Will Tom play in Peoria?

Looks like Tom will be speaking at the 40th annual Central Illinois World Affairs Conference, March 26-27, 2010 at the Par-A-Dice Hotel and Conference Center, East Peoria, IL. Details:

"The World Economy: To the Brink and Back" is the theme. Sponsored by the Peoria Area World Affairs Council, this conference will address the impact of the global economic crisis on US foreign policy, the connection between crime and corruption on the global economy, and the inherent ties between the world economy and the local economy of Central Illinois. The keynote speakers will include Dr. Tom Barnett, author of The Pentagon's New Map; Doug Oberhelman, Vice Chairman of Caterpillar; and Daniel Altman, author of 24 Hours in the Global Economy. Conference registration is available on-line at http://artstix.artspartners.net/default.asp?SearchMonth=3/28/2010&MV=3/26/2010&sel=x. For more information, please contact Angela Weck, Conference Director, at (309) 677-2454 or pawac@bradley.edu.­

Coming to an emerging market near you: capital controls

WORLD NEWS: "IMF Suggest Capital Controls for Emerging Markets," by Bob Davis, Wall Street Journal, 19 February 2010.

The data seems clear enough: emerging markets that had capital controls and used them during the crisis did better than those who did not--and presumably previously let in all manner of "bad" or "hot" money.

The usual bit: everybody wants the content (money), but everybody logically also wants some control--like having dikes for flood surges.

China's designs for Tibet: an economic leapfrogging

WORLD NEWS: "Beijing bets on further growth to stabilize Tibet: Leadership pledges 'leapfrog' progress; Dalai Lama due to meet Obama today," by Geoff Dyer, Financial Times, 18 February 2010.

The article says economic growth in Tibet since 2001 has been 170%. Clearly, it ain't being reasonably distributed to local Tibetans, because otherwise we'd be talking some seriously happy and empowered campers--perhaps even more uppity as a result.

Plenty of Chinese academics admit this state of affairs: the incoming Han do well, the extant Tibetan population does not.

So more growth ain't the answer; better distributed growth is.

The global demand center shifts EVERYBODY'S attention

FRONT PAGE: "China taps more Saudi crude than US as Riyadh looks east: Gulf kingdom seeks 'demand security,'" by Gregory Meyer, Financial Times, 22 February 2010.

"Demand security." I like that.

The Saudis only focused on the U.S. market for political reasons. There is no economic logic to selling to us per se. The PG ranks after Africa after Latin America after North America after America as a source for oil.

So the West-to-East reorientation is both logical and long in coming.

Now let China start picking up the security portfolio in the region and we'll see how that goes for everybody.

Potential in Russia (as the economy worsens)

OP-ED: The end seems near for the Putin model, By Anders √Öslund, Washington Post, February 26, 2010

Aslund has long been an incredibly objective observer of economic trends in the USSR/CIS/Russia. When he speaks, I tend to listen.

Basic judgment here:

A recent week in Moscow left one clear impression: The Putin model of crony state capitalism is dead.

For years, the structure that Vladimir Putin crafted looked invincible, with its steady, high growth rates and effective, mild repression. But the system only distributed ample oil rents to the elites and the ordinary people, creating neither moral nor economic value.

Today the bill is due. In 2009, Russia's gross domestic product plunged 7.9 percent, even though Moscow had the world's third-largest international currency reserves. Russia performed the worst among the Group of 20 leading global economic powers. And as Russian elites realize that the Putin model has failed, opposition to the government is mounting.

Frankly, this is why I always liked the insertion of Medvedev into the presidency. As soon as everybody started crowning Putin as the all-time economic genius, you JUST KNEW it was going to be all downhill from that point, so even just the precedence of his respecting the process provided a nice potential breather scenario by which the bloom would come off the rose, and the widespread assumption that Putin could just take back the presidency was seriously but quietly undermined. It's really different if he's president and the question is, "How do we get him out?" This way can be so much smoother.

