Blast from my past: "Foreign Direct Investment" Decision Event Report" (2001)

Foreign Direct Investment:  
Decision Event Report II of the
NewRuleSets.Project

by

Dr. Thomas P.M. Barnett

with

Prof. Bradd C. Hayes

and inputs from

Dr. Lawrence Modisett

Cdr. Carl Carlson, USN

Prof. Gregory Hoffman

 

18 May 2001 final draft

Contents

I. Project overview and introduction

II. The Asian Energy Futures key findings

III. The Foreign Direct Investment workshop

IV. Starting line analysis

V. The Here and Now of FDI in Asia

VI. The New Rule Sets of FDI in Asia

VII. The There and Then of FDI in Asia (2010)

VIII. Cosmic conclusions about the future(s) of FDI in Asia

I: Project overview and introduction 

This annotated briefing serves as the Decision Strategies Department (DSD) Report for the Foreign Direct Investment: 3+x(Asia)=Triad2? decision event held in New York City on 16 October 2000.

As of 25 May 2001, this summary brief of the NewRuleSets.Project (both an overview of the project and a summation of the Asian Energy Futures and Foreign Direct Investment events) has been presented on approximately 50 occasions to a variety of Washington think tanks, government agencies, and Wall Street firms. Future briefs are always being scheduled, so contact Tom Barnett directly if you are interested in receiving the brief.

The original draft of the Foreign Direct Investment report was posted on the Naval War College’s web site ) on 9 April 2001. Comments on this final version are welcome from all quarters, but especially from the workshop’s participants and anyone who’s seen the brief in person. Comments should be emailed directly to Tom Barnett, the project’s director (<barnettt@nwc.navy.mil>). He can also be reached by phone at 401.841.4053. 

The Foreign Direct Investment event was the fifth in a series of Economic Security Exercises that the DSD has conducted in New York City with the support of Cantor Fitzgerald, the world's largest broker of U.S. Government securities, Eurobonds, and sovereign debt. These events are designed to bring together the worlds of finance and national security to explore issue areas of common interest and, by doing so, build mutual understanding.

For more than 25 years, Cantor Fitzgerald has played a pioneering role as a private-sector intermediary for the fixed income markets. In the early 1970s, Cantor developed the world's first screen-based marketplace for the trading of U.S. government securities. In 1998 it created Cantor Exchange, the first U.S. electronic futures exchange for U.S. Treasury futures. In 1999, Cantor launched a new division known as eSpeed to operate all of its electronic markets. All told, Cantor’s business operations involve financial flows of approximately 50 to 70 trillion dollars a year.

Cantor Fitzgerald provided significant analytic and organizational support to the first three Economic Security Exercises in the series:

• December 1997 event focused on a dual cyber terrorism/disruption of the sea lines of communication (SLOC) scenario involving Wall Street and Southwest Asia, respectively (hard copy of event report is available from the DSD by calling 401-841-1798)
• June 1998 event focused on a dual financial crisis/SLOC disruption in Asia involving Indonesia (hard copy of event report is available from the DSD by calling 401-841-1798)
• May 1999 event focused on the potential global financial repercussions of a substantial Year 2000 Problem (find the report online at ).

eSpeed has stepped to the fore on the NewRuleSets.Project, and serves as Cantor’s support lead for all five of the planned Economic Security Exercises envisioned in this project, beginning with the inaugural Asian Energy Futures event of May 2000 (find the report at <www.nwc.navy.mil/newrulesets/AEFreport.htm>). 

The NewRuleSets.Project is a two-and-a-half-year, five-workshop effort designed to explore how globalization and the rise of the New Economy are altering the basic "rules of the road" in the international security environment, with special reference to how these changes may redefine the U.S. Navy's historic role as "security enabler" of America's commercial network ties with the world. Not a data gathering effort, this project lives and dies with the participants we bring together at our workshops—from throughout the global financial and national security communities. The project has five main goals:

• Explore how globalization and the rise of the New Economy are generating new rule sets with regard to how nation-states and national economies interact with one another
• Determine how these new rule sets alter the basic "rules of the road" in the international security environment
• Link these changes in the international security environment to the U.S. Navy's current quest for a "transformation strategy," with special reference to how these changes may redefine the U.S. Navy's historic role as "security enabler" of America's commercial network ties with the world
• Translate these changes in the international security environment into conceptual paradigms of use to strategic planners in the international financial community
• Generally deepen the cross-cultural understanding both sides—the Pentagon and Wall Street—bring to the table during periods of overlapping geo-strategic and geo-economic instability.

Dr. Thomas P.M. Barnett serves as project director. He is currently a Professor/Senior Strategic Researcher in the DSD. Other DSD personnel involved in the project include:

• Prof. Bradd Hayes, Senior Strategic Researcher, DSD
• Dr. Lawrence Modisett, Chairman, DSD
• CDR. Carl Carlson, USN, Deputy Chairman, DSD
• Prof. Gregory Hoffman, Associate Researcher, DSD. 

The global rule set that has characterized international relations throughout the Cold War period finds its roots in the systemic stresses of the 1930s—namely, the Great Depression and the rise of fascism in Europe. These twin developments led inexorably to the Second World War, from which sprang the hope that "never again" would the international community allow itself to engage in the sort of economic protectionism that destroyed most of the global economic connectivity achieved by “Globalization I” (roughly, 1870 to 1929).

Based on that "never again" spirit, the postwar Western great powers, led by the United States, attempted to "firewall off" the experiences of the 1930s by creating a new global rule set, whose main attributes were exemplified by such international organizations as the General Agreement on Trade and Tariffs, the UN, the International Monetary Fund (IMF) and the World Bank (WB).

This new global rule set engendered the second great period of economic globalization, creating what we've come to know as the globally networked "New Economy." As this New Economy spreads across the planet, it has suffered significant "growing pains" (e.g., Mexico ’94, Asia ’97-’98, Russia ’98, Brazil ’98-’99), leading some to question whether the postwar rule set is still appropriate for the 21st Century. In other words, as national economies become increasingly intertwined in this information technology-driven New Economy, legitimate questions arise as to whether or not a new global financial architecture is in order and, if so, what it might entail.

While not focusing specifically on any of the ideas currently forwarded by economists for such a new financial rule set, our project takes as its starting premise that the current era will witness great change in the planet’s economy, and that these changes will eventually alter our definitions of national security.

NOTE: A portion of this text is adapted from Thomas P.M. Barnett et. al, Final Report of the Year 2000 International Security Dimension Project, DSD Report 00-5, pp. 15-16, found online at . 

As our starting point for analyzing how an emerging new global economic rule set could alter U.S. definitions of national security, we employ the three-tiered analytic perspective introduced by Kenneth Waltz in his seminal 1954 book on the theory of the causality of war entitled, Man, the State and War (New York: Columbia University Press). Waltz’s approach to this eternal question (“Why do interstate wars start?”) was simply to “view” the matter from three separate perspectives, which he labeled “images”:

• The first image, or “bottom up” perspective, is that of humanity itself, or better stated, human nature. In other words, the question he posed was, is it the essential nature of humanity to engage in violence?”
• The second image, or “straight on” perspective, involves the nation-states themselves. In other words, do certain types of states instigate wars while others do not?
• The third image, or “top down” perspective, involves the all-encompassing international system within which these wars between states occur. In other words, does the current structure (i.e., lacking Thomas Hobbes’ Leviathan, or authoritative enforcer of global order) simply allow or even encourage conflict among states?

In essence, Waltz used these three perspectives to test—or poke holes in—conventional wisdom concerning the presumed complicity of man, states and the international system in fomenting war.

We likewise employ Waltz’s analytical framework in discerning the future of inter-state relations in the post-Cold War era, which we will label the Era of Globalization. We think this three-tiered approach forces a certain discipline to our analysis by pushing us to dis-aggregate the emerging global rule sets according to the “location” of the needs they seek to address—namely, the international system, state governments, or individuals.

NOTE: A portion of this text is adapted from Thomas P.M. Barnett et. al, The U.S. Marine Corps and Non-Lethal Weapons in the 21st Century: Annex A—Alternative Global and Regional Futures, Center for Naval Analyses Quick-Response Report 98-9, September 1998, pp. 2-3. 

It is our baseline contention that most militaries—but especially the U.S. military—are largely “frozen” in Waltz’s nation-state image. Why so?

In the Cold War, things were fairly straightforward, as both the international system (through blocs) and individuals (through ideologies) were kept in strict subordination to the state-centered superpower conflict. So when the Pentagon looked abroad, all it saw was "us" and "them" states, with that pesky nonaligned gang in between. The focus on states remains to this day. We call it the "Willie Sutton effect," after the famous bandit who, when asked why he robbed banks, replied, "Because that's where the money is." In other words, nation-states have long served as the preeminent collection point (i.e., taxes) for collective security efforts (militaries), but that has begun to change.

The United States has not yet adjusted its state-centered defense policy to account for the two biggest security trends of the globalization era:

• Power and competition have shifted upward, from the state to the system (in the form of the global economy, culture, and communications grid).
• Violence and defense spending (e.g., small arms races, private security firms) have shifted downward, from the state to the individual.
• Worldwide state defense spending and arms transfers are down dramatically from Cold War peaks, leaving some observers to wonder if the U.S. military is being disintermediated from the global security environment—namely, the perception that it is both irrelevant to the rising market of system perturbations (e.g., financial crises) and largely impotent in responding to the booming market of civil strife. While this is a decidedly harsh judgment, we think it’s important to consider the possibility that the U.S. military is—in effect—losing its market share as global security is transformed by the New Economy.

NOTE: A portion of this text is adapted from Thomas P.M. Barnett, “Life After DODth or: How the Evernet Changes Everything,” U.S. Naval Institute Proceedings, May 2000, p. 48. 

Our take on the future stems from our appreciation of the different trends we see unfolding across the three Waltzian perspectives. First and foremost, we see a future of fewer interstate wars. The early 20th century's high volume of state-on-state warfare will not carry over into the 21st. Nuclear weapons ended great power-versus-great power warfare back in 1945, and as John Keegan predicts, the future belongs far more to civil strife than traditional war.

However, on the international system level we’ll see the U.S. government focusing a lot of diplomatic attention on trying to keep systemic crises—usually triggered by financial tumults—from blossoming into real conflicts among states. Much of this future potential for system-based conflict arises from threats to the global information infrastructure (GII). We get only the slightest hint of this possible future through the emergence of worldwide computer viruses such as the “Love Bug” virus of early 2000. For now, such disruptions seem relatively minor, and since no focused motivations lie behind the acts, little danger is perceived. But it only makes sense that as Information Age economies become increasingly dependent on the movement of raw data, much as Industrial Age economies depended on the movement of raw materials, system-based conflict will be characterized by focused and well-motivated attacks on GII functioning. In short, this is a growing market.

In comparison, real conflicts below the level of the nation-state (i.e., civil strife) should remain fairly constant in the future. Globally there have been a good three to four dozen conflicts every year since World War II that generate 1,000 or more casualties. And while these conflicts are real, U.S. interests tend to be virtual, affording us the flexibility to choose the ones we want to deal with (e.g., Bosnia) and to turn a blind eye to those we don't (e.g., Rwanda).

NOTE: A portion of this text is adapted from Barnett, “Life After DODth,” p. 51. 

So where can a military fit in this new global environment, where almost all the important crises are either too global or too local for most states to tackle with military force? In a world featuring both integrating globalization (i.e., we are all drawn together by the Internet, transportation, mass media, e-commerce, etc.) and dis-integrating localization (so why then do so many societies and economies seem to be coming apart at the seams?), the great challenge facing governments is fostering compromises between the two, otherwise known as glocalization—adapting the local to the global in ways that improve the former's living standards.

Naturally, this can be fairly contentious, with many societies resisting what Thomas Friedman calls "revolution from beyond” (see his The Lexus and the Olive Tree; New York, Farrar Straus Giroux, 1999). In many societies, globalization is looked upon as forced Americanization, and frankly, that’s too much for most people to swallow. Localization, then, becomes a largely anti-Western rejection of the social homogenization fueled by globalization. In turn, any rejection of globalization constitutes a rejection of the concept of a single global rule set, meaning you tell the world, “Hey, in this corner of the planet we do things differently!” You can call it “Asian values,” or “Chinese characteristics,” but in effect you’re just saying that local identity still matters, even as your region may increasingly embrace globalization and all the social and political change that it ultimately forces.

In short, glocalization is the containment of the Globalization Era—sort of a dot.communism, love it or leave it. This individual choice, made again and again in societies throughout the world, will define the ideological conflict of this age: Davos Man (globalization) versus Seattle Man (localization).

NOTE: A portion of this text is adapted from Barnett, “Life After DODth,” pp. 49-50.

All of the published analytic output connected with the NewRuleSets.Project is available online at the Naval War College’s web site at the following address: http://www.nwc.navy.mil/newrulesets.

The web site provides a Project Summary, which we will update on a regular basis as the multi-year research effort unfolds.

For each decision event, such as the Foreign Direct Investment event, we will post three products:

• Read-ahead package that details the event from a procedural standpoint
• Copy of the brief slides
• Event report, such as this annotated briefing.

The web site also offers links to various related sites:

• Naval War College
• Center for Naval Warfare Studies
• Decision Strategies Department
• Biographies of NewRuleSets.Project personnel
• eSpeed.

The web site also offers direct email to project director Tom Barnett for the purposes of commentary and feedback.

The Foreign Direct Investment event is the second of at least five Economic Security Exercises we plan on conducting for the NewRuleSets.Project. Our current schedule is as follows:

• Asian Energy Futures (conducted 1 May 2000)
• Foreign Direct Investment (conducted 16 October 2000)
• Special Decision Event with the National Intelligence Council (conducted 6 December 2000 at the Center for Strategic Studies, Alexandria VA)
• Asian Environmental Solutions (planned for 4 June 2001)
• Special Decision Event with the Naval War College Foundation Board of Trustees (planned for 14 June 2001)
• Food and water resources (tentatively Fall 2001)
• Critical assets of the New Economy (tentatively Spring 2002).

Beyond the June 2001 events, the schedule is tentative and subject to change. We may also add additional events as the research warrants.

Each of the decision events—unless otherwise noted—will occur in one of two places:

• Windows on the World conference center, World Trade Center, New York City
• Decision Support Center, McCarty-Little Hall, U.S. Naval War College, Newport, Rhode Island.

If you or someone you know is interested in attending one of these events (space is extremely limited), please feel free to contact project director Tom Barnett with your nominations.

Each of the decision event workshops involve roughly thirty participants drawn equally from the financial community, the political-military community, and the regional expert community. The point of the effort is not to amass the most impressive collection of focused subject-matter experts, but to bring together a diverse array of experts, decision makers, and opinion leaders from both the public and private sectors, and let the synergy of their intellectual interactions serve as the fundamental analytic output. In short, the goal of our workshops is a "clash of paradigms," and not a rigorous forecasting effort.

These decision events typically unfold over four to five major sessions. Each session involves both facilitated discussion by the group as a whole and individual participation in collective brainstorming tasks, in which we employ a decision software system known as GroupSystems. Using GroupSystems, each participant enters ideas anonymously via a dedicated laptop, while simultaneously commenting on each other’s inputted ideas asynchronously via a portable Local Area Network, or LAN. In effect, then, we intersperse facilitated discussion with a LAN equivalent of a "chat room" where we explore numerous specific ideas in greater detail.

II: The Asian Energy Futures key findings

The following five slides summarize the decision event report we published concerning our first workshop in the series, Asian Energy Futures. This report is found online at .

The following individuals participated in this workshop:

• Dr. David Baldwin, Columbia University
• Mr. Jim Bishop, Caithness Energy
• Mr. Jim Caverly, Department of Energy
• VAdm. Arthur Cebrowski, USN, U.S. Naval War College
• Dr. Alberto Coll, Center for Naval Warfare Studies
• Capt. Dave Duffie, USN, Council on Foreign Relations
• Dr. Dennis Eklof, Cambridge Energy Research Associates
• Mr. Mike Feeley, Sino-American Development Corporation
• Adm. William Flanagan, USN (ret.), Cantor Fitzgerald
• Dr. Ellen Frost, Institute for International Economics/National Defense University
• Mr. Doug Gardner, eSpeed
• Dr. Philip Ginsberg, Cantor Fitzgerald
• Dr. David Gordon, National Intelligence Council
• Under Secretary of the Navy Jerry Hultin
• Dr. David Jhirad, Department of Energy
• Cdr. Mark Montgomery, USN, National Security Council
• Mr. Roy Nercesian, Poten Partners
• Dr. Minxin Pei, Carnegie Endowment for International Peace
• Mr. Robert Randolph, U. S. Agency for International Development
• Dr. Leif Rosenberger, U.S. Pacific Command
• Amb. Paul Taylor, Center for Naval Warfare Studies
• Dr. Katsuaki Terasawa, University of Mississippi
• Mr. Neal Wolkoff, New York Mercantile Exchange
• Mr. Lundy Wright, Morgan Stanley Dean Witter. 

Asia as a whole currently uses about as much energy as the United States, or about 100 quadrillion Btu. By 2020, however, Asia will roughly double its energy consumption while U.S. consumption rises just over a quarter. Asia’s plus-ups are significant no matter what the energy category:

• Oil increases by roughly 88 percent
• Natural gas, 191 percent
• Coal, 97 percent
• Nuclear, 85 percent when Japan is included, but 178 percent when it is not
• Hydroelectric/renewable, 109 percent.

Of the hydrocarbons, Asia comes close to self-sufficiency only in coal. Natural gas is a far different story. This year Asia will use around 10 trillion cubic feet, with Japan, South Korea and Taiwan representing the lion’s share of consumption. These three already buy up virtually all of the region’s currently available methane. The trick is this: Asia’s demand for natural gas skyrockets to 25 trillion cubic feet by 2020, with the vast bulk of the increase occurring outside of that trio. So if those three countries already buy what’s available in-region, that means the rest of Asia will have to go elsewhere—namely, the former Soviet Union and the Middle East.

Asia currently burns about as much oil as the U.S., or roughly 20 million barrels/day (mbd). Since oil is mostly about transportation nowadays, and Asia’s looking at a quintupling of its car fleet by 2020, there is a huge swag placed on this projection. The Department of Energy’s latest forecast is roughly 36 mbd, but even that means Asia has a whole has to import an additional 12 mbd from out of region, or roughly double what it imports today from the Persian Gulf region.

We foresee a series of "rules of the road" emerging for Asia’s energy future.

On the system level:

• We note the decarbonization trend line of human history, moving from wood to coal to oil to methane to hydrogen. Complementing that trend—in an aggregate sense—is the Kyoto Protocol on greenhouse gases, which encourages movement "down" that trend line, even as the CO2 regulatory regime allows some to trade "up" or "down," depending on assigned ceilings and means to purchase additional allowances from others.
• There is the perceived "catch 22" between Asia’s need for large amounts of FDI and the resistance many countries display regarding the transparency Wall Street and other super-markets require for the sort of long-term faith required in infrastructure investments.

On the nation-state level:

• We note the crux of the entire Asian energy problem set: all that infrastructure development will primarily entail private sector money, but too much of the decision making will be performed by government bureaucrats—never a great combination in Wall Street’s opinion.
• It’s also important to remember that Asia is a region still beset by powerful inter-state rivalries and some particularly complex political-military flashpoints that can sour the FDI climate with some alacrity. The four key sources of instability in the coming decade will be: Pakistan-India, China-Taiwan, the Koreas, and Indonesia.

On the individual or subnational level:

• We note that much of the predicted energy growth will depend on individual consumption and usage patterns connected to appliances, electronics, and car transportation. Moreover, the choice to fuel all that electricity demand is often a by-product of economic times, with gas being an easier choice when times are good and coal a last resort when times are hard.
• Finally, workshop participants, while disagreeing on the extent to which green movements would arise in Asia over the coming decades, all agreed that environmental damage (especially health-related concerns from poor air quality) would prove to be an important constraint on many countries’ energy ambitions—unless greater attention was paid to this collective good. 

The following Decalogue describes how Asia achieves its ambitious energy development plans by 2020*:

• The starting-point proposition is that the world possesses more than enough resources to accommodate Asia’s energy growth requirements. There is enough coal, oil and gas to make all those projections come true, and they all exist in sufficient amounts right on the Eurasian continent. So it’s not the resources themselves that are in doubt here, just the economic and political transactions required to move them from A to B.
• Along those lines, so long as the markets work, the resources will flow, but the markets require a certain amount of stability—a sense that economic relationships will pay off over the long haul.
• The biggest input to stability is continued economic growth across the Asian market. Populations have been placed on steep consumption trajectories, and expectations of "better days ahead" widely instilled. So long as things progress, no matter how slowly, stability is likely to remain.
• The energy resources are the key to future growth patterns. The only energy Asia has in abundance is coal, whereas oil and gas must come largely from out of region to accommodate future growth requirements.
• The movement of all this energy into the region will require great infrastructure development, especially as the region shifts ahead to greater natural gas use.
• All that infrastructure development will necessitate large amounts of foreign direct investment—of the long-term variety.
• That money will not flow in sufficient amounts unless Western financial institutions see sufficient transparency, accountability, and rule of law.
• That general transparency stems first and foremost from an overarching sense of security across the region. When countries feel threatened, they necessarily become more opaque to the world at large, erecting more firewalls between themselves and the outside they fear.
• Because serious rivalries still exist across the region, and because multilateral security arrangements are non-existent compared to Europe, the region’s closest thing to a Leviathan is the bilateral security relationships most major players currently possess with the U.S.
• If you remove the U.S. military from Asia, you negate the U.S.’s ability to play Leviathan, and thus threaten the underlying security upon which all this development ultimately depends. Right now the U.S. provides the lion’s share of the collective good of Asian security. It is, in many ways, our main export to the region.

* This slide is presented in an article by Thomas P.M. Barnett, "Asia’s Energy Future Requires U.S. Naval Presence," Proceedings, forthcoming.

How Asia fails to achieve its ambitious energy development plans by 2020:

• The starting-point proposition is that the current global security system is based on universal adherence to—or at least deference to—a single global economic rule set. For most of the last century, the world was divided into two competing rule sets, but that basically ended with the fall of the Soviet Bloc. Now, only a single rule set remains (capitalism), although philosophical struggles remain about the Anglo-Saxon model of capitalism.
• The single global rule set ends if Asia becomes truly insecure—either internally (state on state) or externally (region versus outside world). If Asia’s regional security collapses, the global rule set collapses along with it, for once Asia’s development path is seen as unique, then markets will work one way in Asia and another way elsewhere in the world.
• The internal stability of the region’s major states (and key neighbors) is essential to the security of the region as a whole. Six major players—in addition to the U.S.—seek spheres of influence along largely overlapping definitions of national interest (Russia, China, Japan, India, Indonesia, Australia). Instability in a major regional power therefore invites the perception of vacuum, upsetting the region’s sense of a balance of power.
• Increased consumption is a key component of the internal stability of states across Asia.
• Energy growth is required to fuel this consumption growth, defined increasingly by ballooning demands for electricity and transportation requirements. Most of this new energy demand will have to be met with outside resources.
• Moving all this energy into the region requires great infrastructure development.
• All that infrastructure development will necessitate large amounts of long-term FDI.
• That money will not flow in sufficient amounts unless Western financial institutions see sufficient transparency, accountability, and rule of law.
• That level of reform is unlikely in Asia without a serious pain trigger in the formof an economic downturn of major proportions or a broad financial panic that crumbles years of economic advance. So long as states can muddle through without real reform, they will.
• If such an immense pain trigger were to occur, the shock to Asia’s body politic could be profound enough to call into question it’s ability to adhere to the concept of a global rule set. In short, major portions of the regional economy could—in effect—drop out of the rule set for indeterminate lengths of time—a sort of firewall capitalism. At that point, all bets would be off regarding the West’s willingness to finance Asian energy developments. 

Looking ahead to long-term outcomes, we generate a quartet of long-range scenarios, or landing paths. The X-Y axis is constructed of two questions:

• What is the balance of the overall energy content?
  • High-carb diet = more weighted to coal and oil
  • Low-carb diet = more weighted to natural gas and renewables.
• What is the balance of the overall decision-making mechanism?
  • State-based strategies = more decision-making control is left to public entities
  • Market-based strategies = more decision-making control is left to private entities.

The four scenario titles (generated by our participants) are as follows:

• Pipe Dreams (Low-carb diet + Market-based strategies) reflected the participant’s strong skepticism about such a positive outcome combination. It also captured the consensus opinion that gas pipelines would signal movement in this direction. The skepticism stemmed from the participants’ sense that too much cultural change was needed (and too quickly) to achieve the transparency that would, in turn, trigger a sufficient FDI flow for this outcome to unfold.
• Air Today, Gone Tomorrow (High-carb diet + Market-based strategies) reflected the concern of many participants that an unfettered free-market approach would lead to a spoiling of the "commons"—most notably the air. In short, markets promote cost-cutting behavior and Asia’s path of least resistance here is coal-fired electricity.
• Gaz Kapital (Low-carb diet + State-based strategies) reflected the opinion of most participants that, in many instances, it’ll take a strong state to force the sort of monopolistic approach to infrastructure building that a gas-heavy future would require. So, in effect, participants cited this scenario quadrant as a possible transition stage prior to achieving the preferred Pipe Dreams outcome.
• Coal Day in Hell (High-carb diet + State-based strategies) reflected the pessimism most participants held concerning state-dominated economies with large domestic coal supplies. In effect, they believed the temptation to "burn your own" would be too great for power- consciousness bureaucracies to resist. Naturally, this was seen as the worst possible environmental outcome for states with limited political freedom, since no strong venues would exist to promote the public good.

III:  The Foreign Direct Investment Workshop

We designed the Foreign Direct Investment event with the following goals:

• Generate a "relationship profile" delineating how both Asia and the West must adapt past practices to meet the coming challenges of Developing Asia's huge demand for foreign direct investment (FDI)*
• Explore the key scenario variables and dynamics likely to emerge as Developing Asia's FDI requirements balloon in the coming years, focusing on the need for viable rule sets underpinned by a stable regional security environment
• Determine which political-military instability scenarios present the greatest potential to ruin Developing Asia's FDI climate
• Construct realistic downstream scenarios (covering the next 10 years) capturing Developing Asia's movement toward, or away from, a shared FDI rule set with the world's leading economies (i.e, the Triad of the U.S., EU and Japan "squared" to include a fourth leg—Developing Asia).

The one-day workshop (16 October 2000) was held at the Windows on the World restaurant atop the World Trade Center One. The host for the event was the online securities broker-dealer, eSpeed, represented by Adm. William Flanagan, USN (ret.), Senior Managing Director of the parent company, Cantor Fitzgerald, as well as Dr. Philip Ginsberg, Executive Vice President.

* For the purposes of this decision event, we defined Developing Asia as including: Afghanistan, Bangladesh, Brunei, Cambodia, China (to include Hong Kong and Macau), India, Indonesia, Laos, Malaysia, Maldives, Mongolia, Myanmar, Nepal, North Korea, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand, and Vietnam. These countries constitute the category of South, East and South-East Asia as defined in the United Nations Conference on Trade and Development’s (UNCTAD) annual World Investment Report, which serves as the source for much of the global FDI data presented in this report. 

The Foreign Direct Investment event basically explored, over five substantive sessions, a rough "influence net" model that we constructed to describe the key dynamics of Developing Asia’s ability to attract outside investment and that flow’s long-term impact on the global economy and security environment:

• Concerning "The Blend," we conducted two sessions. In the first session called "Where Asia Gets the Money," participants were asked to determine the likely global pool of FDI stock for the year 2010 and then, through a series of "drill down" votes, determine how much of the total global pool would likely end up in Developing Asia. In the second session called "Energy Case Study," we reviewed the findings from the Asian Energy Futures event and asked participants to brainstorm reasons why state governments in Developing Asia should play a lesser or larger role in developing the energy sector.
• Concerning "The Players," we conducted one session called "Build Your Own Free Trade Zone." This voting process was based on the same logic of "connectivity" that fuels the popular movie trivia game known as Six Degree of Kevin Bacon, or The Kevin Bacon Game. In this effort, we asked participants to build three separate free trade zones, and then, by comparing the three groups, drew some conclusions about which Developing Asian states offer the greatest financial connectivity to the region as a whole.
• Concerning "The Unfolding," we conducted two sessions. In the first session called "Pick Your Dream Investment Partner," we had participants brainstorm ideas about what makes Developing Asia more or less attractive as a target for FDI, as well as what makes the U.S., the European Union and Japan more or less attractive as Developing Asia’s sources of FDI. This session was based on the 1960s American television game show called The Dating Game. In the second session called "Scenario Flashpoint," we examined how a future collapse of the North Korean regime would impact the region’s overall FDI climate, with our participants writing advisory emails to various involved political leaders.
• Concerning "The Adjustment," we conducted one session called "Rule Set Scenarios." In this voting process we asked the participants to name and populate—using "Headlines from the Future" —a quartet of long-term FDI climate scenarios for Developing Asia.

All of these participant brainstorming and voting sessions were captured by the GroupSystems software program for our subsequent analysis, along with our notes of the accompanying discussions. Collectively, this material forms the basis for the analysis we present in this report.

The following individuals participated in the day-long workshop:

• Mr. Mark Arens, U.S. Joint Forces Command
• Dr. James Auer, Vanderbilt University
• Mr. Guy Caruso, Center for Strategic and International Studies
• Mr. James Caverly, Department of Energy
• VAdm. Arthur Cebrowski, USN, U.S. Naval War College
• Mr. Thomas Cunningham, Emcor Group
• Dr. Peter Dombrowski, Center for Naval Warfare Studies
• Mr. Mike Feeley, Sino-American Development Corporation
• Adm. William Flanagan, USN (ret.), Cantor Fitzgerald/eSpeed
• Dr. Philip Ginsberg, Cantor Fitzgerald/eSpeed
• Mr. Jeffrey Goetz, Poten and Partners
• Dr. David Harries, Waterpeople Inc./Maccaferri Consulting
• Mr. Russell Hayward, Dynamic Strategies Asia
• Mr. Jeff Huang, Golden Calf Capital
• Dr. Gary Hufbauer, Institute for International Economics
• RAdm. Michael McDevitt, USN (ret.), Center for Strategic Studies/CNA
• Mr. Edward McDougal, Lehman Brothers
• RAdm. Barbara McGann, USN, U.S. Naval War College
• Mr. Jim Miller, Hagler Bailly
• Deputy Under Secretary of the Navy Charles Nemfakos
• Dr. Minxin Pei, Carnegie Endowment for International Peace
• Mr. John Pike, Zentrale Commerzbank AG
• Dr. Jonathan Pollack, Center for Naval Warfare Studies
• Mr. Lucian Pugliaresi, LPI Consulting Inc.
• Ms. Smita Purushottam, Ministry of External Affairs (India)/Weatherhead Center
• Dr. Leif Rosenberger, U.S. Pacific Command
• Ms. Elisabeth Scheper, Netherlands Org. for Internat’l Cooperation/Weatherhead Center
• Capt. Peter Swartz, USN (ret.), Center for Strategic Studies/CNA. 

This graphic serves as both table of contents for the presentation of analysis and as a rough theoretical model for the NewRuleSets.Project as a whole.

On the question of the future of foreign direct investment in Asia, we break the process down into five distinct stages (moving from left to right across the graphic):

• We begin with the Here and Now time period, which encompasses the Starting Line environment (i.e., current global FDI market), the inevitably larger flows of FDI from the major global sources to Developing Asia (Triad to Quad?), and the dialectical relationship between the size of the global FDI Pie (i.e., do global FDI flows slow or speed up?) and how much of that global pool actually makes it into Developing Asia (Do the Math).
• Moving from the Here and Now into New Rule Sets, we describe the transition point as a sort of Dating Game between Developing Asia’s three great external "suitors" (North America, Europe, Japan), using this paradigm to explore notions of what makes for an "attractive" long-term FDI relationship.
• In the New Rule Sets time period, rather than trying to present an all-encompassing theoretical model of how various potential pathways unfold, we offer instead a "black box" model, or Scenario Dynamics Grid that displays a matrix listing the key economic, political, technological, cultural, environmental, and security dynamics involved in Developing Asia’s effort to attract FDI. As a dialectical expression of those scenario dynamics, we define the evolution of Developing Asia’s FDI environment as a struggle between the forces of transparency (New Laws) and the region’s continuing inability to move away from Old Orders, or that which keeps Asian capitalism an idiosyncratic model of the global brand.
• Moving from the New Rule Sets to the There and Then, we describe the transition point as a series of Tipping Points, or paradigm shifts that we think Asia must undergo before being able to achieve its maximum potential as a global magnet for FDI.
• In the There and Then time period, we present an X-Y axis with four major outcome scenarios, or Landing Paths, fleshing this framework out with a a series of possible sign posts (projected newspaper headlines) for both positive (Good Signs) and negative (Bad Signs) outcome scenarios. We wrap up this model with The Kevin Bacon Game, which has us exploring the concept of which Developing Asian economies are the "most connected" players in the global FDI game.

We begin our analysis with the Starting Line.

IV:  Starting Line Analysis 

This slide shows where FDI sits within the universe of financial flows into and out of Developing Asia (1999) and demonstrates why we chose to focus on just direct investment as we looked ahead to the region’s economic future. First, let’s break down the numbers:

Developing Asia self-finances to the tune of about 40 to 50 percent of its investment needs. So when these countries need money, they can basically count on one another for roughly half of it. The rest of their external net financing comes primarily from three main sources: Japan, the EU and the United States. In 1999, the net flow was approximately $40 billion.

Of that $40 billion, almost three-quarters came from private sources, while just over a quarter came from government entities. This breakdown gives you a sense of the relative importance of the private sector versus the public sector.

