If you look at where emerging markets are today, and their importance, and the impact of politics on events in Europe and the United States, and the eventual economic outcomes, then it becomes clear that there is a big geopolitical shift happening in the world, never mind resource nationalism. It would seem that relevant political science is becoming more impactful in the marketplace, even for hedge fund businesses.
We all know that we experience creative destruction in the marketplace on a regular basis – this doesn’t surprise any of us. It doesn’t happen as often in global politics – the last time we experienced it was World War II. But it is happening now. When the world order was recreated, during World War II, the United States was reluctant to come into that conflict. President Putin referred to this recently, observing how much pain and suffering was caused in the world because the USA was not prepared to enter the war for quite some time. Wouldn’t it be a pity if we were moving back towards that pre-war world, he said? In some ways this is very insightful, and would be even more insightful if Putin himself were getting on a plane to attend the G8 summit in Camp David this year. But the relevant point is that the post-war global architecture was created largely by the United States.
We’ve addressed it by various iterations – the G6, the G7, the G8 – but in reality it was a G1+. American institutions, American values, American capital, American allies and American priorities. The Bretton Woods Accord, the World Bank, the IMF, the United Nations Security Council – these were all largely American inventions, for good or bad. And it all sounded global. The World Bank is meant to be a global institution, but like the World Series in baseball, it is a sop. It worked perfectly well for many decades because it reflected the underlying balance of power in the world, especially if you include the like-minded countries that shared many of the same values.
Over the past 30 years, of course, the underlying balance of power in the world has shifted, from the United States towards China and from the developed world towards the developing world; from the debtor countries towards the creditor countries; and at some point, if your architecture reflects one world order and the actual underlying balance of power shifts too far in another direction, it will clearly break. The Soviet Union collapsed, but it was not a big enough shock to break the system. Nor was 9/11. But when the 2008 financial crisis happened, that was substantial enough to wreck the system, and this in turn has given birth to the G-Zero.
We created the G20 with the conceit that the 20 largest countries in the world could sit around a table and provide some form of collective decision making for the public good, creating new architecture and institutions. It is an aspirational idea to have a new global accord on trade, like Doha, but it’s not going to happen. It would be nice to have a new global accord on climate change, but that won’t happen either. US-led global institutions are dying, and going forward we’ll have US-led institutions that are not global, or global institutions that are not US-led. Maybe we’ll have neither.
This is already starting to happen with trade. The current US principle is to create the TTP – the Trans-Pacific Partnership – which would include like-minded countries like Canada, Mexico, South Korea, Japan, Australia and New Zealand. Other countries, like Russia or China, would not be invited to participate in that forum, because they want to create a smaller group that will actually be able to agree on fundamental ways to build more effective world trade.This has not been reflected in the US approach to climate change, but it is the US approach on security, on financial architecture and regulation. This is because the financial architecture is not affected by the G-Zero world – the Chinese and Russians don’t play in this game – it’s really still the ECB, BoJ and the Fed, relatively autonomous institutions which are not usually politicised, though some of course would disagree. They seem to work relatively harmoniously.
There has been a huge debate in the US over the past few months over whether or not the country is in decline, but whether or not you believe this, the US is not going to bail out Europe, it is not going to remove Assad from power in Syria, it is not going to lead a new global trade deal and is not, in my view, going to bomb Iran. This is not a decline question, but one of willingness. It means we are heading into a structural environment where geopolitical volatility is much greater, and in that environment emerging markets will seem a little bit more dangerous. There will be more of a flight to quality, there will be more desire to focus on growth and resilience together, and the US will benefit from this in the short term. In the long term the US will suffer from the safe haven curse – a bit like the Dutch disease on resources, but without the resources. To the extent that the US benefits from the G-Zero world, it allows the US to have much more rope to hang itself with, and not to deal with issues like deficit reduction.
Globally, in a US-led world, you did very well if you aligned yourself with that US-led trend. In this world order, it is now very different, and you need to be able to hedge yourself. Countries that I call ‘pivot states’ do particularly well. Mexico is all US, whether it be tourism, trade, remittances or drugs. Canada, on the other hand, looks to Asia for its future. If Obama does not want to build a Keystone XL pipeline to Canada, I know 1.3 billion Chinese that would be very happy to have that opportunity. And it’s not just about energy – it’s about timber, and shipping lanes and lots of other things. Canada can pivot. Ukraine can’t pivot – they’ve got Russia, and that’s about it. Turkey pivots well. Taiwan wants to pivot, but can’t. Vietnam thinks it can pivot over time, but it’s going to be hard. Indonesia and Singapore can pivot very well. It is a way of avoiding capture by a single country or bloc, and it works for emerging markets as well as developed ones.