Old briefing slide: the Bell curve on talent in the old USSR featured the huge, undifferentiated middle and the "na leva"/grey/black market talent on the left and and the "na prava"/siloviki/security types on the right. As so often has been the case in past Russian mental breakdowns, the first instinct was to parrot the West in everything, so the fixers and schemers ruled the 1990s. That could only go on for so long and the Right reasserted itself, enjoying the brief joy that was supremely high oil prices. Now that such "genius" is discredited, we and Russia face the possibility of something more sensibly middling emerging.

Medvedev represents the tip of that wedge. Is he the answer or the best? Hardly. He's just the guy currently in the slot, but he represents something bigger, and so his political existence is a marker on future opportunities that I expect will surprise people in terms of how much more reasonable that system can become in relatively (in historical terms) short order.

At the very least, analysis such as this reminds us of what a chimera we build when we start bowing down before the all-mighty authoritarian capitalism--a faddish bit that's already fading even as the hyperbolic books keep coming.

Case in point:

Much of Russia's economy is now dominated by monopolistic state corporations such as Gazprom, Russian Railways, Russian Technologies, Transneft, Rosneft and a handful of banks. They are run by Putin confidants who are close friends from his days in the KGB.

Tell me how this differs all that much from rising Chinese flagship companies dominated by the "princelings" class (relatives of top party leaders).

This is a great way to dominate an economy, but a crappy way to pick management talent. Why we should believe this inbred pool should outperform our ruthless market dynamics is beyond me. Such is our overblown crisis of confidence just because our quarter-century-long boom refused to extend itself further. OMG!

More:

These big state corporations accounted for much, if not all, of the decline in Russia's GDP last year. They are a black hole of inefficiency. Their leaders do not know how to run a company, which leads to poor financial results, huge state subsidies, miserable services and enormous corruption.

Read Minxin Pei on the similar explosion of corruption in China.

The Chinese hide a lot of efficiencies by going crazy in extensive-growth strategies, but as I like to point out, the success trajectory there is limited: already China is finding its resource draw harder and harder to low-ball by building deep trade ties with every resourced-cursed country out there, and the turning point of 2010 being the golden year (absolute bottoming out of percentage of non-working dependents) means labor will start costing progressively more. Then there's the undeniable environmental damage build-up and the growing backpressure from the West and other BRICs on the mercantilist trade patterns/currency manipulation/etc.

Point being, the global system is built to accept new risers but is naturally incentivized to push ever harder for reasonable rule-set compliance as they blossom, because "rising" typically involves all manner of cheating. Just ask America. We were masters at it for a very long time.

But as always, our punditry crowns the winner just as his entire throne starts crumbling.

Better story that way, because then they can start selling you on the "amazing" and "unexpected" downfall!

Does that mean I predict state capitalism collapses? No. Means I simply don't buy the current hype of authoritarian capitalism's inexorably ascendancy. In fact, I find it a troublingly stupid trend among serious analysts.

(Thanks: David Emery)

The develeraging in the U.S. reaches an "epic pace"

FRONT PAGE: "Lending Falls at Epic Pace," by Michael R. Crittenden and Marshall Eckblad, Wall Street Journal, 24 February 2010.

Chart is the eye-opener: annual percentage change in total loans outstanding at FDIC-insured banks.

Four times since FDIC created that growth was negative: 1938, 1942, 1991 and 2009. Only the 1942 drop was bigger, and that had to be the USG war effort crowding out private investment absurdly.

2009 saw a drop of 7-8%.

A North Korea I think we could stomach

COMPANIES | INTERNATIONAL: "N Korea operator looks to millions of 3G users: Subscribers reach 100,000 in first year," by Heba Saleh and Christian Oliver, Financial Times 3 February 2010.

Rare-enough nice story from potentially--and logically--influential Seam State Egypt: it's telecom (Orascom Telecom) says its sub in NoKor (Koryolink) has picked up its first 100,000 subscribers. Not bad for a country of only 24 million, especially given the draconian controls over media of any sort.