On the public side of the ledger, very little actually flowed from the International Financial Institutions (IFIs) such as the International Monetary Fund or World Bank. Most (over 90 percent) originated from bilateral aid agencies such as the U.S. Agency for International Development. These numbers give you a sense of the relatively narrow role played by IFIs.

On the private side of the ledger, there was a large outflow of credit, or previously loaned funds. This flow represents several countries (e.g., South Korea, Malaysia) paying back loans that were extended to them during the Asian Flu of 1997-98. Most of this money was loaned by commercial banks.

Also on the private sector side, there was a huge inflow of equity investments. A small portion of that focused on portfolio investments, or the region’s stock markets, but the vast bulk of that flow involved direct investments—meaning foreign entities actually purchasing assets or existing firms.

We chose to focus on FDI because it is usually more strategic and long term in nature, typically involving transnational corporations or small and medium-sized companies setting up overseas operations. Whereas portfolio investments and loans are far more volatile, FDI reflects the global investment community’s appreciation of the region over the long haul. Also, unlike loans, stocks, or foreign aid, FDI involves actual ownership, meaning it is a far less liquid form of investment suggesting cross-border economic integration.  

Here we look more closely at the relative importance of public sector foreign aid (ODA, or Official Developmental Aid from the Organization of Economic Cooperation and Development, or OECD) versus FDI for emerging markets.

During the Cold War, ODA substantially outpaced FDI as a source of external financing for developing economies. Even as late as 1990, ODA flows were roughly double that of FDI. In that economic paradigm, IFIs like the World Bank and bilateral donor agencies like USAID were major players in deciding which developing economies would receive the most attention. 

This paradigm was turned on its head quite rapidly over the course of the 1990s, suggesting a very different, or new rule set regarding external financing of emerging markets. By the end of the decade, FDI was routinely outpacing ODA by a five-fold margin, effectively pushing the IFIs and bilateral agencies to the margins of the developing world—or to the truly undeveloped economies. Meanwhile, transnational corporations (TNCs) became the great arbiters of the designation "emerging," for TNC-fueled direct investment now represents the largest component of external resource flows to developing countries. According to the United Nations, the world’s average annual FDI outflow for the late 1990s (1995-99) was four times as large than a decade earlier (1985-89).* Simply put, FDI is now one of the most powerful variables of the global economy.

* All references to United Nations figures on FDI are drawn from the UN Conference on Trade and Development’s (UNCTAD) World Investment Reports, various years. Global FDI outflows for the years 1995-99 averaged $540 billion compared to $136 billion for the years 1985-89.

In this slide we explain why we chose to focus on FDI stock (i.e., the accumulated total) versus annual flow.

The chart above compares the net flow of portfolio investments, loans, and FDI into Developing Asia over the 1990s. Looking at stock investment and loans, it is not hard to spot the Asian Flu of the late 1990s, as both lines suffered significant—and in the case of loans, severe—net outflows following its onset.

But looking at the annual flow of FDI, it is not at all apparent that any financial crisis occurred in the region in the 1990s. So while Developing Asia experienced some genuine volatility in both stocks and loans, FDI flows expanded smoothly across most of the decade. This means that at the end of the 1990s, an enormous accumulation of FDI had been achieved by Developing Asia. Unlike loans that have to be paid off at some point, or stock market flows that reverse at a moment’s notice, FDI represents a long term stake—something to be protected by the foreign firm that has put its money on the line. 

We chose to focus on FDI stock because we think the accumulation of such direct investment in Asia’s economic future represents that region’s genuine integration into the global economy—a process so huge and unprecedented that it generates new rules for globalization as a whole. Simply put, by accepting long term foreign investments, Asia puts itself on a pathway of accommodating its particular economic rule set to that of the larger international economic community, represented here by Europe and the U.S.

Now let’s look at the distribution of global FDI stocks by source (outward) and target (inward) regions.

Looking first at the inward stock, we get a sense of where TNCs like to invest, or which countries do the best job of attracting outside investors. What the world is really saying to your country when it invests directly in your economy is this: "We like your future market and we want to be a more permanent part of your success." In short, it is a seal of approval or a sign of long term confidence in a country’s internal rule set.

As the numbers above make clear, four regions of the world attract the vast majority of FDI (just over 90 percent): 

• Europe (39%)
• North America (25%)
• South/East/Southeast Asia (17%)
• South America (10%).

Who are the great sources of that FDI? Here we look at outward stock totals and see that only three regions register in the double digits:

• Europe (53%)
• North America (28%)
• South/East/Southest Asia (15%).

What this charts makes abundantly clear is this: if Asia has to turn to the former Soviet bloc and the Middle East for energy, it has to turn to Europe and North America for the financial resources to make it happen.

V:  The Here and Now of FDI in Asia

Having completed our cursory tour of the FDI landscape, let’s turn our attention to the unfolding of the Here and Now, which we define as the inevitable expansion of the current Triad of global FDI holdings (i.e., United States, European Union, Japan) into a downstream expression which we dub the future Quad (namely, the Triad + Developing Asia).

The concept of the Triad comes from UNCTAD’s 1999 World Investment Report, which described the concentration of global FDI stock in the U.S., Western Europe, and Japan as constituting a special, longstanding stronghold in the global financial community.*

* See UNCTAD, World Investment Report 1999: Foreign Direct Investment and the Challenge of Development (New York: United Nations, 1999), p. 22. 

We like to describe the Triad as the financial embodiment of George Kennan’s Cold War strategy of containment, which focused on the U.S. denying the socialist bloc hegemony over Western Europe and Japan. Obviously, we succeeded in more ways than one, for not only did we deny the Soviets an opportunity to divide and conquer the West militarily, we likewise laid the cornerstone for the second great era of globalization by extensively linking these three pillars through foreign direct investment. 

Not surprisingly, this chart likewise displays the two strongest bilateral military relationships in the international security environment:

• NATO, or the U.S. and Europe
• The U.S.-Japan security alliance.

In other words, FDI follows the flag even more than trade, because FDI represents long term relationships of trust, and these grow most easily between members of stable military alliances.

The Triad of the U.S., the EU and Japan constitute just over two-thirds of the world’s GDP. In this first snapshot of the Triad’s FDI holdings, we include the European Union’s intra-EU investments, which are sizeable. When we do so, the Triad’s share of global FDI outward stock is 80 percent.

Looking within the Triad itself, we recognize the EU as the largest source of FDI at just over half. But this snapshot is a bit misleading, for as the EU continues its process of integration, counting France’s FDI in Germany gets to be a little bit like counting Michigan’s FDI in Wisconsin. In this report, what really interests us is the amount of the West’s FDI assets that are available for cross-regional flows—namely, into Developing Asia.

We gain a better sense of the relative weight of each leg of the Triad when we exclude the European Union’s intra-EU FDI. By lopping off that large amount from the EU’s FDI total (roughly half), we see that the Triad’s share of global GDP and FDI are equal. In this snapshot, it is easier to identify the United States as the world’s largest source of cross-regional FDI resources.

In this and subsequent calculations, we will include the European Union’s intra-EU investments because, for the foreseeable future, the EU remains an entity far closer to a multinational economic union than a federated state like the United States. This approach also (frankly) allows us to use UNCTAD’s FDI data without having to constantly estimate the intra-EU share. 

Proceeding in this manner, we estimate the global FDI stock at $5.7 trillion as of October 2000. If the Triad holds four-fifths of that total, they control an aggregate pool of $4.6 trillion. Using the relative shares established by Snapshot A (EU = 55%, U.S. = 35%, Japan = 10%), we thereby estimate each leg’s holdings as follows:

• EU, $2.6 trillion, with roughly half invested within the EU itself
• United States, roughly one and a half trillion
• Japan, approximately $400 billion. 

It is interesting to note that the Triad’s members each have their own little financial sphere of influence with regard to FDI. UNCTAD’s World Investment Report 1999 (p. 22) identified those countries in which the Triad "dominates," meaning those economies in which one of the Triad’s members accounts for "at least 30 percent of total FDI inflows during a three-year period."

Not surprisingly, much like security-based spheres of influence, these financial variants are based on geographic proximity and/or past colonial relationships (with one notable exception noted below).

The United States’ financial sphere of influence is centered almost exclusively on Latin America: 

• Latin America = Argentina, Bolivia, Chile, Columbia, Costa Rica, Venezuela, Mexico, and Trinidad and Tobago
• Southeast Asia = Singapore (the noted exception).

The EU’s sphere of influence is clearly bifurcated between regional neighbors and former colonies:

• Former colonies = Brazil, Peru, Cape Verde, Egypt, Swaziland, Tunisia and India
• Regional neighbors = Czech Republic, Hungary, Poland and Turkey.

Japan’s sphere of influence is solely concentrated in Southeast Asia, meaning both neighbors and, in several instances, former WWII-era occupied territories:

• Singapore, South Korea and Thailand.

In essence, just as the containment triad represented a political reach extending beyond its immediate membership, its financial counterpart represents an economic whole that’s larger than the sum of its immediate parts.  

Now we turn to Developing Asia and what it brings to the table in terms of FDI outward stock.

Developing Asia’s current pool of FDI outward stock is roughly equivalent to that of Japan, or $400 billion. Using the latest UNCTAD data, we estimate that roughly nine-tenths of that total has been invested within the region itself, leaving only a tenth for distribution to the outside world. Of that 10 percent, the large majority goes to the Triad, and only a tiny fraction to emerging markets outside of Asia. 

In effect, Developing Asia pretty much looks out for itself in terms of direct investment, and does not stray very far from home. That tendency, in combination with the substantial FDI provided by Japan, means that Developing Asia has limited—up to now—its reliance on Western investors to roughly one-third of its total FDI requirements. As developing regions go, this has been a relatively closed system in terms of Western influence. 

As a theme for the Foreign Direct Investment event, we proposed the emergence of a Quad by 2010, meaning:

• European Union (with any new members unlikely to alter its aggregate FDI total in any significant manner)
• North American Free Trade Area (United States, Mexico, Canada)
• Japan
• Developing Asia.

This expansion could be viewed as the next great step in a sort of post-containment strategy designed to:

• Bring Asia into the now-Western dominated community of developed economies
• By doing so, effectively rule out great power warfare in Asia in the same way it has been ruled out among the Triad members.

Such a Quad would be a formidable concentration of economic might, encompassing (as it does today) roughly 85 percent of the global GDP and 90 percent of the global FDI stock.* The individual shares of the Quad’s total FDI pool would be as follows:

• European Union, 55 percent (including its intra-union FDI)
• NAFTA, 30 percent (including its intra-area FDI)
• Japan, roughly 7 to 8 percent
• Developing Asia, roughly 7 to 8 percent (including its intra-regional FDI).

In many ways, the Quad must emerge in practice, if not in form, for Developing Asia to attract the out-of-region FDI it needs over the coming generation.

* The proposed Quad’s current share of global GDP is 85 percent. The GDP percentage shares of NAFTA and the EU would not change appreciably by 2010, while Developing Asia’s would rise slightly from today’s figure and Japan’s would decline slightly. These changes largely stem from demographic changes in Developing Asia (growing) and Japan (shrinking).

Having presented the notions of the Triad and Quad, we can now explain our somewhat cryptic, pseudo-mathematical decision event "formula": 

• 3 refers to the Triad of the United States, the European Union and Japan, or what we like to call the financial embodiment of the Cold War strategy of containment, as well as the three main pillars of Globalization II.
• + x(Asia) refers to our proximate thesis that Developing Asia must turn increasingly to these three main sources of foreign direct investment over the coming years if their ambitious plans for economic development and energy consumption are to be realized.
• = Triad2? refers to our ultimate thesis that eventually Developing Asia will combine with the current FDI Triad to form a recognized Quad.

In terms of global financial architecture, this process is arguably the most important dynamic the world will witness over the coming generation. Naturally, new rule sets (e.g., politically codified expressions of consensus economic tenets) will be required for this process to unfold, but new rule sets will also be a downstream effect.

Where security fits in this argument is a complex question. Clearly, security relations between the legs of the Triad are very strong, forming the deep trust that allows these FDI bonds to form. Currently, many political-military analysts and decision makers in the United States are predicting that Asia will be the focus of interstate conflict in the coming decades. For this Quad to come into being, improved security relations within Developing Asia, and among all four legs of the quartet, is a minimum requirement. If the Quad is achieved in any real fashion, it will reduce the potential for great power war both within Asia and between Asia and the outside world to a considerable degree.

In effect, we argue that the primary strategic goal of the West should be to foster the security and economic integration of Developing Asia to the extent that it effectively joins a developed North that is committed to the long-term integration of free markets and democratic societies.

Having laid our vision for the progressive unfolding of the Here and Now, we now explore the dialectic tension between the amount of money the world has available for foreign direct investment and that share of The Pie that actually makes its way to the countries most in need—the so-called emerging markets. In this section, we asked our participants to Do the Math in a two-fold sense:

• Tell us how how much money the world will likely make available for cross-regional FDI flows over the coming decade
• Help us understand how much of that global pool would end up in Developing Asia, which in effect allows us to plot the strengthening and weakening of existing financial relationships both within Asia and between Asia and the outside world.

Before we took any votes on the subject, we presented participants with the following information regarding the explosive growth of global FDI outward stock over the past 20 years:

• In 1980, the global FDI outward stock was approximately half a trillion dollars. This amount represented 5 percent of the global gross domestic product of approximately $10 trillion.
• Over the 1980s, FDI flows averaged $120 billion a year, increasing the global FDI outward stock in 1990 to roughly $1.7 trillion, or 9 percent of the global GDP of $19 trillion.
• Over the 1990s, FDI flows averaged $400 billion a year, bringing the global FDI outward stock total in October 2000 to approximately $5.7 trillion. This amount represents 18 percent of the current global GDP of roughly $31-32 trillion.

In sum, global FDI outward stock has essentially tripled in both of the last two decades, or a ten-fold increase in all from 1980 to 2000. The FDI stock’s percentage share of the global GDP has basically doubled in both of the last two decades, or a 2 to 3 fold increase in total from 1980 to 2000. Annual flows of FDI has increased 10-fold from 1980 to 2000.

The total picture presented by this data suggests that FDI has become a profoundly important variable in the functioning of the global economy, both as an absolute amount and when measured against the world’s economic growth. For example, global outward FDI flows averaged 5 percent of gross fixed capital formation at the Cold War’s end, but rose to roughly 12 percent by 1998.

What we proposed for the next ten years was that the twin patterns (i.e., rough tripling in absolute stock and rough doubling of percentage share of global GDP every decade) would extend themselves one more time. If this were to occur, the global FDI outward stock in 2010 would be approximately $15 trillion, or 36 to 38 percent of expected global GDP. The annual average flow of FDI required to achieve this growth is approximately $900 billion. For comparison’s sake, the 1999 FDI flow was $800 billion, and in 2000 it was $1.1 trillion. The Economist predicts a drop to roughly $800 billion in 2001 (24 February 2001, p. 80).

This slide lays out our four-step process for Doing the Math on the likely growth of FDI inward stock for Developing Asia by 2010:

1. Our participants voted on the global total of FDI outward stock for the year 2010. Noting that the current global total was just under $6 trillion, we gave the participants a range of 5 to 15 trillion US dollars (constant), instructing them to pick a whole number.
2. Having then determined the Quad’s share of the global total (using the previously established estimate of 90 percent), our participants voted on the percentage share of the Quad’s total that would remain within the quartet, i.e., invested in one another.
3. Having established how much of the global total would be kept within the Quad, our participants next voted on the likely distribution of the Quad’s pool among its four members.
4. Finally, we determined the likely inward stock of Developing Asia’s FDI for the year 2010 by adding up the estimated FDI stock totals flowing from:
   • United States to Developing Asia
   • European Union to Developing Asia
   • Japan to Developing Asia
   • Developing Asia to itself.

The point of this effort was not to come up with the most accurate forecast of FDI flows, but to force the participants to confront their own expectations about the future functioning of the global economy and their assumptions regarding the ability of the West to pull Asia into a closer, more integrated financial relationship.

We begin the process with the first vote on global FDI outward stock in 2010.

Our participants voted for a global FDI stock of $11 trillion, or a rough doubling of the current (October 2000) global stock. Considering the decline of global equity markets since the decision event last fall, this prediction may strike some as still unduly ambitious, despite the resistance of our participants to embrace the notion of another tripling of the stock amount.

Let’s put this vote in some perspective. First off, global FDI annual flows could drop to roughly $500 to 550 billion and still reach the $11 trillion mark, meaning annual flows could average roughly half of 2000’s record flow of $1.1 trillion. So, in many ways, this vote represented a certain pessimism about the future, despite the prediction of a doubling effect.

Secondly, a 2010 FDI stock total of $11 trillion would represent just over a quarter of the predicted global GDP of $41 to 42 trillion—far from a doubling of today’s percentage share of 18 percent.

Finally, as a point of comparison,we note that the Economist Intelligence Unit (EIU) has just published a report (February 2001), entitled World Investment Prospects, which they claim is the first detailed global forecast of FDI flows. In this report, the EIU predicts a global FDI outward stock total of $10 trillion by the year 2005. This would equate to an average annual flow of $900 billion, or a flow roughly 60 percent heavier than what our group of participants predicted.

If the Quad, as we predict, holds 90 percent of the global FDI stock in 2010, then its combined total would be just under $10 trillion. The totals for each leg of the Quad would be as follows:

• NAFTA, 30 percent or $3.0 trillion
• EU, 55 percent or $5.5 trillion
• Japan, 7.5 percent or $750 billion
• Developing Asia, 7.5 percent or $750 billion. 

Having voted on the size of the global FDI "pie" for the year 2010, we next asked our participants to determine the likely share of the Quad’s total FDI outward stock that would remain within the quartet. In effect, we asked them to think ahead to how much the Quad members would choose to concentrate their FDI in one another vice the rest of the world. 

In preparation for this vote, we informed participants that the Triad members currently keep approximately two-thirds of their pooled FDI outward stock within the Triad itself (i.e., invested in one another and, in the case of the EU, within the Union itself).

We also reminded participants that, on average, Developing Asia states invest upwards of 90 percent of their outward FDI flows in one another.

In this vote, we asked participants to make a number of simultaneous decisions:

• How the current distribution within the Triad’s three legs would change with the addition of Developing Asia
• How much Developing Asia might redirect its FDI outward toward other Quad members versus how much it would likely keep for itself
• How much remaining FDI each member of the Quad would employ outside the quartet, or to the rest of the world (e.g., Latin America, former Soviet bloc, Southwest Asia, Africa).

Accounting for Mexico and Canada in NAFTA’s total.

In this second vote, our participants voted to keep roughly 80 percent of the Quad’s predicted 2010 FDI stock pool of $10 trillion within the quartet, or approximately $8 trillion. This represents a higher percentage of concentration than that currently seen within the Triad, but that only makes sense given the tremendous economic opportunity represented by Developing Asia over the coming decade, and the fact that Developing Asia adds roughly 4 billion people to the mix.

After deciding how much of the Quad’s FDI total will remain within the quartet, we asked the participants to decide how the pool would likely be distributed among the four legs over the next decade. In effect, we asked them to think ahead to how much the Quad members would choose to concentrate their FDI in Developing Asia vice the other legs—and the rest of the world.

In preparation for the third vote, we informed participants of the current breakdown in FDI stock percentages for each leg of the Triad:

• The strongest bond obviously exists between Europe and the United States, as both direct over 90 percent of their in-Triad FDI total to one another.
• In contrast, neither the EU nor the United States seems able to achieve much direct investment in Japan, which, by all descriptions, throws up a lot of formal and informal barriers to inward FDI flows.
• Japan’s outward FDI is the most evenly distributed within the Triad, with approximately two- thirds going to the U.S. and one-third to the European Union.

In many ways, it is fair to describe the Triad as an incredibly strong dyad with a third leg that clings to both.

Finally, we reminded our participants that Developing Asia currently directs only a small fraction of its FDI outward flows to developed economies.

The one thing we did not provide the participants were current estimates of each Triad members FDI flows to Developing Asia, preferring to let them "guesstimate" those flows on their own.

This last vote was the most complex of the three, but in many ways, all we were asking the participants to do was to tell us which dyad relationships within the proposed Quad would grow stronger in terms of FDI flows over the next decade and which would grow weaker.

Rather than present percentages here, we delineate which dyad relationships grow stronger (measured against today’s estimated percentage shares) over time and which grow weaker. 

For NAFTA, the participants voted for stronger dyads with all three Quad partners, meaning less FDI available for the rest of the world. The same basic judgment was offered for the European Union.

In Japan’s case, the group voted for a stronger FDI relationship with only the EU, envisioning a smaller percentage of Japan’s FDI flowing into North America (presumably because it is hard to imagine us investing any less in Japan given how little we do today) and Developing Asia. As a result, a greater share of Japanese funds would be made available for the world outside the Quad (e.g., former Soviet bloc, Mideast, Latin America).

As for Developing Asia, the group basically predicted an opening up of the region’s heretofore "closed" FDI loop, meaning far higher percentage flows to all other Quad legs, as well as to the world outside.

We believe we can draw three basic conclusions from this vote:

• Even a strong reorientation of Western investment toward Developing Asia is unlikely to weaken the already formidable trans-Atlantic FDI bond.
• A strong reorientation of U.S. investment toward Developing Asia may weaken some of our financial connectivity with Japan, in large part because they do not yet allow us into their economy in a meaningful way.
• A strong reorientation of Western investment toward Developing Asia is likely to free up Asia FDI for redirection to other parts of the world.

In sum, when the West invests in Asia it helps to integrate that region into the global economy on two levels: by tying the West closer to Asia and by tying Asia closer to the rest of the world. 

Having completed our three "drill down" votes, we are now able to calculate our workshop’s estimate for the likely available inward stock of FDI in Developing Asia in the 2010 timeframe. This calculation is not presented as a "scientific forecast"—something better obtained from an industry group or The Economist Intelligence Unit—but rather as a bias-revealing vote by a cohort of experts covering the issue from political, economic and security angles.

A second point to remember about this calculation is the timing of the vote in relation to market trends. As of mid-October 2000, the market decline was already in full swing, although the full extent of the bear market was not yet in view. Accordingly, it is fair to say that this group vote was not taken by those still caught up in the so-called high-tech bubble of 1998-2000, nor by those unduly depressed by the markets’ rapid decline in the first half of 2001. Nonetheless, this entire voting scheme must be viewed as nothing more than the collective opinion of some smart people one morning in the fall of 2000. 

Using our "drill down" voting process, we finally arrive at the following estimated figures for inward FDI stock available to Developing Asia in the year 2010. 

Not surprisingly, our participants predicted that Developing Asia itself would provide the largest share of FDI, or between 35 to 40 percent of the total amount of $1.45 trillion. NAFTA would provide the second largest amount at just over a third of a trillion, then the EU with just over a quarter. Japan and the rest of the world would combine to provide approximately $300 billion, or one-fifth.

How do we interpret this combined estimated total of $1.45 trillion FDI inward stock for Developing Asia in 2010?

First, we note that Developing Asia typically accounts for roughly half of the FDI flows into Emerging Markets. So if we double $1.45 trillion to get a $2.9 trillion total for all Emerging Markets, that would represent a 26 percent share of the global total ($11T) the group voted for previously. Such a percentage would be in line with historical averages. According to UNCTAD, Emerging Markets have typically garnered one-quarter of global FDI flows over the years.

Second, we will cite the particular vote of Dr. Gary Hufbauer of the Institute of International Economics, who recently completed a major study on world capital markets.* Hufbauer’s 2010 estimate for all Emerging Markets was $2.9 trillion, or 24 percent of his global FDI stock vote of $12 trillion.

In sum, we believe the participants’ votes are defensible both in terms of fitting within historical ranges and corresponding reasonably well to mainstream economic forecasts. Again, compared to the Economist Intelligence Unit, our group was fairly conservative, but we only expected that since we brought together a fairly wide range of expertise to discuss both future potential and future problems.

* Wendy Dobson and Gary Hufbauer, World Capital Markets: Challenge to the G-10 (Washington DC: Institute of International Economics, 2000). 

By any fair estimate, our vote was somewhat rigged. After all, our starting premise for the workshop was Developing Asia’s need to attract more FDI from the West over the coming years to accomplish its ambitious growth targets. So it’s no surprise that our voting process indicated that experts expect more Western investment in Asia in the future. 

The question we were really searching to answer here was: How much might the West’s relative financial influence in Developing Asia increase? In effect, if Asia can continue to self-finance to a large degree through intra-Asian FDI, state-based financing, internal savings, and trade surpluses, then the West’s ability to draw Asia toward a single global rule set is limited.

What do we then draw from this session?

• Right now we estimate that the West has cumulatively provided just under a quarter of Developing Asia’s inward FDI stock, compared to the two-thirds that Asian themselves (Japan included) have supplied.
• Based on this voting process, we believe Developing Asia is transitioning to a new reality in which extra-regional providers will come to dominate the FDI market.
• Over the next decade or so, we foresee the West’s position in Developing Asia’s inward FDI stock roughly doubling from its current percentage share.
• While it would be naïve to equate a rough doubling of percentage share with a doubling of financial "influence," it does seem fair to say that the West’s economic influence in Asia will rise dramatically over the coming years as a result of further financial integration brought on by a combination of globalization and Developing Asia’s extraordinary need for foreign investment.

Of course, what cannot be extrapolated from this simple exercise is the answer to the eternal question about the chicken and the egg, which we paraphrase here: Does the West’s rising economic influence lead to the emergence of new rule sets in Asia or must new rule sets arise in Asia for the West’s economic influence to grow?

Where does this vote leave us following the great decline in equity markets in early 2001 and the resulting slowdown in the global economy? How much stock (pun intended) can we place in this sort of projection?

Again, we like to emphasize how modest our group’s projection actually turns out to be when compared to recent history.

Developing Asia ended the 20th Century with an inward FDI stock total of about three-quarters of a trillion dollars. To achieve a 2010 stock total of $1.45 trillion, the region would need to attract around $70 billion a year (counting both intra- and inter-regional flows). $70 billion equates to roughly the average inward flow of the mid-1990s, or substantially less than what poured in during the heyday of the high-tech bubble in stock markets at the very turn of the century.

During this voting process, we took time out at several occasions to ask participants to brainstorm reasons why they might be wrong in their collective guesstimate of $11 trillion in global FDI stock for 2010. This slide presents ten of the best arguments we heard about why there won’t be a larger FDI flow into Developing Asia over this decade.

The arguments can be grouped into four general camps:

• The 1990s were extraordinary, and past performance does not guarantee future results.
• There is a natural ceiling on FDI: at some point more mature market venues appear and investors will prefer them for their increased efficiency and ease
• The global economy is due for some breakdowns, crises, snafus.
• Developing Asia is simply ill-equipped to absorb all this investment without destabilizing outcomes.

Here we present the flip side arguments, or why there very well could be a bigger FDI flow into Developing Asia than we’re envisioning.

The arguments can likewise be grouped into four general camps:

• The global fundamentals are in good shape; this is just a necessary pause in the action.
• Transnational corporations are the big drivers here, and they see a big market they want to be part of (think about a middle class of perhaps a billion people!).
• If there is a natural ceiling on FDI, Asia is a long way away from it, given the immaturity of their financial markets.
• Asia is opening up and working on new rules, so the long term looks very solid.

By presenting these alternative analyses, we give you a sense of the range of opinions that came together in three, very particular votes. In short, we had a full complement of both bulls and bears.

VI:  The New Rule Sets of FDI in Asia

Moving to New Rule Sets, we shift gears from number crunching to a norm-oriented brainstorming exercise where we explore the notion of what makes a region an "attractive" FDI partner, in terms of either providing or receiving investment flows.

We dub this workshop session "The Dating Game," after the 1960s American television game show of the same name.

The original version of "The Dating Game" debuted in December 1966 and immediately became a major game show hit on American television.

During its seven-and-a-half year daytime run on the ABC network, earning a distinction as the 31st longest running television game show in history, the program set up some 3,000 dates for contestants. Appearances on the show helped launch the fledgling careers of numerous actors who later became major television and movie celebrities, including Sally Field, Tom Selleck, Burt Reynolds, Arnold Schwarzenegger, and Steve Martin—to name a few.

The show was designed to feature two date selections during each half-hour program. The format was simple: three young men or women (the "contestants") sit on stage and vie for a date with a young woman or man (the "guest") who is hidden from their view. Only the host, the studio audience and the television audience could see both the guest and the contestants at the same time. Asking questions especially prepared to reveal the romantic nature of each contestant, the guest judges their responses to determine which one is best suited to his or her particular taste. At the end of each segment, the selected contestant joins the guest to share a prize date, which always includes a fun-filled weekend during which they travel to some desirable and romantic destination.

In effect, the Dating Game was an early form of what we now call reality-based television: the show replicates a real-life dynamic (choosing someone for a date) in an artificial environment for the entertainment value of simple voyeurism. 

In our version of the game, we cast Developing Asia as the guest, with three contestants vying to win the FDI "date" that leads to a long term economic relationship: 

• NAFTA
• European Union
• Japan.

And yes, as with any committed relationship, this one also involves a subtle mix of personal attraction (e.g., cultural ties), fear and loathing (security issues), interpersonal conflict (political controversies) and a desire for long-term financial security (it always comes down to money, doesn’t it?).

In this first round of questioning, the guest (Developing Asia) asks the three suitors to offer up what they think is their single best feature.

Having opened the game as such, we turned our participants loose with their laptops to brainstorm how each of the contestants might answer.

This slide presents a selection of the best ideas we received from our participants. They are grouped in trios along the following lines: 

• The first row ("Most dynamic…," "Alternative to US…," "Most money…") focuses on a combination of sheer market capacity and the security muscle that comes with it. The U.S. is presented as the obvious leader in both categories, but Europe is seen as offering the same economic package without the additional national security "baggage." Japan is presented as the most liquid ("most money and fewest scruples") or easiest to deal with, since it does not represent a security challenge.
• The second row ("Management talent…," "Experience in…," "Strong existing networks…") focuses on management capacity. The U.S. is presented as the most forward leaning, while Europe is presented as the most experienced. Japan, once again, is presented as the easiest fit.
• The third row ("Most New Economy…," "Don’t judge…," "We’re here…") focuses on Developing Asia’s hopes and fears regarding globalization’s ultimate impact. The U.S. is presented as the leading edge of the New Economy, while Europe is contrasted for its ability to export Western efficiency without imposing "alien" values. Japan is contrasted even more as the "local boy made good," who is more like its neighbors than these upstart, New Economy-types from the West.
• The last row ("...movies!" "...movies," "...movies") focuses on cultural differences. The U.S. is seen as an egomaniacal exporter of culture, while Europe is contrasted for its sophisticated acceptance of other cultures. Japan, yet again, is presented as the insider who can really understand the local environment. 

In this second round of questioning, the contestants are asked to reveal their least attractive feature as it relates to serving as a source for FDI. Here our participants brainstormed critical descriptions of all three economic players, as they might be viewed from the perspective of Developing Asia. 

This slide presents a selection of the best ideas we received from our participants. They are grouped in trios along the following lines:

• The first row ("Impatient business…," "Labor rigidity to US…," "Not reciprocal…") lists the classic gripe about each economy’s business practices. The cliché on the U.S. is our lack of patience and our incomprehensible political system (to wit, the 2000 presidential election). The European cliché is the pampered, privileged German worker who’ll defend his eight weeks of vacation to his dying breath. Japan’s cliché focuses on its lack of reciprocity.
• The second row ("Impose values…," "Lotsa bureaucrats…," "Very arrogant…") explores the concept of business culture. The U.S. is blamed for Seattle Man and our tendency to moralize about other people’s "unfair practices." Europe is criticized for going overboard on rules, especially as the EU cracks down on union-wide standards for everything from beer to ball bearings. Japan is tagged for its well-worn mask of cultural superiority, which as of late has definitely shown signs of cracking.
• The third row ("We’ll pollute…," "Not very good…," "Terrible corporate…") zeros in on each system’s Achilles heel. America is the land of the lowest common denominator—a Hobbesian economic wasteland where everyone races to the bottom. Europe is an old fogey in a young man’s game, and clearly doesn’t have the stomach for hyper-competition. Japan’s corporations, once the envy of the world, are now despised by many as dinosaurs from another age.
• The last row ("…experience at building nations," "…experience as landlord...," "…experience as labor overseer...") gets at the worst historical baggage each side brings to the table in Asia. The U.S. is seen as the militaristic bully, Europe as the former colonial master, Japan as the unrepentant war criminal. 

In the last round of questioning, the tables are turned on the Guest, and we ask our participants to brainstorm both compliments and criticisms of Developing Asia as a target for FDI.

This slide groups the most interesting ideas in best-worst pairings:

• The first row ("…growth potential," "…growth dangers") gets right to the heart of the matter. When the international business community looks at Asia, the first thing they see are markets, markets, markets. It’s the bromide, "If I could just get every person in China to buy one . . .." But with that potentially massive market comes a demographic downside: Asians have already abused their environment mightily in their rapid industrialization. How much worse could it get when you combine all that population growth with mass consumerism?
• The second row ("Great labor…," "Our markets…") tackles two great clichés: Asians as hard- working (true, but what Emerging Market features lazy workers?) and Asian as one vast marketplace (when in reality Asia is a jigsaw puzzle of countless markets, each a little different from the rest). India is a good example on both counts. Non-resident Indians certainly do well abroad, suggesting that if the Indian government just got out of the way more often, India would have a lot more to offer the world. On the other hand, there is no more fractured market in the world, with its hundreds of languages and dialects.
• The third row ("We love technology…," "Don’t like to share info…") highlights the great irony of the region: the juxtaposition of great skill in information technology design and manufacturing and an almost culturally ingrained distaste for transparency. Outside of India, where is the press truly free in Asia?
• The fourth row ("Governments are friendly…," "Governments are rigid") targets governments which seem to specialize in maximizing control versus encouraging individual and corporate risk-taking. If China spent half as much time encouraging e-commerce as it does trying to keep its population under "mouse arrest," how much further ahead would that economy be in ten years?
• Finally, the last row ("I don’t have a weight problem…," "I have a very unstable personality...) cites arguments about the region’s historical maturity. Despite featuring some of the oldest continuous civilizations in the world, Asia features a lot of insecurity—both real and imagined—that detracts from its obvious positive attributes as a up-and-coming center of the global economy.

