The economics of exclaves

Cut off from their mainland states, exclaves exist in geographic, political and economic isolation. These national offshoots present a number of challenges that are proving difficult to solve

 
Russia's Kaliningrad Oblast, is sandwiched between Lithuania, Poland and the Baltic Sea. The irregular nature of these pockets of land mean they encounter a unique array of challenges 

Deep in the European Union’s eastern fringe, intrepid travellers may find themselves greeted by an unfamiliar sight. Surrounded on all sides by the Schengen Area, a border crossing suddenly emerges and, on the other side, the words: “Welcome to the Russian Federation.” Given the Russian border – as it appears on most maps, anyway – is located some 300 miles further east, this may come as something of a surprise to most.

If there were economic opportunities presented by Kaliningrad’s unique geography, they have largely been opportunities missed

Russia’s westernmost territory, however, is not connected geographically to the rest of the country. Instead, the Kaliningrad Oblast is sandwiched between Lithuania, Poland and the Baltic Sea. At 15,100sq km, Kaliningrad is larger than Lebanon, Cyprus and the Bahamas, and is roughly equivalent to half the size of Belgium. Its capital city, also named Kaliningrad, is 525km from Berlin and 1,093km from Moscow.

It is just one of many exclaves – pockets of land geographically separated from the rest of their nation states by foreign territory – found throughout the world. Similarly, an enclave describes a territory enclosed by another country. Vatican City and Lesotho are the only completely enclaved sovereign states, but many regional enclaves and semi-enclaves can be found around the world. In fact, the scarcity of true enclaves means the terms are often used interchangeably.

Frequently, these national fragments provide difficulties for both their ‘mainland’ states and the countries that surround them. Disconnected from the national governments tasked with supporting them and often facing external trade barriers, exclaves face challenges that contiguous regions simply do not. Where an exclave is the focal point of geopolitical tension, its economic isolation can be particularly striking.

Unequal borders
Visiting an exclave can be a jarring experience: languages that are not widely spoken for hundreds of miles suddenly become commonplace, while state flags belonging to distant nations are hoisted high into the air. Most noticeably of all, the economic disparity between an exclave and its surrounding states can be pronounced.

Located on the North African coast, the Spanish exclaves of Melilla and Ceuta have some of the most unequal borders in the world, with Spain’s GDP per capita almost 10 times that of Morocco, the country that surrounds them (see Fig 1). The coastal exclave of Oecusse, meanwhile, is one of East Timor’s poorest areas, and Central Asia contains nine exclaves that remain at the heart of border disputes, making life difficult for their inhabitants.

If exclaves present headaches for mapmakers, they also cause serious problems for local economies. The Fergana Valley, which lies at the heart of Central Asia’s regional jigsaw, is poorer than the surrounding area despite its many natural resources. Disputed borders are costly to patrol and severely limit local development. What’s more, access between exclaves and their mainland territories is frequently blocked, particularly at times of regional tension. Consequently, national governments often attempt to reroute essential infrastructure in an effort to avoid conflict, but this is not always possible. The route between Vorukh and the rest of Tajikistan alone has been blocked at least 10 times since 2012, stunting economic growth in the exclave and the surrounding area. Blockades, it seems, are not great for business.

Trade is often cited as a way of reducing inequality, but it is here that exclaves face their most pronounced challenges. Whether separated by thousands of miles or just a few feet, the logistical challenge of transiting goods and services in and out of exclaves is significant. Evgeny Vinokurov, Director of the Centre for Integration Studies at the Eurasian Development Bank, believes closer integration could help address the inequality that exists between exclaves and the surrounding areas.

“[One] option is reaching such a level of integration between the mainland state and the surrounding state that the presence of the enclave is no longer problematic and so provides for a smooth passage of people and goods between the mainland and the enclave,” Vinokurov noted in his book A Theory of Enclaves. “Integration between the mainland and the surrounding state softens the issue of transit between the exclave and the mainland, or even removes it altogether.”

For some countries, allowing exclaves to integrate more fully into the surrounding state could be construed as geopolitical weakness

How likely it is for exclaves to achieve closer integration is difficult to say. Susanne Nies, Corporate Affairs Manager for the European Network of Transmission System Operators for Electricity and author of Enclaves in International Relations, believes that, for some countries, allowing exclaves to integrate more fully into the surrounding state could be construed as geopolitical weakness.