The hopeful word from an Orascom exec who we should assume is in the know:

We see that there is a very big plan for an economic boom. They are really looking to have, by 2012, a much stronger economy. We believe that mobiles and eventually international communication will definitely be part of this.

Now, the Kim crowd has been making unrealistic plans for years and years, so that part is suspicious, because God only knows that the only way NorKo could get a strong economy fast is by opening up--ala post-Mao or Dengian China.

Then notice how the guy's perspective changes in the quote: We see them with a big plan, and we believe that must include such-and-such.

So yeah, I can see Kim with big plans, and I can see this exec believing in the power of positive thinking, but if this glimmer suggests that Kim is finally going along with the Chinese desire (and quiet lobbying of the past few years) for NorKo to go down the Deng pathway, then yeah, I think we can live with a DPRK that has millions of cellphone users in the foreseeable future.

Of course, North Koreans citizens, so empowered, might not long be able to live with the DPRK as we've long known it.

And that would be even better.

I wish the Egyptians well, and continue to pray that the Chinese will get their way eventually. Because I most definitely prefer the low-and-slow buyout plan.

The NBA is to China as MLB was to Japan

FRONT PAGE: "An NBA Problem Child Packs His Baggage for China: After Playing the Garden, Why is 'Starbury' In Taiyuan? It Must Be the Shoes," by Loretta Chao, Wall Street Journal, 28 January 2010.

Starbury conquers a small slice of a very big potential market: Stephon Marbury, troubled and fading star of the NBA, cashes out in China instead.

Expect a lot more of this in the coming years. Basketball is becoming as big in China as baseball previously achieved in Japan.

How the end of the Cold War screwed up a lot of history

COMMENT: "How political ideology found a new world," by John Kay, Financial Times, 27 January 2010.

Great line:

In Europe the collapse of socialism removed an issue that divided parties, but in the US it removed an issue that united them.

Now we spend our political capital on as many minor and useless divisions as we can come up with.

Half-empty glass on trade war

COMMENT: "Why a trade war is likely to break out this year," by Michael Pettis, Financial Times, 27 January 2010.

We are told at the outset: commentators have been predicting unmitigated, Core-wide trade wars as a result of the global financial crisis. They've been wrong so far in 2008 and 2009, but 2010, this author argues, will be different.

The fight over currency valuations will be the driver.

Cool observation:

Like the US before the 1930s Great Depression, China has benefited from a decade of surging productivity growth and an undervalued currency to claim an outsize share of global manufacturing and a relatively small share of global consumption, which requires it to export the surplus abroad.

So long as global consumption surged in unison, China's tactics were acceptable. Now, they no longer are, meaning nasty backpressure is building against the Chinese throughout the system.

This, the author believes, becomes the trigger: Western fear and stupidity combined with Chinese hubris buttressed by intransigence over the realization that the domestic/export balance cannot be quickly corrected.

The author is a finance professor at Peking U.

This op-ed comes closest to capturing the sum of all my fears right now. It makes the whole Iran WMD thing seem awfully puny in comparison.

Would we want a R&D-busted China "rising"?

FRONT PAGE: "China leads world in growth of scientific research," by Clive Cookson, Financial Times, 26 January 2010.

WORLD NEWS: "Huge shift in Bric's scientific landscape: Researchers in China, India and Brazil have turned the tables on Russia," by Clive Cookson, Financial Times, 26 January 2010.

WORLD NEWS: "Patents in China Hit a Record: Multinationals Say Policies Will Crimp Investment in Technology Development," by Loretta Chao, Wall Street Journal, 4 February 2010.

I just wish I could come across the "acceptable" headline that read:

"China's demand for global resources skyrocketing and environmental problems piling up, but entire apathetic (and rapidly aging) population sitting on its ass, when not otherwise engaged in stupid, government-organized political demonstrations; Chinese premier says, 'What do we need with education anyway?; Millions in America comforted by news that R&D lead growing!"