We now turn to the Scenario Dynamics Grid, which is our "black box" model of sorts. Here we seek to arrange, in a systematic fashion, those broad scenario elements that we think—in aggregate—offer us the majority of the explanatory power we need to analyze how this huge process of change unfolds over the coming years.

The scenario elements we cite here are obviously not the only ones in play, and we don’t pretend that this 3X6 matrix encompasses the universe of change that will be FDI in Developing Asia from now to 2010. Rather, we choose to focus on these 18 scenario elements because we think it’s important to tackle the subject with both vertical depth (i.e., drilling down through Waltz’s three levels) and horizontal breadth (i.e., our six global "lenses" of economics, politics, technology, culture, environment, and security*).

These 18 scenario elements are, so to speak, signposts directing us to where the change connected with the growing role of FDI in Asia’s economic development is most likely to be concentrated—in terms of causality. Naturally, the more we research the subject, the better our signposts become in terms of clarity, but for now, these are the best 18 scenario elements we can identify.

The scenario dynamics grid as a whole should be viewed as a sort of smorgasbord: we think all of these elements are potentially in play for all of the countries in question, but obviously each country’s path will be a selection of sorts from the larger menu of possibilities. As such, the grid is purposely defined in a rather generic fashion, so as not to concentrate too much explanatory power on just one country to the detriment of others.

* The six global "lenses" roughly correspond to Thomas Friedman’s notion of "six-dimensional" thinking about globalization, as expressed in his The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar Straus Giroux, 1999), see the chapter, "Tourist With an Attitude," pp. 3-24.

Beginning with the economic lens and focusing first on its nexus with the international system, we cite the fundamental tension between two possible future pathways: an Asian economic grouping that is Japan-centered or one that is anchored more by a rising China. The difference may be crucial not only for Western business interests, but U.S. national security interests as well. A Japan-centered grouping is more likely to favor a trans-Pacific orientation, while a China-centered one would likely remain captive to Beijing’s concept of "globalization on our terms."

In many ways, Japan is ahead on the learning curve, having already experienced the collapse of its state-dominant development model, whereas China’s may linger for years to come—or collapse soon enough from the rigors of international competition once it finally joins the WTO.* But eventually one country will emerge from that crucible, and whoever gets there first may well determine which country dominates the region over the long haul. For now, both are too weak to serve as the organizing principle of a truly integrated Asian market.

At the level of the nation-state, we note the all-important question of whether or not Asian economies move away from the Japanese banking model and toward that of the U.S. In a nutshell, Japanese banks, in collusion with the government, value firms more for their strategic relationships than their profit potential, leading to lots of bad loans to businesses that would otherwise falter in a more open marketplace. As a result, Japan’s banking crisis has dragged on for years now, while the U.S.’s Savings & Loan crisis of the late 1980s was dispatched with our usual harsh speed.**

Finally, on the individual level, we cite the potentially large role Asian personal savings accounts could play in the region’s investment future. Simply put, too much of Asia’s financial assets sit in do-nothing bank accounts when they could be employed in more efficient capital markets.

* On this subject, see Craig Smith, "Private Business in China: A Tough, Tortuous Road," New York Times, 12 July 2000, p. A1.

** For a good review of the crisis, see Stephanie Strom, "Rickety Japanese Banks: As Borrowers Collapse, Is New Bailout Needed?" New York Times, 8 September 2000, p. C1.

Turning to politics and focusing first on its nexus with the international system, we note the important role played throughout the region by Strategic Financial Alliances (SFAs). SFAs are prevalent in Asia because too many governments there simply do not get along well with one another. A classic example is Taiwanese airlines investing in their Chinese counterparts despite a ban on direct flights between the two countries. Often, SFAs work through a neutral intermediary, which is how a lot of investment flows into China via Hong Kong and Singapore—two linchpins in Asia’s SFA network. For example, two firms that otherwise would not join together are willing to do so if the right Singaporean firm steps in as a cornerstone in the alliance. In sum, SFAs represent international networking at its best: getting around the political roadblocks that too many governments put in the way of value-enhancing business partnerships.*

Dropping down to the nation-state level, we cite the obvious issue of rule of law. Few things scare away foreign investors more than judicial caprice, especially when it smacks of political motivation. Governments can facilitate a return on investment, but only a sound judiciary guarantees a return of investment when conflicts arise.**

Finally, and much in the same vein, we focus on cronyism and corruption at the level of the individual. It is the judgment of many experts that Asia simply has not "cleaned up its act" sufficiently as a result of the Asian Flu of 1997-98.*** While a few heavyweights disappeared in the financial earthquake (Indonesia’s Suharto the most prominent example), the culture of cozy business-government relationships persists throughout the region.

* Thanks to Dr. Minxin Pei for his inputs on SFAs.

** For a good description of this problem in China, see Erik Eckholm, "Judicial Caprice in China: 4 Families Share Stories," New York Times, 10 September 2000, p. A10.

*** On this subject, see Sheryl Wudunn’s chapter, "Reinventing Lives," in Nicholas D. Kristof and Wudunn, Thunder From the East: Portrait of a Rising Asia (New York: Alfred A. Knopf, 2000), pp. 143-62.

Turning to technology and focusing first on its nexus with the international system, we emphasize India’s emergence as a global information technology superpower. The country’s high-tech enclaves already account for roughly half the software written in the world today, an achievement that is not so surprising when you realize India has the largest pool of IT workers in the world. Then again, it also possesses the largest pool of illiterates in the world. In some ways, India matters most as an example to the rest of the developing world. If globalization succeeds in India, where half the population is terribly impoverished, then it can succeed just about anywhere. But if it can’t succeed in democratic India, with its booming IT sector, then where can it succeed?*

Moving to the nation-state level, we note the loss of control many Asian states are experiencing as a result of the Information Revolution. One good example is last year’s South Korean parliamentary election, when the Internet proved itself a political force. When political activists wanted to publicize past corruption by certain candidates, the timid mainstream press took a pass, only to find itself outflanked by the Web. Out of 86 candidates named in a corruption "blacklist," 58 lost in a stunning turn of events.** A second prime example is seen is the mobilization of Falun Gong members in China by the group’s reclusive, New York City-based leader, working primarily through postings on his website.***

Finally, on the individual level, we cite the coming wireless revolution in Asia, which is likely to transform social interactions there to an unprecedented degree. One reason why this revolution will advance so quickly in Asia versus the U.S. is that Asians never became addicted to "fat" visual content on the Internet in the same way that Americans have. As such, Asians are far more willing to adapt themselves to using handheld devices for real-time alphanumeric communications, moving them ever closer to the concept of an "Evernet" of 24-7-365 connectivity.****

* On India’s IT, see Anthony Spaeth, "India’s New Incarnation," Time, 27 November 2000, p. B2.

** See Doug Struck, "Internet Changed Culture of S. Korean Vote," Washington Post, 15 April 2000, p. A14.

*** On Falun Gong, see Elisabeth Rosenthal, "Beijing in Battle With Sect: ‘A Giant Fighting a Ghost,’" New York Times, 26 January 2001, p. A1.

**** On the Evernet concept, see Barnett, "Life After DoDth," and Thomas Friedman, "Brave New World," New York Times, 22 September 2000, p. A29. 

Shifting over to culture and focusing first on its nexus with the international system, we cite global fears regarding Asia’s cheap labor. Of course, this is a bit of a red herring, because if all it took to attract FDI was cheap labor, then Sub-Saharan Africa would attract the lion’s share, and this surely is not the case. Clearly, more than just cheap labor must go into the mix. But it is just as clear that Asia as a whole suffers from widespread underemployment, which is the real reason why labor remains so inexpensive. Simply put, many Asian workers are poorly utilitized in many sectors, where great gains in efficiency could be had, given the right blend of new rules and greater access to financial capital, which, in effect, work to free private firms from the influence of political powers more interested in preventing unemployment than maximizing growth potential.* 

Dropping down to the level of the nation-state, we highlight the phenomenon of Asia’s clannish business structures, wherein a small number of families tend to control inordinate amounts of national economies in states such as Indonesia and the Philippines. In effect, these oligarghic market structures mean—as one of our participants put it—"a lot of FDI flowing into Asia is really ‘family direct investment’" that never escapes the grip of these powerful clans, thus limiting the potential multiplier effect in the economy as a whole.**

Finally, at the individual level we note the important variable represented by the overseas Chinese who work throughout the world, but are especially concentrated in the Asian region. They are important in a two-fold sense:

• Their remittances back to China are substantial, as are their estimated personal savings.
• Their presence in other Asian countries not only causes local concerns about a Chinese "fifth column," it also places these expatriates in the position of serving as convenient scapegoats during economic tumults.***

* On China, see Craig S. Smith, "Sharp Shift for China’s Economy as Entrepreneurs Woo Investors: New Rules Easing Companies’ Access to Capital," New York Times, 28 December 2000, p. A1.

** The top 15 families in Indonesia control over 60 percent of the corporate assets; in Philippines and Thailand it is between 50 and 60 percent. Other countries registering 25 percent of higher include Malaysia, Singapore, and South Korea. This data is cited in Andreas Kluth, "A Survey of Asian Business: In Praise of Rules," The Economist, 7 April 2001, p. 6.

*** This was most obviously the case in Indonesia following the onset of the Asian Flu; for an overview of this situation, see Brian Barry, "A Survey of Indonesia: The Faltering Firefighter," The Economist, 8 July 2000, pp. 1-16. 

Switching to the environment and and focusing first on its nexus with the international system, we cite Asia’s growing out-of-area energy requirements. The region approaches self-sufficiency only in coal. In natural gas, where requirements are expected to roughly triple over the next two decades, Asia must increasingly turn to the former Soviet bloc and the Middle East, since advanced economies in the region already buy up the lion’s share of what’s produced locally. In oil, Asia’s requirements for out-or-region imports are predicted to double by 2020. Asia already buys up roughly two-thirds of all oil produced by the Persian Gulf region, and will buy approximately three-quarters as early as 2010. These dynamics create a co-dependent relationship between Asia and the energy-rich regions of the Persian Gulf and Central Asia: Asia is increasingly dependent on the political-military stability of these regions, and these regions are increasingly dependent on the economic stability of Asia.*

Moving down to the level of the nation-state, we focus in on the role of the state in the energy sector. One of Wall Street’s great concerns about the future of energy in Asia is the disproportionate mix of public decision making and private finance—namely, too much of the former controlling the latter. The historical record of state energy planning around the world is rather dismal, and yet, in the case of Asia, the states that will experience the most rapid increases also feature the heavy hand of state control.** In sum, while Wall Street likes to see monopolies build networks, it prefers them to be run by market forces once they are operational.

Finally, on the level of the individual, we note the general environmental issues connected with all this rapid growth. It is fair to say that Asia’s infrastructural requirements over the next two decades are unprecedented in human history. The combination of rapid rises in energy consumption, population, urbanization, and water usage will further damage an already battered regional ecosystem.***

* For a good overview of this connectivity, see Robert A. Manning, "The Asian Energy Predicament," Survival, Spring 2000, pp. 73-88.

** For a good description of Enron’s difficulties in the Indian electricity market, see Celia W. Dugger, "High-Stakes Showdown: Enron’s Right Over Power Plant Reverberates Beyond India," New York Times, 20 March 2001, p. C1.

***For good analysis on this subject, see National Intelligence Council, Global Trends 2015: A Dialogue About the Future With Nongovernmental Experts, NIC 2000-02, December 2000, .

Finishing with security and turning first to its nexus with the international system, we will argue that there exists in Asia a division of spheres of influence between China and the United States.* In effect, China is the dominant mainland power in the region, while the U.S. is the dominant maritime power. By and large this regional balance of power has been stable, with occasional lapses into mini-standoffs such as the 1996 controversy over Taiwan or this year’s surveillance plane imbroglio. But on a bilateral basis, it is fair to say that both sides have spent most of the 1990s coming to the conclusion that the other power constitutes the main threat to peace in the region.** How this military relationship unfolds over the coming years will go a long way in determining the region’s security environment. 

Downshifting to the level of the nation-state, we cite the "UK effect," as in, United Korea. No single change to the region’s security landscape over the coming years will be more profound than the eventual reunification of the Korean peninsula. With the inevitable demise of the North Korean regime, the potential for a major land war in Asia will be immediately and significantly reduced. Two questions arise about this scenario: the speed of the collapse (fast versus slow) and the nature of South Korea’s response (can it just "buy out" Pyongyang or must it go in and literally take over the country?). Naturally, the best outcome in terms of the FDI climate is a slow collapse where Seoul "buys out" the North Korean regime in piecemeal.***

Finally, on the level of the individual, we cite the issue of Asian xenophobia about Western companies coming in and buying up big chunks of the economy, thus replicating, in some sense, a colonial-era atmosphere of "distant owners." This tendency to "blame the West" was also seen in the Asian Flu of 1997-98.****

* Thanks to RAdm. Michael McDevitt, USN (ret.) for this concept.

** On this trend, see Thomas E. Ricks, "For Pentagon, Asia Moving to the Forefront," Washington Post, 26 May 2000, p. A1, and John Pomfret, "U.S. Now a ‘Threat’ in China’s Eyes: Security and Taiwan Issues Lead to Talk of Showdown," Washington Post, 15 November 2000, p. A1.

*** During the FDI decision event, we asked the participants to vote on which of the four possible scenarios (established by the two questions cited above) they believed was most likely. Their overwhelming choice was the Slow-Pay scenario, as in, a slow North Korean collapse accompanied by Seoul’s progressive buy-out.

**** See Paul Markillie, "A Prickly Pair: How Will Malaysia and Singapore Respond To Greater Openness in the Region," in his "Survey of South-East Asia: The Tigers That Changed Their Stripes," The Economist, 12 February 2000, pp. 8-11.

Having presented our overview of the key scenario dynamics we believe will shape the future FDI market in Developing Asia, we now turn our attention to existing obstacles (Old Orders) that our participants identified as hampering the region’s ability to attract outside investment. These ideas are culled from various brainstorming sessions and discussions we conducted over the course of the workshop, and are organized across same six topic areas we employed in the previous section: 

• Economics
• Politics
• Technology
• Culture
• Environment
• Security.

For each Old Order, we have identified a corresponding advancement or correction, which we dub a New Law. These ideas were likewise culled from various brainstorming sessions and discussions.

This section basically presents a wish list. In effect, we ask our participants to provide us two types of ideas here:

• Tell us something you don’t like about Developing Asia with regard to FDI.
• Give us an example of some event or deal that would signal an improvement in this issue-area.

In sum, the ideas all come from the participants, but we have provided the packaging and linkages.

To explain a bit further, we will say that "new laws" represent significant reforms, treaties, contracts or deals of some sort that our participants identified as signaling an improvement in Developing Asia’s long term FDI climate. "Old orders," in contrast, represent a significant deficiency in the current FDI climate that would be overcome or seriously diminished by the achievement of a relevant "new law." 

We organize these pairings in a three-tiered manner:

• Letting go of the past refers to some long-standing order or way of doing things
• Getting a grip on the present refers to a more recent or near-term obstacle
• Reaching for the future refers to those situations whose solution set is probably the furthest from actual achievement.

Obviously, the "wish" element grows stronger the farther back you delve into the past or the farther ahead you look into the future.

Starting with economics, the Asian order with the longest pedigree is the cozy relationship that exists between major banks and their clients—or borrowers. In the U.S., banks foreclose bad loans based on their own objective economic standards, but in many Asian countries, an unusual degree of closeness exists between bankers and their corporate clients, so much so that a political consensus is often required for the painful decision to actually bankrupt a failing firm. Absent such political decision-making, the tendency of the banks is to let bad debts pile up, creating an untenable overhang for the banking system as a whole. It is exactly this sort of vulnerable situation that convinces foreign investors that currency depreciation is in the offing, which in turn can trigger a currency crisis and/or financial panic. As Japan is one of the worst offenders in this regard, a truly stringent reform of the banking laws there would be viewed as a significant step forward.* 

Moving to the near term, we cite the Asian "values" so prominently celebrated during the heyday of the Asian Tigers. In essence, the crux of these "values" is the acceptance of the collusion of corporations, financial markets, and governments in a national economic policy that emphasizes macro-stability and broad-based development via an export strategy and deemphasizes the market’s role in picking winners and losers through competition.** The "new law" proposed here is the creation of an Asian Securities and Exchange Commission.

Looking more to the future, we cite growing Asian resentment over perceived Western meddling, most notably through international financial institutions such as the IMF and World Bank. Both institutions, and the IMF in particular, were harshly criticized for their handling of the Asian Flu.*** The "new law" proposed here is for an Asian Central Bank that would allow the region to—in effect—rescue its own during times of trouble.

* On this subject, see Stephanie Strom, "Japan’s Corporate Woes Compound Bank Troubles," New York Times, 3 April 2001, p. C1; and also "Japan’s Emergency Relief Plan Is Brought Out to a Cool Reception," 6 April 2001, p. B1.

** For an interesting overview of China’s stock markets, see Clay Chandler, "A Bull In China Stocks: Wild Rise Giving Investors Risky Ride," Washington Post, 4 August 2000, p. E1.

*** On this, see John Micklethwait and Adrian Wooldridge, A Future Perfect: The Challenge and Hidden Promise of Globalization (New York: Crown Business, 2000), pp. 174-82.

Shifting to politics, we start with the cliché of China as an expansionistic power bent on reconstructing its near-mythical, Middle Kingdom past. We call this a cliché because too many observers tend to extrapolate from China’s efforts to reclaim "lost provinces" a more generalized ambition to gobble up large chunks of Asia. In reality, China’s appetite for expansion has always been narrowly focused.* Now that Macau and Hong Kong are back in the fold, the last significant piece of this puzzle remains China’s claim of sovereignty over Taiwan, which it views as a renegade "province" destined to rejoin the motherland at some point. Because Taiwan represents such a tremendous financial gateway into the Chinese mainland, we note that any accord that would solidify the two countries’ standing with one another—regardless of content— would greatly enhance investor confidence in both.

Looking more to the present, we cite investor concerns over the fate of China’s state-run enterprises, most of whom have long been propped up by subsidies from the state. With China’ imminent accession to the WTO (probably by the end of this year), many of these unprofitable enterprises will face foreign competition for the first time in their existence, leading to many failures within the coming years.** Therefore, how China handles this process will go a long way toward signaling to the outside world its commitment to free markets.

Scanning ahead to the future, we cite Western concerns over the course of one-party rule in China. Clearly, the Chinese Communist Party is weaker now than it has ever been, controlling less and less of the country’s social and economic life as free markets expand across the economy. The real question is, how quietly will the party exit stage left? One step that would quell investors’ fears about that downstream outcome would be for Beijing to make the Yuan, or Renminbi, convertible.*** This development would signal a significant loss party control over the economy, making its inevitable departure from power less uncertain. 

* For a counterpoint, see Robert S. Ross, "Beijing as a Conservative Power," Foreign Policy, Mar/April 1997, pp. 33-44.

** For a good overview, see Craig S. Smith, "Chinese See Pain As Well As Profit in New Trade Era: Fears About Job Losses," New York Times, 21 September 20001, p. A1.

***For inklings in this direction, see Craig S. Smith, "China to Let Banks Set Own Interest Rates Over Next 3 Years," New York Times, 20 July 2000, p. C3.

Shifting to technology and looking first to the past, we cite Asia’s long-standing tendency toward copycat R&D, or basically breaking Western patents and copyrights. This issue has long been associated with Japan, and more recently with India’s pharmaceutical industry, where the issue has become caught up in the global debate on how best to handle the AIDS epidemic in Africa.* On another front, one of the U.S.’s main beefs with China over trade has been copyright infringement on recorded entertainment and software, a subject that periodically threatens to poison economic relations between the two. As such, the "new law" proposed would be some sort of treaty or series of national laws outlining Asia’s willingness to enforce the legal concept of intellectual property. 

Turning more to the near term, we note the growing concern that Southeast Asia is falling behind in the so-called New Economy, as, relative to the rest of Asia, states here are not attracting the same level of information technology investment. For example, Chinese citizens are twice as likely to use the Internet than Southeast Asians. In short, Southeast Asia lacks much of the physical infrastructure for e-commerce to take root. Plus, the societies there do not adapt well to the transparency required for networks to flourish.** Along these lines, investors would welcome some explicit recognition of this danger by regional governments and coordinated economic incentives to accelerate Southeast Asia’s development of the necessary infrastructure.

Finally, looking more to the future, we note a similar concern. Many of our workshop participants were adamant about dispelling the myth of Asia as one giant undifferentiated market for Western goods and investment. Focusing on localism which they believe is exacerbated by the region’s minimal infrastructure development, one idea proposed was the emergence of an Asian NASDAQ, or PACDAC, that would focus investment toward IT and IT-related infrastructure development.***

* On this point, see Donald G. McNeil, Jr., "Selling Cheap ‘Generic’ Drugs, India’s Copycats Irk Industry," New York TimesI, 1 December 2000, p. A1.

** Wayne Arnold, "Southeast Asia Losing Ground In New Economy, Report Says," New York Times, 7 September 2000, p. C4.

***A Japanese version of the NASDAQ was launched last June. For a brief description, see the report by the Japan Economic Foundation, "Nasdaq Japan market was launched on June 19," . 

Moving on to culture and focusing first on the past, we note Japan’s continued resistance toward accepting full responsibility for its actions in the Second World War. This historical amnesia perpetuates huge reservoirs of mistrust and even hatred of the Japanese in such countries as South Korea and China, to name the two most prominent cases ("comfort women" and the "rape of Nanking," respectively). To this end, we propose some sort of official reconciliation treaty between China and Japan over the latter’s rule in Manchuria during the 1930s and first half of the 1940s.* 

Looking more at the near term, we focus on China’s growing sense of anxiety over its perceived non-acceptance into the ranks of global powers. In short, Beijing wants desperately to be recognized by the world, and the United States in particular, as a relative co-equal, and not merely as an upstart power that needs to be contained. The proposal here is for Beijing to be awarded the 2008 Olympics, signaling its emergence as a world-class city capable of putting on a global show.**

Finally, peering into the more distant future, we note the Chinese leadership’s continuing obsession with cracking down on Falun Gong, out of the fear that cults or religious-based movements have historically played substantial roles in fomenting political upheaval in the country.*** Understanding how these specific fears contribute to an overall hostile religious environment in China, we propose the achievement of a diplomatic recognition treaty between China and the Vatican as a positive step in the direction of demonstrating the government’s willingness to allow greater pluralism in general.

* For a description of one legal case involving Japan’s infamous Unit 731 and its activities in China, see Howard W. French, "Japanese Veteran Testifies in War Atrocity Lawsuit," New York Times, 21 December 2000, p. A3; see also Doug Struck, "Chinese Confront Japan In Court: Germ Warfare Victims Testify," Washington Post, 9 March 2001, p. A20.

** Another interesting idea along this line (but probably a lot farther off) would be the awarding of an National Basketball Association franchise. The first ever Chinese player joined the Dallas Mavericks this season.

*** For an overview on the resurgence of religion in China, see John Pomfret, "Old-Time Religion Popular Again in Rural China," Washington Post, 24 August 1998, p. A1.

Shifting over to the environment and focusing more on the past, we cite the plethora of border and maritime disputes between major powers in the region, with a number of countries still technically at war with one another (dating back to WWII). Paraphrasing Robert Frost, we believe good pipelines make good neighbors, and given the region’s skyrocketing requirements for oil and natural gas, it only seems natural that these old border disputes should be put aside in favor of linking energy producers and consumers. A good example of a breakthrough in this arena would be Japan and Russia moving past the Kurile Islands dispute and finally going ahead with one of the natural gas pipelines currently proposed.* 

Looking more at the near term, we highlight the general powerlessness of individuals to seek redress for personal and property damage brought about by environmental pollution. One way to achieve some corporate responsibility in this arena would be class-action lawsuits that would begin to define the private-sector’s responsibility for the environment.**

Looking ahead to the future, we note the failure of any advanced economy to ratify the Kyoto Protocol on climate control, in large part because of resentment over the fact that large, emerging economies such as China and India were excluded from the regulatory regime. To that end, we propose the notion of a successor Kyoto accord that would be far more inclusive and thus present a better chance for a global consensus to emerge.

* On this subject, see Mark J. Valencia, "Energy and Insecurity in Asia," Survival, Autumn 1997, pp. 85-106.

** For a good example of this sort of progress, see Elisabeth Rosenthal, "Pollution Victims Start to Fight Back in China," New York Times, 16 May 2000, p. A1.

*** For some of the arguments against the Kyoto Protocol and the rationale behind President George W. Bush’s recent decision to turn the U.S. away from that agreement, see Andrew C. Revkin, "Bush’s Shift Could Doom Air Pact, Some Say," New York Times, 17 March 2001, p. A7.

Finishing up with security, we first zero in on the region’s most prominent Cold War hangover: the divided Korean peninsula. The consensus we heard at the workshop—especially from the Wall Street participants—was that South Korea should not wait until North Korea collapses to begin trying to "buy out" the regime in every sector possible. In other words, rather than wait out Pyongyang and face a very expensive reunification process, Seoul is better off seeking economic integration now, even at the risk of lengthening the socialist government’s life span. Exposure to South Korea’s vastly higher standard of living can only have a subversive effect on the North Korean regime’s legitimacy. Meanwhile, the deeper Seoul’s financial tentacles reach into the North Korean economy, the easier the process of later reunification. 

Looking more at current events, we highlight the dangerous nuclear standoff between India and Pakistan, where the focus of conflict is the disputed Indian state of Jammu and Kashmir. Radm K. Raja Menon, Indian Navy (ret.) likes to say that India’s national security paradigm remains trapped within "the sacred soil syndrome."* On the one hand, you could argue that no nation has lost more land since WWII (e.g., Pakistan, Bangladesh). On the other hand, no economy today better demonstrates the "death of distance" associated with information technology. As Thomas Friedman might say, India is at once a leading "Lexus" economy (i.e., high-technology producer) and a classic "olive tree" society (i..e., still fighting over seemingly meaningless bits of land). To move India beyond this trap, we look to some strategic arms limitation treaty with Pakistan.**

Looking ahead to the future, we target the Pentagon’s never-ending search for a "near peer," which is clearly focused on China. Granted that Wall Street has a different appreciation for China, they would welcome some downstream multilateral security agreement that brought together the U.S., China, and Japan.

* This quote comes from RAdm. Menon’s presentation to the International Maritime Seminar held in conjunction with the Indian Navy’s first-ever International Fleet Review in Mumbai, India, 16 February 2001.

** For an overview of Indian national security strategy, see Thomas P.M. Barnett, "India’s 12 Steps to a World-Class Navy," Proceedings, forthcoming.

VII:  The There and Then of FDI in Asia 

Moving into the third and last of our "diamond dialectics," we now turn to the subject of Tipping Points, a concept we borrow from Malcolm Gladwell’s recent book by the same name.* 

In a nutshell, we’re employing the term tipping point to mean a pinnacle moment in the adoption of a new understanding or perception (i.e., a paradigm shift), beyond which we can speak about a "new rule set" becoming thoroughly embedded in a country’s (or region’s) political and economic culture.

To illustrate this point, we employ the imagery of Sisyphus (see following slides), the legendary king of Corinth who was condemned, according to Greek myth, to roll a heavy rock up a hill in Hades only to have it roll down again as it nears the top—ad infinitum. While not wanting to insinuate that these tipping points are, by any stretch of the imagination, unachievable, we do want to impress upon the reader our sense that these "journeys" will not be easy ones.

We will propose six tipping points, corresponding—yet again—to our six global lenses (economics, politics, technology, culture, environment, security).

* Malcolm Gladwell, The Tipping Point: How Little Things Can Make a Big Difference (New York: Little Brown & Co., 2000). 

In this first tipping point, we focus in on the key economic paradigm shift that needs to occur to improve the long term climate for FDI in Developing Asia. In a nutshell, it is fair to say that the current investment environment in Asia is almost the complete opposite of that in the United States. In the U.S., most individuals have little to no personal savings (i.e., traditional bank accounts), but do have financial assets at work in various capital markets, such as stocks and bonds. In Asia, the situation is completely reversed: many individuals have substantial personal savings in traditional banking institutions, but few of their financial assets find useful employment in capital markets. 

The tipping point is obviously the development of efficient capital markets that are universally accessed. At that point, the cost of money both inside and out are equalized, meaning that—all things being equal—individuals and firms should not care about where their capital comes from because all available capital adheres to the "law of one price." When Developing Asia’s capital markets reach this tipping point, the economies there become indifferent about Western versus Asian sources of FDI, giving them maximum choice opportunities and fostering competitive rates for all.

In this second tipping point, we focus in on the desired political paradigm shift. Here we highlight the issue of ownership within the economy. In the classic Asian format, exemplified by the chaebol (South Korea’s industrial conglomerates) and the keiritsu (Japan’s families of companies), complex patterns of cross-ownership and financial alliances lead to a melding of political and economic power in a system best described by the oxymoron "state-directed capitalism." The extreme closeness between public and private sectors allows for focused national economic policy, but likewise facilitates protectionist tendencies, seen most vividly in the inability of foreign investors to achieve significant levels of direct ownership in these economies. 

For now, the West is largely limited to bottom feeding (buying only the most distressed firms) in the more closed Asian economies. A tipping point would therefore come when foreign firms are freely able to merge and/or acquire (M&A) not just the "losers," but the real "jewels" (meaning high-profile firms or assets, like famous chunks of real estate or signature companies in media, entertainment, energy, or finance). We know Asia reaches a tipping point when we are able to buy outright the Asian equivalents of the Chrysler Building, MGM Studios, the Los Angeles Dodgers, Pacific Gas & Electric, or J.P. Morgan.

In this third tipping point, we focus in on the desired technological paradigm shift. Here we zero in on the issue of which sector of the economy receives the most FDI attention. Right now, Asia is a collection of scattered outposts of the New Economy, or—better said—increasingly networked enclaves, but enclaves nonetheless. In other words, many Developing Asian states have a hard time integrating high technology throughout their economies as a whole, even as—collectively—Asia continues to rise as a new global center of gravity in IT (both in terms of hardware and software).*

The measure we chose to focus on here is sector shares of inward FDI flows. In developed economies, almost 60 percent of inward FDI flows go to the service sector, with just over 40 percent going to the primary and manufacturing sectors combined. In contrast, Developing Asia’s current inward flows display the opposite spread: two-thirds to primary and manufacturing and one-third to services. A tipping point that suggests Developing Asia has achieved more broadly based integration of information technology will be when FDI flows into the service sector outpace that of the manufacturing sector.

Along these lines, we asked our participants to vote on what they think the likely sector shares will be for Developing Asia in 2010. The results displayed above suggest that considerable ground can be covered within the next decade and that this tipping point is likely to be achieved within a generation.

* On this, see Celia W. Dugger, "In India, Unwired Villages Mired in Distant Past," New York Times, 19 March 2000, p. A1. 

In this fourth tipping point, we focus in on the desired cultural paradigm shift. Here we emphasize the shift from the region’s current oligarghic business culture to one more clearly based on merit. The key ingredient to a meritocracy, however, is universal access to education, and here Asia lags desperately behind the rest of the world. But more pertinently, the entire region currently lacks a graduate business school with an international reputation of a Harvard, Wharton, or University of Chicago. Instead, Asia (mostly its elite) has taken to sending large number of students to U.S. universities, where too many are lost for good to the West. 

So we choose as a tipping point the development of world-class business schools in Asia, be they of Asian origin or Western export. Hopeful signs in this regard include:

• Prominent U.S. and European business schools establishing satellite operations throughout Asia*
• A decline in the brain drain to the West for both India and China, as young people start to return in numbers following the achievement of degrees or simply stay behind as career opportunities improve.**

* See David Leonhardt, "All the World’s a Campus: Top Business Schools Have No Borders," New York Times, 20 September 2000, p. C1.

** See Pamela Constable, "India’s Brain Drain Eases Off: For Best and Brightest, Staying Home Is Option to High- Tech Jobs in U.S.," Washington Post, 14 September 2000, p. A23; and John Pomfret, "A Brain Gain for China: Western-Trained Professionals Return," Washington Post, 16 October 2000, p. A1.

In this fifth tipping point, we focus in on the desired environmental paradigm shift. Here we explore the reality that most governments simply have not yet stepped up to the plate on environmentalism, remaining too friendly with the private sector and barely enforcing standards that are far too lax. According to Daniel C. Esty, an expert on international environmental standards at Yale University, "The worst pollution in the world is unequivocally in Asia. The statistics on China are stunning, and right behind those Chinese cities stand almost every other major city of Asia." The World Health Organization estimates that roughly 2 million people die each year from air and water pollution. Which means, as New York Times reporter Nicholas Kristof notes, that more Asians die each year of pollution than perished in the entire Vietnam conflict across the 1950s, 1960s, and 1970s.* 

Asia’s historical tendency has been to treat the environment as a private good with limited public liability. What they need is a mindset that says the environment is a public good worth protecting, with private liability for those who pollute or otherwise damage it. But because the region’s development needs are so great, we believe the best route to a green future is one built on transparent capping systems employing trading regimes that allow the most responsive firms to monetize their efficiencies and the least responsive ones to purchase credits.