“When it comes to enclaves, everything is foreign policy,” Nies explained. “Enclaves are micro-entities with a political history distinct both from that of the heartland they belong to and the enclaving states surrounding them. They are often symbols of victory, and states will do everything to control their trophy.”

Unique circumstances
Exclaves are geographical oddities. Their incongruity with surrounding states presents certain challenges, but not insurmountable ones. In fact, the economic quirks thrown up by these nation-state offshoots can present opportunities, too. The Kaliningrad Oblast, for example, has experienced both highs and lows as a result of its isolation from Mother Russia.

Kaliningrad Oblast

947,873

Population

15,100sq km

Area

1,093km

Distance from Moscow

The early 1990s hit Kaliningrad particularly hard. Lithuanian independence, swiftly followed by the fall of the Soviet Union, caused a huge economic collapse in the region. Between 1991 and 1998, industrial decline in the Oblast was recorded at 70 percent. However, as Russia became increasingly integrated within the global economy at the end of the 1990s, Kaliningrad’s fortunes began to improve. Its location has also ensured that military spending has always been of great economic significance to the region, and today it is home to the headquarters of Russia’s Baltic Fleet, as well as some of the country’s most advanced weaponry.

“Enclaves can be grim and isolated or, on the contrary, paragons of international cooperation, taking advantage of their geographical location,” Nies said. “Kaliningrad can, of course, be used strategically for placing weapons in the immediate neighbourhood of the EU, but it does not need to create a feeling of mutual anxiety in the region. Russia, in the recent past, has also tried to use Kaliningrad as a bridge to the EU… exporting electricity and other assets.”

In fact, it wasn’t so long ago that Kaliningrad’s unique situation made it a poster child for Russia’s economic development. Between 1999 and 2004, growth hit 10.1 percent, outperforming Russia’s other regions (see Fig 2) and, indeed, some of Kaliningrad’s EU neighbours. Its development may have been swift, but it did require a helping hand.

Unwilling to see its westernmost region fall into a state of decay, the Russian Government granted Kaliningrad special economic zone (SEZ) status in 1996, providing a number of tax and customs duty benefits. The region rapidly became a manufacturing hub, attracting food processing factories, car-assembly plants and a host of other businesses. At one point in the mid-2000s, it was estimated that one in every three televisions bought in Russia was manufactured in the exclave.

In these more prosperous times, it seemed as though Moscow’s dream of creating a Baltic Hong Kong was coming to fruition. Then, on April 1, 2016, Kaliningrad’s SEZ status expired. Within a few months, prices on staple goods had increased by between 18 and 24 percent. Major employers, like the once-thriving agriculture firm BaltAgroKorm, were forced into bankruptcy. The harsh economic challenges of life in an exclave had been laid bare. The absence of interregional trade with other homeland states made for an unfavourable business climate, while promises of greater cooperation between Russia and the EU remained underutilised. If there were economic opportunities presented by Kaliningrad’s unique geography, they have largely been opportunities missed.

Out of sight
Nearly 2,000 miles away, the Spanish exclaves of Melilla and Ceuta present further examples of the economic problems created by these territorial anomalies. Every day, thousands of Moroccans make the journey from their villages, towns and cities to collect Spanish goods they can sell on once they’ve made their way back to Morocco. According to customs regulations in the North African country, any items that can be carried unaided are classified as personal luggage and, therefore, not subject to import tariffs. The practice, which is tolerated by both Spanish and Moroccan authorities, may offer some an economic lifeline, but more often results in exploitation.

Meilla and Ceuta’s Legal Smuggling Industry

15,000

Moroccans enter the cities per day for trade

$7.60

Approximate earnings per trip

$1.72bn

Annual value of goods smuggled

30%

Proportion of Spain’s exports to Morocco

45,000

People directly benefitting from the industry

400,000

Number of people benefitting indirectly

Septuagenarian women jostle with out-of-work men for the opportunity to haul packages weighing up to 100kg, each containing a mixture of household goods, food and clothing. In exchange they’ll earn around MAD 70 ($7.60) per trip, risking their lives to do so. Not only are the long-term effects of carrying such a heavy load detrimental to the porters’ health, the journey itself is fraught with danger. Competition for goods at the tight border crossing is intense and has even resulted in the deaths of eight women since 2009 – a result of asphyxiation and crushing.