The G-Zero is not sustainable. Nature abhors a vacuum, and so does geopolitics. If you want to know what comes after the G-Zero, there are two questions you need to ask yourself. Firstly, what is the relationship between the US and China going to be like? These are the two largest economies in the world. Is this going to work in a relatively harmonious way, or will it be more competitive? You have to answer that question if you want to know where the world’s going. Secondly, how much do other countries matter? Will they count, or will things really be driven by the Sino-US relationship?
If the G-Zero started in 2008, with the financial crisis, we’ve had four years to see where we’ve been going on these two questions. My expectation at this point is that the US-China relationship will get worse, significantly worse, and that other countries will come to matter a lot. In part that is because of the trajectory of other countries like Brazil, Turkey and India over the long term, but also because of the limitations of what the US and China will be prepared to do globally, for very different reasons. If I’m right about this, then the world we’re heading towards will not be one where we see new global leadership, with a different constellation of players. It will be one where regions will become more important. It will not be a series of mini-globalisations, however. In Europe integration is about shared political and economic values. It is largely voluntary and institutionalised. In Eurasia, where Russia is doing the integrating, it is more coercive. It is all about energy and security ties to Russia.
There can be a radically different way to think about who wins, and who loses in a region. If you look at the Middle East, absent the willingness of the US, China, Europe or Japan to do the heavy lifting, who does the integrating? It is the Saudis, the Turks and the Iranians. But there is only one problem: they do their integrating in completely different directions and along sectarian lines. The Saudis are supporting Sunni Arab monarchies, the Iranians are supporting largely disenfranchised geopopulations, and the Turks are supporting the urbanised, secularised middle classes. We’re going to see greater proxy fights there – the Middle East does very badly in a G-Zero world. I don’t think it is surprising that since the Arab Spring began, the only country with a definable positive trajectory in the Middle East is Tunisia. It’s a small country and not one we invest in, and that’s the problem. Asia is very interesting, because if you want to talk about Asian economic integration, you have to talk about China. If you want to talk about Asian security integration, you have to talk about the United States. Will countries in Asia be able to balance that over time? Some will, and some will not and that will be a critical question if you want to understand the impact of geopolitics on investment strategies in Asia over the coming medium term.
Q. In theory Europe is a very wealthy area, and yet it can’t seem able to bail itself out, or it doesn’t want to. What is the future for Europe if regions are going to become more important? Is there much future for a united states of Europe?
It is very clear that Tim Geithner’s happy to come to Europe frequently, but he’s not writing cheques. The Chinese were asked to help out, and the response was no. If Europe works, it will be because Europe makes it work, and of course that’s a very different environment from the one we saw following the peso crisis, the Asian crisis, or the Russian debt crisis. That makes it harder for Europe, but that does not mean Europe can’t get through it. It just means that the contest is more challenging, and as a consequence that means the likelihood of a broader recession is greater than it was five years ago, 10 years ago, even 20 years ago. It is not a good time to have a European crisis. I’m also sceptical, because we’re talking about such a large number of states, with different political cycles, and this is not going to change anytime soon. The ability to have a common and coherent foreign policy is going to be a challenge, irrespective of what you think about where Europe itself is heading, and how well the Eurozone will get through this.
Europe is certain to become more inward looking as the result of the crisis – it was already on that path, and the crisis is going to make it worse. There seems to be no political will to come up with a silver bullet solution, assuming there is one. We are set to see Europe dealing with this crisis for the next three to five years at least. You also have countries which once wanted to join Europe now caring less. Turkey is more focused on the Middle East and last year opened 12 embassies in Africa. Turkey’s second biggest trading partner is now Iraq. A few years ago it was Italy. The appeal of Europe has certainly diminished for those countries that spent a long time struggling to get in.