* The quote and World Health Organization data are cited in Nicholas D. Kristof, "The Filthy Earth," in Kristof and WuDunn, Thunder From the East, p. 295. 

In this last tipping point, we focus in on the desired security paradigm shift.* Here we target the lack of genuine civil-military relations in many Asian states. What we mean by that is, in too many instances, there is civil-military identity rather than true separation and natural tension. The classic example is the military leader who also holds tremendous political power within the government, and then also controls significant private-sector assets. This situation is bad on four levels: 

• It gives the military too much influence within governments
• It offers the military too much protection from both market and political forces that might otherwise stem defense spending
• It detracts from the professionalism of the military, as we have seen in China in recent years when the military was encouraged to "self-finance"
• It presents the military with too many opportunities to crowd out natural market growth due to their relatively large weight in the national economy.

When Asian generals and admirals are limited to only one title, then we will know that a tipping point has been reached—namely, the role of the military has been appropriately subsumed to a background, enabling function with regard to overall FDI climate.

* Thanks to David Harries in particular for this concept. 

Shifting from Tipping Points to the There and Then, we’ll now examine a quartet of rudimentary outcome scenarios for Asia’s potential investment future. We call them "rudimentary" because we won’t present any great detail as to the alternative futures they portend. Rather, we’ll offer them up as a way to capture varying degrees of optimism/concern exhibited by workshop participants regarding the likelihood of each pathway’s unfolding.

The scenarios were framed in the following fashion:

• We constructed the X-Y axis beforehand and presented it "ready-made" to workshop participants at the beginning of the "Outcome Scenarios" session.
• The participants then spent several minutes brainstorming—via GroupSystems—notional "headlines from the future" that served as illustrations for each of the four scenarios; selections of these headlines are presented in the next section.
• Following facilitated group discussion of the four scenarios, participants nominated—via GroupSystems—titles for each of the four scenarios.

The X-Y axis is constructed of two simple questions:

• What is the nature of the regional security environment?
  • Does the U.S. remain the regional Leviathan?
  • Or does an Asian-based Leviathan emerge (either singular or collective)?
• What is the relative flow of FDI into the region?
  • Does the "pie" continue to grow?
  • Or does a Western economic crisis reduce it significantly?

The four resulting scenario titles are as follows:

• The Dow Rises in the East (U.S. as Levithan + Expanding Pie) reflected the optimisim of those who see Asia as still a largely untapped market for both trade and investment. In this scenario, an expanding pie keeps Asia’s great powers more focused on economic development than arms races, enabling the U.S. to retain its Leviathan status. This scenario was seen as a simple extrapolation from today.
• Asia Cries, "Uncle!" (U.S. as Leviathan + Shrinking Pie) reflected the concern of many participants that an economic slowdown in the West would not only shrink the cross- regional FDI flow, but likewise put the U.S. in the awkward position of trying to enable security in a region undergoing increasing economic and political stress—think of an "Asian Pneumonia" next time around. The worry here was that the U.S. would have a hard time avoiding the perception of being a bully/taskmaster, not just in security affairs but also in economic relations—especially as the IMF and World Bank are perceived to do our bidding.
• Bye, Bye Miss American Pie (Asian Leviathan + Shrinking Pie) reflected the opinion of most participants that, in the event of a severe economic downturn in the West, U.S. military presence in Asia could well come under pressure back home. If U.S. financial and security presence were simultaneously curtailed, Asia’s adherence to the concept of a single global economic rule set would surely decay. The danger seen in this scenario is one of Asia pursuing a competitive rule set, or one that rejects not only Western dominance in security matters, but financial ones as well.
• Chinese Carry Out (Asian Leviathan + Expanding Pie) reflected the sense of inevitability that some participants felt about a security challenge eventually rising in Asia due to China’s rapid rise in the global economy. Simply put, an economy that grows that much cannot adopt the security posture of some small trading state. But security challenge to whom exactly? Japan? India? The United States? Everyone? And what strategy does an emerging China seek to carry out once it has "arrived"? 

In this section, we flesh out our long-term scenarios a bit by providing several "headlines from the future" for each quadrant. These headlines were generated by the workshop participants as a way of populating the outcome scenarios. Of the several hundred notional headlines provided, we selected two dozen that we felt captured the lion’s share of our participants’ concerns and/or desires regarding Asia’s future investment paths.

As for which headlines constitute Good News or Bad News, we leave that judgment to the reader.

First we examine the scenario that most closely resembles an extrapolation from today’s situation: The Dow Rises in the East. 

Four themes emerged among the numerous entries we received for this scenario whereby the U.S. remains regional Leviathan and the FDI pie continues to expand:

• A growing military cooperation between the U.S. and China
• A rapid acceleration of mergers and acquisitions in both directions, to include real "jewels"
• An integration of financial markets
• Economic integration within Asia that did not trigger U.S. fears of being shut out.

Next we examine the scenario entitled Asia Cries, "Uncle!" 

Four themes emerged among the many entries we received for this scenario, whereby the U.S. remains regional Leviathan but the FDI pie shrinks significantly:

• China, failing in the heightened global economic competition, turning rightward and inward
• Increased xenophobia and social anxiety about globalization
• A search for domestic scapegoats as well
• The U.S. perceived as pursuing a security posture in the region akin to a colonial power.

Here we examine the scenario entitled Bye Bye Miss American Pie. 

Four themes emerged among the many entries we received for this scenario, whereby an Asian Leviathan emerges under the conditions of a shrinking FDI pie:

• Within the region, major states begin allying themselves against China
• Increased xenophobia leading to active anti-Westernization measures
• Some smaller states seeking U.S. "adoption" due to heightened security fears
• Russia and the U.S. finding new reasons for cooperation 

Finally we examine the scenario entitled Chinese Carry Out.

Four themes emerged among the many entries we received for this scenario, whereby an Asian Leviathan emerges under the conditions of an expanding FDI pie:

• The most Western states seek explicit economic union with the United States
• China replaces Japan as the Asian economy we most respect and fear
• India’s emergence as an IT superpower provides some balance to China’s emergence as a manufacturing superpower
• China becomes the "France" of Asian security: always pushing for regional solutions that limit the role of the U.S., while being careful never to engage us head-on.

We wrap up our presentation of workshop output with an exploration of the concept of "connectivity," as suggested by the Internet-based trivial pursuit known as the Kevin Bacon Game (or alternately, Six Degrees of Kevin Bacon). This popular movie trivia game is based on the notion of trying to determine the shortest number of linked steps between any two points.*

After explaining how the game works and what it suggests about connectivity, we’ll show you how we used it in our workshop to get our participants to think about the "most connected" FDI targets in Developing Asia.

*  The discussion of the Kevin Bacon Game that follows is based on Malcolm Gladwell’s description of the same in his chapter, "The Law of the Few: Connectors, Mavens, and Salesmen," pp. 46-49, The Tipping Point. 

According to the Oracle of Bacon, the most comprehensive version of the Kevin Bacon Game on the Internet, "The object of the game is to start with any actor or actress who has been in a movie and connect them to Kevin Bacon in the smallest number of links possible."* Two actors are linked if they've been in a movie together, but links through television shows, made-for-TV movies, or through production staff (e.g., writers, producers, directors) do not count. Most actors can be linked in 4 steps or less, meaning a typical "Bacon number" for any actor is 2 or 3, meaning it takes 2 or 3 movies to link the subject in question to Kevin Bacon. 

According to the University of Virginia’s School of Engineering and Applied Science (Department of Computer Science), which maintains the Oracle of Bacon web site, the average Bacon number for all actors is roughly 2.8, based on a combined pool of approximately 450,000 actors.**

The example we use here is Kevin Kline, who can be linked to Kevin Bacon in as few as 2 steps, but we use 3 movies here, to make it a little easier.

Spend a minute to contemplate which two actors appearing across three movies will link Kevin Kline to Kevin Bacon. The process would go something like this:

• Kevin Kline + Actor A in Movie #1
• Actor A + Actor B in Movie #2
• Actor B + Kevin Bacon in Movie #3.

Then check out our preferred answer on the next slide. 

* The Oracle of Bacon is found at <http://www.cs.virginia.edu/oracle>.  The Oracle uses data from the Internet Movie Database <http://us.imdb.com>.

** Cited at <http://www.cs.virginia.edu/cgi-bin/oracle/center-cgi?who=Kevin+Bacon>. 

Here’s how we do it:

• Kevin Kline appears with Meg Ryan in French Kiss (1995), a romantic comedy. That’s movie link #1.
• Meg Ryan appears with Tom Hanks in Sleepless in Seattle (1993), another romantic comedy. That’s movie link #2.
• Tom Hanks appears with Kevin Bacon in Apollo 13 (1995), a space adventure based on a true story. That’s movie link #3.

So Kevin Kline is easily linked to Kevin Bacon in three steps.*

Of course, so long as movies are being made, any actor’s Kevin Bacon number can rise or fall, depending on who appears in movies with them (especially if that person is Kevin Bacon).

Who is the actor who currently holds the lowest Kevin Bacon number at 2.599102? Turn the page and find out.

* According to the Oracle of Bacon, Kevin Kline actually has a Bacon Number of 2 (he appears with Diane Lane in Chaplin (1992) and she appears with Kevin Bacon in My Dog Skip (2000). When Kevin Kline finally acts in a movie with Kevin Bacon, he will join the exalted ranks of actor who possess a Kevin Bacon number of one (approximately 1,500 actors currently enjoy this recognition), according to the Oracle site. The only actor with a Kevin Bacon number of zero is—of course —Kevin Bacon himself.

The current holder of the lowest Kevin Bacon number is Christopher Lee, who recently edged out the long-time reigning champion, Rod Steiger. 

What makes Christopher Lee the most connected actor of all time?

• He has been acting for a long time, appearing in his first movie, Corridors of Mirrors, in 1948.
• He has acted in a lot of movies, 215 in all (including the next Star Wars movie due in theaters in 2002).
• He is a "character actor," meaning not the lead actor, in the vast majority of his movies.
• He has appeared in all sorts of movies.

These characteristics are what make him the most connected Hollywood movie actor of all time. Does this make him the most powerful or most famous movie actor of all time? Obviously not, but it does mean that—compared to actors in general—he is extremely well-known within the industry. In short, if you wanted "inside information" on the widest array of industry players over time, he would be your best source among actors—your quickest link.

What makes for a well-connected player in direct investment flows to a particular region?

• That country would have a long-established reputation as both a target and source of investment flows. It would be considered a gateway to other economies.
• It would be a high-volume player. When measured as a percent of GDP, its inward and outward stock would register a relatively high percentage, meaning more than 50 percent.
• It is more than likely not a huge industrial state, but rather a smaller, trading state with strong financial markets.
• It would deal in a broad array of sector investments, demonstrating great versatility in its partnerships both within the region and throughout the world.

Our version of the Kevin Bacon Game was to ask our participants to construct a variety of Free Trade Areas linking Developing Asia to the three main sources of global FDI—the Triad members.*

Here is how we did it:

• We presented the participants with a list of states in Developing Asia (note that we did not break Hong Kong out as a separate player).
• Then we asked them to construct a Free Trade Area from the direction of NAFTA. Specifically, we asked them to choose the ten "best" countries for a NAFTA-led Free Trade Area that linked North America with Developing Asia.
• Then we did the same for both the European Union and Japan.
• Finally, we combined the top-ten rankings from all three Free Trade Areas to determine those Developing Asian economies with the lowest Kevin Bacon-like number, meaning the countries most easily connected to other countries in the region though FDI flows, as estimated by our diverse group of participants.

In each vote, we instructed the participants to consider:

• All the characteristics of a well-connected state
• Which states would provide the best fit with the primary FDI source in question, not just in terms of economic compatibility (and certainly not just the absolute size of the economy), but also political, technological, cultural, environmental and security "fits."

* For some examples of countries currently moving in this direction, see Agence France-Presse, "China Outlines Need For Free-Trade Zone," New York Times, 26 November 2000, p. NE9; Joseph Kahn, "Practicing What Free Traders Preach," New York Times, 3 December 2000, p. WK6; and Elizabeth Olson, "Regional Trade Pacts Thrive As the Big Players Fail to Act," New York Times, 28 December 2000, p. W1.

Our first vote on a NAFTA-led Free Trade Area for Developing Asia yielded the following top-5 candidates: 

• Singapore: former British colony, like the U.S. and Canada; following loss of U.S. military base in Philippines, security relationship with U.S. blossoms rapidly
• Philippines: former "possession" of the U.S.; until recently, long-time site of U.S. military facilities; member of U.S.-dominated South East Asia Treaty Organization (SEATO) during Cold War
• South Korea: strong security alliance with U.S.
• Taiwan: strong security relationship with U.S.
• Thailand: good military ally of the U.S. in the region; member of SEATO.

Note that none of these states has had anything close to an adversarial security relationship with the U.S. since the Second World War.

Our second vote on an EU-led Free Trade Area for Developing Asia yielded the following top-5 candidates: 

• India: past colonial ties to Portugal, France and UK
• Malaysia: past colonial ties to Portugal, Netherlands, and UK
• Singapore: former British colony
• China: past colonial ties to several European powers over the centuries
• Indonesia: past colonial ties to Portugal, Netherlands, and UK.

Note that—at one time or another—all five states were colonized in some portion by European powers. It must have been that sort of colonial hubris that pushed our participants to envision a FTA that includes both India and China.  Then again, China just joined the so-called Bangkok Agreement that reduces tariffs on over 600 products among the following countries: India, South Korea, Laos, Sri Lanka and Bangladesh.*

*The Bangkok Agreement was formulated in 1975.

Our third vote on a Japan-led Free Trade Area for Developing Asia yielded the following top-5 candidates:

• Singapore:occupied by Japan during WWII
• Taiwan: former Japanese colony
• Malaysia: occupied by Japan during WWII
• Thailand: occupied by Japan during WWII; later Japan’s ally during the conflict
• Indonesia: occupied by Japan during WWII.

Note—yet again—the linkages between past security-based relationships and current financial relationships. 

In this slide we present the top-ten lists for all three Free Trade Areas constructed by our participants. Note first how they all selected the same ten states, just not in the same order. The line across the middle separates the top five from the bottom five. Combined rankings (an average of the three ranks) appear on the far right. 

Based on this process, we declare Singapore to have the lowest Kevin Bacon-like score on FDI connectivity. This should not be surprising. Singapore has the second largest inward and outward FDI stock totals in Developing Asia (after China/Hong Kong). The global average for FDI as a percentage of GDP is approximately 14, both inward and outward. Singapore’s outward stock percentage is 56, while its inward share is 86 percent.

Singapore has had strong past/current political-military relationships with all three global pillars of FDI. It is a well-known and much trusted player. It is the closest thing in Asia to a pure trading state (now that Hong Kong has joined China).

In sum, it was the collective judgment of our participants that, if you wanted your investments in Developing Asia to have the greatest flexibility and reach—or the most connectivity—Singapore was the best place to start. For once your money enters Singapore, it can move elsewhere around the region in the fewest number of steps.

Not surprisingly, a recent Economist survey cited Singapore as having the highest ratings for quality of corporate governance, transparency, and rule of law —all characteristics you would expect from the Kevin Bacon of Asian FDI flows.*

* See Kluth, "A Survey of Asian Business," pp. 4 & 16. The source of the survey data is Political and Economic Risk Consultancy. 

VIII:  
Cosmic Conclusions About the Future(s) of FDI in Asia

Having worked our way through our conceptual model and presented the output from the Foreign Direct Investment event, we’d now like to wrap up this report with a handful of "cosmic conclusions" about the future(s) of Asian economic development.

One thing we heard several times throughout the workshop and in subsequent email traffic was how so many of our participants were excited about long term investment prospects in India, primarily in information technology but also in pharmaceuticals and energy.

India is hard for Westerners to grasp due to its enormous and eclectic population. If you took the population of the entire Western hemisphere and crammed it into the U.S. west of the Mississippi, you would have something like an India. There would be plenty of very rich people, about three hundred million middle class, a similarly sized working poor, and then even more people living in abject poverty—all in the same country. And then there is the incredible diversity: the religions, the languages, the lingering caste divisions.*

But as we stated earlier, India is a very important country for the future of globalization.** With everything it offers the New Economy, the world needs India to be a success story. But for that story to be written, India needs substantial foreign investment.

To date India has attracted about as much FDI inward stock ($16 billion through 1999) as long-isolated Vietnam ($15 billion), with roughly half of that coming in a three-year spurt between 1995 to 1998, peaking in 1997 at a flow of 3.5 billion but declining since then.***

What struck us about the workshop was the enthusiastic sense of many participants that India was turning a corner in terms of global perceptions of its investment climate. In some ways, the manner in which participants spoke about India’s prospects reminded us of how people spoke about China’s prospects half a decade earlier. Can India make such a leap into "star"economy status? Much depends on how its IT sector holds up during the current slowdown in the West.

* On India as a nation, see Shashi Tharoor, India: From Midnight to the Millennium (New York: Harper Perennial, 1998).

**On how globalization is changing the lives of average citizens in India, see James Traub, "Keeping Up With the Shidhayes: India’s New Middle Class, New York Times Magazine, 15 April, p. 20.

***Data comes from UNCTAD, World Investment Review 2000, p. 297. 

One statement we heard time and time again during the workshop was, "If we were having this workshop back in 1990 instead of 2000, imagine how much we would have been talking about a Japan dominating Asia versus a China." Indeed, thinking back to the national debates triggered by Paul Kennedy’s 1989 book, The Rise and Fall of the Great Powers, you would half-expected that the subject of our workshop might have been Japan’s dominant FDI position in the United States and what we were going to do to protect ourselves.

The point the participants were trying to make was two-fold. First, it certainly is hard to predict the economic future of great powers.

But more importantly, it would be just as irresponsible now to count Japan out as a future crucial player in Developing Asia because of its prolonged economic slump and financial crisis. Japan has displayed an uncanny knack for painful rebirth and resurrection over the course of its history. Recent calls by some senior officials to let the economy "die once so that it can live again" suggest that the country is moving ever closer to the drastic steps many financial experts have long advocated for a banking sector awash in bad loans.*

How Japan emerges from this crisis will go a long way toward determining the future course of investment and economic development across Asia as a whole. Japan is simply too big a piece of Asia’s FDI puzzle to be discarded, no matter how dire its short term situation becomes.

* On this notion, see Clay Chandler, "As Japan’s Economy Sags, Many Favor a Collapse," Washington Post, 9 March 2001, p. A1. 

It has been said so many times about China, but we will say it again here: something has got to give over the coming years. Either the politics will come unglued from the social pressures created by all this economic development or, if political leaders cling too tightly to their controlling ways, the economy will eventually fall victim to one of the several "train wrecks" predicted (e.g., banking crisis, regional disparities growing too large, massive unemployment due to foreign competition).

In terms of FDI, China remains one of the world’s most intriguing products, trapped within one of the world’s worst packages. Deng Xiaoping decided to reform economics before politics, and since Mikhail Gorbachev proved just how hard the opposite course was for the former Soviet Union, it is hard to argue with his strategic choice. But China will be dealing with those political reforms over the coming decade, whether it wants to or not.

In short, what the Second Generation of leaders (Deng) started in economics has not been matched by the Third Generation (Jiang Zemin, Zhu Rongji) in the political realm, largely in frightened response to the Tianamen Square protests of 1989. Now as the so-called Fourth Generation rises to power in the next two to three years, questions abound about their willingness to further political reform in response to economic advance.

This Fourth Generation, however, is rightly described as the stay-at-home generation. They did not travel to Russia for education like the Third Generation, nor do they resemble the Fifth Generation that spent so many formative years in the U.S. and Europe.* One thing is clear: this cohort is relatively non-ideological and technocratic in outlook. Oddly enough, a few prescient Soviet watchers were quietly pointing out the same things about the Gorbachev generation just as they came on the national stage in the mid 1980s.

* On the Fourth Generation, see John Pomfret, "China’s Generational Shift: People’s Congress May Signal Rise Of New Leaders," Washington Post, 5 March 2001, p. A12.

Much has been made about Developing Asia’s tremendous future requirements for foreign investment, especially in infrastructure development and energy. Given the huge sums projected, many have made the case—including us—that Asia has no choice but to turn to the West for a good portion of that investment flow.

While not backing away from previous statements, we do feel the need to point out the tremendous sums of personal savings in Asia that remain largely untapped in this development process, primarily because the region lacks efficient capital markets that are broadly accessible to the bulk of the population. Looking at just China and Japan, we have come across numerous estimates that suggest if Asians had the same access to capital markets as most Americans do, Developing Asia’s opportunities for intra-Asian FDI might be significantly enhanced.*

For now, these assets remain largely trapped in unproductive savings accounts and pension funds. They remain a variable of considerable potential importance, but one dependent upon new rule sets emerging in Asia to free them for better employment.

* Good references include the Japan Statistical Yearbook, Standard & Poor’s Current Statistics, and various annual reports by the International Monetary Fund (World Economic Outlook), the Organization for Economic Cooperation and Development (International Direct Investment Statistics Yearbook), and the United Nations (Statistical Yearbook).

Our fifth and final cosmic conclusion is, in many ways, a larger argument (and advertisement) for the NewRuleSets.Project as a whole. It is the same argument upon which we ended our first report on Asian Energy Futures.

After each of the Economic Security Exercises we’ve conducted over the past five years, participants walk away from the experience speaking excitedly about a new sense of understanding of the connectivity between the security and economic worlds—namely, how the two work in tandem to provide international stability.

We like to describe this combination effect as the global rule set, or what we’ve come to understand as the ultimate international peace dividend arising from the end of the Cold War. As stated earlier, the collapse of the Soviet Bloc and its long-standing challenge (or rejection) of the Western economic rule set made possible—really for the first time in human history—a truly worldwide rule set for how military power buttresses and enables economic growth and stability.

How so? For the first time in human history we have a true global military Leviathan in the form of the U.S. military, and no peer competitor in sight—not even a coherent alternative economic philosophy (although one clearly brews in the anti-globalization protests of Seattle Man). This unparalleled moment in history both allows and compels the United States to better understand the security-economic nexus, in large part because of its complete reversal of priority from the Cold War. During the strategic stand-off with the Soviet Union, economic might was seen as supporting military power, but now that situation is completely reversed: to the extent that the military matters, it matters because it stabilizes the global economy.

How do we define this ying-and-yang relationship between the military and economic worlds?

First we speak of stability, which comes from military security, and then we speak of transparency, which is both demanded by, and engendered by, free markets. These two underlying pillars form the basis of the single global rule set that now essentially defines the Era of Globalization.

Within those two pillars, the U.S. clearly plays a crucial role:

• The U.S. Government, through the U.S. military, supplies the lion’s share of system stability through its Leviathan-like status as the world’s sole military superpower.
• The U.S. financial markets, which lead the way in fostering the emergence of a truly global equities market that will inevitably operate 24-7-365, play the leading role in spreading the gospel of transparency, in large part because it’s any country’s best defense against the sort of financial currency crises that have periodically erupted over the last decade (Mexico 1994, Asia 1997, Russia 1998, Brazil 1999, Turkey and Argentina 2001).

As such, it is essential that these two worlds—military and financial—come to better understand their interrelationships across the global economy. 

Uncovering and better understanding this fundamental relationship is especially important because—the vast majority of the time—the military and business communities operate in oblivious indifference to one another.

One’s tempted to counter, "So what? They don’t need to be aware of one another on a day-to-day basis."

And in a basic sense, that’s true. But if you consider the rise of system perturbations as a new form of international security threat in the 1990s, and if you understand that most of these perturbations come in the form of financial crises that can engender serious subnational violence (e.g., Indonesia today), then perhaps this connectivity seems more pertinent. Because ultimately the global economy operates on trust, which is based on certainty, which in turn comes from the effective processing of risk.

In the end, the military and financial markets are in the same business: the effective processing of risk.  For the military, it’s the risk of conflict and the disruption of normal life by large-scale violence, while in the financial world, it’s the risk of bankruptcy (insolvency) and the disruption of normal business by large-scale panics or failures.

Invariably, these two problem sets merge in the increasingly interdependent, IT-driven, globalizing New Economy, so understanding the military-economic connection isn’t just good business, it’s good national security.

Blast from my past: Final Report of the Year 2000 International Security Dimension Project (1999)

NOTE: see "Other Publications/U.S. Naval War College projects"
for PDF version of report

U.S. Naval War College

Center for Naval Warfare Studies

Decision Support Department

 

Year 2000 International Security Dimension Project Final Report

by

Dr. Thomas P.M. Barnett

with

Prof. Henry D. Kamradt

and based on inputs from

Dr. Lawrence Modisett, Prof. Bradd Hayes, Prof. Theophilos C. Gemelas & Prof. Gregory Hoffman

 

Originally posted 23 July 1999

TABLE OF CONTENTS

I. Introduction -- Page 3

II. Our Big Picture Approach -- Page 9

III. A Series of Y2K Onset Models -- Page 17

IV. The M Curve of Influence -- Page 33

V. The Scenario Dynamics Grid -- Page 43

VI. Some Preliminary Thinking on CINCs' Strategies -- Page 66

VII. A View From Wall Street -- Page 79

VIII. Some Cosmic Conclusions About Y2K -- Page 94

Appendix Y: List of Workshop Participants -- Page 99

I. Introduction:  How This Project Started and Why

The Year 2000 International Security Dimension Project is the brainchild of Vice Admiral Arthur K. Cebrowski, President of the U.S. Naval War College. For those familiar with his career, this should come as no surprise, as he has long served as a leading thinker within the military regarding the intersection of technology and global change. Admiral Cebrowski believes the Year 2000 Problem (hereafter Y2K) can have a significant historical impact on humanity's relationship with technology, if only to rapidly teach us all a great deal about what it means to live in an increasingly interdependent, interconnected, and information technology-driven globalized economy.

Soon after assuming his post at the War College in the summer of 1998, Admiral Cebrowski tasked the Center for Naval Warfare Studies' Decision Support Department, led by Dr. Lawrence Modisett, to engage in a year-long study of Y2K's potential to trigger significant scenarios of internal or transnational instability in the world outside the United States.

We've since defined "significant scenarios" to mean a crisis situation of significant magnitude to demand--under the potentially unprecedented global circumstances of Y2K--Defense Department (DoD) attention in terms of possible crisis response. Such a response could range from anything as minor as the rapid insertion of a small "tiger team" to help foreign nationals repair a specific network facility to something on the order of a Complex Humanitarian Emergency mission to some country or region especially hard hit. In short, it's a wide open playing field, with a key uncertainty being how the United States itself weathers the Y2K Event.

From the beginning of this project, we've stressed an "agnostic" approach on Y2K and its potential impact, meaning we seek neither to rally a broad social or governmental response to deal with this problem (e.g., the ongoing remediation effort) nor to present any sort of "official" government outlook on what is likely to happen. Instead, we've approached the Y2K event as we would any other potentially destabilizing event of serious political-military impact--by employing a standard decision scenario approach. By "decision scenario approach," we mean using credible scenarios to create awareness among relevant decision-makers regarding the sort of strategic issues and choices they are likely to face if the more stressing pathways envisioned come to pass. Naturally, because we work for the military, we're more interested in the "darker" scenarios. That doesn't mean we expect or predict really bad things will happen, only that we think it's essential the U.S. Military must consider the potential scope of the problem in advance so as to avoid both errors of omission and comission once the Y2K Event begins--with an emphasis on the latter.

How We View the "Whole Enchilada"

As you'll notice, we call our project the Year 2000 International Security Dimension Project--not the Y2K International Security Dimension Project. Why? It's our firm contention that DoD should view the Millennial Date Change Event as comprising a constellation of simultaneously unfolding elements, of which Y2K is clearly the most important. Our draft list of globally significant pieces to this puzzle would begin as follows:

• Year 2000 computer problem (e.g., software and embedded chips) in and of itself
• Y2K--the global remediation effort and all that it entails
• Y2K as a global education process regarding the pervasiveness of "all this invisible technology"
• Y2K as a global crisis management challenge and economic threat 
• Global economy just coming off a period of significant widespread turmoil (e.g., the Asian Financial Crisis of 1997 and its subsequent spread to Russia and Brazil), resulting in significant reform efforts by many of the affected countries
• Millennial Event in its largely secular form, i.e., the "world's largest party ever"
• Millennial Event in its religious form, i.e., celebrating the onset of the Third Millennium since Christ's birth
• Millennial Event in its socio-political form, i.e., marking a milestone period in the planet's history during which political leaders, as well as ordinary citizens, engage in extraordinary debate regarding the status quo and what should logically follow
• Millennial Event is its extremist form, i.e., the strong assumption by some in society that the event will usher in profound and cataclysmic global change, typically associated with apocalytic visions involving a deity or supernatural force
• Tendency of humans to seek grand unifying theories for periods of human history that involve above-average levels of complexity, and utilize those theories as guides for self-perceived "strategic" action.

Looking at that list, you quickly come to the conclusion, as we did last fall, that this was not a subject one could handle in the typical BOGGSAT-style (Bunch Of Guys & Gals Sitting Around a Table). No, we needed many bunches of guys and gals sitting around many tables, parsing out this huge puzzle from a variety of perspectives. Since the Decision Support Department's greatest expertise comes in talking with experts and synthesizing their views for wider distribution, we soon settled on a workshop approach that would involve a very broad range of expertise outside the military. [A complete list of our workshop participants can be found in Appendix Y.]

Looking over that list, we likewise came to the conclusion that, since the Millennial Date Change Event appears to have so much "baggage" and "fellow travelers," so to speak, our project risked expanding into a study about anything happening to anyone anywhere in the world come 1 January 2000. While not shying from that challenge, for you'll see that comprehensiveness is our calling card, we readily realized that ours would not be a technical approach of lists upon lists of things that could go wrong. Rather, we decided that the most feasible approach for a small research unit such as ours would be to concentrate on the broad dynamics of the possible scenarios, to include not only the functioning of networks (broadly defined as any distributed system that moves material), but economic activity, societal responses, as well as the operations of government entities.

In a nutshell, then, our project became focused--despite the broad nature of the subject matter--on the possible scenario dynamics the Defense Department could face if it were tasked by the national leadership to engage in crisis response activities abroad during the Millennial Date Change Event and the subsequent unfolding of the Y2K Event. Mind you, our assumption going in was that we would not uncover any new or unprecedented missions for the CINCs (Commanders in Chief) of DoD's various regional military commands (e.g., Southern Command covering Latin America, Central Command covering SouthWest Asia, European Command covering Europe and most of Africa, and Pacific Command covering most of Asia in addition to the Pacific island states)--and, to date, we have not found any. Rather, our assumption has been all along that, while the CINCs are likely to engage in very familiar missions of crisis response, it is the internal or regional dynamics into which they may delve that will be unusual and worth preparing for in advance.

The Structure and Schedule of the Workshops

We conducted four workshops, starting in December 1998 and concluding in May 1999.

DECEMBER SCENARIO-BUILDING WORKSHOP

For our first workshop in December of last year, we invited about two dozen functional experts to help us construct and flesh out a series of generic onset models (presented later). The experts invited fell into four rough categories of knowledge and experience:

• Distribution/Service Networks (e.g., food, basic needs, oil/gasoline, air and mass transit, electric power, and telecom service)
• Business activity (e.g., major manufacturing, major retail, medical, insurance, and finance-banking)
• "Social communications" (e.g., mass media, government regulation of mass media, face-to-face and individual comms, the Internet)
• Government services (e.g., defense, police, basic services, and emergency services).

Visit our archive website (http://www.nwc.navy.mil/y2k) to view the readahead package for the December Scenario-Building workshop held at the Decision Support Center of Sims Hall at the U.S. Naval War College in Newport, RI.

The participants at this event provided us with a number of useful and imaginative inputs via a meeting facilitation software program known as GroupSystems (e.g., scenario pieces presented in the format of "newspaper headlines," possible warning indicators of events moving from one scenario to another, "bumper sticker" names for individual scenarios), in addition to their moderated participation in nine separate discussion sessions covering the following topics:

• Y2K as a series of discrete and periodic events
• Y2K as a widespread and sustained event
• What makes a country’s "networks" (broadly defined to include social networks) robust?
• What makes them vulnerable?
• Signposts indicating the nature of the Y2K event’s unfolding
• The best-case scenario (Y2K as discrete/periodic and systems are robust)
• The next-best-case scenario (Y2K as sustained/widespread and systems are robust)
• The next-worst-case scenario (Y2K as discrete/periodic and systems are vulnerable)
• The worst-case scenario (Y2K as sustained/widespread and systems are vulnerable)
• "You Make the Call!" on Y2K both within the US and around the world.

We were able to gather and edit several hundred ideas and scenario vignettes from the various GroupSystems sessions and subsequently published them on our web sites at the Naval War College and Geocities. Visit our archive website (http://www.nwc.navy.mil/y2k) to view the GroupSystems inputs from this workshop.

JANUARY SCENARIO-DYNAMICS WORKSHOP

At our second workshop in January of this year, we brought together about two dozen functional experts with a strong experience/knowledge base in networks, business activity, social issues and/or government in one of five world regions:

• Western Hemisphere outside of US
• Europe (to include Russia)
• Southwest Asia (to include Middle East, Central Asia, and Indian sub-continent)
• Asia
• Africa.

Visit our archive website (http://www.nwc.navy.mil/y2k) to view the readahead package for the January Scenario-Dynamics workshop held at the Senator Claiborne Pell Center of Salve Regina University in Newport, RI.

Participants at this event provided the study team with a number of useful and imaginative inputs via the GroupSystems approach (e.g., advice-filled "e-mails" written to their "close personal friend" who serves as top policy adviser to the President of Country X), in addition to their moderated participation in eight separate discussion sessions covering the following topics:

• "Mania" phase of the Y2K event (see the section, The M Curve of Influence for details)
• "Countdown" phase
• "Onset" phase
• "Unfolding" phase
• "Peak" phase
• "Exit" phase
• Possible malevolent acts by those seeking to destabilize social order
• Region-by-region predictions as to how Y2K will impact nation-states.

