of 5,000 years by delivering to an Egyptian leader absolute control over the Nile's domestic flow and the power to insulate Egyptians from the dreaded traumas of the river's periodic episodes of extreme droughts and floods."

From a systemic perspective, the Aswan Dam's location is rather stupid: about 12% of the reservoir water ends up evaporating because the dam is located in the middle of a scorching desert, which is the reason why the British wanted the major dam reservoir projects to be up in the Ethiopian highlands. Aswan also blocks the normal silt depositing, so now Egyptian farming is dependent on exogenous fertilizers. Still, the Aswan Dam remains a symbol of Egyptian prestige and command over the Nile, and it has been instrumental in Egypt's ability to sustain the largest Arab population.

(satellite view of the Aswan Dam)

The dam is monstrous in terms of scale: more than two miles long and 360 feet high, Aswan has created an enormous reservoir, the 344 mile long, 8 mile wide Lake Nasser, to protect Egypt from multiyear droughts. The twelve hydroelectric generators at Aswan produced half of Egypt's electricity in the mid 1970s. When the reservoir was originally flooded, it displaced over 100,000 Egyptians and Sudanese (part of the reservoir extends into Sudan) and submerged an untold number of ancient monuments.

(flooding of archaeological sites around the Aswan Dam's Lake Nasser reservoir)

Dark Side of Aswan

Steven Solomon writes: "...yet for all its majestic power, the Aswan Dam has not been able to alter one other historical feature of the Nile: nearly every drop of it originates outside Egypt's borders, while the well-being of Egyptian society depends on consuming a vastly disproportionate share of the Nile basin's water. Beyond upstream Sudan, the countries of equatorial East Africa's great lake plateau provide the sources of the White Nile. By far the biggest contributor of Egypt's water is highland Ethiopia, whose Blue Nile, Atbara, and Sobat rivers supply some 85% of the water, and all the silt, that arrives every June at Aswan. Throughout history, impoverished Ethiopia and the White Nile river states have sipped only a tiny fraction of the Nile's water for their own economic development..."

Just after starting the (High) Aswan Dam project, Nasser moved to secure a treaty with Sudan. The Nile Waters Agreement of 1959, shockingly, awarded Egypt 3/4 of all of the water of the Nile, while Sudan got the remaining 1/4 and the eight other upriver states, most notably Ethiopia, got nothing. It was an extraordinarily brazen "water grab" powerplay.

Nasser's successor continued the policy of making control of Nile flow the top national security concern of Egypt. The assassinated Egyptian president Anwar el-Sadat is generally regarded as having been a great man of peace because of his historic treaty with Israel, so many may be surprised to learn of how stark and bellicose his words to Ethiopia were: "We depend on the Nile 100 percent in our life, so if anyone, at any moment thinks to deprive us of our life we shall never hesitate to go to war because it is a matter of life and death."

Sadat may in fact have been at least partially motivated to pursue peace with Israel because the Israelis had attained air superiority and had been threatening to bomb Aswan. If the Aswan Dam was ever breached---absolutely massive conventional bombing would have to take place, if not an atomic weapon being deployed, in order to break a rock-filled megalith like Aswan---and Lake Nasser were to empty in a single, wild blast, Egyptian civilization would almost certainly be destroyed by the resulting, near-Biblical flood. Sadat's attitude towards Ethiopia frequently featured aggressive, jingoistic war rhetoric, and the Egyptian press at the time bordered on overt racism.

The short version of the story since Nasser came to power is that Egypt has very jealously guarded its giant dam and reservoir, and has not wanted the Nile-participant countries to its south to build their own superdams and thus have the ability to control the flow that hits Aswan. A variety of different ethical justifications have been made for this position, but the two most typical ones seem to be: 1) Egypt, because of the ancient history of great Egyptian civilization on the Nile, has a kind of "first-user" priority when it comes to Nile flow; and 2) Aswan only controls the river flow that affects Egypt (i.e., downstream of Egypt is the Mediterranean Sea), therefore Aswan---unlike an Ethiopian superdam---can never be "weaponized" and used strategically against another country.

The politics of the Nile have had some hideous social consequences: the powderkeg that is connected to any efforts by the Ethiopians to harness the Blue Nile for major irrigation projects has made substantive work in the area difficult. The droughts which Aswan and Lake Nasser shield Egypt from are still strongly felt in Ethiopia: I can remember watching Billy Idol and other favorites perform at the Live Aid concert in England during the mid-1980s. Live Aid was motivated by the great famines that were causing so many starvation deaths in Ethiopia. Well, the starvation was due to a drought that began in the late 1970s and continued for nearly ten years, and the people of Ethiopia absorbed the full shock to their agricultural system because they had no equivalent to Aswan to provide them with a giant reservoir during the extremely dry times.

Solomon: "The great 1980s Nile drought, and the humanitarian tragedy it wreaked on Egypt's southern neighbors, highlighted Egypt's paramount national security priority in securing its near-monopolistic usage of Nile waters and the Aswan Dam's linchpin role in delivering it. At the same time, it painfully exposed the dam's military vulnerability, and the unimaginable devastation that would occur if its towering barrier were breached in an attack."

If we want to find a single blame for the epic, highly televised disaster that was the Ethiopian famine of the 1980s, we might look at the Egyptian nationalism and militancy that have made that country unwilling to allow Ethiopia the same benefits that Egypt enjoys. I'm not trying to find a simplistic, one-factor answer for a complicated set of social, political, geographical, and economic problems, but I will say that Egypt has been remarkably clear about its willingness to go to war over any substantive upstream dam/irrigation projects that might be attempted by the Ethiopians. In November of 1989, upon learning that the Ethiopians were conducting feasibility studies for a dam that would potentially store about 50% of the volume of water that reaches Aswan, Egyptian officials warned the Ethiopian ambassador that any damming of the Blue Nile would be taken as an act of war.

I am going to close the discussion of Nile geopolitics by saying that the situation is proof that the "tragedy of the commons" problem is NOT necessarily solved by having governments engaged. This is still a potentially explosive issue: in 2005, the Ethiopian prime minister said that, "While Egypt is using the Nile water to transform the Sahara Desert into something green, we in Ethiopia---who are the source of 85% of that water---are denied the possibility of using it to feed ourselves."

Enter the Dragon: Chaos in The Nile

The flood-drought cycles of the Nile clearly are of enormous consequence to many African nations, and the reconciliation of these cycles through dam construction projects has ripple effects that could concern the rest of the world as well. So it is no surprise that the boom-bust tendencies of this great river came to the attention of a British hydrologist named Harold Edwin Hurst. Hurst went to Egypt in 1907 and remained there for about forty years; much of his work was centered around the engineering of a larger dam at Aswan. Hurst wanted to determine the optimal size for the reservoir (and thus the dam) according to rainfall patterns and how they affected the flooding and drought cycles of the Nile. What Hurst found, upon investigation, was evidence that the Nile displayed mathematical properties we now refer to as Chaotic. The tool he developed and the fascinating, sometimes frightening things that it and other techniques from Chaos Theory have taught us about many aspects of our world, from financial market prices to earthquakes, were probably the key inspirations for the trading strategy that we employ at this firm, and they will also be the subject of the next blog entry.

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