On foreign policy, there’s nothing new. Libya is certainly the most recent example of Europe’s inability to translate economic power into tangible force and that trend will continue. We don’t have leadership in Europe – we have second class politicians across the board. Jose Manuel Barroso and Angela Merkel barely talk to each other. Merkel has a very domestic, incrementalist approach. There is also a big question mark over Mario Montiand whether he will stick around next year after the election. In our opinion, it’s unlikely. So we may have a return to the same old politics, even in the third largest economy in the Eurozone – i.e. a coalition government composed of a very heterogeneous group of parties.
Q. I recall there was quite an interesting book by Samuel P. Huntington about the clash of civilizations and the world polarising into groups, along ethnic or cultural lines for example. Is that something you are suggesting with your views on the major blocs?
Huntington’s best work was before that, Political Order in Changing Societies, a fantastic book. The Clash of Civilizations was not data driven and data matters. Look at what people’s affiliations really are, and you will find that civilizational attachment is much less important than how long they have lived somewhere, the attachment they have to the land, and how much capital they’ve built up there.
Look at the Middle East – Huntington would tell you we’re going to have a big problem with Islam. I look at the Middle East and I see local factors becoming much more important; give all these folks the Internet and these cleavages become much more salient in the media. The first 500 million people in the world to get the Internet were all rich people and all of them attached to liberal democracies. Is it a surprise that we therefore thought the Internet was a tool that brought you liberal democracy? Correlation and causality are not the same thing. When you give 500 million more people the Internet you have a very different view of what actually matters to them and what attachments are most important to them; they’re not civic or national priorities, they are local and tribal. They feel much more oppressed because the ‘other’ is oppressing them, and this generates more conflict. These conflicts tend to be much more localised.
I would argue that Al Qaeda isno longer a major global issue and while there will be Islamic-related problems in Britain and the US, this will have much more to do with domestic populations. Black people who have been incarcerated, don’t have jobs, and have been proselytised by radical imams in the jails – that is a growing issue. It is by no means civilizational, and to the extent the US will have to cope with a civilizational problem, it will stem from these people, not from outside its borders.
Within Eurasia, as Samuel Huntington would tell you, the Russians are Orthodox, and the Muslim peoples in the other republics should hate them. Yet when the Soviet Union collapsed in 1991, the Russians ended up as minorities in all of these countries – with the exception of Armenia they represented over 5% in every newly independent state. They did end up fighting in places where they were civilizationally different, and did they end up integrating where they looked like the other people? No. In Ukraine, and in countries like Latvia, the Russians had a huge problem locally, even though they were civilizationally similar, because they were fighting over resources and land and history, while in Kazakhstan, where they were civilizationally very distinct, they actually integrated quite well. They may not have integrated in terms of intermarriage, they may not have culturally integrated, but they have politically integrated, which is the most salient point in terms of markets.
I do believe we are moving towards a world which is more fragmented, and you will see more coalitions of the willing. Many of these coalitions will be geographic in nature, but some of them won’t. The Trans-Pacific Partnership is geographic in only the most stretched sense, as some of the countries that won’t be in it could fit in terms of geography, but don’t fit in terms of values.
Q. Is the G-Zero world going to be defined in terms of commercial interests, or if not, what will be the driver?
It depends on where you are. If you’re in Europe, commercial interests will be a much more important driver, as will common political values. If you have a Greece or a Hungary able to make deals that make sense from a European legal perspective, that could easily cause a major rift in the EU or Eurozone. For the United States commercial interests will remain very important, but in other parts of the world, they will not be what drives integration. For the last 50 years, globalisation around the world has been commercial and economic – I don’t see that as the primary global driver anymore. My last book was called The End of the Free Market. I didn’t mean the end of the free market in the West; I meant the end of the global free market. We now have a world where the second largest economy is state capitalist. It’s a very different system.
Again, Facebook’s going to have an IPO. A lot of people are going to get rich. 500 million internet users in China are not going to participate in that. It’s not a global Internet. This is fragmenting the market. If you have a different 4G system in China to one you have in the United States, telecommunications will be fragmented. Of course, you’ll also see diversification away from the US dollar as the world’s reserve currency. Politics is injecting itself into the global economic system in ways that will make the world economy and the world market less efficient, but also in ways that will change the way we think about comparative winners and losers.