We were able to gather and edit several hundred ideas and scenario vignettes from the various GroupSystems sessions and subsequently published them on our web sites. Visit our archive website (http://www.nwc.navy.mil/y2k) to view the GroupSystems inputs from this workshop.

MARCH SCENARIO-STRATEGIES WORKSHOP

At our third workshop in March, we explored the possible range of DoD policy measures and associated CINC regional strategies that might be pursued in response to the unfolding of the Y2K and associated Millennial Date Change Events along the phased scenario timeline developed and populated in the January workshop. While we benefited by some CINC representation, our real focus was on tapping into the extant inside-the-Beltway knowledge base regarding Y2K contingency planning, with an eye toward blending that knowledge with our own for eventual provision to the individual CINCs as both they and the Joint Staff begin planning against the threat of Y2K-induced crises around the world. The participants at this workshop came mainly from defense-related federal agencies and think tanks.

Visit our archive website (http://www.nwc.navy.mil/y2k) to view the readahead package for the March Scenario-Strategies workshop held at the headquarters of The CNA Corporation in Alexandria, VA.

Participants at this event provided the study team with a number of interesting and illuminating inputs via the GroupSystems approach, which in this instance involved providing us feedback on our proposed list of "policy do's and don'ts" for the governing authorities of a notional country as well as our list of possible CINC mission categories (see the readahead package for details). For purposes of the one-day workshop, we reduced our six-phase scenario timeline to the following three groupings (which formed the basis for our three discussion sections):

• "Mania/Countdown" phases
• "Onset/Unfolding" phases
• "Peak/Exit" phases.

We were able to gather and edit several dozen ideas and commentaries from the various GroupSystems sessions and subsequently published them on our web sites. Visit our archive website (http://www.nwc.navy.mil/y2k) to view the GroupSystems inputs from this workshop.

MAY ECONOMIC SECURITY WORKSHOP

At our fourth and final workshop in May, we focused on how global financial markets would "process" and/or be impacted by the Y2K event. Most specifically, we were interested in exploring how Y2K could trigger a "new rule set" for the international economy by further crystalizing some of the most pressing issues arising from the Global Financial Crisis of 1997-98 (e.g., push for more controls over international capital flows, calls to revamp/reform the IMF, more transparency in Emerging Markets and Hedge Funds, de facto dollarization of some economies). The participants at this workshop came from a variety of Wall Street investment banks, brokerage firms, and related financial organizations.

Visit our archive website (http://www.nwc.navy.mil/y2k) to view the readahead package for the May Economic Security workshop hosted by Cantor Fitzgerald LP in the World Trade Center in Manhattan, New York.

Participants at this event provided the study team with a number of interesting and illuminating inputs via the GroupSystems approach, which in this instance involved providing us with arguments--both pro and con--as to Y2K's potentially negative impact--both short and long term--on global financial markets across the same three scenario-phase pairings employed in the March workshop.

We were able to gather and edit several dozen ideas and commentaries from the various GroupSystems sessions and subsequently published them on our web sites. Visit our archive website (http://www.nwc.navy.mil/y2k) to view the GroupSystems inputs from this workshop.

Some Caveats Before Proceeding

Understanding that there is a tremendous gap between the public face many corporations and governments put forward on this issue ("we will have it well in hand") and the private fears and concerns expressed by many information technology experts (ranging from "global recession" to "apocalypse 2000!"), we wanted to explore this topic in as systematic a fashion as possible. We've never pretended that we'll end up with all the answers, but merely a sensible read on what's possible, how governments and companies are likely to respond across a range of scenarios, and what the USG and DoD should be prepared to undertake in response to Y2K's global unfolding. In short, while we're not interested in unduly hyping the Y2K situation, we are interested in exploring the "dark side" potentials because, frankly, that's what we get paid to do as a research organization that serves the U.S. military.

So read on, understanding that all our "what-if?-ing" serves neither as prediction nor perception management by the U.S. Naval War College. Like everyone else on this planet studying Y2K, we're groping for answers. Yes, we've done our effort in a rather comprehensive fashion, and yes, we are experts at thinking about future events. But please don't approach this analysis as "cookbook," but rather as "primer." The confidence we seek to instill in readers--key decision-makers and average citizens alike--is one of comprehending the potential scope and complexity of the scenario, and not of reducing the Millennial Date Change Event into a crude or simplistic "one-to-ten scale" type of crisis management strategy.

There's nothing wrong with being deeply concerned about Y2K on a global scale after you've read our report, but if you're fearful or panicked, then you haven't really understood what we said. 

II. Our Big Picture Approach

DoD Preparations for Y2K and Where We Fit In

We won't be offering any "official history" here, nor any insider critiques of US Government efforts to prepare for Y2K.  We just want to be up front and clear in explaining how we see our work fitting in with the rest of DoD's broad, long-term effort that stretches back several years.  By and large, we're late-comers to this party, having only begun our research effort in August of 1998.  To the extent that we've moved closer to the head of the pack on scenario planning, it's because we've focused on the broad dynamics of how the Millennial Date Change Event may possible unfold--not on the technical aspects of network, software, or embedded chip failures directly caused by Y2K, nor on any remediation efforts to prevent such failures.  In short, we're pure crisis management in focus, which is why our analysis has attracted particular attention within the intelligence community.

Slide 1: Inside the Wire vs. Cross Wire vs. Outside the Wire Perspectives

DoD preparations for Y2K through the spring of 1999 have almost exclusively focused on dealing with what we'd describe as the known knowns (see Slide 1 above), or identified problems that have identified answers.  For DoD, it's useful to think of these problems--albeit in a highly reductionist manner--as those that occur inside the wire ("wire" referring to that which separates the military world from the civilian world, or the fences that typically surround military bases), meaning those activities that occur within bases or between operating platforms (e.g., ships, planes, transport vehicles).  This is the classic remediation focus one would expect: making sure all our systems work individually and collectively.  By most reasonable measures, DoD has this problem set well in hand--and it only makes sense that it would.  It's a huge organization with lots of money and lots of responsibility.

Starting early this year, DoD attention has turned increasingly to the subject of host nation and US local community support to military bases--namely, utilities such as electricity, phone systems, and sewer.  We like to describe this set of potential issues as the known unknowns, meaning identified problems without easily identified answers.  If the known knowns can be thought of as existing inside the wire, then the known unknowns are basically those Y2K issue areas that cross the wire that separates the military and civilian worlds.  From DoD's perspective, no matter how well they remediate their own systems and networks, there's still the huge question of how much their base operations rely on host nation support.  This will be a subject of intense DoD effort and planning as the rest of the year unfolds.

Our project's work really has nothing to do with either of those first two problem sets, for what we're really concerned with is what can still go wrong beyond the wire.  Moreover, we're not concerned with bases located within the US, as Y2K crisis management within the US will be led by the Federal Emergency Management Agency in conjunction with a host of state and local government agencies.  Thus, our study's focus is exclusively on what could go wrong during Y2K beyond the wire in foreign countries, or crises to which DoD could be called upon by National Command Authority (i.e., the White House) to respond.  This is the real set of unknown unknowns, for while most Y2K analysts will agree that we have a fairly decent read on what will or will not likely happen in the US, our sense of what could or could not go wrong abroad is far weaker.

Historically, the US responds to about 5 to 8 major crises a year around the world with some sort of significant military effort (e.g., ships dispatched, troops deployed, planes fly sorties).  Typically, 2 to 3 of these crises are ongoing situations where we continue operations begun in a previous year, like those today in the Former Republic of Yugoslavia or Iraq. The rest tend to be "peaks in messes," meaning ongoing bad situations that flare up or deteriorate to the point that the US decides to intervene militarily in some manner, such as recent forays into Haiti or Somalia.

Of course, the $64,000 question with Y2K and the Millennial Date Change Event is,  "Is this confluence of elements likely to create a higher-than-normal crisis load for DoD over the year 2000?"  For example, instead of looking out on the world and seeing the usual 10 to 20 crises and picking 5 to 8 for response, does the US Government look out over the course of 2000 and see some larger number of crises, and, if so, do we pick the same "top 5 to 8?"  Or a different "top 5 to 8?" (meaning our calculus of national interest might be changed during this unusual period).  Or do we try to do more than the usual effort?  In short, how important may Y2K turn out to be in terms of US foreign policy--both in the short term and over the longer term?

No one can offer precise answers to these questions.  What we can say, though, is that our analysis to date hasn't uncovered any serious evidence that what DoD could be called upon to do in terms of crisis response would be dramatically different from what we've done in the past--namely, disaster relief and humanitarian assistance.  Of course, there's always the chance that crisis will generate conflict, but again, we don't foresee any new species of crisis here, but rather the types of situations with which DoD has great experience.

We believe our analysis offers particular utility in alerting military planners, decision makers, and operational commanders to the sorts of broad scenario dynamics they may encounter if they are called upon to engage in military operations in response to Y2K-related crises, or even non-Y2K-related crises that occur during the same time period.  So while the missions may not change, the local and regional environment within which those missions occur may experience social, political, economic and infrastructural dynamics that are unusual and linked to either Y2K or the larger Millennial Date Change Event.  Moreover, to whatever extent our analysis of generic Y2K and Millennial Date Change Event scenario dynamics illuminates potentially similar dynamics within the US, additional understanding may accrue concerning the overall stress level that may occur "back at the home front."

Again, none of our material here is meant to be predictive in the sense of providing a step-by-step "cookbook" approach to Y2K and Millennial Date Change crisis management.   Our fundamental goal in collecting and synthesizing this analysis is to avoid any situation where US military decision makers and/or operational commanders would find themselves in seemingly uncharted territory and declare, "I had no idea . . .."  We can't and won't tell any regional CINC staff how to run a military operation during Y2K's unfolding or the Millennial Date Change Event.  They know far better than we how to proceed in such real world contingencies.  All we can do is alert them to the particular scenario dynamics that may come together during this potentially unusual global experience.

A Process View of Y2K

"Y2K--The Event" will feature a distinct build-up phase (already begun), a peak period we consider "THE crisis," and an "end" phase in which the crisis unwinds either by its own accord or, more likely, by decree.  Either governments will declare that the "crisis has passed" or some other crisis will arise and capture our attention.  Slide 2 below presents another way of thinking through the process of Y2K's build-up, unfolding, and end.

Slide 2: A Process View of Y2K

The vertical axis of Slide 2 speaks to Network Instability/Failures, meaning the sorts of computer and network failures we've all experienced in our daily lives.  The horizontal axis offers a timeline from 1998 to 2001.

As we move from left to right, the relatively low level of network instability and/or failures that we show for 1998 represents life as we know it--i.e., computers and networks break down with a certain frequency that we have come to know and accept.  A big part of that acceptance is the "rule set" we have developed for dealing with these failures, such as "Always check by phone if the pager seems down," or "Always follow up with a phone call when the e-mail doesn't seem to go through."  We'll call these familiar rules of thumb the "old rules," which we've developed as workarounds for familiar failures.  These are our effective coping mechanisms, to use a psychological term.

The key uncertainty for 1999 is the extent to which the level of network instability/failures begins to rise over the course of the year as we get closer to dateline 010100 (six digit code representing the first day of January, 2000, as in, ddmmyy).  If Y2K turns out to be a significant experience, then at some point in late 1999 or perhaps the first few days of 2000 the frequency and/or severity of the network instability and/or failures will reach some unknown threshold past which the "old rules" will no longer seem to apply.  At that point, society would--in effect--develop a "new rule set," or "new rules" that apply to the dramatically altered parameters of the perceived crisis situation--however defined.

Our project is largely concerned with uncovering and understanding the potential "new rule set" that would ensue if Y2K, when combined with the Millennial Date Change Event, turns out to cause a significant and unprecedented rise in network instability for an extended period of time.  Now, we can debate what the word "extended" means, but for our analytical purposes, it would be a length of time that exceeds what a reasonable citizen might expect in terms of network, economic, social, and government service disruptions arising from the "3-day snowstorm" measure that many advocate as a planning parameter for Y2K.  Any unfolding of Y2K that doesn't create a lengthier array of significant disruptions for any area, country, or region, is unlikely to generate a "new rule set."

Finally, once the Y2K Event plays itself out (signified in the slide by the break in the chart line) and the failure/instability rate begins to decline, the question in terms of Y2K's long-term legacy is whether or not we return to the "old rules" associated with the previously understood standard of network instability, or whether we settle in on some "changed rule set" engendered by our experiencing of the Y2K Event.  In large part, that will depend on the extent to which we come to understand Y2K as either a one-time event unique in human history or a preview of what "network instability" (and its associated crises) may evolve into as we move ever deeper into a period of history where individuals, communities, countries, and regions of the world become more interconnected and interdependent.  In short, if globalization and networking represent the future, maybe Y2K has far more to teach us about that future than we might think if we view it as nothing more than the "last stupid act of the 20th Century."

Millennial Mania as a Key Element of the Millennial Date Change Event

In this section, we'll define Millennial Mania as corresponding to one of our previously noted elements of the Millennial Date Change Event--namely, the Millennial Event in its extremist form, i.e., characterized by expectations of profound and cataclysmic global change, typically associated with apocalyptic visions involving interventions by a deity or supernatural force.  Having to define this element, we might seem to be relegating it to the extreme edges of society, and, to a certain extent, we are.

However, given the simultaneity of Y2K's unfolding and the opportunity afforded by the Millennial Date Change Event for a portion of the public to interpret Y2K's meaning and causality through the prism of an apocalyptic perspective, the Millennial Mania element may--in effect--"pour fuel on the fire," heightening inappropriate or counter-productive responses to those direct Y2K failures that may occur.  This can happen in a variety of ways, with the three most important avenues being:

• Tendency to extrapolate direct Y2K failures into "overwhelming evidence" of the collapse of society
• Propensity to attribute causality of "fellow traveler" failures to Y2K, thus feeding the "overwhelming evidence" of the collapse of society
• Capacity to behave in response to such "overwhelming evidence" in ways that, in turn, lead to cascading network failures or related societal breakdowns where none would have otherwise occurred, which subsequently provide even more "overwhelming evidence" in a self-fulfilling fashion.

It is the last concept that we would like to highlight--namely, the notion of "iatrogenesis," which is narrowly defined as the unintended side effects resulting from treatment by a physician, but which we use more broadly to mean average people doing stupid things during stressful times (although the notion of unintended side effects caused by a true expert is useful as well--namely, the mistakes created by software remediation).

As is readily apparent to anyone who's tracked the Y2K debate, there are many Y2K "physicians" currently on the scene, many of whom have little understanding of information technology, but who are nonetheless offering all sorts of "advice"--usually for a fee.  By and large, we are not talking about IT firms and consultants in the business of remediation or commercial crisis management, but the relatively narrow group of self-proclaimed experts who offer frightening predictions regarding Y2K effects, as well as ways to "weather the storm"--usually by purchasing their products or services.

In addition to the hucksters and outright scam artists, there is a relatively small but highly vocal and well connected (over the Internet) group of individuals and organizations promoting all sorts of apocalyptic interpretations of Y2K's meaning and causality.  Some seek remuneration, but many do not, as they firmly believe--in their millennarian fashion--that the "signs" of the "end times" are somehow foretold in Y2K's onset and unfolding.  The vast majority of these "physicians" tend to predict great harm will come to those elements of society for whom they have historically shown great contempt.  In other words, these "experts" tend to warn of disaster for those unlike themselves, with "unlike" being defined in terms of religious beliefs, racial or ethnic categories, political attitudes, social mores, sexual orientation, and the like.  The tendency of some of these "experts" to attribute Y2K's alleged destructiveness to the "evilness of their ways" is unmistakable and deplorable.

Such fear-mongering "physicians" prey on those intimidated by information technology in general, and in particular those looking for external guides to help them interpret and understand Y2K's meaning and causality.  The impact this small but influential group of "experts" may have on societal response to Y2K's onset and unfolding is extremely difficult to predict.  Mass media and elites in general tend to grossly overestimate the panic factor in natural and man-made disasters, as proven time and time again throughout history.  Moreover, the tendency of elites to censor the flow of information out of fear of panic is often a far larger source of instability than the crisis itself.  In that sense, it is less the power over mass behavior that fear-mongering "physicians" or "experts" actually exert during Y2K's onset and unfolding, than the power they seem to exhibit in the preceding months and weeks that may negatively impact elite decision making regarding the transparency of government preparations and plans for dealing with whatever crisis may actually ensue.  In short, the most profound iatrogenic effect these "physicians" or "experts" may have could be on elite behavior vice mass behavior--again, in that self-fulfilling manner that exemplifies iatrogenesis.

For further insights into Millennial Mania and the forms it may take surrounding Y2K and the Millennial Date Change Event, we recommend the following:

• Visit Boston University's Center for Millennial Studies' web site (www.mille.org) for more information regarding millennarian or apocalyptic groups and their potential for disruptive or iatrogenic behavior in the coming months; the site provides many good links in addition to numerous interesting and illuminating interpretations of ongoing social response to both Y2K and the Millennial Date Change Event
• Rent any of the following movie videos for glimpses into a variety of extreme responses or emotional dynamics that  segments of society may exhibit during Y2K and/or the Millennial Date Change Event:
  • The Rapture (1991), on why certain people are attracted to visions of religious-based apocalypse
  • The Trigger Effect (1996), on how stressful situations can lead to iatrogenic behavior due to "battle fatigue"
  • The X-Files (1998), on "paranoia" (you can figure out your own definition of that word) over government conspiracies, cover-ups and the abuse of political power during crises
  • Deep Impact (1998), on divided loyalties in the face of looming crisis and popular responses to the notion of "The End of the World As We Know It (aka, "TEOTWAWKI," a broad theme that runs through much of the apocalyptic interpretations of Y2K's potential global impact).

And if none of that jars your imagination regarding Millennial Mania, then just consider that astronomers are predicting one of the most violent periods of solar flare activity in recorded history for the period January through March 2000. So, if you're looking for a sign from above . . . you'll get it.

The Biggest Picture View of Y2K's Potential Impact on Global History

The Y2K Event comes at what may be a pivotal point in global history.  We'll explain this bold statement using Slide 3 below:

Slide 3: The Biggest Picture View of Y2K

The global rule set that has marked international relations throughout the Cold War period and into the 1990s finds its roots in the systemic stresses of the 1930s--namely, the Great Depression and the rise of fascism in Europe.  These twin developments relatively quickly segued into the Second World War, from which came the notion that "never again" would the international community engage in the sort of self-destructive behavior (e.g., economic protectionism) that both led to and exacerbated the Great Depression, and by doing so laid much of the groundwork for World War II.  Based on that "never again" spirit, the global system's great powers, led most notably by the United States, attempted to "firewall off" the experiences of the 1930s and early 1940s by creating a new global rule set, whose main attributes were exemplified by such international organizations as the General Agreement on Trade and Tariffs, the United Nations, the International Monetary Fund and the World Bank.

This new global rule set gave birth to the second great period of economic globalization (the first being roughly from 1880 to 1929), creating what we've eventually come to know and identify as the globally networked "New Economy." This New Economy features, as Thomas Friedman has noted in his book, The Lexus and the Olive Tree (New York: Farrar Straus Giroux, 1999, pp. 39-58), three critical democratizing processes:

• Democratization of global finance
• Democratization of global communications
• Democratization of global technology.

As this New Economy emerges on a global scale, it has begun to feel some "growing pains," most notably in the global financial crisis of 1997-98 (beginning in Asia and spreading to Russia and Brazil), leading some to question whether the Global Rule Set of the early postwar years is still appropriate for the world in which we currently live.  Granted, the now seemingly "old" Global Rule Set of the late 1940s and early 1950s succeeded beyond the wildest dreams of its progenitors.  It not only outlasted the main threat to global stability of its time, the Soviet Bloc, but created the greatest period of global economic advance in history, not to mention the longest period of great power peace in the 20th Century. However, as states and their economies become increasingly intertwined in this information technology-driven New Economy, legitimate questions arise as to whether or not a new Global Rule Set is in order.

Naturally, the United States is not particularly enamored with the call for a new Global Rule Set, for it is doing quite nicely in the current set and most of the calls for new rules typically center on placing restrictions on the free flow of international capital, something the U.S. does not wish to see for reasons of its obvious economic success over the course of the 1990s.  If, however, Y2K were to induce serious global economic disruptions, coming as it does on the heels of the Global Financial Crisis of 1997-98, then it is possible that international sentiment for some aspects of a new Global Rule Set, however defined, would grow so powerful that even the United States might find it advantageous to shape its emergence rather than delay or prevent its emergence.

Could Y2K play the role of the "straw that breaks the camel's back?"  At this point, it seems like a long shot, and yet, 1989 looked to be a rather ordinary year until 1990 rolled around and we realized the Cold War was essentially over.  In short, we rarely have the opportunity to schedule moments of global historical importance--they simply appear on their own and usually elicit our great surprise.  The fact that Y2K is indeed a scheduled moment in history only adds to its mystery, but in the end, if Y2K proves to be an historical turning point between one era and the next, it won't be because of what Y2K is, but because of what it told us about the status quo and the need for change.  In short, it's not what Y2K destroys that will be important, but what it illuminates. 

III. A Series of Y2K Onset Models

Explaining Our X-Y Axis

Our X-Y Axis (shown below as Slide 4) begins with two simple questions:

• Horizontal axis asks the "What?" question: What is the nature of the Y2K Event?
• Vertical axis asks the "So What?" question:  What is the impact of the Y2K Event?

There is a huge difference between these two questions, for the first question focuses on cause, while the latter focuses on effect.

One way we like to differentiate between the two questions is to employ a medical analogy.  Think of the horizontal axis (What? question) as the nature of the trauma or illness and the vertical axis ("So What? question) as the patient's overall health.  Two extreme examples show why this analogy is illuminating:

• Example 1 is an elderly man who is stricken with a very slow growing bladder cancer.  While this elderly man could have lived with this cancer for several years, the stress of his hospitalization, exploratory surgery, and the frightening diagnosis stresses his already fragile system to the point where he suffers a stroke and is dead within two weeks as a result of major organ failures cascading throughout his system.  To sum up, while the initiating event (bladder cancer) was more minor than major (placing it on the left side of the horizontal access below), the man's overall system robustness was weak (placing him on the lower side of the vertical axis).  The medical outcome was--irrespective of its modest origins--disastrous.
• Example 2 is a two-year-old child struck with a very aggressive kidney cancer that--by the time of diagnosis--has spread to both her lungs.  Other than that, though, the child is in excellent health, and as such, is more than able to survive the surgeries, radiation, and months of chemotherapy with no lasting negative effects of clinical value.  To sum up the child's case, while the initiating event (kidney cancer) was more major than minor (placing it on the right side of the horizontal axis), the child's overall system robustness was strong (placing her on the higher side of the vertical axis).  The medical outcome was--again, irrespective of its profound origins--quite positive.

These two very different medical case histories, drawn from the author's family history, highlight the importance of juxtaposing the "What?" and "So What?" questions to create the four quadrants of the X-Y axis, for it is not enough simply to ask how bad Y2K may be.  Given how bad it may be (i.e., how many computerized systems fail), Y2K's ultimate impact will depend greatly on the targeted system(s) in question.

Looking at Slide 4, we then explain our X-Y Axis as follows:

• The horizontal axis, asking the "What?" question of the Y2K Event, posits the minor extreme on the left as being "Y2K events are discrete and episodic" and the major extreme on the right as being "Y2K event is widespread and sustained."
• The vertical axis, asking the "So What?" question of Y2K's impact, posits the minor extreme on top as being "Systems are robust," and the major extreme on the bottom as being "Systems are vulnerable."

Two caveats are in order:

• By "Y2K Event(s)," we refer only to network failures directly attributed to Y2K or those caused via subsequent cascading system failures, to exclude any social, economic, or political responses that exacerbate or reduce failure rates.
• By "Systems," we refer not only to a country's network systems (broadly defined to mean any network that moves something--e.g., bytes, people, electricity),  but also its political, economic and social systems, with the key attributes of robustness being:
  • Distributiveness
  • Recovery capacity
  • "Workarounds" capacity
  • Trust "capital."

Having defined the extremes of our axes, we break down the four quadrants in the following manner:

• Best Case is when Y2K events are discrete and episodic and systems are robust
• Next Best Case is when the Y2K event is widespread and sustained, but systems are robust
• Next Worst Case is when Y2K events are discrete and episodic, but systems are vulnerable
• Worst Case is when the Y2K event is widespread and sustained and systems are vulnerable.

Slide 4: The X-Y Axis for Y2K Onset Models

Y2K Onset Model #1: The Ice Storm

The Ice Storm onset model is depicted in Slide 5 below.

In the embedded chart, the vertical axis defines a "field of Y2K failures," meaning we're not going to offer any percentages or "hard numbers" here, just a rough notion of overall failure saturation.  Along the vertical axis we display the years 1999 through 2001, with the months of 1999 noted in solid-line marks and the months of 2000 noted in dashed-line marks.  The difference between the two markings is meant to suggest that while we may feel we have a firm grasp of appropriate time units for the timeline leading up to 010100, perceptions of time's passing once we pass through the 010100 threshold may vary greatly depending on locale.  For example, the subjective time unit of note for Wall Street at the beginning of January may be the first day of trading--a mere several hours' time, whereas the subjective time unit of note for a sheep herder in a less developed country may be as long as until the first time he brings his sheep to market--possibly several weeks.

Slide 5: The Ice Storm Onset Model

The Ice Storm onset model offers the classic, TEOTWAWKI view of Y2K: it hits en masse on or about 010100 and strikes virtually every aspect of society.  To the extent that such a model may seem to hold true on a perceptual basis in any one locality or region (meaning, for all practical purposes, it seems as though all systems are impacted to some disabling degree), we posit that the Ice Storm's components are logically broken down into three categories:

• Direct Y2K failures
• Cascading system failures resulting from the direct failures
• Iatrogenic crisis management or social responses that exacerbate the cascading failures or trigger new threads.

While this model held implicit sway during much of the Y2K debate in 1998, it has receded in prominence over the course of 1999, as remediation efforts make clear that this is not a useful universal model.  Having said that, however, we believe the model retains great validity for understanding pockets of significantly damaging Y2K impact that may occur around the world, meaning those areas where--for all practical purposes--the TEOTWAWKI notion may well emerge among significant portions of a population battered by widespread network failures.

Of course, even here we're still talking only about the perceived onset, and not some sustained environmental status that would realistically drag on for months.  As such, the key question for the Ice Storm onset model is, "How fast can the society or economy in question recover by necking down the failure rate to some level commensurate with reasonably sub-optimal functioning (meaning, for many around the world, the return to "life as we know it")?"

Y2K Onset Model #2: The Flood

The Flood onset model is depicted in Slide 6 below.

Slide 6: The Flood Onset Model

The Flood onset model depicts a slow but inexorable bulge of network failures that first rises above the usual "background noise" level on or about 010100 and then expands for something in the range of the first six months of 2000, peaking near the end of the 2nd Quarter or at some point in the 3rd Quarter.  In some ways, we could suppose the same breakdown of elements (direct, cascading, iatrogenic) here as with the Ice Storm model, but because of the greatly extended timeline (thus allowing for more effective crisis management and network triage), we limit our description here to direct and cascading network failures, thus positing a peak failure rate somewhere in the range of 50 percent of all networks.

As such, the Flood model gets nowhere near the TEOTWAWKI pain range, but instead describes something more akin to a significant economic downturn, most likely corresponding to popular perceptions of a recession or financial market "correction."   In that manner, the Flood  model possibly describes a more profound economic impact than the Ice Storm, which, while it is a shock to the system, is probably of shorter duration.  So, like the Ice Storm, the Flood model involves an interrelated sequence of network failures, albeit with a far smaller immediate impact on the overall functioning of society.

In keeping with the weather analogy, the key question for the Flood model is, "What constitutes a 'low-lying area?'"  One example of a potential low-lying area would be manufacturing, whose network failures would not likely be centered on the 010100 threshold, but rather build up over time as production continued throughout 2000.  Another could be medical supplies, especially the production and distribution of key pharmaceuticals.  Still another might be the processing and distribution of clean drinking water.

Y2K Onset Model #3: The Hurricanes

The Hurricanes onset model is depicted in Slide 7 below.

Slide 7: The Hurricanes Onset Model

The Hurricanes onset model presents a series of sectorally-limited (meaning unconnected across sectors) but relatively lengthy (meaning some cascading effect) constellations of network failures.  In effect, this model is a hybrid of the Ice Storm and Flood models.  The Hurricanes model packs the same immediate punch as the Ice Storm model, albeit in isolated "low-lying areas" (echoing the Flood model), thus limiting the overall impact on the functioning of a society.

The Hurricanes model speaks more to the "winners and losers" approach to thinking about Y2K's ultimate impact:  some sectors of society will seemingly get off scot-free, while others will seemingly suffer great damage.  The key difference with the Flood model is the lack of interrelation and simultaneity, so rather than employing the economic language of "downturns," we're more likely to describe "shake-ups" in one or another industry.

The same approach to identifying vulnerable sectors that one uses with the Flood model would apply here, although in an overall sense, the Hurricanes model is probably best used to think about countries whose remediation efforts have been weak, for here we run into the notion of over-confidence possibly leading to poor crisis management preparation.  If such "poor remediators" turn out to be far more vulnerable than they realize, then the key question becomes, "How can coordinated triage and crisis management avert the appearance of a critical mass of substantial--yet still relatively isolated--network failure clusters?"

Y2K Onset Model #4: The Tornados

The Tornados onset model is depicted in Slide 8 below.

Slide 8: The Tornados Onset Model

The Tornados onset model refers to a "season" of sectorally- and temporally-limited Y2K-induced network failures.  This model is the closest to a null hypothesis of Y2K's overall impact, for, in many ways, it describes life as we know it, albeit with a higher-than-average failure rate.  The Tornados model can likewise be thought of as the "key dates" model, for the two go naturally hand-in-hand when one seeks real-world evidence of significant network failures that either produce serious disruptions of service or require extraordinary efforts at repair.  For if such key dates come and go without displaying any significant failures, meaning they're so big they can't be hidden by the service providers in question, then these Y2K milestones pass by without registering significant values on any sort of TEOTWAWKI scale, becoming the Y2K equivalent of a "tree crashing in the forest when no one's there to hear it." 

The "key dates" approach does correspond nicely with the Gartner Group's predictions of Y2K failure rates rising and falling over the course of 1999 and through the year 2001, but the big deficiency of this model to date has been the lack of any stunning failures on key dates that have already passed.   For example, no failures featuring major negative impact occurred on 1 or 3 January, the first day and business day, respectively, of 1999.  The start of many fiscal year programs on 1 April also failed to reveal any serious disruptions for the governments involved.  The so-called "nines" problem that was slated to appear on 9 April likewise produced no failures of great societal value in any country around the planet.  Most recently, the 1 July threshold came and went with no apparent damage to the 46 U.S. states whose fiscal years began that day.

Meanwhile, Cap Gemini America, the computer consulting firm, declares on the basis of their recent survey of  Fortune 500 companies and a smattering of U.S. government agencies that close to three-quarters of the respondents report experiencing a Y2K-related failure through the first quarter of 1999.  But if these firms are having these failures and none are making any headlines, how is that much different from everyday life as we know it?  Aren't private firms and government agencies experiencing network problems on a fairly regular basis, and just as regularly keeping such failures under wraps?  The key missing data involve how much different 1999 is turning out to be compared to any previous year, meaning what is the "instability added" from Y2K?  And that's the data we haven't found anywhere yet.

Having said that, the key question for the Tornados model remains, "What constitutes good learning over time?"  For example, should our confidence grow due to the lack of Y2K headlines stemming from the key dates already passed?  Or should we ignore most if not all of that success, especially for a pure fellow traveler such as the "nines" problem?   After all, we can get fixated on Y2K key dates all through 1999, get through them all quite nicely, and still suffer significant tumult on 010100.  Uneventful key dates make that seem less likely, but don't rule out it out by any means.

Onset Models Leading to Generic Y2K Outcome Scenarios

Of course, none of the four onset models are likely to hold sway for any one region's entire Y2K experience, and in that sense, we are likely to see versions of all four models occurring simultaneously around the planet at various points in the Y2K Event.  As ideal types, the four models are designed to help the reader disaggregate the complexity presented by Y2K's myriad of possibilities, rather than provide a "pick one of four" analytical choice that would invariably prove false and pointless.

Slide 9: The Onset Model Arrayed on the X-Y Axis

Slide 9 above arrays the four onset models on our X-Y axis, and the placement should seem fairly intuitive given our descriptions:

• Tornados represent the "Y2K events as discrete and episodic" and "systems are robust" quadrant, meaning a season of relatively isolated and concentrated damage that follows little rhyme nor reason to the extent that we can trace causality.
• Flood represents the "Y2K event as widespread and sustained" but "systems are robust" quadrant, meaning a rising tide or deluge of damage that follows the logic of systematic vulnerability, i.e., the low-lying areas analogy.
• Hurricanes represent the "Y2K events as discrete and episodic" but "systems are vulnerable" quadrant, meaning a season of somewhat isolated but wide-swath damage that follows the logic of either poor remediation or unforeseen vulnerabilities--basically one in the same.
• Ice Storm represents the "Y2K event as widespread and sustained" and "systems are vulnerable" quadrant, meaning a seemingly pervasive or all encompassing damage pattern that is inescapable, but one that at least reveals itself in its entirely with great speed, thus facilitating recovery.

Again, our rationale in presenting such onset models is not to encourage a "pick one" mentality, but rather to break down the abstract nature of the potentially universal problem set into a series of weather analogies that are far more easily understood by the average citizen--not to mention your average elite decision maker.

