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Once economics was known as Political Economy; economics departments called themselves Department of Political Economy. Textbooks were titled Introduction to Political Economy. Then over a century ago economics became “Economic Science”. It was all downhill from then on. The result: as yesterday’s Financial Times noted, “There can be little doubt. The science of macroeconomics is in deep trouble. The best and the brightest in the field fight over the most basic problems.”

Recently in Singapore Deputy Secretary of the Ministry of Foreign Affairs Bilahari Kausikan gave a 30-minute overview of global geopolitics in the wake of the global crisis to a group of MBA students at Nanyang Business School. *He stressed how closely linked geopolitics and economics are. Here is a brief summary:

“Economics drives geopolitical change. We learned this in 1997, in the Asian crisis. Experts have been premature in saying that we now live in a multipolar age. U.S. power is still far ahead of any other country in the world. The lesson of the last eight years is not the decline in US power, as many have said. But rather: the Bush Administration learned how hard it is to translate power into influence. The current global financial crisis compounds the difficulties. This, notwithstanding the immense popularity of President Obama — he will experience difficulty, as Bush did, in translating American power into change and influence in the world. The crisis is punishing the American model of capitalism. So, we do not have a multipolar world, but the U.S. needs to act as if it were multipolar. This is not new. In the Cold War, we had a multipolar world. The Cold War was a time of relative stability, because nations had to join one club or the other, in view of the threat to them. Today there is no reason to ‘join’, and so nations pursue their own self-interest. 

There is no alternative model to a U.S.-led globalization. Autarky never succeeds. There may be disillusionment with globalization. But it is not going to go away. There is no alternative. Technologies that have enabled, facilitated and created globalization (e.g. the Web) will not be unlearned. They will not go away. 

The world needs to be led. But by whom? There is no leader at present except the U.S. There is disillusionment, protectionism, international tension, even conflict. But — who will stimulate global demand, to lead us out of the recession? It can only be the U.S. There will be no global recovery unless and until the U.S. economy recovers.

Europe? The EU is internally focused. They seek to protect their own way of life, and have internal problems in integrating the EU nations. China? Not yet ready for global leadership. Russia: a 3rd World economy, based solely on oil and gas, underinvesting in everything, including in oil and gas (because to invest in them would require intervention by American companies, which Russia does not want at any cost). India, too, has internal problems. Japan is the 2nd largest economy in the world, but also has found it very hard to translate economic power into global influence. The Japanese economy has underperformed economically.

China’s relative position has improved. There is talk of a G2, a bipolar world. A new model! This is premature. Neither the U.S. nor China seek this model. The U.S. interest is to preserve the status quo. China too has the same interest. To do otherwise would be to create competition between the U.S. and China, and conflict. Neither seek this, at the moment. 

In the long view, 10-20 years, U.S. – China relations are the key. But — if not G2, then what? We still need globalization. An axiom says: recognizing the problem does not necessarily mean we will find the solution. The world needs globalization. Globalization needs leadership. International bodies do not ‘fill the bill’. They are collections of sovereign states pursuing vested interests. So change will come slowly.

A curiosity: Why are the heads of the World Bank and IMF always, respectively an American (Robert Zoellick) and a European (Dominique Strauss-Kahn)? Why? 

We are in transition from the old system to a new one. Transitions are always painful. They require leadership. For 200 years we have had a Western-dominated system, based on the nation state, a Western invention. The East has had to adapt to Western modalities. Only a handful of countries in the East have made this adaptation successfully. China is one. Simply saying that the West has grown, and Asia declined, is far too simplistic. 

This is a period of greater flux and change, and countries will have to adapt to it. Change is and will be rapid and unpredictable. Countries will have to be nimble! And they will have to participate in a relentless global marathon race. 

One fact is key. U.S.-China relationships will be the most important, for many years. The key issue will be how to rebalance global saving and consumption. How to rebalance a situation where one country did the consumption (U.S.) and another (China) did the saving. 

A curious fact: one shoe factory in China can make one pair of shoes for every person on the face of the earth. There are some 1.2 billion people in China. Even if China shifts to domestic demand, this huge shoe factory will not have nearly enough demand for its output.

Will the U.S. change its behavior temporarily, toward saving more? Permanently? No one knows. In the short to medium term, 5 – 10 years, the world will have greater volatility and greater unpredictability. It will be a less governable world. Everything will be suboptimal. The solutions to problems will require collective globalization.  Climate change. Nuclear proliferation. There is need of leadership, which is sadly lacking. 