It would be some weird alternative history where Mao's economic policies actually worked!

So yeah, I'm happy to have all those ambitious and smart Chinese along for the ride.

As for its sudden rise in such activities, it is part and parcel of its developmental trajectory. Look at any Old Core economy that underwent a similar climb, and you'll find the same pattern.

Only slacker among the BRICs? Resource-cursed Russia, mais oui. Brazil better take note.

Cloud on the horizon? New patent regs in China that outside firms see as too protectionist, which "could crimp foreign companies' willingness to invest in cutting-edge technology development in China."

Tom in the Palomar College Telescope

OP-ED: Conservatively Speaking: The shiny side of CO-IN, By Dan McCarthy, The Telescope, 3/1/10

Here's the part that directly addresses Tom:

Dr. Thomas Barnett, one of the leading authors on the subject of globalization as a strategic security interest, calls the various constructions, aid distribution and connectivity expanding endeavors "System Administration," or "SysAdmin" for short.

Those who do these jobs are, collectively, "System Administrators." After high-intensity fighting (invasions/capturing cities) wins the "war," this side swoops in and makes sure to "win the peace." It's the primary objective in any effort to modernize countries stuck in the dark ages, which all operations work toward.

In other words, combat makes system administration possible, and SysAdmin makes combat worth it.

Wolf: escape hatch is small but roomy enough

COMMENT: "How to walk the fiscal tightrope that lies before us," by Martin Wolf, Financial Times, 17 February 2010.

Bit of a smackdown to Niall Ferguson's recent claim that the U.S. is the next Greece waiting to happen. It was pretty standard stuff from Ferguson: extrapolating a disaster/bad trend, however distant or near, to America's "inescapable" near-term future.

I tend to believe that history happens to some countries, while certain special countries--like the United States--tend to happen to history, so I guess I'm correctly described as an "exceptionalist" in the sense that I find myself instinctively recoiling from the "doomed to repeat" arguments traced back to previous states/regimes/empires/etc. I see more precursor and prediction in our role as world's first multinational union than fatalistic follower of pathways engineered by more traditional entities. I also dislike the way Ferguson, who seems to truly admire America, is constantly announcing that the sky is falling every other month.

Anyway, Wolf says this: our fiscal tightrope presents dangers of excessive tightness in the short run and excessive looseness really only in the long run. Rather than advocating a "Keynesian free lunch," Wolf argues that, "the benefits of the higher output today exceed the costs of debt service tomorrow." Ferguson, he states, "believes instead in the conservative free lunch," or the view that "fiscal tightening today would have little effect on activity." Under normal conditions, Wolf says, this is true enough, but since monetary policy has reached its limits, fiscal policy is primarily what remains in the responsible policymaker's toolkit.

The countries with the biggest jumps in deficits were the ones that suffered the biggest bubbles--no surprise.

But:

If these governments had decided to balance their budgets, as many conservatives demand, two possible outcomes can be envisaged: the plausible one is that we would now be in the Great Depression redux; the fanciful one is that, despite huge increases in taxation or vast cuts in spending, the private sector would have borrowed and spent as if no crisis at all had happened. In other words, a massive fiscal tightening would actually expand the economy. This is to believe in magic.

Of course, the heavier debt burden is dangerous--Ferguson's ultimate point. The pathway here is clear enough if distasteful: budget cuts and higher taxes, with the obvious starting point being long-term entitlement spending growth as currently projected. In short, we'll need to redefine retirement.

The big long-term dilemma is the Japan problem: continued private deleveraging AND continued high fiscal deficits. But until the latter issue can be tackled, the private sector must be given, in Wolf's words, time to "heal."

"That, not fiscal retrenchment, is the priority."

Wolf's bottom line: predicting a Greek outcome for the U.S. in the near term is nothing less than "hysteria."

Naturally, you can see why I like Wolf.