Slide 10 below presents a series of outcome-focused Y2K scenario titles arrayed along our X-Y axis.  By pairing them up with our onset models, we--in effect--offer a "coming and going" view of the Y2K Event (leaving the "guts" of our Y2K analysis for the section on Scenario Dynamics).

Slide 10: Outcome Scenarios Arrayed by Y2K Onset Models

• Run of the "Mille" refers to the Best Case Scenario, meaning Y2K comes in bits and pieces and we prove far more robust than we give ourselves credit for.  So it's "run of the mill" in that we take Y2K in stride, but Run of the "Mille"  in the sense that the Millennial Date Change Event still exists at the core of the Y2K null hypothesis.  Thus, in this scenario, whatever social instability occurs around the 010100 threshold is more driven by millennial elements (e.g., apocalyptic-driven behavior, world's largest party, great religious feast) than by actual Y2K-driven network failures. Humanity emerges on the far side of this "crisis" wondering what all the hype was about.
• "Humans 1, Computers 0" refers to the Next Best Case Scenario, meaning Y2K is big and bad but we weather the deluge of failures and only the systematically weak are left with permanent damage.  This is the Nietzschean social scenario that says, that which does not collectively kill us, makes us collectively stronger.  Humanity emerges on the far side of this crisis with a renewed confidence vis-a-vis the invisible and pervasive information technology that "seems" to control so much of our lives.
• "Houston, We Have a Problem" refers to the Next Worse Case Scenario, meaning Y2K comes in bits and pieces but we are surprised to realize how fragile our systems are.  Like the Apollo 13 mission from which this quote was drawn, it seems as though relatively minor weaknesses--the IT-equivalent of an Achilles' heel--sequentially disable many sectors of society with ferocity, leading to cascading failures that can threaten the sum of the whole.  Humanity emerges on the far side of this crisis split into winners and losers, meaning--respectively--those who proved resilient and those whose weaknesses were exposed.  In some ways, Y2K will unfold something like a computer virus: those with sufficient immunity will survive just fine, while those with weakened immune systems will suffer catastrophically.
• "Y2 KO!" refers to the Worst Case Scenario, meaning Y2K is big and bad and we're far more vulnerable than we realized.  We are collectively "knocked to the mat," with the real uncertainty being, do we get back up before the "referee" finishes his "count?"  Or do we lie there prostrate, dazed and confused?  Of course, at some point we do get up, and how humanity emerges on the far side of this crisis is largely determined by the nature of the "knockout."  Is Y2K merely a "TKO," meaning a "knockout" attributed solely to "technical" failures?  Or is Y2K a genuine "whupping" where all our systems (political, economic, social, and network) fail us miserably?  In other words, are we merely embarrassed and so continue on as before?  Or are we truly humbled and thus serious changes result?

Potential Y2K Impact by Country Groups: Conventional Wisdom Has Changed Over Time

The conventional wisdom on which countries around the world are more vulnerable to Y2K has changed dramatically over the past year.  We display our interpretation of this changing debate in the following two slides.

First, a word on how we break down the world into four IT categories:

• We define an "Ultra-Modern" IT category as including only the United States, which, by all measures, stands head and shoulders above the rest of the planet in terms of IT adoption rates.  To put it bluntly, there's no way Y2K will be bad enough to derail the US's progressive adoption of IT.  There's simply no going back.
• A "Modern" IT category basically captures the rest of the OECD-type states (Organization for Economic Cooperation and Development) such as Japan, Germany, France, etc.  These economies tend to be relatively distributed in terms of networks, but not nearly as "New Economy" in outlook or practice as the U.S.  Like the U.S., these countries are unlikely to see the further adoption of IT derailed by Y2K, although it could greatly influence some of the choices they make in coming years.
• The "Modernizing" IT category corresponds to Jeffrey Garten's list of the "Big Ten" emerging economies, with the addition of Russia.  Garten's "big ten" are:
  • China
  • India
  • Indonesia
  • South Korea
  • Turkey
  • South Africa
  • Poland
  • Mexico
  • Argentina
  • Brazil.

What's most immediately noticeable about this group is that you're talking about the bulk of the world's population, not to mention several that recently experienced serious economic tumult (or at least serious buffeting) in the Global Financial Crisis of 1997-98.  With this group, you're also talking about countries that have adopted IT in a huge way only in the past decade or so, so Y2K has some potential here to trigger a bit of a technology backlash if its overall impact is bad enough.

• The "Pre-Modern" IT category bundles up the Rest of the World (ROW).  Here we're talking about countries with low IT penetration rates.

Slide 11: Conventional Wisdom on Potential Y2K Impact (1998)

Slide 11 above displays the conventional wisdom that we consistently bumped into when we began our research back in the summer of 1998.  In short, the broad assumption implicit in most writings about Y2K's potential impact was that there was a direct relationship between a country's development level and its potential vulnerability on Y2K-induced network instability.  Following this rule, an ultra-modern IT country like the U.S. was the most vulnerable, while Pre-Moderns like a Haiti or Somalia were least vulnerable.  On the face of it, this made perfect sense, because you can't be harmed by breakdowns in what you don't have--or so it seemed.  This thinking likewise tracked with much military strategizing regarding Information Warfare, which also posited that the more IT-intensive your society was, the more vulnerable it was to Information Warfare. 

Slide 12: Conventional Wisdom on Potential Y2K Impact (1999)

What a difference a year makes!  Or so it seems if you buy into the Gartner Group's estimates of likely Y2K network failure rates by country (see Slide 12 above).  Now everyone knows that the Gartner Group's data is heavily based on the self reporting of the countries in question (or the private firms within those countries), so taking this very rough estimate with a grain of salt, you're nonetheless faced with a stunning reversal of fortune that's apparently occurred solely on the basis of the remediation efforts each country has or has not pursued over the last year.  In short, from the perspective of failure rates, the U.S. goes from most vulnerable to least vulnerable, along with a host of like-minded states (e.g., Canada, United Kingdom, Australia).  On the other end of the spectrum, the countries looking at the highest failure rates are the modernizing countries, such as China and Russia, and the IT Pre-Moderns, such as a Vietnam and Zimbabwe.

Slide 13: The So-What Filter Applied to Today's Conventional Wisdom on Country Vulnerability

While failure rates (the percentage of system failures) are expected to be much higher in the pre-modern and modernizing countries than they are in the U.S. or OEDC nations, failure rates do not, by themselves, describe the whole picture.  As noted earlier, IT is far more integrated into the economies and infrastructure of modern countries than those of emerging and modernizing nations.  Consequentially, 25 percent system failure in the U.S. is likely to be much more significant than a 90 percent failure in a small pre-modern nation.  In the most primitive of these, even 100 percent system failure is likely to be below the event horizon; while even 10 percent system failure in a modern IT-intensive economy could result in significant economic upheaval.  As suggested in Slide 13, when all the factors—remediation effort, dependency on IT, network maturity, distribution and redundancy of the architecture—are integrated, the nations that seem to have the most to fear from Y2K would seem to be those in the process of modernizing.  In general these tend to be increasingly dependent on IT, but have not been able to spend much money on remediation and have not developed the highly distributed and redundant networks of the U.S. and other modern nations.

So really, in the short span of about 12 months, the conventional wisdom on which countries are most vulnerable to Y2K has been dramatically reversed.  Like the original conventional wisdom before 1999, this one also makes eminent sense when you think about it: rich countries with a lot more to lose and a lot more disposable income to throw at the problem have succeeded most in remediating the Y2K threat into something more manageable.  Meanwhile, countries new to the IT scene, whose awareness of Y2K lagged significantly behind that of more advanced IT countries, tend to possess less resources to throw at the problem.  Moreover, they tend to pirate software more and, as such, pay less attention to system administration concerns such as Y2K or viruses such as CIH.  In that sense, the destructive path of CIH, the so-called Chernobyl virus, may well prove to be reasonably predictive of Y2K's ultimate impact--namely, more serious in Asia, Latin America, and the Middle East than in Europe or North America.

Matching Country Groups With Y2K Onset Models

So, to the extent that we're willing to go out on a limb regarding which country groups are likely to experience which Y2K onset model, our best guess would be as portrayed in Slide 14 below.

Slide 14: How Y2K May Go Down By Country Groupings

By arraying the countries across our X-Y axis, we're not so much predicting how we think Y2K will unfold for each and every country belonging to each grouping as suggesting that if any one of the onset models is going to be strongly associated with a particular development or IT-intensiveness level, they are likely to correspond as follows:

• We see the U.S., along with very similarly structured near Ultra-Modern states such  as Canada, Australia, and UK, probably experiencing the Tornados onset model, meaning that Y2K comes in bits and pieces and the countries are essentially robust.  Gartner predicts several other advanced European states, along with Israel, will fall into this category.  Correspondingly, this country group would likely experience the outcome scenario described as Run of the "Mille."
• To the extent that many important Modern states, such as France, Germany, Italy and Japan, have not progressed nearly as much as they might have in the time allotted, we expect that this country grouping may experience something closer to the Hurricanes onset model.  In short, we see the damage stemming from Y2K failures to be more significant than it might have needed to be because those countries enter into the situation more vulnerable than they realize. Correspondingly, this country group would likely experience the outcome scenario described as Houston, We Have a Problem.
• If the Ice Storm model actually occurs, we believe it's most likely to happen to a Modernizing country, such as a Russia, China, India, Poland, or Turkey.  Here, Y2K may hit with far more force both because remediation has been weak and because these countries' systems are--in general--more vulnerable to disruptions.  Correspondingly, this country group would therefore be more likely to experience the outcome scenario described as Y2 KO!.
• It is in the IT Pre-Modern category that we expect to witness the Flood onset model, or the slow build-up of progressive failures.  While these countries' systems in general tend to be more robust in the sense that they are more used to "doing without" or "working around problems," it may well be the slow but steady deluge of many small failures that causes Y2K to seem like a widespread and sustained event that drags out over several months.  Good candidates for Flood status would therefore be less developed states in Latin America, Africa, the Middle East, and South and Southeast Asia.  Correspondingly, this country group would likely experience the outcome scenario described as Humans 1, Computers 0.

IV. The M Curve of Influence

Understanding Where Opinion Leaders Can Influence Social Response

The strategic vision of Y2K we have encountered again and again, both in our Internet-based research and in our many discussions with experts and ordinary citizens from around the world, is that the event will unfold, peak, and then disappear--all with great speed--in a tight timeline surrounding the Millennial Date Change Event.  In effect, what the majority expects is a very tall Bell Curve surrounding 010100, which we depict below in Slide 15.

Slide 15: The Y2K Bell Curve Too Many People Expect

In other words, the conventional expectation is that Y2K failures will:

• Ramp up dramatically along an asymptotic curve in the last couple of months in 1999
• Experience a rapid topping off in the first few days of 2000
• Decrease in a similarly steeped downward curve until basically disappearing as a phenomenon of note somewhere in the middle of the First Quarter of 2000.

The problem with this view is three-fold:

• It tends to draw off strategic resources from both mid-1999 and the rest of year 2000 (and beyond) and concentrates crisis management approaches on the 010100 threshold.
• It inaccurately reflects the likely spread of Y2K-related network failures, as predicted by the Gartner Group.
• It fools decision makers into thinking that not only will their influence be best used in a concentrated fashion around the 010100 threshold, but that it will likewise be effective during that specific period.

We believe one or more of these three mistaken assumptions are incorporated--to some degree--in much if not all of the strategic planning for crisis management of the Y2K Event around the world.

Instead of focusing on a Bell Curve perspective regarding Y2K's onset and unfolding, we argue that Opinion Leaders, whom we'll define as anyone with the power to influence the actions of others, should instead approach the Y2K timeline with the following three assumptions in tow:

• Your best time to influence social response is during the months leading up to Y2K's onset, with an emphasis on reasonable mass preparations, the establishment of crisis management arrangements, and the shaping of popular perceptions as to what will likely lie ahead.
• Your influence will disappear in the last few weeks and days leading up to the 010100 threshold, as the public will have largely made up its mind regarding individual preparations and strategies for experiencing--not to mention celebrating--the Millennial Date Change Event and the associated onset of Y2K; moreover, your influence will never be lower than on 010100, when your ability to control mass events will essentially approach zero.
• Your influence will reemerge once the Millennial Date Change Event expires and the true nature of Y2K's unfolding--however bad or minor that may be--makes itself apparent to you and society, for at that point you will have problems to solve, targets for resource allocation, etc.--in short, the battle will be joined.

Slide 16: The M Curve of Influence Explained

Thus our "M Curve of Influence" (Slide 16 above) describes both the utility of Opinion Leaders' efforts before (Schedule/Shape the Build-Up) and after (Define/Execute Exit Strategies) Y2K's onset, while emphasizing the loss of influence over societal actions and response during the actual onset (Slow Down the Abnormal Time).  In short, our strategic advice mantra would be: 

Organize . . . Relax . . . Attack

Explaining the First, or Pre-010100 "Hump" of the M Curve

We ascribe the first hump of the M Curve, or the bulge of influence we think Opinion Leaders enjoy over the summer and fall of 1999, to what we describe as the popular competition between awareness and fear regarding Y2K and the associated Millennial Date Change Event. Slide 17 below explains this competition.

Slide 17: The "Trigger Effect" Explained

The first thing to note on the slide is our humility.  The vertical axis is labeled "Order of Magnitude," which is just a fancy way of saying we're theorizing about a very complex phenomenon and thus can only describe it in rather vague terms.  The timeline, on the other hand, is fairly straightforward--namely, we're talking about 1999. 

It's our general hypothesis that no matter what country you're talking about, awareness of Y2K will precede--and in some ways, trigger--fear about Y2K.  In a generic situation, then, we're describing the rise of "Awareness and the Public Transcript" as occurring more in the first half of 1999 than in the second half, meaning most people heard and came to understand Y2K in the initial sense in early 1999.  This happened primarily as a result of their being flooded with all sorts of Public Transcripts about the state of remediation efforts and the (typically) non-likelihood of Y2K-related failures come 010100.  Public Transcripts can be described as authoritative statements by authoritative people.  They typically highlight a rosier-than-average perspective on Y2K, quite often out of official fear of "alarming the public unnecessarily."  Of course, much of the awareness-raising effort encapsulated in such Public Transcripts requires "scaring" the public enough to take action, and therein lies the rub.

As we enter into the summer and fall of 1999, the Awareness and Public Transcript wave begins to give way (i.e., awareness has peaked) to the Fear and Private Transcript wave, which is likely to peak in the last few weeks and days of the year.  The fear part of the equation is nothing more than anxiety over the uncertainty caused by the looming event, whereas the Private Transcript describes the "off-line," unofficial, or individual preparations and/or decision making regarding how a person, economic firm, national government, etc., plans on either enacting or following a particular rule set for what it perceives will be the crisis period surrounding Y2K.  So, for example, the differences between a Public and Private Transcript could be as follows: 

• An individual's Public Transcript could be that he or she is administrator of a small town and thus plays a prominent role in community preparations and perception management while simultaneously engaging in the Private Transcript of stockpiling food, water, and weapons at home.
• A firm's Public Transcript could be publicizing the success of its remediation effort while its Private Transcript could be its quiet stockpiling of key industrial material inputs, the cutting of ties with suppliers and vendors it does not deem sufficiently compliant, or the preparation and public announcement of new rule sets.
• A government's Public Transcript could be publicizing how all essential services will survive the Y2K Event intact and without any disruptions while quietly establishing all sorts of emergency procedures to deal with just such failures.

We describe the point in the year when the Awareness and Public Transcript wave is surpassed by the Fear and Private Transcript wave as constituting a Trigger Zone of sorts.  This is where we believe the manic, or Mania Phase of Y2K begins.  In short, this is when you will see individuals, firms, and perhaps even governments start to exhibit extraordinary behavior in response to whatever they believe "others" in society may do--i.e., the fear of fear itself. 

Slide 18: What the Trigger Zone Might Look Like in US 

Having said all that, we want to be careful not to leave readers with the impression that we're predicting a serious "freak out" factor for the United States come Labor Day, for it is by no means a given that the Fear and Private Transcript must overwhelm the Awareness and Public Transcript wave.  In effect, if Opinion Leaders do their job correctly in terms of the Awareness and Public Transcript effort, the Fear and Private Transcript wave can be greatly reduced (see Slide 18 above).  By way of analogy, think of how Wall Street spent much of the 1990s educating Baby Boomers about the dangers of yanking their money out of mutual funds at the first sign of trouble.  Then think about how well that effort paid off during the Global Financial Crisis of 1997-98.  In short, the better Opinion Leaders shape popular expectations, the less likely it is that Fear and the Private Transcript will balloon to dangerous proportions--not every knee has to jerk.

And indeed, it is our impression that as far as the United States is concerned, it is quite possible that the Fear and Private Transcript wave will remain marginal, meaning perhaps 15 to 20 percent of the population will engage in fear-based behavior that could be described as "excessive," understanding what a loaded term that is for many in the Y2K debate.

Slide 19: What the Trigger Zone Might Look Like Overseas

When looking abroad, however, we are far less sanguine outside of Canada, Australia, the U.K., and a few other, mostly northern European states.  In many countries overseas, we perceive the Awareness and Public Transcript effort to be woefully inadequate, thus inviting an explosion of the Fear and Private Transcript wave once the public comes to grasp what may be--by then--a significant and largely unavoidable period of profound network failures (see Slide 19 above).  In this dynamic situation, Opinion Leaders in these countries will see their influence plummet and possibly be curtailed for a far greater time post-010100 than would have otherwise occurred, meaning a popular backlash. 

Explaining the Second, or Post-010100 "Hump" of the M Curve

We ascribe the second hump of the M Curve to nothing more than the prediction by the Gartner Group that as much as 70 percent of Y2K failures will occur after 1 January 2000.  As depicted below in Slide 20, the Gartner Group estimates that only about one-third of all Y2K-related failures will have occurred by the end of 1999, leaving upwards of two-thirds or more still to unfold once the clock strikes midnight on 31 December 1999. 

Slide 20: The Gartner Group Prediction on Y2K Failure Rates

True to the Bell Curve image, Gartner is predicting that the highest frequency rate will occur in the ten days surrounding the 010100 threshold, where 10 percent of all Y2K failures will be concentrated.  However, their prediction that close to two-thirds, or 60 percent of Y2K-related failures will follow this peak frequency period stands in dramatic contradiction of the Bell Curve assumption.  Why we push the notion of the second, or post-010100 "hump" in the M Curve of Influence is our concern that too many decision makers in positions of authority will, in their concern for maintaining control over what we perceive will be a largely uncontrollable situation surrounding the Millennial Date Change Event, squander precious resources that should be held in reserve for the failures yet to come.

Slide 21: The Gartner Curve Versus the Bell Curve

Another way to express our general concern is to raise the following issue, portrayed above in Slide 21.  If the halfway point in Y2K-related failures doesn't occur until some point after both the Millennial Date Change Event and the peak frequency period of 10 days surrounding the 010100 threshold, then what is the danger that private and public organizations will have misallocated their resources based on a predicted disruption period lasting through only the first few days of January 2000?  Note, we're not saying to abandon such predictions or weather analogies (such as the Three-Day Snowstorm analogy), because most are based on the predicted loss of utilities--primarily electricity.  For that particular core set of issues, the days-long predictions as an expectation management tool may well be appropriate.  However, for other aspects of the economy, the days-long paradigm may end up misleading and thus misdirecting the strategic use of resources, not because individual disruptions last longer than a few days, but because the cumulative period wherein many simultaneous days-long disruptions occur may drag on for weeks or even months in certain countries.

Summing Up Our Strategic Advice From The M Curve

Slide 22 below juxtaposes the M Curve of Influence against the Gartner Group's curve of Y2K-related failure rates.  By presenting both projections together, we seek to highlight what may--at first glance--seem like the counterintuitive nature of our strategic advice.

Slide 22: The Gartner Curve Versus the M Curve of Influence

To sum up: we believe Opinion Leaders should concentrate their strategic resources and efforts at two distinct points in the Y2K Event timeline--namely, during the pre-010100 and post-010100 phases.  Correspondingly, we think it best not to try to exert too much social control or direction during the Millennial Date Change Event or Y2K's immediate onset surrounding the 010100 threshold.  Much like in preparing for the land fall of a hurricane, we think authorities should concentrate their activities in the following three-pronged manner:

• Prior to 010100, do as much as you can to prepare the population for inevitable disruptions, with a strong emphasis on shaping expectations and delineating personal crisis management strategies.
• When the 010100 threshold looms and then passes, do not try to control events that cannot be controlled, but seek to "ride out the wave."
• Post the initial wave of high-frequency failures, engage in aggressive triage to drive down the impact of the remaining failures as they continue to unfold.

Our underlying philosophy in all of this advice is that people in general respond quite well DURING disasters or crises, but that the panic potential beforehand and the "battle fatigue" danger afterwards are far more important management points than the actual threshold event.

V. The Scenario Dynamics Grid

Creating a Composite, "Black Box" Scenario

So far we've offered a series of "going in" and "coming out" scenarios for Y2K, with the Onset Models (Tornados, Hurricanes, Flood, Ice Storm) serving as the former and the Outcome Scenarios (Run of the "Mille," Humans 1 Computers 0, Houston We Have a Problem, Y2 KO!) serving as the latter.  Again, we've constructed these bookend scenario sets less to predict than to frame the potential problem set presented by Y2K. In this section we'll tackle the "black box" in-between those bookend scenario sets, but rather than mechanistically trace Best Case Onset Model to Best Case Event Scenario to Best Case Outcome Scenario and so on, we're going to present a single composite scenario that is both phased and broken down into components sectors (Networks, Business, Social Response, Governance).

When we say "composite," we mean a single scenario that posits Y2K as both substantial and relatively drawn out. We won't offer any more detailed parameters than that, because we're not interested in debating those fine points that we can't really predict, but rather concentrate our analysis on the scenario dynamics we feel confident would appear in a reasonably stressing scenario.  Having said that, we need to stress that this composite scenario is simultaneously about all countries and no one country in particular, meaning we strive for relatively generic content.  Obviously, being Americans, our cultural biases will show through, but since we're writing first and foremost for U.S. decision makers, that's not the worst sin we could commit here.

By "composite" we also mean that no one should view this compilation of scenario dynamics as an all-or-nothing prediction (i.e., either we're right or we're wrong), for we don't think Y2K will go down exactly and completely like our scenario anywhere in the world.  However, we do believe that many if not most of these dynamics will appear in an country suffering a dramatic Y2K experience, and we think that all of these dynamics will appear in some countries in various subsets and combinations.  In short, this composite scenario should be viewed as a smorgasbord--i.e., all of these items will be laid out on the Y2K table, but not every guest will partake of every dish.

Breaking Down the M Curve Into a Six-Phase Composite Scenario

Slide 23 below breaks down the M Curve into six separate phases along a composite stressing Y2K scenario.  We emphasize stressing because, if Y2K turned out to be a complete dud, then our M Curve of Influence would immediately go from being a Bactrian to a dromedary, or from a "two-hump" to a "one-hump camel."

As you view Slide 23 and read the explanation below, please keep in mind that the M Curve does not represent the course of Y2K failure rates, but only our sense of the peaks and valleys of Opinion Leaders' capacity to influence social responses to such failures.

Slide 23: The Six Phases of the Composite Y2K Event Scenario--Arrayed Against the M Curve of Influence

We explain the six separate phases as follows:

Mania refers to the phase during which public awareness, anxiety, and preparation for Y2K accelerates dramatically.  For most countries, this will be across the summer and/or fall of 1999, with the "size" of the mania growing in direct relationship with the lateness of its onset (meaning the later in the year it starts, the more profound it will be).  For the U.S., for example, we'd predict the Mania Phase to really kick in come Labor Day (i.e., end of summer and beginning of fall, when thoughts turn to preparing for the winter), but for a country like Russia, probably not until November. 

In general, a good rule on start dates would seem to be: the more "crises" a country has on its plate, the later will be the start of the Mania Phase.  Of course, it there's enough crises a country may well skip the entire concept for all the obvious reasons, but that would clearly be a special case outside of our generic model.  One key assumption of this phase is that enough "evidence" (a very slippery concept here) surfaces by this time that says Y2K may well be significant and/or sufficient "public outcry" or "alarm" is orchestrated by Opinion Leaders (whether they come from officialdom or the public itself) to fuel the Mania in the absence of such "evidence."

There are probably several factors that will determine the intensity of the Mania phase.  The first is the degree of obfuscation or denial associated with the Public Transcript.  This can have two affects on the resulting mania:

• In cases where there is significant obfuscation/denial associated with the Public Transcript, once the Private Transcript (perceived truth) is revealed, there is likely to be a very large delta between the public and private positions (i.e., between what I’m told and what I see).  The degree of discontinuity between the two positions is likely to be one of the primary determinants of mania intensity.
• The greater the obfuscation in the Public Transcript, the more evidence to the contrary (Private Transcript) will have to emerge before the public script is rejected by the masses.  This might very well delay the emergence of the widespread concern until very late in the game.

This brings us to the second primary determinants of mania intensity, available preparation time.  The later in the game the Private Transcript is revealed, the greater the Mania is likely to be for any particular delta between Public and Private transcripts.  The Mania is most accentuated when large public vs. private discontinuities appear so late in the year that people feel they no longer have adequate time to prepare for an event that now seems will be very different from what they’ve been told to expect.  Here we'd see the increased likelihood of shortages, panic, and generalized iatrogenic activity.

The third important factor is mass trust in the ruling elites.  If you believe in your leader strongly enough, you’ll follow him or her right into a brick wall (or a spaceship hiding behind a comet).  In extreme cases, trust in leadership could completely dissipate the mania.  Of course, if the leader is overly optimistic, the Onset and Unfolding phases could provide a rude awakening.

Ultimately, frequent communication between the leader and the led, along with the most transparent possible information on Y2K preparations, seem to provide the best opportunity to mitigate the Mania.

Countdown refers to last few weeks and days of 1999, when individual and group preparation for the Y2K and associated Millennial Date Change Event takes on a life of its own, meaning the simultaneous actions of a substantial portion of the populace rapidly propels Y2K up to the level of a social phenomenon no longer easily made subject to any organizational control--private or public.  On the face of it, that sounds pretty scary, but depending on the society and culture, it need not be.

Much will depend on the individual's sense of vulnerability in the face of a potentially destabilizing event, and that sense of vulnerability will depend proximately on his or her sense of achieved preparations but ultimately on his or her expectation of the event ahead.  Preparations alone are unlikely to reduce uncertainty, thus the previously shaped expectations of the public at large will loom large at this point.  But like riders traversing the first great drop of a roller coaster ride, few minds are likely to be changed in transit.  Most people will turn a blind eye and a deaf ear to further entreaties or advice, as they steel themselves for the remainder of the "ride."

Onset refers to probably no more than the first week of January 2000, but is primarily concentrated on the 31 December 1999 (Friday)  through 3 January 2000 (Monday) time frame.  Y2K's overlap with the Millennial Date Change Event and all the associated angst, celebration, joy, and violence that milestone is likely to evoke from large numbers of people around the planet will make for a very confusing time period, during which far too many simultaneous local experiences will be processed for widespread consumption via a global mass media blow-out of epic proportions.  Almost by definition, a crisis is a compression of time, during which "more things happen than usual," making societal response patterns unpredictable.  So given all that's likely to be going on during Y2K's Onset Phase and the accompanying media saturation coverage, we will--by definition--experience a crisis atmosphere that will inevitably skew most people's perceptions of events.

Unfolding refers to the  indeterminate length of time (depending primarily on a country's level of IT) that will have to pass before the private and public leadership circles within individual countries can ascertain the extent of Y2K-induced network failures they collectively face.  Our assumption here is that more advanced IT countries will more quickly catalogue and analyze those failure events that have already transpired and thus generate more accurate estimates of  what's left to unfold than will less advanced IT countries.

As a crisis management rule,  this capacity for gathering intelligence and processing estimates should not be considered a predictor for the country's aggregate failure rates, so a shorter Unfolding Phase shouldn't be considered commensurate with a less traumatic Y2K Event, for the rush of failures is likely to be greater and thus more traumatic in a shorter phase.  However, in terms of social response dynamics, it's fair to assume that the shorter the Unfolding Phase, the easier it is for Opinion Leaders to rebuild their influence over public perceptions.  Correspondingly, the longer the Unfolding Phase (meaning the longer the sense of public uncertainty regarding the question, "How bad will this whole thing turn to be?"), the greater the potential for mass iatrogenic behavior that only confuses the situation further and complicates both direct recovery and broader crisis management efforts.

Peak refers to period during which a country experiences the maximum impact of its Y2K-induced network failures and whatever side effects those failures may create throughout the economic, social and political arenas.  Naturally, the definition of "peak" is highly subjective, since it is very unlikely that countries or regions will experience Y2K in a collective, unifying sense.  Y2K, if it turns out to be substantial for any one country, is likely to exhibit a strong "localizing" effect, meaning it will tend to cut communities off from one another, thus varying their individual experiences greatly.  As such, any attempts to define or declare--on a country-wide basis--the "peak" of the Y2K Event will be highly contentious and politicized affair.

Exit Point refers to either an apparent or a self-declared end to the systemic Y2K Event and any associated crises.  Like the definition of the "peak," this will be a highly contentious and politicized debate that will--assuming Y2K has been substantial--immediately segue into, and thus set many of the key judgment parameters for, the official and unofficial "score settling" that inevitably accompanies any crisis period.  For example, in the United States the Y2K Exit Point is likely to overlap with the first few weeks of the 2000 Presidential primary season.

One key alternative scenario element for this phase is the emergence of a follow-on crisis--whether it be related or unrelated to Y2K--that effectively "ends" the Y2K Event by superseding it in national importance.  Of course, in this instance, much would depend on the public's perception of the causality surrounding the "new crisis"--namely, did it truly arise "on its own" or was it "engineered" by "powers-that-be" to divert public attention from the continuing Y2K crisis (e.g., the "splendid little war" scenario, alternatively known as the "wag the dog" scenario).

The Scenario Dynamic Grid Explained 

Slide 24 below presents our Y2K Scenario Dynamic Grid.  The four-by-six grid is arrayed in the following manner:

• The four rows correspond to our four Y2K sector areas:
  • Networks
  • Business
  • Social Response
  • Governance.
• The six columns correspond to our six-phase composite scenario timeline:
  • Mania
  • Countdown
  • Onset
  • Unfolding
  • Peak
  • Exit Point.
• The main entry for each grid box represents our definition of the key scenario dynamic in play for that sector area during that scenario phase.  For example, "F2Q," or "flight to quality" is the key scenario dynamic in play in the Business sector during the Countdown Phase.
• The secondary entry (in the smaller red box-arrows) for each grid box represents our definition of a key emerging scenario dynamic to look out for as the timeline moves from that particular phase to the next one.  For example, "Answer Man" is the key emerging scenario dynamic to watch for as the timeline moves from the Unfolding Phase to the Peak Phase in the Governance sector.

We offer the same general caveat regarding the Scenario Dynamics Grid that we cited for the M Curve: we feel fairly confident that the first three phases (Mania, Countdown, and Onset) will occur regardless of how Y2K actually unfolds post-010100, so the dynamics we cite in those columns are essentially predictions that we think will come true in some combination for enough states around the world so as to serve as a useful generic model.  As for the final three phases (Unfolding, Peak, Exit Point), there we're getting into hypotheses regarding an assumed Y2K Event that proves to be stressing and substantial.  In that regard, the scenario dynamics listed for those columns do not represent predictions of what must happen--only estimates of what could happen given a particular stressing scenario.  In other words, if Y2K is a dud, you can largely forget the last three columns.

Slide 24: The Y2K Scenario Dynamic Grid

The Network Timeline in Detail

Moving from left to right along the timeline:

In the Mania Phase you see the ramping up of the Stockpiling dynamic, with individual stockpiling attracting the most media attention, even though it's the stockpiling by economic firms and governments that will have far more profound market impact.  Of course, stockpiling will occur in direct relationship to public fears concerning the interruptions of key network services (utilities and food distribution being the big drivers), and will reflect the strategic distance between the Public and Private Transcripts of business firms, i.e., the difference between what they're saying to reassure customers and the steps they're taking to deal with non-compliant suppliers and vendors.  In both instances (individual and organizational stockpiling), it's the "little guy" who will suffer or fall behind, thus increasing "his" anxiety.

Thus the dynamic to watch as we go from Mania to Countdown is the emergence and increased agitation of the Most Vulnerable.  On the individual basis, stockpiling is a middle-class (or better) phenomenon in that it requires disposable income that the poor do not possess.  Since rural poor tend to have a better system of workarounds for these situations, the group to watch are the urban poor, who will likely be the first to feel any squeeze from stockpiling purchases and thus grow more anxious.  In terms of economic firms, it's the Small/Medium Enterprises that will suffer, simply because they don't have the capital of larger firms to safeguard themselves against supplier disruptions.

In the Countdown Phase, Getting (It) There refers to two phenomena: 1) movement by people to locations where they may choose either to "celebrate" or "ride out" the millennial date-change event; and 2) a "topping off" of crucial supplies by individuals or organizations.

In the first sense, we expect to see a greater than average amount of travel in anticipation of the 010100-threshold.  Rich people will want to travel somewhere exotic for fabulous celebrations.  More religious-minded people will travel to holy meccas and shrines to celebrate Christendom's Third Millennium.  Party-goers will pack urban areas for mammoth New Year's Eve extravaganzas.  Apocalyptic-minded individuals will head to the hills or sanctuaries.  Safety-conscious people may leave urban areas for rural ones.  Families may gather with even greater frequency, either out of a simple desire to share the moment or out of concern for more vulnerable members.  Governments may organize and move around security and/or crisis management forces.  In short, a lot of movement may occur, with gross numbers linked to popular anticipation of the event as being historic or "once in a lifetime."