Although the Spanish and Moroccan governments could work together to crack down on this legal form of smuggling, the cost of doing so would be great. Estimates indicate 45,000 people rely on the border trade for their livelihood, while a further 400,000 benefit from it indirectly. For Spain, this form of atypical trade represents 30 percent of the country’s exports to Morocco, adding up to over €1.4bn ($1.72bn) annually. In Melilla alone, the activity supports a third of the city’s economy. According to Vinokurov, this practice could be considerably more valuable when the trade of illegal goods is taken into account.

“Some 15,000 Moroccans enter Ceuta and Melilla every day, mainly for the purpose of small trade,” Vinokurov explained. “The shadow economy may have even greater value than the legal economy. Black market trade in the enclaves includes stolen luxury cars, gold, diamonds and currency, and the shadow economy includes, on the one hand, smuggling of certain goods and, on the other hand, money laundering. One network, which was uncovered in Ceuta in July 2000, had laundered drug money to the value of $153m in eight months.”

Cut off from the mainland, exclaves force governments to adopt economic policies they would not normally consider. In Kaliningrad, preferential treatment attempted to stimulate long-term prosperity – largely without success. At the same time, many analysts have claimed the financial support provided by Moscow came at the expense of Russia’s other regions. In Ceuta and Melilla, geographic isolation has resulted in an economic loophole being created. Closing it would certainly cause damage to both Morocco and Spain, but maintaining it allows the exploitation of the poor to continue. Tucked away in the midst of a foreign land, exclaves are easy to forget about, and this certainly seems to be the case regarding the terrible working conditions of these cross-border traders.

Tied down
While exclaves may appear to be geopolitical offshoots ploughing their own path, their development is often entwined with that of their mainland state. In the case of Ceuta and Melilla, their economies rely heavily on Spanish support. Although not part of the EU Customs Union, they enjoy preferential treatment as part of Spain. The EU also provided €117m ($143.9m) between 2000 and 2006 for regional development projects, a significant sum given the relatively small size of the exclaves’ populations (84,000 for Ceuta; 86,000 for Melilla). The Spanish Government is also responsible for creating many civil service jobs and financing thousands of military posts in the two cities.

Kaliningrad’s economic fortunes correlate closely with Moscow’s imposition of special economic benefits. While it suffers from economic stagnation as a result of Russia’s reticence to trade more openly with EU, its neighbours Poland and Lithuania are seeing continued growth. For Russia, however, the possibility of closer integration between Kaliningrad and its surrounding states is not likely to be explored, with anxieties over the re-Germanisation of this territory remaining. Although the city of Kaliningrad ceased being the East Prussian capital of Königsberg in 1946, the Russian Government clearly feels the exclave remains vulnerable to outside interference.

While exclaves may appear to be geopolitical offshoots ploughing their own path, their development is often entwined with that of their mainland state

“Enclaves are litmus tests, expressing a lot about international relations, the mainland state and the enclaving state,” Nies explained. “Despite its relative smallness, a country like Russia can’t accept losing Kaliningrad, which, from their perspective, remains a symbol of its victory in the Second World War.”

In India and Bangladesh, the benefit of putting aside historical land boundaries in order to solve present-day problems has been demonstrated recently. In November 2015, the two countries exchanged the many enclaves caught up in their complicated border arrangement. A total of 51 enclaves were transferred from Bangladesh to India, with a further 111 enclaves going in the opposite direction. Previously, the residents of the enclaves were unable to claim citizenship rights in either country, leaving them ineligible for state support. Today, there is hope that infrastructure projects will be launched in the formerly enclaved territories, helping lift the residents out of poverty.

Simply ceding territory to surrounding states, however, cannot solve the issues facing many other exclaves. More than 86 percent of the residents in the Kaliningrad Oblast today are ethnically Russian, while the territories of Ceuta and Melilla have been a part of Spain since the 15th century – before the modern state of Morocco even came into being. Exclaves may appear to be relics of a time when powerful nations made land grabs as they saw fit, but severing them from their mainland countries would not necessarily improve their fortunes. Protectionism, whether warranted or not, may prevent exclaves from achieving their economic potential, but it also protects the national identity of many of their residents.

For exclaves, therefore, the question arises of how to keep their distinctiveness intact without rejecting the economic opportunity that lies beyond their borders. In order to achieve this, political alignment to the mainland must be maintained, but not at the expense of economic openness with surrounding states. Open trading routes are vital for the development of both the exclave and its neighbouring regions, providing this doesn’t take the form of an exploitative relationship. Balancing the trade-off between autonomy and openness will not be easy to achieve, but it’s the only way to ensure an exclave’s distinction does not become synonymous with decline.

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