Moderate Islam is winning

TERRORISM | ISLAM: "The Jihad Against The Jihadis: How Moderate Muslim Leaders Waged War On Extremists--And Won," by Fareed Zakaria, Newsweek, 22 February 2010.

Nice piece of analysis that Zakaria has offered in the past. Dovetails with plenty of deeper expert analysis.

Here, the Saudis turning on al Qaeda is trumpeted as " one of the most important, least reported trends in the war on terror" (Petraeus quote).

Following Sageman, Zakaria says we're mostly dealing with a "handful of fanatics scattered across the globe" rather than a viably broad political movement. And yes, "handful" is a good term in a world of 6.8B people, especially considering the off-grid locations where they're concentrated (lovely Afghanistan, NW Pakistan, Yemen, Somalia).

Biggest point: 9/11 triggered a crucial rethinking of what constituted progress within the Islamic world, and the good guys (moderates) are winning across the board.

Again, that means globalization is accelerating, not decreasing.

COIN isn't new (it's just no one was listening before)

POST: The Price of Protecting Civilians, by Andrew Exum, The Daily Beast, February 23, 2010

The truly tough stuff to stomach about COIN:

What U.S. military officers have come to learn through the course of these conflicts in Iraq and Afghanistan--and what the parents of soldiers back home need to understand as well--is that in fundamental ways, the conflicts in Iraq and Afghanistan do not resemble the conventional conflicts the U.S. military fought in the 20th century and trained to fight in the 21st. The U.S. military, then, has taken a pragmatic approach to fighting these wars that increases the short-term risks to soldiers and Marines on the ground but also increases the long-term chances of strategic success.

Additionally:

Put another way, the conflict in Afghanistan required U.S. and NATO units to go above and beyond the laws of land warfare in order to minimize civilian casualties and safeguard strategic aims. Units could not afford to be technically clever but strategically foolish. The United States and its military officers in effect realized something our Israeli allies never have--that being legally correct in the execution of combat operations matters little when held in contrast with television images of civilians being exhumed from the rubble of an air strike which might have also killed a terrorist leader. This is not the elevation of some high-minded human-rights ideal--it is a reflection of the hard realities of modern conflict conducted in the age of 24-hour satellite television.

Insurgencies, as Lieutenant General Sir John Kiszely told me in 2007, are like staircases. At the top are the hardcore insurgents. Below them are the facilitators, and below them is the neutral population. At the bottom is the friendly population. Reckless counterinsurgency tactics cause the staircase to become an elevator--everyone moves up until you have alienated your friends and made more new enemies than you can possibly kill, capture, or convince to reconcile with the government.

Smart stuff from a very solid source. But a lot of people have been saying this all along. It's just that, when any one engagement gets reviewed, the logic in isolation from the larger strategic goals tends to suffer from the scrutiny. Our history has been to waste resources like crazy to keep casualties down, something we could do due to our wealth. But that sort of attrition-based stuff just doesn't apply well here. These natives aren't moving; they are the very same "settlers" that must ultimately be accommodated as integration proceeds.

And no, that integration does not proceed as a result of American will. We need to move that childishness of that notion in this day and age, because we are no longer globalization's central driver.

Expect Beijing to push its own technology rules. Our job is to push back.

EDITORIAL: "Beijing tightens technology noose: China's control of technology standards must be resisted," Financial Times, 23 February 2010.

China makes ever stringent demands on producers of IT trying to enter its markets.

Why?

There is all the reason to see their policies as a conscious strategy to use China's girth to shift technology standards by making it too costly for the industry not to adapt.

The potential fruits of this strategy are most obviously commercial . . . the more insidious implication is political.

Commercially, the rules force outside companies to maintain special lines for Chinese products, creating an inefficiency that benefits local companies.

Politically, its all about mastering encryption so as to be able to circumvent it with censorship.

Response?

As a first step, the US and the EU could plan import restrictions on technology posing an unacceptable risk of control by other states. China's export dependence may induce it to change its view.