The "topping off" phenomenon in Networks will occur along a myriad of avenues, with one good example being the advice proffered by many authorities that it would be wise for everyone to have their cars' gas tanks filled up.  If, for example, a large majority of a population attempts to actualize that advice in the last 2 to 3 days on 1999, it is quite possible that spot shortages will immediately appear (i.e., gas lines) and most nations' distribution networks aren't set up to handle that much volume in a concentrated time period.  This, of course, would create a social dynamic all its own.

As we move from Countdown to Onset, the dynamic to watch involves efforts by authorities to encourage both individuals and organizations to go off-line as much as possible in the last few hours of 1999 and during the first 24-72 hours of 2000 (i.e., through the holiday weekend). Going Off-line means doing whatever is possible to reduce loads on utility networks.  For example, it means encouraging large-scale celebrations to be as low-tech as possible to reduce electricity loads.  It may mean also that authorities encourage more distributed celebrations to reduce stress on mass transit networks.  Much of any government's success in encouraging this conservation will depend greatly on previous public education campaigns.  For example, in the U.S. the FCC has already begun asking the public not to use telephones or modems on 31 December and 1 January to avoid overloading the public telephone system.  In effect, the FCC fears some combination of the "Mother's Day" effect (i.e., everyone calls family members to note the historic occasion) and a "testing the system" effect (i.e., everyone checking to see if the phones and Internet are still working).  Of course, if everyone tests or calls Mom at the same time, the stress on the telephone network can become a self-fulfilled prophesy.  In countries around the world with less robust public utility networks, this dynamic is all the more important.

A particular subset of the Going Off-line dynamic refers to the possibility that some energy power plants--namely nuclear power plants--may be taken off-line for some indeterminate period of time surrounding the 010100 threshold due primarily to safety concerns.  If this were to happen, then obviously a country's energy power grid would suffer diminished load capacity.  At this time, however, predictions regarding such actions are highly speculative.  For example, earlier this year there was a lot of loose talk about airlines and ports shutting down for some period surrounding 010100, and although some isolated declarations of intent have been made (e.g., Virgin Airlines giving employees New Year's Day off for "family reasons"), widespread shutdowns in either industry seem ever more unlikely as time passes and confidence regarding Y2K grows.

Once we get to the Onset Phase, despite the best efforts by authorities to encourage low-voltage celebrations, we nonetheless foresee great potential for the overloading of network systems.  Again, we're talking the world's largest party, plus it's the middle of winter in the northern hemisphere.  Factor in all the additional activity--and thus added network load--associated with Y2K, and we're looking at a possible spiking of demand for network services (e.g., electricity, phones, Internet access, mass transportation). The key element here is obviously electricity, for if that keeps flowing, then whatever additional demands emerge in other network areas can probably be handled in "rush hour" modes.

As such, it only makes sense as we move from Onset to Unfolding to watch out for Black Outs, or the disruptions of basic utilities, "downing" of the Internet in places, spotty phone service, etc.  Current predictions for such disruptions range from the "Three-Day Snowstorm" analogy in the U.S. to predictions of far longer outages in places such as China or Russia.  The key question for any country, though, is not whether the outages will happen, for some inevitably will, nor how long they last, as many countries deal quite nicely with such disruptions (thinking of Russia), but rather whether or not these blackouts represent the first of many interrelated waves of failures, or simply the early flame-out of the Y2K phenomenon.

If Y2K proves to be substantial and long-lasting, it will reveal itself in the Unfolding Phase, which in the Networks sector would lead to the dynamic of Rationing, meaning anything from rolling brownouts/blackouts in some utilities, to possible restrictions on access to mass transit or thoroughfares, to even the distribution of basic foodstuffs by authorities.  The key point is that either non-market mechanisms will arise by government fiat and/or market prices will rise high enough to cause de facto rationing by wealth of items typically viewed as basic.

Since transportation of goods into areas where shortages exist is the primary means of relieving the rationing dynamic and thus ending the "localizing" phenomenon of Y2K-related network failures, it would be precisely a broad and continuing slowdown in this sector that would signal a movement from the Unfolding to Peak Phase--hence we cite the dynamic of Traffic Jams as the key indicator in this transition.  A good example of the type of transportation slowdown would be the dozen or so global mega-ports through which flows the vast majority of goods shipped over the high seas.  Substantial slowdown in several of these mega-ports would exacerbate the Y2K Event, with the most likely culprit in this equation being neither the ships themselves nor the off/on-loading networks, but rather the recording keeping--i.e., the paper work.

A Peak Phase in the Network sector would feature the dynamic of Haves vs. Have Nots, caused simply by the disparities in deprivation engendered by network failures.  Reasons for this would include:

• Better preparations for deprivation by some
• More disposable resources for some to deal with deprivations once they appear
• Some areas will feature a higher percentage of vulnerable populations (e.g., very young, very old, sick or disabled)
• Localizing effect will mean some communities are better situated in terms of basic supplies than others (e.g., southern areas will be in growing season while northern areas will not)
• Remediation efforts will have varied greatly by area
• Failures will not be evenly distributed or evenly timed.

In short, because some people and/or areas will do better than others, tensions will inevitably rise between groups suffering varying levels of "pain" or varying rates of recovery.  Note, this is not the same as saying "people tend to freak out" during disasters, for here we're past the initial "disaster" and deep into the painful aftermath.  By analogy, the Onset would correspond to the "people coming together when disaster hits" notion, whereas the Peak corresponds to the period weeks later when tempers begin to flare as people start realizing that although "we were all in the same boat in the beginning," that initial leveling phenomenon has given way to serious differences in rates of recovery and the ultimate resumption of "life as we knew it."

Getting us from the Peak  to Exit Point, which we define as Metropolis Saved, meaning that if the cities are back to near-normal then the crisis is largely over from a Network perspective, may require some extraordinary efforts by some extraordinary actors.  These efforts must either solve the problem of "things not moving" by fixing the networks themselves or by generating and supporting sufficient workarounds to get things moving by alternative means.  We have dubbed this dynamic Network Leviathans, meaning super-empowered organizations that can somehow make things move even when it seems that normal network pathways are hopelessly disabled.  By definition, we're first and foremost talking about militaries here, for it's the military that specializes in creating logistical networks where none have previously existed--typically on a battlefield.  The down side to this is that no military in the world comes even close to matching the logistic capabilities of the U.S. Military.  The up side is that most militaries around the world have some real experience in providing these functions within their own countries during times of natural disasters.  So if it's a ragged capability in many countries, at least it's one that's familiar.  Given that the U.S. Military is unlikely to get deeply involved within the United States, given the relatively robust nature of our distributed police, emergency response, and National Guard networks, one of the main roles it may play will be that of Network Leviathan overseas in conjunction with international and foreign national relief organizations.

We end our discussion of the Network sector by positing the legacy issue of New Faultlines.  By this we mean humanity discovering divisions among itself that were not apparent before the Y2K Event.  In effect, we're taking about divisions based on information technology that have arisen during the past couple of decades but have not yet made themselves as obvious in a popular sense as they might be after a traumatic Y2K experience.  The two obvious extremes of this equation are:

• Those "too dependent" on information technology will have their "comeuppance" while those more "self sufficient" will emerge from this experience more confident about a future that inevitably features an ever increasingly frequency of this sort of IT "disaster."
• Those "too slow" on information technology will have their "comeuppance" while those who adapt themselves with greater speed will emerge from this experience more confident about a future that inevitably features an ever increasing IT quotient.

The Business Timeline in Detail

Moving from left to right along the timeline:

In the Mania Phase we see the phenomenon of firms Taking Options, meaning business firms setting up and/or implementing alternative supplier/vendor arrangements in anticipation that some portion of their existing supplier/vendor base will not perform well in the coming Y2K Event.  This is a variant of life-as-we-are-coming-to-know-it in the New Economy, with its rapidly shifting alliance strategies and frequent market-share quakes, and yet, it may take on an added dimension here because of the (potential) simultaneous actions of many firms focused around a single date in time.  But in the end, all it really says about business and finance is that when managers look ahead to Y2K, they see winners and losers, and therefore plan accordingly.  Nothing personal, mind you, just business.

As we move from Mania to Countdown, a compelling dynamic becomes the appearance and use of Leper Lists, which finger those suspected of not performing well in the coming Y2K Event.  They are definitely a double-edged sword, for, on the one hand, they represent a great motivator for remediation laggards while, on the other hand, they can bring the same sort of self-fulfilling prophesies that one associates with rumors about a bank's liquidity--namely, bank runs. So if a supplier gets a bad wrap as "non-Y2K compliant" and then sees orders dry up as it is shunned by long-time business partners, then problems are bound to ensue regardless of the firm's ultimate Y2K vulnerability.  The recent experience of the Global 2000 Coordinating Group and their near-publication of a Y2K-readiness rating of major trading nations (they backed off at the last minute for fear of sparking capital flight) speaks volumes about the dangers involved with such lists, and yet appear they will, for they represent serious intelligence about potential market failures by competitors.  Firms will naturally want this information and--once they have it in hand--will naturally use it to their own advantage.

Flight to Quality is the natural dynamic of choice for the Countdown Phase, for it speaks to the notions of last-minute panics and the desire for safe haven.  Recent history has given us plenty of examples of what Thomas Friedman would call "stampeding" by the international "Electronic Herd" of global investors.  Moreover, there's plenty of good history to back up the concern, as the Economist pointed out in its September 1998 survey of Y2K (19 September 1998, p. 4):

Since the start of modern times, the end of a century has been a time of economic unease.  The British and Dutch stock markets in 1699 and 1799 and the Dow in 1899 all saw sharp falls in prices, according to ING Barings, a Dutch bank; between December 2nd and 18th 1899, the Dow fell by 23%.  A millennium, even more than a centennial, would be spooky enough without the fear of computer failure.  Perceptions, rather than reality, may turn out to be the most dangerous aspect of that pesky millennium bug.

Of course, none of this says anything about the mid-term stability of global financial markets, nor about Y2K, but only about the psychology of investors and their periodic tendency to engage in fear-fulfillment.

So where does the money go?  Gold prices are at historical lows.  The U.S. stock market is overvalued already by the measure of many experts, and yet would seem to offer a great place to park cash in the short run since the U.S. should come through Y2K okay.  Or do Internet stocks come tumbling down, bearing the brunt of the technology fear?  In short, you ask enough questions and fairly soon you're back in the life-as-we're-coming-to-know-it territory that one associates with the emerging New Economy, again begging the question of whether or not Y2K represents something fundamentally unique in history or a harbinger of the future.

The dynamic to watch as we move from Countdown to Onset is what we refer to as Cash On Hand, meaning both the issue of liquidity in markets (e.g., everyone trying to sell bonds at once in a certain small-country market and finding no buyers) and the issue of paper money in circulation.  Both issues revolve around panic and the desire for fungible assets during a perceived time of great uncertainty.  So cash on hand may be an important safety cushion for a country's central bank in terms of protecting themselves from both outside forces (e.g., foreign currency reserves to ward off speculators) and inside forces (e.g., sufficient money in circulation to ward off bank runs).  A rule we might propose for this dynamic would be, the more control you have over your country's cash reserves (having more is obviously better) and money in circulation (to include the printing of money), the safer you are regarding Y2K-induced financial panics.  Again, there's nothing terribly particular to Y2K about this advice, rather it's simply the occurrence of Y2K that highlights a capacity that countries are increasingly coming to value in a globalized New Economy.

With the Onset of Y2K, we expect to witness the dynamic of an economic Dead Zone that will encompass both retail and financial transactions.  In retail, we're talking about a consumer that's already spent his or her available disposable income either on Y2K preparations or end/beginning-of-year holidays or some combination thereof.  In the financial world, we're talking about companies--far more than usual--working to move transactions away from the end of the calendar year, meaning "earlier" into December or "later" into January.  Again, neither of these dynamics is particular to Y2K or the Millennial Date Change Event, but are part of the normal end-of-calendar-year business cycle.  All we're predicting here is a larger than normal effect.  For example, we'd expect extra market "holidays" around the 010100 threshold in many countries around the world, as markets there attempt to ease their financial sectors past the date change in as relaxed fashion as possible (possibly phasing them in over several days before reaching full working volume).  Even if markets or governments didn't take these extraordinary steps, the wariness of individual firms and investors to play in those first few days might well do the trick all by itself.

Of course, at some point, financial markets have to come back online completely, and here's where our more speculative material kicks in. If Y2K turns out to be widespread and substantial in impact starting in January, the dynamic we look for in financial circles are what we'd call Market Quakes.  This refers to Y2K-induced or related network failures that either directly disable financial market operations or create cascading investor panic about broader economic dynamics (including disabled market operations) that find their reflection in wild market swings.  Such quakes, of course, can start anywhere on the planet, but once started, tend to move with time zones from one global super-market to another (e.g., from Tokyo to Hong Kong to Europe to London to New York and then all over again).  Rather than labeling this dynamic a "financial contagion," it's really more a matter of copied behavior: investors in one market fear that what they're watching in another market is a clear indicator of their own future, thus eliciting similar defensive responses.  For the business timeline as a whole, this is probably the key single dynamic, for if Y2K is going to kick into a larger economic downturn, the first real signs probably appear here.  Conversely, if Y2K is going to turn out to be a financial non-event, the lack of any market instabilities here will go a long way toward killing any potential downturn in its tracks.

Moving in the Unfolding Phase, here is the time for the Internet-based economic "doombrooders" such as Edward Yardeni either have to fish or cut bait, meaning either we see the dynamic of Fortressing and Islanding rise up in a serious way or these theories of economic back stabbing decimating social trust and destroying business chains will need to be quickly discarded.  Of course, some of this dynamic may have already unfolded during the previous phases, especially the Mania one, but it's really in this phase, when the supply chain failures pile up that this dynamic should rear its ugly head in a broad-scale manner if Y2K is going to unfold in a truly dramatic and destructive manner.  And again, what's dramatic and destructive about islanding and fortressing is the loss of social trust and what that will do to aggregate economic behavior.  If individuals see great numbers of long-standing trust relationships evaporate overnight in response to Y2K-related failures, then perceptions of the future will change drastically and for the worse.  In short, we'll clearly be in a new and largely unknown rule set.

The key dynamic to watch regarding popular perceptions of an emerging rule set is what we call Personal GDP—namely, the depletion of financial resources set aside to weather the Y2K Event.  Everyone—every person, firm, government, etc.—will enter into the Y2K experience with certain expectations regarding how much this is going to cost them.  When this threshold is reached, meaning the money (and/or other assets) set aside is gone, perceptions of economic loss can escalate dramatically and result in a significant skewing of individual and collective decision making.  Of course, the more individuals and organizations plan for a “tall” Bell Curve, but instead find themselves riding the stretched-out “far side” of a curve that never seems to end, the worse this dynamic becomes.

The Peak Phase in the Business timeline is defined as a de facto Cash Economy, meaning a virtual de-creditization of the economy as social trust evaporates and almost nothing gets done unless cash or other hard "currencies" (depending on what society you're talking about) are involved.  Realistically speaking, within the hardest hit pockets of a country, we'd see cash economies sprouting up, without the country as a whole devolving to a cash-on-demand status (meaning the semblance of normality tends to be preserved in official circles).  The obvious model for this type of situation would be Russia since the fall of the Soviet Union.  Having said that, we'd note the Russian tendency to muddle through--with great day-to-day effectiveness--what advanced Western countries would consider a state of almost complete economic collapse; in other words, our worst nightmares are often many countries' normal operating procedure.

To go from the Peak to Exit Point, countries may well have to face the task of some sort of SME Triage, meaning some sort of economic or political response to substantial numbers of Y2K-related business failures among Small and Medium Enterprises.  We don't have any simple answers on this one; we just note the potential rapid loss of jobs connected with SMEs and the tendency of many governments around the world to consider that a serious threat to political stability.  For SME failures to occur in great numbers, one would imagine the confluence of three dynamics over a substantial length of time:

• Direct Y2K failures leading to failed business operations
• Islanding and fortressing of extant business partners by firms in response to failed business operations
• Increased exposure to litigation liability for breached contracts or product liability issues.

We define the Exit Point as Winners Crowned, meaning the identification of individuals or firms that are perceived as having flourished during the Y2K-induced economic crisis and who, by doing so, set the tone for whatever New Rules characterize the resulting economic legacy of Y2K.  This, of course, will be greatly determined in most countries by the accompanying political legacy to be discussed below in the Governance timeline.  A good way to think of this dynamic is to reflect on how Wall Street periodically crowns some new set of financial "giants" every X years as defining what seems to be a new model of market activity (e.g., the "quants" or "professors" after 1987).  Of course, if Y2K is substantial for a country, we could see the "winners" emerging with a far greater concentration of wealth, particularly if many SMEs are to die off or be absorbed by larger firms.  If this occurred, one could easily consider--yet again--that Y2K fits well within the paradigm of the New Economy, which is described by many as featuring a high SME failure rate and a winner-takes-all playing field.

The Social Response Timeline in Detail

Moving from left to right along the timeline:

In the Mania Phase we cite the Truth is Out There dynamic signifying large amounts of popular distrust of the Public Transcript put forth by government and business leaders regarding Y2K potential impact.  By some estimates, for example, there are more than 100,000 web sites currently devoted to "surviving Y2K."  Clearly there's a significant market for this sort of material, meaning that the "good cop, bad cop" approach pursued by many authorities (i.e., Don't worry!  But get ready!) tends to drive a percentage of the populace to non-traditional sources of crisis-related information.  In short, many people "out there" assume that the "full story" is somehow being "kept from them," while the "official story" is not to be fully trusted.  It's not hard to see why there's so much mistrust.  It is very hard to determine who is an "expert" on Y2K, much less what good data is, and very little of the material you see on the subject expresses anything close to ambivalence.  In the end, the fine line between proper preparation and overreaction is almost impossible to pin down.  Meanwhile, advocates on both sides of the argument constantly deride the other's attempts as "misinformation" of some sort or another.

Not surprisingly, the dynamic to watch as we move from Mania to Countdown are Rumor Mills, for when people don't feel that authorities are being fully transparent in terms of information sharing, then they tend to seek out and respond to whatever informal information they can get their hands on.  The Internet naturally plays a huge role in this, as does the mass media, but it is really the face-to-face communication that tends to hold the greatest sway over popular actions as uncertainty rises.  That's only natural, since people tend to turn to others close to them for advice and collaborative thinking during crisis periods.  So, as a general rule, the greater the popular perception of looming crisis, the greater the role played by rumor mills in particular, and informal communication channels in general, with the most dangerous situation being when authorities have effectively lost the attention of the public regarding preparations for crisis management.  It is also fair to say that rumor mills tend to work more effectively in less developed economies than in more advanced ones, where access to mass media is virtually universal.  Finally, it's probably accurate to say that rumor mills will generate increasingly wilder stories (e.g., urban legends) as the 010100 threshold looms, therefore many of the activities of authorities near the end of the Y2K build-up will be focused on stamping out "bad information" vice spreading "good information."

When the Countdown Phase ensues, Information Overload seems inevitable for all societies not undergoing some greater sort of "crisis," whatever that could be.  Mass media coverage of the Millennial Date Change Event and "looming Y2K crisis" is likely to reach epidemic and epic proportions, in large part because the latter presents almost everything one could ask for in terms of a global media event:  great uncertainty, great danger, great debate, lots of conflicting expertise eager to sway public opinion, a worldwide "playing field," and a worldwide audience.  Toss in the world's largest party and we're talking some high ratings, especially for news programs which increasingly specialize in releasing frightening bits of information to the public over a stretch of time as a way to ensure continued loyalty.  Since bad news sells better than good, it goes without saying that much "bad news" will be "found" by the mass media during the last few weeks of 1999.  The effect of all this "bad news" can have one of two effects on the public:  scare them into action or numb them into inaction or indifference.  Much will likely be determined by individual exposure to network failures prior to 010100 that can be causally linked to Y2K: if no to little exposure happens, the heavy media coverage is likely to incite indifference, whereas significant exposure may incite some level of panic among those "convinced" by their experiences.

Moving from Countdown to Onset,  we watch for the dynamic we entitle, Final Solutions, by which we mean individual citizens and organization actively engaging in "endgame" strategies decided upon weeks or perhaps even months earlier.  This aggregate pursuit of what could be highly idiosyncratic coping (or simply celebratory) strategies may well be disorienting for society as a whole, for it may appear to all that significant segments of the population are clearly "going their own way" at the last moment, thus decreasing social trust as a whole as the 010100 threshold looms.  Since, in many cases, the exhibited behavior may be the first public expression of that which up to now has been a strictly Private Transcript, the sudden shift in behavior by many may ratchet up the level of uncertainty and fear for the society as a whole.  Of course, the classic story here is the one concerning survivalists or apocalyptics "heading for the hills" at the last moment, determined to "escape the chaos."  Another variant that may wreak serious social harm is that small minority of mentally unbalanced individuals who may seek to "go out with a bang" on their own terms, raising the potential for a cluster of Jamestown-like mass suicides, Littleton-like shooting tragedies, and/or Waco-like stand-off between authorities and heavily-armed religious cults.  In this regard, we'd argue that special security attention be given to religious shrines or meccas, or any place with strong significance for typically marginal social elements with a history of acting out violently during times of stress.

When the Onset finally hits, there will simply be a Will to Party that is both inescapable and profoundly powerful.  To a great extent, the public desire for mass celebration should be accommodated to the greatest degree possible while seeking to reduce network pressures and limit unmanageable concentrations of people.  Typical celebrations magnets, such as religious meccas, capital cities, and cultural landmarks, are likely to be packed to the breaking point, and while that presents significant security problems, attempts by authorities to block access are likely to be counterproductive.  Naturally, the "world's largest party" is likely to produce a corresponding large amount of personal injuries, sporadic low-level violence, spontaneous riots, alcohol- and drug-related crimes and medical situations, and so on and so on.  Almost none of this will have anything to do with Y2K in and of itself, but instead will simply reflect the nature of the Millennial Date Change Event in the country in question.  If Y2K failures do disrupt such celebrations, there should be cause for alarm and yet, most people "trapped" in such situations respond quite nicely by rising to the occasion according to the spirit of the celebration. This is not to say that riots, violence, etc., won't happen, but that the additional burden of Y2K-related failures is unlikely to exacerbate their normal course to any significant degree.  In short, it will be a wild party no matter what, and if Y2K "joins in," its immediate effect is likely to be negligible.

As we move from the Onset to Unfolding, an inevitable dynamic will be one of Panic Release, meaning social expressions of exasperation, anger, fear and loathing.  The possible angles are many, with the following being just a few:

• Some will be exhausted by all the recent uncertainty, build-up, and celebration
• Others will be angry that Y2K turned out to be a "sham"
• Still others will be angry that Y2K turned out to be "far worse" than authorities "let on"
• Some will be angry at the lack of the "apocalypse," "rapture," or supernatural intervention in human affairs
• Others will be convinced that such "end times" are indeed unfolding
• Still others will be frightened by all the "odd behavior" they seem to be witnessing.

In short, the Millennial Date Change Event, along with the threat of the Y2K Event, is likely to elicit a strong build-up of social tension, not all of which will be spent in the celebrations surrounding 010100.  There will be burn-out, a sense of let-down, along with heightened anxiety that Y2K "has finally begun."  Many, if not most of the population will take all this in stride, but a significant minority will not.  The big question will be whether that minority's actions will trigger broader social responses that authorities cannot control or simply be contained by authorities and written off by the larger public as the "typical nonsense of the extremists/troublemakers/wackos."

Assuming a significant Unfolding of the Y2K Event, the next dynamic of note is the Iatrogenic Zone, or what we like to call, "average people doing stupid things under duress"--something we're all familiar with.  This is not so much panic, as the purposeful attempt to "fix things" that only leads to making them worse.  Tackling real and identifiable problems is only a small portion of this dynamic (e.g., "experts" who attempt to "fix" things, armed only with their blinding ignorance), because the real damage tends to be done by those individuals or groups that target the imaginary, insignificant or unrelated "Y2K problems" with great gusto and, by doing so, create follow-on failures and clouds of confusion about actual Y2K causality.  This dynamic is a key one for extending the Y2K Event beyond its minimal boundaries and into the realm of an unanticipated disaster, with the paradigm being the stunned local official staring into the news reporter's camera stammering, "We had no idea that people were going to . . .."

As we watch for a transition point from Unfolding to Peak, the crucial social dynamic is what we call the Trigger Effect (referencing the 1996 Amblin Entertainment movie of the same name noted earlier in this report).  As stated before, most people do not panic during disasters, but rather rise to the occasion nicely, with only a very small minority succumbing--temporarily--to so-called disaster shock (i.e., a massive mental reordering of priorities following a cataclysmic event).  The Trigger Effect doesn't refer to either of those two realities, but rather to one that appears much further down the road in a crisis--namely, when "battle fatigue" sets in.  A particularly acute trigger of this sort of "crossing-the-line" behavior is the perception that either the crisis is being artificially drawn out by uncaring authorities ("Why don't they fix things faster?") or that recovery rates are unequal "for a reason"--meaning preferential treatment is being afforded by authorities.  Nothing brings on the "short fuses" faster than the sense that "we're no longer in this together," whether the "they" are those receiving preferential treatment or the slow-footed authorities suspected of tending to their own needs first.

The Peak situation is obviously the most volatile phase in the social sphere, for it is here that group anger boils over and looks for ways to express itself.  Typically, that means the targeting of small, easily identifiable demographic groups toward whom long-standing resentments have been harbored by the majority, usually over a sense of economic injustice ("They have exploited us long enough!").  Scapegoating, or the dynamic of targeting relatively weaker groups for persecution, is nothing more than the age-old practice of human sacrifice in light of "unexpected" and "unexplainable" disaster (meaning, in a practical sense, that those truly "guilty" are unreachable, so instead, "you hate the one you're with"--with apologies to Stephen Stills).  In effect, disaster seems to rain down on you from on high, and since there's nothing you can do about the "source," you appease the anger within by striking out against those nearby that you've always resented anyway.  In Indonesia, for example, during the 1997-98 Global Financial Crisis, it was the ethnic Chinese that often served as scapegoats, although sporadic reports of "ninja witches" being hunted down by villagers in remote areas made for the most compelling reportage.  No matter what the idiosyncratic explanations by locals for this violent behavior, it remains nothing more than the inherent human tendency to look for someone to blame and target for persecution whenever "hard times" suddenly appear and the causality seems unclear or complex.

Of course, Scapegoating lies not only in the realm of mass behavior, but often serves as a political tool by those already in, or vying for, power.  For example, an embattled regime is well served by blaming the society's ills on some small demographic group and then arranging for their state-sponsored persecution (think of Rwanda, for example).  Then there's the targeting of political opponents or rivals (e.g., Malaysia following the financial crisis) designed to buttress the sagging political fortunes of a leader perceived to have done poorly by his or her people.  In short, "hard times" breed harsh attitudes, and harsh attitudes make for absolute solutions, which in turn make for excellent political tools for those leaders with the will and way to divide and conquer (or typically, reconquer) their own populations during conditions of internal crisis.  Think of Lenin in Russia during World War I, or Hitler in Weimar Germany, and you get the picture of the potential for political tumult under the right conditions.

Can Y2K create such dire circumstances in any country?  Assuming the right set of truly disastrous proportions, anything is possible. In short, our planet's recent good fortune in seeing unrest lead to greater political freedom shouldn't blind us to the potential for equally negative outcomes.  One true bright spot, though, is our hypothesis that Y2K will probably present greater political unrest potential for authoritarian states than for democracies.  Why?  Again, distributiveness equals robustness with regard to network failures, and democracies are simply more distributed than authoritarian regimes.

The dynamic to which authorities may have to resort to move their societies out of the Peak Phase and into the Exit Point is proving to their public that the Guilty Will Pay.  Now, this probably sounds a bit hypocritical following the previous paragraphs on scapegoating, but the reality is that a key motivation for scapegoating is the perception that the truly guilty are out of reach and therefore untouchable, so instead you reach for what's at hand.  When authorities act to demonstrate to the public that rules still matter and those who break them will not get away with it due to the perception of unusual circumstances ("All bets are off!"), they send a strong signal that while a new rule set may be emerging, the old one still operates in familiar ways, forcing accountability in the end.  Accountability is what keeps vigilantism and scapegoating at bay, for it says that--ultimately--those who break the rules will pay for their crimes.  Hopefully, authorities can convince the public that state-directed retribution will remain within legal parameters, but it's entirely possible that in certain extraordinary situations, extraordinary (meaning, extra-legal) measures will have to be taken.  That can sound fairly sinister from an American perspective, because we have relatively high legal standards, but in many countries around the world, definitions of extra-legal means are highly dependent on the circumstances or the crisis and cultural (in)sensitivity to losses of political liberty.

The Exit Point for the Social Response timeline is easily defined--namely, the broad perception that the "Worst is Over!"

Once the perception takes hold that the Y2K Event has crested and we're on a downward glide path back toward "life as we knew it," the crisis effectively ends in terms of social response.  Naturally, attempts by authorities to will this view into popular acceptance will probably be met with significant resistance if the gap between rhetoric and reality is too much for the populace to bear.  In the best possible path, a freely operating mass media senses this spontaneous mood shift among the citizenry and "declares" victory on their behalf.

The legacy issue for the Social Response realm is the potential for New Faiths to emerge from Y2K's ashes. These faiths can be either secular (i.e., political movements) or religious based, with the key attribute being their self-perceived "birth" under conditions of great crisis.  Along these lines, we cite the emergence of the revolutionary Marxist group Tupac Amaru in Peru following a tremendous natural disaster (earthquake).  In short, disaster can bring people together in all sorts of ways, with political or social activism--be it peaceful or violent--a frequent long-term outcome.  Given the tumultuous global changes of the 1990s, it's only natural to assume that new faiths will rise up in challenge to, or support of, new definitions of the status quo.  If Y2K triggers enough social tumult, it may crystallize a larger moment in history in the minds of those either happy or unhappy with the recent transformations wrought by the end of the Cold War, the Information Revolution, and the emergence of Globalization and the New Economy.

The Governance (aka, Political) Timeline in Detail

Moving from left to right along the timeline: 

In the Mania Phase we focus on the dynamic of the Credibility Gap, referring to the tendency of populations to distrust "official truths" put forth by government agencies on the subject of Y2K.  This gap extends in both directions, meaning it includes both those who believe the state is too lax in tackling the issue and doesn't warn the public enough about its potential effects and those who believe the state is unnecessarily hyping the issue and scaring the public.  The later any government began its efforts to raise public awareness and push remediation efforts, the greater the gap will be, for the public tends to respond in one of two ways:

• People assume the government "blew it" by not tackling the subject earlier, and hence is covering up its "mistakes" now.
• People assume the government  is "caving in" to Y2K "fear mongers" and doesn't really have a good grasp of the actual situation or resulting vulnerability.

Outside of the U.S., the dynamic carries the additional burden of potential anti-Americanism, anti-Westernism, anti-capitalism, and/or anti-technologism, for the Y2K "problem" is easily identified as stemming from any or all of those quarters and thus remains suspect in terms of actual causality ("Is it a real problem or an American scam?").  Additionally, tied to both these variants is the sub theme that either the government or the U.S. Government in particular really knows how to "make Y2K go away" but isn't "coming clean with us" for some selfish reason (e.g., profit motive, "plot" to derail the Euro's introduction).

Given this substantial level of distrust of government leadership on the issue, a crucial dynamic as we move from Mania to Countdown is any public or private sector efforts to educate the public about how to prepare for the Y2K Event, aka Y2K & U-type promotional and educational material or campaigns.  Obviously, the earlier and more aggressive the campaign, the better.  Likewise, the more transparent and honest the campaign, the better.  Sounding too ominous only scares the public either into hyperaction or inaction, while sounding too optimistic only makes people think you're holding back the "bad news."  Emphasis should be on the universality of the effect and the universality of the response--"we are all in this together."  Since IT-awareness is relatively scarce in many countries around the world, while work-arounds for network failures are a fact of daily life, these campaigns in many parts of the world can focus more on explaining causality than the provision of "survival information."  In other words, in most places people know what to do already in response to Y2K-induced failures (i.e., the same old, same old), so authorities should focus their educational campaign on dampening any potential social backlash that could be fueled by disparities in suffering or recovery times, as well as ignorance of causality leading to the propagation of conflict-triggering "explanations" ("Let me tell you why this really is happening to us and why you shouldn't take it anymore!").

Once the Countdown Phase begins, our dynamic comes more in the form of advice, as in, "Go with the Authority on Tap."  By this we mean that governments should not seek to introduce special leaders, authoritative bodies, or new rule sets in the waning days of 1999, but rather should stick with the architecture of authority they (hopefully) have already put in place during the previous months.  If new authorities and rules are introduced at this late date, governments are likely to trigger more distrust than trust, and more rule-breaking than rule-abiding than if they simply went with what they already have--no matter how deficient.  Why?  Any last-minute introduction of new authority only fuels popular suspicions or fears that the government is ill-prepared and/or now is finally "coming clean" on its "secret plans" to use Y2K as a pretext for some sort of reordering of political relations either within the government or between the government and the population.  The positioning or use of military and/or security forces becomes a highly volatile issue during this phase, for it represents the worst fears of some regarding the government's "true motives" vis-a-vis Y2K.