The unique nature of our global system, implies that transformation (which must happen) causes conflict, and in the past it has resulted from confict — often World War. Today, we have no such war, yet must create transformation. This has never happened before in history. There is much domestic disfunctionality. Most systems are becoming more pluralistic. National consensus has become more complicated. Electorates are more impatient with politicians, and impatient with public servants. This further reinforces the political volatility.

China and India went to war in 1962. After that, they ignored one another. They are now beginning to cooperate.    The European model is not applicable to Asia. Asia is diverse and multipolar. There will be ‘variable geometry’ in Asia.  Many different organizations, which will overlap, and to which some countries will belong, but not all. And indeed, globalization is a misnomer — a large part of the world is not part of the global system and has not benefited from it. 

The current need for transformative change is unprecedented. It will create instability and volatility in geopolitics.  There are major implications for global managers.   ”
________
* Mr Bilahari Kausikan graduated with a Bachelor of Social  Science degree in Political Science from the National University of Singapore in  1976. He obtained a Master of Arts degree in Political Science from Columbia University in 1980. Mr Kausikan first joined the Civil Service in 1981 as a Foreign Service Officer in the Ministry of Foreign Affairs.  He was absorbed into the  Administrative Service in 1983. He served in various appointments in the Ministry before he was appointed Singapore’s Ambassador to  Russia from 1994 to 1995 and Permanent Representative to the United  Nations in New York from 1995 to 1998. Mr Kausikan has been Deputy Secretary in the Ministry of Foreign Affairs since April 1998.

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Global managers are religious about reading at least one financial daily every day. Miss an issue, and you miss key trends. Today’s issue of Financial Times is proof. In this one issue, once can find many of the key trends going on in the world today.

Pp. 1, 2. Solar power drive. “China plans to offer subsidies to solar power projects”. China has been behind the curve in clean/green tech, but is battling fast to catch up, and will offer subsidies of 50-70 % for solar projects, especially in Western regions. 

P.1. “Goodyear will not be Temasek’s chief”. Chip Goodyear ran BHP Billiton, and a year ago was hired, after a long wooing, to run Temasek, Singapore’s semi-Sovereign Fund. Today it was announced he is leaving, even before he really started. Why? This issue highlights the dramatically important new role sovereign funds will play in capital markets, as they recover, and the strategies they will follow. Goodyear probably wanted to invest in resources. But did Temasek’s Board?

P. 1. “Treasury yields fall on Fed strategy”. Exit strategies apply to VC investments — how do we get our money out? But they also apply to Federal Reserve strategies. How will the Fed turn around its low-interest-rate policy, and hike rates again, and when will the Fed do this? Bernanke’s recent pronouncement on this issue — perhaps to keep his job, as he is up for reappointment  next year and some Dinosaur Democrats want Larry Sommers instead — hints that an ‘exit’ and rising rates will not come soon. Treasuries reacted by seeing their yields fall. 

P. 1. “China to deploy forex reserves in push to speed overseas expansion”. Chinese Prime Minister Wen Jiabao said “we should hasten the implementation of our ‘going out’ strategy and combine the utilization of foreign exchange reserves with the ‘going out’ of our enterprises”. 

Say again? Pardon?

Loose translation: China should begin shifting its $2 trillion dollar asset reserves from paper assets into real assets (companies, resources), thus encouraging its enterprises in ‘going out’ (i.e. globalizing), using China’s vast resources to do so. This is a key trend. What companies will China seek to buy? Where? When? The answer will have vast impact on world markets.

P. 9 “Asia keeps the West’s betrayed faith”. While many Western populations are becoming wary of globalization (realizing, at last, that they have on the whole lost out from it), Asian societies continue to support it (because they have been the big winners). What will the final outcome be — more globalization, less, or the same?

P. 9. “Research conflict point way for ratings agencies.” Remember the ratings agency scandal — S&P or Moody’s rating toxic mortgage-backed securities as AAA when they are B minus?  Research now shows, if you pay analysts based on the accuracy of their recommendations, their research quality improves. Why not do the same for ratings agencies? 

P. 9. “Warring economists are carried along by the crowd.” “There can be little doubt. The science of macroeconomics is in deep trouble. The beset and the brightest in the field fight over the most basic problems.” Macro-economists disagree. Macroeconomists cannot agree on creative ideas regarding how to deal with the global downturn. I am a macroeconomist. My my. Why am I not surprised?….

…and we are only on page 9. 16 more pages to go….

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
July 2009
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