Q. You mentioned the last inflexion point being World War II, which I find strange because we’ve spent a good 20 to 30 years in a Cold War framework, which was very definitive geopolitical grouping. That was certainly an inflexion point, which most of us have obviously lived through and possibly traded through in the 1990s. The geopolitical structures we’re referring to here, at least in my context, were driven by horrendous bloodshed, so I think it is a bit of a stretch to imagine that an economic event can generate what you’re describing. Coalitions of the willing only seem to work when you have enough core members who share similar value systems, and I don’t think that’s changed.
You’re absolutely right that the post-war period was defined in a large part by the strategic conflict between the United States and its allies on one side, and the Soviets and the Eastern Bloc on the other. Having said that, the global economy and US-led globalisation was a Western-driven manifestation, and when the Soviet Union collapsed, all that accomplished was to speed it up. It brought more countries into the fold. You had 15 new countries in the Soviet Union and a bunch of Eastern Bloc countries that suddenly looked like places that were going to accept values that were shared by the US and its allies. You saw that in terms of the eastward expansion of the EU, NATO expansion, the enlargement of the WTO, all of these institutions. Certainly the Soviet Union and the Cold War was important from a security perspective, but when you think about the world order, it was much more consistent before the Soviet Union collapsed, in terms of globalisation, than it was in the pre-World War II period, and I would argue in the post-2008 period.
The G-Zero world did not come into being with the financial crisis, it was the straw that broke the camel’s back. The G-Zero world has been coming for at least the last few decades. The fundamental point in the G-Zero world is, as Fareed Zakaria would say, the rise of the rest. It is inexorable, and it is not going to change. If it were not for the 2008 financial crisis, it would have been another in five, 10 or 20 years’ time. It would have been some shock that recognised this massive realignment of forces. To the extent that creative destruction happened earlier as opposed to later, frankly that’s better from a global perspective, because you at least have a relatively strong power in the US and its allies to play a significant role in helping to shape whatever order emerges from it.
It is not something that suddenly came out of the blue. It is certainly true that coalitions of the willing are not always led by the United States. It is also true that over the past few decades, most coalitions of the willing have been led by the US, and were the US not to play such a defined leadership role, you would not have such a coalition. One of the most important changes has been the lack of willingness by the United States to play the role of global policeman or lender of last resort – that’s not just a reflection of a more complicated world order, it is also a reflection of what is happening in the United States.
The most important book that has been written on the US in the last year, in my view, is by Charles Murray, called Coming Apart. It talks about the massive fragmentation that has occurred in the United States between the rich and poor. If you look at the US in the last 40 years, and you look at the top 10% of earners, and you look at the attachments that make them optimistic about America’s role in the world – meaningful employment, marriage, religious affiliation, community participation – they’ve stayed remarkably constant for 40 years. Now look at the bottom 90%. They are falling off a cliff in all four categories. The implications of this are that increasingly there is a large percentage of Americans that do not find it in the interests of America to support globalisation. They do not find it in their interests for America to maintain a global military presence. They will not be preached to on this issue.
Barack Obama goes to Afghanistan, signs a deal with Mohammed Karzai, a face saving deal to get out of Afghanistan, and one that will certainly lead to a worse situation on the ground in Afghanistan, which will be a problem for the United States. But it is a bigger problem for Pakistan and India.
36% of the world’s oil travels through the Straits of Hormuz. The Iranians have threatened to shut it down. If the US does not do anything about it, it becomes a problem for the US, but it is a bigger problem for India and China.
The US is not going to remove Bashar al Assad from power in Syria. The civil war has expanded as a consequence, and it is starting to spill over into Lebanon and Turkey, potentially into other countries. That is a problem for the US, but it is a much bigger problem for Turkey, Lebanon, Saudi Arabia and Qatar. This is not just about a sudden post-2008 transition – it is more complicated than that.
With writing a book, you need to give people a big idea, and to say G-Zero started in 2008, people can get that. In the same way, if I say there’s no longer a global free market, it is now free market versus state capitalism, of course there are shades of grey. The US is hardly a free market – in many sectors corporations capture the state in the US. That’s hardly a free market or open regulation. But the US is much more of a free market than Russia or China, and that shade of grey is sufficiently great for us to make a distinction. I’m arguing that the shades of grey are sufficiently different before and after 2008 for us to capture that; I’m not saying that we’ve gone from black to white.