Goal? Letting China know that, while we cannot stop them from IT censorship at home, we can limit their companies' accrued economic benefits abroad.

Seems reasonable to me.

The pattern: Old Core supermajor JVs with New Core emerging supermajor

COMPANIES & MARKETS: "Shell and Brazil's Cosan plan $12bn biofuels joint venture," by William MacNamara, Financial Times, 2 February 2010.

Been my advice for years, not that I was particularly or even slightly unique in offering it.

Bottom line being, Old Core companies cannot possible sit out the New Core's rise: you need access to those markets, and the hyphenated behemoths that subsequently emerge and conquer the bottom-of-the-pyramid consumer markets.

The Core-Gap split on ECM (equity capital markets)

SPECIAL REPORT: "ECM global volume analysis (pdf)," source: Dealogic, Financial Times, 3 February 2010.

Misleading chart showing ECM (equity capital markets) by size around the world.

NorthAm and Europe seen as behemoths standing alone at $275-300B range, with everybody else far behind.

But what if we combine North Asia (China), Japan, SE Asia, Australasia (I bet the Kiwis love that term), and the Indian subcontinent (it's like a continent, but somehow beneath it; it reminds me of the little girl's line re: South America from "Up" ["It's like America--but south!"--eyes widening on the last word]?

That grouping possesses a collective if unintegrated ECM of $286B, just behind NorthAm's $294B and just above Europe's $275B. There's your obvious tripolar Core, whose greatest gaps are the lack of an Asian union and a related collective currency that would serve as the other half of any two-gang-up-on-the-dollar/euro/asia balancing dynamic.

The more Gap-heavy regions (Caribbean, LATAM, Mideast, Africa) add up to a whopping $38-39B, or a bit over half that of Japan or Australasia alone.

Why this matters? The money flow is arguably the most important flow in globalization, rivaled only by the security flow (mostly provided by US). Asia's big pot will be the driver in shrinking the Gap.

Going (more) with what has worked on health inside the Gap

OBAMA'S BUDGET PROPOSAL: "Strategy Shifts on Global Health: HIV/AIDS Remains Priority, but New Emphasis Is Planned for Tropical Diseases and Efficient Care," by Betsy McKay, Wall Street Journal, 1 February 2010.

I agree with this shift. Easterly's point in White Man's Burden: we are constantly telling poor countries how to manage death (like AIDS) instead of focusing on helping them manage life (the preventable stuff, the kids-oriented stuff, and management of chronic health issues--which HIV increasingly becomes, thank God).

Thinking back to my recent column about the Human Security Project report (got a nice thank-you email from them, saying they love being properly understood): the big reducer of death across the Gap has mostly to do with vaccinations, a subject on which you really must give it up to the health-focused NGOs/PVOs.

A lot of things go into making war so historically scarce right now.

South Africa tilting toward BRICs: been there, saw that

ANALYSIS: "Out of the bottle: South Africa; Two decades since an end was declared to apartheid, companies that once looked to the west or inward are devoting attention to the 'Brics'--and the interest is reciprocal," by Richard Lapper, Financial Times, 1 February 2010.

I picked this up all over the place during my recent short trip to Cape Town. Every conversation started with the BRICs. Hell, Canada gets a lot more mention than the U.S. or Europe, largely because it's such a huge mining presence (and thus the gold-standard--pun intended--for the we-are-not-resource-cursed crowd).

The point of this article: it ain't just mining companies making this shift happen, but finance, retail, telecoms, consumer goods companies, etc.

It is a very profound and persistent shift.

South Africa's trade with the BRICs has almost quadrupled since 2005. That gets you some serious focus. For now the BRICs rank behind Eurozone, the Middle East, and North America (lots of Canuck money, mind you) in terms of total capital investment in Africa (FDI) since 2003, but that will change fast.

Also understand that South Africa thinks of India and China being much closer geographically than the traditional West, and, having flown there, I can see why.