There is an unwillingness on the part of Americans to understand not just 2008, but a series of actions that have occurred over the last 10 years that have really had an impact on what Americans stand for. Look at the elections in 2000, where 50% of Americans believed the outcome was stolen by a partisan vote of the Supreme Court. Look at Worldcom and Enron and Accenture: the US used to have a gold standard in accounting around the world, and suddenly there was a question about that. Look at Guantanamo and ask about human rights. And then you have the 2008 financial crisis and Bernie Madoff, and you ask about how America projects itself in terms of free market capitalism, and the gold standard in capital markets. Ask enough questions like these, and it is not as if the Chinese have better answers, they have worse answers. China’s human rights record is radically worse than anything we have in the United States, but the fact is the Chinese can look at the United States and say “our model is actually perfectly fine too – these folks have no right to proselytise.” From that perspective, the 2008 crisis happened at a very unfortunate time, in terms of the US narrative.
Obama understands that all these things have impacted America’s capacity to be the indispensable leader, but he does not talk about the inherent value of American core values globally. Romney understands the importance of American core values but refuses to talk in any way about the damage that’s been done to them in the course of the past 12 years. It is a problem that Americans are not prepared to address in the near future, and one that is likely to reinforce the G-Zero thesis for the next five years, not help us to come out of it.
Q. It looks as though Putin stole the Russian elections and there could be uprisings there. How will this play out? Will Russia emerge stronger or will we see a Russian Spring?
I believe that if the Russian elections were held fairly, he would still have won, but not by much. He would have lost Moscow in a large way. But Russia’s a large country, and note that Navalny, the opposition leader, came out after the elections and talked very poignantly about how the opposition had mis-read the mood of the rest of the country. They really thought they had much more support than they did. I do not believe that the Russian opposition has the kind of legs that will allow it to fundamentally overthrow the Russian government, and I do not believe that Putin is the kind of leader that is preparing to shift, now that he has taken the presidency again, towards a more reformisttack.
Russia’s heading in a negative direction, but that doesn’t mean you can’t make money there. They don’t have state capitalism in an operational way, they have kleptocracy. But they do need Western technology and management, so Exxon, Mobil, Statoil, companies like that can do very well by coming in and having a good relationship with the Kremlin. But in terms of where the Russian economy is going as a whole, the demographics are disastrous, the rule of law is abysmal, the quality of the bureaucracy is negative compared with many other emerging markets. The big multinationals like Walmart and Toyota that have tried to get into Russia have been very disappointed, and in many cases have either pulled up stakes or simply not expanded.
Q. Angela Merkel has said that she believes Ukraine is a dictatorship. Do you think we’ll see that sort of vocabulary being used by European leaders about Russia?
Absolutely – we’ll see it more from Britain than other countries, but Merkel is very different in this regard than Schroder was. She does not care much about the direct energy relations with the key oligarchs in Gazprom and the rest. She’s certainly not likely to be on their payroll anytime soon. I don’t think Russia will be seen as a pariah, but less as a partner either. It will be harder for the Russians to play the Europeans off one another.
There is a little more coherence on some of this foreign policy stuff coming out of Europe, even though they’re not necessarily willing to do the heavy lifting. If someone has a really defined interest on a big international issue, they can carry more of the day, and this is how I think some of these Iranian sanctions are getting through. As a consequence we’ve seen oil prices come off on lack of geopolitical risk around Iran in the last couple of months.
Q. Netanyahu’s new grand coalition may be a domestic political theme to delay elections. But does it also mean Israel will still look to bomb Iran?
Shaul Mofaz, Netanyahu’s new coalition partner, is much more dove-ish on Iran, so why bringing him into the coalition would make it more likely that they will attack is a mystery to me. With Mofaz inside the tent, it is easier for Netanyahu to have a common front in policy, so it is easier too to have everyone saying the same thing, and this makes the Israelis look more hawkish. That is useful for Israel. Netanyahu does not want to bomb Iran, but neither does America, and this is a problem for Israel. It is hard and dangerous for Israel, and they are also lying about the timeline. They have been very effective in disrupting the Iranian nuclear program via covert means. It is clear that Iran’s enriched uranium program on advanced centrifuges has been delayed significantly because many Iranian scientists are now scared to work on the programme. There are other reasons too, but despite all this the Israeli timeline for when they must attack has not changed. Why not? Because the American election timeline has not changed, and this is what the Israelis are really pegging to. They are trying to maximise their leverage with the US. It’s a smart strategy.