Such popular suspicions only highlight the government's need to get it's security "house in order" substantially prior to the 010100-threshold.  This is especially true in relation to the key dynamic we cite for the transition period from Countdown to Onset--the danger of the First Strike.  First Strike refers to the high probability that significant numbers of activist groups will seek to mark the Millennial Date Change Event by engaging in some high-profile activities--both malevolent and benign, but focused foremost on garnering mass media attention--in support of whatever cause they espouse.  Most political causes or movements--not just the extreme, apocalyptic ones--tend to be very date sensitive, meaning history and the milestones of time's passage play a great role in motivating action and determining its timing.  The 2000 threshold will simply be too great a target for most such groups to pass up, regardless of their motives (i.e., anything from simple self-celebration to catastrophic violence).  Moreover, the rise of the Information Revolution provides new avenues for such strategies, most notably the Internet and the World Wide Web, which are likely to see explosions of released viruses and various expressions of hacktivism (i.e., politically-oriented hacking).   In short, authorities should expect all sorts of groups standing up at this point and declaring, in so many words, that either "We rule!" or "We're not going to take it anymore!"

Once the Onset hits, the government's key task is Keeping Up Appearances, meaning maintaining normal routines to whatever extent possible as Y2K emerges and millennial celebrations/activities are played out so as to avoid fueling any popular fears regarding the potential for social disorder.  Those elements looking for opportunities to foment greater levels of popular uncertainty or fear will likewise be watching closely for signs that things are amiss.  So to this end, governments must be prepared to see through to completion whatever normal routines exist for marking the beginning of the new year, with special emphasis placed on the safety of notable figures--both public and private--who may participate or attend.  For example, imagine the potential uncertainty and fear engendered by the missed or failed (for whatever reason) appearance of an important religious leader at a long-scheduled and highly-attended public celebration.  Following this line of reasoning, governments should avoid overloading themselves with too many events and their attendant security requirements.  Better to do less and do it well than do too much and risk unintended consequences.  In short, stay with what you know.

Moving out of the Onset and into the Unfolding, be aware that Opportunists Abound.  For the same reason why we advise authorities not to overextend themselves right at the 010100 threshold, many political opportunists such as terrorists and others looking to take advantage of a decreased security environment under conditions of "chaos" will likewise probably adopt a wait-and-see attitude regarding Y2K's unfolding.  Unlike the First Strike types who are so eager to make their mark with an eye toward history, these typically more malevolent actors will look to piggy-back their destructive or criminal actions on Y2K-related failures so as to maximize their impact and/or rewards.  A variety of strategies can be imagined:

• Spoofing Y2K failures to induce more network uncertainty and increase popular fears
• Striking to take advantage of security failures caused by Y2K
• Taking credit for Y2K failures they had no part in producing.

Naturally, those who normally seek to play "outside the rules" are at a distinct advantage during periods when rule sets are either suspended or unclear, so authorities must assume that such elements are actively planning to exploit Y2K's unfolding in any way possible. 

The Unfolding Phase witnesses the dynamic of Backlash, meaning the potential for some segments of the population to lash out at authority over perceived failures to address whatever Y2K-related difficulties emerge and linger.  Again, we're not talking about the immediate popular reaction to any potential difficulties, but rather the tendency for negative emotions to emerge as the period of suffering drags on.  Obviously, the Most Vulnerable segments mentioned above are most likely to serve as "tinder" for any such backlash, highlighting once more the great utility in assuring their basic needs during the Y2K's unfolding.  Governments should focus crisis management and response efforts on Y2K causes vice symptoms, although the latter requires special efforts if more vulnerable segments of the population are affected.  Public relations efforts are paramount here, especially any efforts by leaders to show that they are aware of and responding to public "pain."  The key goal of the government, though, should be on gathering sufficient intelligence so as to manage public perceptions of the "time remaining" in the Y2K "crisis."  Obviously, honesty is the best policy here, so transparency in all matters should be the top priority in all state-public information flows.

The dynamic to watch out for as we move from Unfolding to Peak is the appearance of the Answer Man, or the political and/or military leader who promises a rapid reduction in disorder and uncertainty if only he (or she) is allowed to amass--albeit on a "temporary basis"--extraordinary power and institute certain strong measures that typically involve a drastic loss of civil liberties for the population as a whole.  Of course, history teaches us that this "temporary basis" often turns out to be a great number of years, usually ending with the "great leader's" death and the plunging of the political system into great turmoil.  If such an individual is to appear under Y2K's peak conditions, his or her ideological appeal is likely to be based on anti-Americanism, anti-Westernism, anti-capitalism and/or anti-technologism.  Thus the "cure" offered will likely involve sort level of detachment from the global economy, or a firewall strategy of sorts.  In this way, the likely outcome of any state's Y2K "disaster" is likely to be one of systematic withdrawal versus striking out in anger against one's neighbors or the West in general.  The regions where this outcome is most likely are those with the lowest development levels, i.e., the least to lose in such a strategy.

The Peak Phase dynamic of greatest importance is the state's Mobilization Capacity in the face of an onslaught of popular demands for government services and general redress under conditions of social stress and perhaps open disorder.  If all of the dynamics outlined above are occurring in the Network, Business and Social spheres, then the government is likely to inundated with a flood of trouble calls, appeals for disaster relief, anger and resentment, etc.  Only the most advanced states have historically exhibited a great capacity to effectively channel such a broad array of public demands in a short period of time under crisis conditions, and even there capabilities are occasionally found to be greatly lacking (e.g., the slow response of the Japanese government to the Kobe earthquake).  Even in these advanced states, however, the potential universality of the Y2K Event presents a huge challenge, for crisis management of natural disasters, for example, is based on the principle of attacking the problem through a huge and rapid in-flow of out-of-area help.  Outside the rather small circle of advanced economies with strong mobilization capacity, the vast majority of states around the world exhibit far more meager skill sets.  A good indication of this is the exceeding thin nature of local police in most developing states.  Just like individual regions within advanced states, less developed countries face the additional burden of possibly being denied out-of-area help from those very same advanced states too preoccupied with their own Y2K problems.  In short, many may dial their version of 9-1-1, only to receive a "busy signal."

Again, taking into consideration all the different Peak Phase dynamics presented in other timelines, it's easier to understand the notion that--in the political realm--desperate times often require dramatic acts be taken by those in power to maintain social control.  We call this dynamic, Killer Apps, referring to bold political actions that serve to erase popular uncertainty and  restore public faith in government control.  At its most benign, a killer app can be nothing more than a Churchillian speech by a national leader that calms the public and draws people together in the "common cause" of recovery.  At its most malevolent, a killer app can be nothing less than an authoritarian leader's liquidation of a troublesome opposition party through mass arrest and imprisonment or executions.  It can be the calculated, top-down direction of ethnic conflict designed to unleash maximum violence or the imposition of martial law to avoid unnecessary bloodshed.  In effect, it can be almost anything so long as it's bold and redraws the lines of uncertainty and disorder set in motion by the Y2K Event.  But as with any attempt to "seize the bull by the horns," unintended consequences can abound.  In short, it can be a very wild ride.

We define the Exit Point dynamic as the beginning of the Legal Deconstruction, meaning anything from letting the lawyers "go at it" to the collapse of a coalition government and the resulting special election, to the passing of new laws, to the resignation of top government officials, to special government investigations as to "what went wrong," and so on.  In short, the legal deconstruction is nothing more than the resumption of standard government procedures for "digesting" a crisis experience and moving back to "life as we knew it."   Obviously, this is where many of Y2K's legacy issues will be dealt with.  Likewise, this is where the great social debate will be held as to whether Y2K represented a unique, almost exogenous event akin to an Act of God, or the harbinger of what instability and crises will look like in the next century.

The legacy issue of the political realm is Y2K's potential to alter leadership rosters.  Obviously, Y2K will occur on someone's "watch," so popular perceptions of the current government's handling of its crisis management duties will determine the likelihood of turnover by either legal (e.g., elections) or extra-legal (e.g., revolts) means.  New Rulers are likely to arise on the basis of:

• Popularity untainted by the crisis (e.g., leaders in exile or out of power)
• Popularity achieved during the crisis (e.g., military or technically-focused leaders)
• Popularity on the basis of representing a stark alternative (e.g., so-called Green or anti-technology/development leaders, those advocating a "simpler lifestyle" or a "less Western lifestyle, those advocating a return to "better values")
• Willingness to take advantage of disorder through bold political means (e.g., revolutionaries, dictators).

Looking across the other legacy issues defined earlier (New Faultlines, New Rules, New Faiths), it's not a great stretch of the imagination to say that Y2K, if it were to unfold as a global event of significant disturbance, has the potential to represent a turning point in human history, coming as it does on the heels of the end of the Cold War, the rise of Globalization, and the unfolding of the Information Revolution.  Then again, history is rarely scheduled as neatly as Y2K.

VI. Some Preliminary Thinking on CINCs' Strategies

Missions the U.S. Military Might Have to Perform

Slide 25 below presents a list of missions we think the U.S. Military could be called upon to perform across the six-phase timeline of our Y2K Scenario Dynamics Grid.  We don't mean--by any stretch of the imagination--to suggest that all of these missions are likely to be performed.  Rather, we're simply hypothesizing what the U.S. Military could be called upon to do if the National Command Authority (e.g., the President) saw reason to respond to any of the particular dynamics listed below with regard to any country or region of the world.  Like the Scenario Dynamics Grid itself, this is another "smorgasbord" listing of possibilities, designed to orient U.S. political-military decision makers as to the potential breadth and scope of the problem.

Along those lines, you'll note that we're not talking here about inter-state wars or full-blown military "sneak attacks."  Instead, our advice is geared more to U.S. Military interventions abroad in states or regions undergoing significant dislocation and dysfunction as a result of the Y2K crisis.  As such, note also that we really haven't ginned up any new or exotic "Y2K missions."  That could reflect the limits of our imagination, but we think not.  Rather, our list speaks to the great breadth of missions that the U.S. Military already undertakes on a regular basis all over the world.  It also reflects the underlying reality  that if Y2K is going to be all about the breaking down of connections and infrastructure, then the military remains--to the extent its own Y2K house is in order--ideally suited to responding to such crises if they are deemed in the national security interests of the United States.

In short, the military (really, all militaries) are built around the principle of making things move and work under conditions of great environmental distress (i.e., war) or where infrastructure is lacking (i.e., remote or austere locations).   Of course, given the logical localizing effect of any significant Y2K unfolding (i.e., communities cut off from one another and outside help in general), local resources will be the key--thus the useful emphasis on grass-roots responses wherever possible.  Just as obviously, we note that, in the grand scheme of all things global (such as Y2K), militaries in general represent a relatively scarce resource that should only be used in a strategic fashion.  Simply put, militaries in general, much less the U.S. Military, cannot be the cure for whatever ails the world as a result of Y2K.  This resource represents but one of many social assets that can be applied to triage what may turn out to be a very broad and interconnected problem.

Slide 25: Possible U.S. Military Missions Arrayed Across Scenario Dynamics Grid

So, if Y2K turns out to be significant and long-lasting in the manner suggested by our six-phase scenario time line and associated dynamics, we foresee ten mission categories possibly arising:

• Y2K Intelligence Preparation of the "Battlefield" (Network/Business/Social Response-Mania/Countdown) refers to the normal pre-crisis/conflict gathering of information relevant to possible downstream missions.  As such, any CINC is likely going to want to know the answers to four essential questions:
  • Which countries in my AOR (Area of Responsibility) are most vulnerable to Y2K?
  • How may the U.S. Military intervene most effectively to help nation states restore network operations?
  • Who may seek to take advantage of Y2K to pose security threats to U.S. interests in the region?
  • How much may Y2K be "worth" to the United States in this region?  And what are we as a nation willing to pay for it?

• Logistic/Network "Tiger Teams" (Network-Onset) refers to sending specialized personnel into a particular country to help authorities bring crucial network nodes and/or facilities back online during the onset of the Y2K event.  Since such assets are typically scarce resources, any such efforts are likely to be focused on host nations where U.S. military bases are located so as to ensure sufficient infrastructural support to allow continued operations.  Beyond that we're talking about either key strategic allies or key network junctures that support the global economy--usually one and the same.
• Freedom of Navigation/Escort Operations (Network-Peak/Exit) refers to role the military can play in providing security for the transport of essential resources during periods of crisis when criminal or rebel elements tend to be more bold.  As we've learned in previous interventions abroad during Complex Humanitarian Crises such as Somalia in the early 1990s, it's not enough to guard relief supplies at key nodes (usually metropolitan centers).  You also have to provide security as they are transported between key nodes, for it's there where the pirates, bandits, mafia or rebels tend to lurk, thus exacerbating the already bad resource strain.
• Complex Humanitarian Emergencies, or CHEs (Business-Onset/Unfolding/Peak) refers to a total breakdown of the civilian economy and the resulting loss of social and political control by authorities, otherwise known as a "failed state."  What happens here is typically the Non-Governmental Organizations (NGOs) and Private Voluntary Organizations (PVOs) of the international relief community come to the fore and administer broad-scale relief, while the U.S. Military or United Nations Peacekeeping forces provide infrastructural assistance (e.g., logistics, essential security, basic government services) designed to help local authorities "get back on their feet" and resume political control over a reasonably stable economic and social situation.
• Show of Force (Social Response-Onset) refers to prepositioning of military assets or troops at any location within a CINC's AOR so as to signal U.S. resolve regarding, and the capacity for responding to, threats to U.S. national security, to include threats to friendly or allied governments. This is obviously a tricky thing to figure out beforehand with Y2K, because it won't necessarily be clear which situations of value to the U.S. will be threatened by Y2K, or when.  Nonetheless, certain key relationships or situations are routinely identified as possessing high U.S. national security value, and these are likely to receive special attention as the 010100-threshold approaches.
• Medical Support (Social Response-Unfolding) refers to the Iatrogenic dynamic by which ordinary people do stupid things under conditions of duress and end up hurting themselves in significant numbers, either by injury, the spreading of disease, or poor responses to physical deprivations brought about by network failures.   Obviously, we're talking here about situations of sufficient scope to overwhelm local medical response capacity, which, in many nations around the world, is rather limited in comparison to the United States.
• Chapter 7 Humanitarian Interventions (Social Response-Peak) refers to the potential for Scapegoating during the worst periods of any Y2K event, and the potential for military interventions designed to protect the targeted demographic group by either providing safe havens or repelling/disarming those inflicting the violence. This can range from spontaneous riots to top-down directed efforts at ethnic cleansing.  Along these lines is the potential for certain governments or political movements to target members of opposition groups opportunistically in conjunction with the Y2K event.
• Military-Military Programs (Governance-Mania) refers to the typical U.S. military cooperation with foreign militaries that we conduct on a regular basis around the world, with the notion here being that such activity should be focused on raising local military awareness of the possible Y2K scenario dynamics that may arise in any one nation or region.  Likewise, if any CINC engages in training and/or exercises for the 010100-turnover, serious consideration should be given to including as many allied militaries as possible within any AOR.  In short, outreach ends on 010100, so it's use or lose it.
• Information Warfare/Defensive (Governance-Countdown) refers to protecting the critical information infrastructure of the United States and its military/diplomatic facilities around the world against the First Strike potential of those elements that would mark the 010100-threshold by engaging in protests or criminal or terrorist acts.  Obviously, the U.S. Military must be most concerned with maintaining its own capacity for tracking events globally, for once lost, our collective ability to manage any subsequent crises evaporates.  Once secured, though, any capacity we may offer to allies and friendly regimes in terms of facilitating their own defenses against such attacks represents a significant value added to international security during this potential global crisis.  Likewise, this experience may end up telling us much about what the U.S. may be able to offer allies in the future under the rubric of an "information umbrella" akin to the nuclear umbrella of the Cold War era.
• Counter-Terrorism/Crisis Response (Governance-Onset) refers to standard counter-terrorist operations and generic crisis response capabilities every CINC possesses.  The key issue here is not how to apply these assets, but where, when and why?  Other than the obvious threat to U.S. citizens and facilities abroad, the trick will be in determining which situation is worthy of a U.S. response, and which should be allowed to play out under strictly local conditions involving local players--a sort of "let it burn" strategy.  What will be unclear during the 010100 transition is whether any outbreak of terrorism or crises represents a one-shot deal, or the beginning of a lengthy wave that will feed off a subsequently significant unfolding of the Y2K Event.  If the former holds true, then any 010100-centered outbreak would logically be dismissed as so much "white noise" associated with the Millennium Date Change Event, with U.S. assets better held in reserve for other, possibly far larger crises.  If the latter were true, then an early-on blunting of such activity could prove decisive in the end.
• Non-Combatant Evacuation Operations, or NEOs (Governance-Unfolding) refers to the evacuation of U.S. citizens from foreign countries when broad-scale threats arise as to their safety.  With regard to the Y2K scenario, this corresponds to the dynamic of Backlash that may unfold as Y2K's breadth and depth become more apparent and people grow angry with authorities for not preparing better, not telling them more in advance, etc.  Since Y2K is easily identified in many cultures with the United States and the West in general, U.S. citizens and firms operating abroad may make inviting targets for those local elements (either public or private) seeking foreign scapegoats to "atone" for whatever economic or social dislocation results.
• Information Warfare/Offensive, Special Operations Forces, Covert Operations (Governance-Peak) refers generally to the range of extraordinary or special military operations that are logically considered as being "on the table" if U.S. national security interests are subject to grave risk abroad during the height of any Y2K-related political crises.  In essence, if countries of high value or interest to the United States are experiencing a peak-range confluence of Y2K-triggered dynamics as described by our model, it's only reasonable to expect that we'd consider using such extraordinary instruments of influence.

Again, looking over this list of possible missions, one is tempted to wonder whether or not we've lent too much drama to the Y2K Event. But understanding our goal of thinking through the permutations of a significantly disabling global unfolding of Y2K, we come away from the list less impressed by what we've included that what we've left out: specifically combat operations associated with a major regional contingency.  While there's nothing to say that a major regional contingency (also known as a war) can't happen during the Y2K Event, we note that even this stressing rendition of a generic Y2K scenario doesn't easily lend itself to contemplating such large-scale scenarios.  To repeat, Y2K impresses us as a localizing phenomenon more likely to create civil strife and internal breakdown in political order rather than trigger inter-state conflict.  To the extent this is true, U.S. Military operations in response to Y2K-related crises abroad will fall wholly under the rubric of Military Operations Other Than War (MOOTW), meaning that if Y2K represents a harbinger of global systemic crises of the 21st Century, it may represent a significant reordering of U.S. Military force structure and operational priorities.

Primary Tasks, Strategic Choices, and Key Uncertainties

Slide 26 below presents a CINC-specific version of the Scenario Dynamics Grid which focused on the primary task CINCs face in each scenario phase, plus the main strategic choice and key uncertainty each faces in making that choice.  Obviously, we presume a lot here, as any CINC is going to understand his AOR a lot better than a bunch of academics sitting in Rhode Island.  But, going with the proposition that it's always easier to respond to a straw man than gin up ideas from scratch, we toss this CINCs' Scenario Strategy Grid out on the table to start the conversation.

Slide 26: The CINCs' Scenario Strategy Grid

In the Mania Phase, we see the primary task as Update existing plans.  Again, our list of "Y2K missions" is fairly standard, and there's almost nothing we can tell a CINC about doing any of those tasks better.  What we think needs to be done, though, is a review of the extant plans--a scrubbing, if you will--to take into consideration the environment within which those standard missions may occur.  So while the plans may largely remain the same, the execution may differ somewhat during the Y2K event due to the dynamics we presented earlier, not to mention the Y2K vulnerabilities faced by the military itself, especially in the area of host-nation support.

The strategic choice here is the Degree of outreach, meaning how much does the CINC open up to countries (both friendly and not-so-friendly) within his AOR regarding the common and individual security challenges they may face in the coming months?  As with any position of high authority, this is a very tricky question that involves walking a fine line between motivating your audience and scaring them into either misdirected action or inaction.  Probably the stickiest issue here involves the sharing of information or intelligence, for, as with so many aspects of the Y2K Event, this particular issue will tell us much about the price of secrecy and the promise of transparency.

Finally, the key uncertainty here is the typical $64,000 question: how vulnerable is the AOR?  Our back-of-the-envelope analysis suggests the following:

• EUCOM probably faces the least challenge of the four warfighting CINCs, since Europe as a whole probably does fairly well.
• SOUTHCOM faces some real challenge, because several countries in Latin America may do quite poorly, although the security risk here will be low and the focus on relief support.
• PACOM faces even more challenges, because many large economies in Asia may do quite poorly, and because there are key security tensions in the region (e.g., Koreas, Pakistan-India, Indonesia).
• CENTCOM probably faces the biggest challenge of the four warfighting CINCs, since the Mideast as a whole has done poorly in Y2K remediation and is quite vulnerable in terms of having centralized, monoculture economies paired with relatively authoritarian political regimes.

Clearly, the CINCs need to do everything they can to ramp up their level of awareness regarding key individual countries within their AOR in the time remaining.

In the Countdown Phase, we see the primary task as Exercises and ramping up Command and Control focus regarding Y2K.  Obviously, command personnel in the AOR field need to be up to speed as the 010100-threshold approaches, and whatever efforts can be made to train the HQ command staff that will be on hand for the first few weeks of 2000 will probably pay off.  In short, no command personnel should enter the Y2K Event without receiving an immersion in the range of potential situations and dynamics they could face--thus avoiding the utterance, I had no idea it was going to be like this!

The strategic choice here is the Force Posture question, meaning does the CINC want his forces spread out across the AOR in anticipation of the 010100-threshold, or does it make more sense to have the forces pulled in and ready to move out in whatever direction seems most appropriate once Y2K begins to unfold?  A big factor here, obviously, is that nature of the CINC's trust in his own networks, i.e., the more vulnerable he feels, the more likely he is to keep forces closer in to HQ and vice versa.  Then there's the issue of raising expectations by forward presence, and the possibility that moving forces after 010100 could create tensions in those areas of departure (i.e., Why are you leaving us and going over there?).  Clearly, this is a very tricky subject full of political-military nuances.  Finally, there's the issue of whether any special force posture can be justified, given the overall lack of knowledge as to how Y2K will unfold.  In short, any force posture is likely to be off-base in some unforeseeable manner.

The key uncertainty here is the politically-charged issue of the CINCs' ability to access specialized reserves and National Guard forces for duty overseas.  Therefore, as resources go, it quickly becomes a homeland vs. CINCs dynamic.  Naturally, National Authority Command decision making will favor the U.S. domestic scene over the international scene, thus the capacity of state governors to tie up such personnel through the first days of 2000 is a given.  The big question here is how long will it take for the U.S. to become comfortable enough with Y2K in the domestic arena to allow CINCs' access to these personnel for employment overseas, where their specialized skills may be crucial to many of the missions listed above.

In the Onset Phase, we see the primary task as Intelligence regarding Y2K's unfolding, with the obvious question being, What's going on that we can definitely link to Y2K?  So it's not only understanding the breadth of activity across the AOR (something the CINC's staff performs on a routine basis), but also the capacity to disaggregate Y2K-direct failures from fellow travellers, secondary and tertiary cascading failures, and then also the iatrogenic factor of "people doing stupid things under stressful conditions."  The only useful rule of thumb we think we can offer here is as follows: treat clearly identified Y2K "disease" wherever it triggers significant security problems, otherwise concentrate on "symptoms" of distress and assume the private sector will deal with the "disease."

The strategic choice here is the Move vs. Wait question, meaning when does the CINC--in conjunction with NCA directives, naturally--know enough to move ahead and assume a proactive posture.  At first glance, the answer may seem obvious, as in "move when you see a problem you can deal with!"  But given the fact that the 010100-threshold may represent only a small fraction of Y2K's ultimate unfolding (only 10 percent, according to the Gartner Group), there's a clear disutility to responding too frantically to the "opening shots" of what may be a far larger "conflict."  Certainly, the CINC must feel confident that his own house is in order before doing anything, and how long it takes to ascertain that is not easy to predict.   But once beyond that threshold, the move-vs-wait question looms very large as a national security issue--one we must essentially resolve "in the dark" until we come to a clear consensus as to how much Y2K is worth to U.S. foreign policy.

The key uncertainty here highlights the difficult of the move-vs-wait issue, for no matter when the CINC and NCA decide to move ahead to deal with whatever Y2K-related crises arise in any AOR, no one can be sure how many Unknown Unknowns are still out there.  In effect, once military forces leave the security of the base or garrison, they enter into the larger process of Y2K's unfolding on the international scene and thus become caught up in the larger dynamics they seek to mitigate or mollify.  A force in reserve represents an asset, whereas a force incapacitated in the field represents a liability.  Once committed to the open playing field of Y2K, it may be quite difficult to "turn back the clock" and resume any pre-game position.  So while some may argue, "use it or lose it" on the employment of military forces in response to Y2K, the counter-argument may be made that, "once you use it, you may lose it."

In the Unfolding Phase, we see the primary task as Consequent Management of whatever political-military crises erupt and meet the NCA's criteria for response.  Again, we see the CINC conducting standard missions under non-standard conditions.

The strategic choice here is the Triage questions of what and where?  Any such thinking along these lines depends heavily on how the U.S. values Y2K in the aggregate sense--namely, what is Y2K worth to the U.S.?  Without a sense of the aggregate value of Y2K, prioritizing individual crises in the manner of triage becomes difficult, unless we simply fall back on the notion that our allies come first, our friends second, and our non-friends last.  However, a wholesale borrowing of the national security template for implementing Y2K crisis response may well prove to be misguided for anything other than maintaining our current security relationships around the world--i.e., it may poorly capture our long-term economic security concerns surrounding Y2K's ultimate impact.

The key uncertainty here is Troop Morale.  For example, suppose Y2K's immediate unfolding in the U.S. is minimal and we end up committing forces abroad in crisis response actions stemming from Y2K-related problems.  What might be the effect on troop morale in the field if the situation subsequently deteriorated back in the United States, or, more likely, back at the overseas base?

In the Peak Phase, we see the primary task as Juggling Resources across whatever crisis response missions the CINC might be pursuing across his AOR.  As described in the Scenario Dynamics Grid, we think the military's role as Network Leviathans (i.e., making things move when the usual networks are incapable) may constitute the most crucial impact it can have during the worst points of the Y2K Event.  Thus, in the end, it may be TRANSCOM that turns out to be the most important CINC-dom.

The strategic choice here is the question, How much do you throw in? Again, this choice revolves largely around the question, How much is Y2K worth to the U.S.?  While it's easy to say that Y2K is not a problem the military can "solve," there is the undeniably reality that many states around the world will feel the strong temptation to play the blame game on Y2K, with the United States as the most logical target of anger.  After all, we're the clear global leader in IT, and Y2K is largely of our "creation." After all, if you buy into the notion that a country can take credit for a technological revolution, then you certainly shouldn't be surprised that many might blame that same country for a global technological snafu--especially if it ends up dropping those countries farther back in the economic "race."  Y2K may be a no-win situation for the U.S., thus suggesting a low value be assigned.  But it's likewise also a potentially big loss situation in terms of foreign policy aftermath.

The key uncertainty here is the potential resource competition, CINC vs. CINC, as Y2K reached its peak-level impact.  This would not only entail the competition over scarce resources across AORs, but also the competition between resources for Y2K-related crises versus more traditional fellow travelers that could opportunistically appear during the same time frame.  For example, suppose North Korea attacks South Korea, believing its defense is hobbled by Y2K failures.  Under normal circumstances, that Major Theater War, or MTW, would automatically assume top priority, just as the far smaller Kosovo bombing campaign recently achieved.  Now, it may seem completely reasonable to state that such a scenario should automatically receive top priority, but if the competing broad threat is a global economic meltdown triggered by Y2K, then must that priority status automatically be given over to the Korean scenario?  Or does the Korean scenario immediately fall into some sort of quasi-Cold War domino status, meaning the U.S. must show resolve here lest the world think everything's fair game now that Y2K has turned out to be substantial.  Again, it all depends on how you value Y2K in terms of U.S. short-term and long-term interests.

In the Exit Phase, we see the primary task as the Gracious Hand-off, which basically assumes that the U.S. has engaged in some collection of military interventions and/or missions related to Y2K, and now seeks to disengage itself from the environment following the close of the Y2K Event.  This is nothing more than implementing your exit strategy in a graceful manner, but it does bring up the issue of what would constitute the criteria for ceasing an intervention that was triggered by Y2K-related failures.  For example, if we intervene in a country because the network failures triggered mass unrest, do we leave once the network function is restored, or when the mass unrest dissipates?

The strategic choice here is the question of When to declare victory?  Clearly, this is a crucial choice for the United States Government, for while there will be strong political pressure to declare Y2K "over and done with" domestically as quickly as possible (i.e., we will be on the eve of the presidential primary season), it seems only reasonable to expect that a different calculus may need to be employed regarding overseas situations.  The U.S. will likely be viewed as a "winner" in the Y2K Event, so it's behavior toward so-called Losers will be closely watched by the international community.

The key uncertainty as the Y2K Event wraps up for the CINCs is the amount of damage done to rotation schedules and overall OPTEMPO.  While the civilian world might feel itself justified in luxuriating in some sort of Y2K "hangover" period, the military community will simply resume its normal duties, which, as we'll discuss below, are fairly substantial at this time.

How Much is Y2K Worth to the U.S.?  Thinking About a Maximum DoD Crisis Load

Table 1 below represents our attempt to develop a back-of-the-envelope measure of how many crises the U.S. Military can handle at the current time.  By developing a sense of how many crisis response "chits" the Defense Department could employ during the Y2K Event, and then noting how many of those are likely to be unavailable due to ongoing operations, we get a sense of how much more the DoD could handle regarding Y2K above and beyond its current activity load.

CINCdom	CRISIS UNIT	CURRENTLY IN USE?
SOUTHCOM	1	Available
EUCOM	1	In Use--Balkans
"	2	In Use--Balkans
"	3	In Use--Balkans
"	4	In Use--Balkans
"	5	In Use--Northern Iraq
CENTCOM	1	In Use--Iraq
"	2	In Use--Iraq
"	3	Barely available--Focused on Iraq
"	4	Available
PACOM	1	Available
"	2	Available
"	3	Available

Table 1:  Back-of-the-Envelope Calculation of DoD's Crisis Management Load Capacity, With Estimate of Current Load

Our reasoning here is fairly simplistic.  We started with SOUTHCOM, the smallest of the warfighting CINCs and decided to give them one crisis response chit, which we define as something roughly analogous to Operation Just Cause, or the invasion of Panama to capture Manuel Noriega in 1989.  Given that valuation for SOUTHCOM, we decided to award the remaining CINCs the following number of crisis response chits:

• EUCOM: five
• CENTCOM: four
• PACOM: three.

That gave us a total of 13 crisis response chits of the size of Just Cause.

Next we decided how many of those 13 chits were likely to be available as of 010100.  Despite the continuing activity of SOUTHCOM troops in relief efforts connected with Hurricane Mitch, we felt that this CINC would have its single chit available for use come 010100.

With EUCOM, our sense is that, between the constellation of Balkan operations and its Northern Watch (No Fly Zone) duties in northern Iraq, that CINC's five chits were all likely to be unavailable come 010100, especially given the additional burdens accruing from the ground presence in Kosovo.

With CENTCOM, our sense is that their current conduct of operations involving Iraq takes two of their four chits off the table.

Finally, with PACOM, we foresee all three chits being available at the 010100-threshold, although either a China-Taiwan or a Koreas scenario could easily intervene between now and then.

Add that current level of activity up, and what you see is that, of the 13 possible crisis response chits, the U.S. is likely to have only 6 available as Y2K unfolds.  Speaking geographically, the U.S. is likely to have but one crisis response chit for the Western Hemisphere, roughly two for the Middle East and Africa (thinking of EUCOM and CENTCOM as a whole), and three for all of Asia and the Pacific region. This is a very generous calculation that could easily be criticized as overly optimistic.

What's important to remember about this calculation is as follows: any MTW would automatically eat up the remaining six crisis response chits, meaning a substantial Iraq, Korea, or South Asia scenario--if pursued--would effectively rule out any U.S. Military response capacity for Y2K.   In short, if an MTW scenario rears its ugly head, the U.S. needs to ask itself whether or not such a standard political-military scenario represents a value significantly greater than the aggregate global damage that may be caused by Y2K.  For if the U.S. chooses to pursue an MTW scenario, it will effectively write off Y2K on a global basis as far as any military crisis response is concerned.  In the end, this may be a perfectly reasonable choice, but make no mistake--it is a huge choice fraught with great uncertainty as to the long-term outcome.

U.S. Foreign Policy Legacy Scenarios:  Who Feels the Pain?

Slide 27 below presents a rather simple two-by-two matrix that explores the notion of Y2K's legacy for U.S. foreign policy, something that we think the CINCs need to consider as they think ahead on their AOR strategies regarding Y2K crisis management.

Slide 27: Possible Y2K Legacy Scenarios--U.S. versus World

The four legacy scenarios are built off of two very basic questions:

• How bad is Y2K for the U.S.?
• How bad is Y2K for the rest of the world?

In the best outcome (Not So Bad for both the U.S. and World), we predict that Y2K will go down in history as one big Rorschach Test, meaning each country will take from the experience that which serves them best--proximately, a rationalization of their Y2K response strategy and ultimately, a justification of their overall economic development strategy.  For example, for those who prepared much, they'll claim Y2K proved the utility of their proactive approach, while those who prepared little might claim that it was all a big hoax perpetrated by the U.S. in particular or the West and its mass media in general.  By and large though, countries and cultures will emerge from the experience with most of their biases about IT intact (e.g., it's great, it's evil, it's progressive, it's destructive).

In the next best outcome for the U.S. (Not So Bad for U.S. and Bad for the World), we predict that Y2K becomes further evidence in the minds of many around the planet that the U.S. is a bullying hegemon who selfishly looks out for its own interests while trampling those of others.  In effect, the U.S. will Win the Battle, But Lose the Peace.  Y2K will be viewed by many countries that fall further behind in the New Economy race as just another power play pulled off by the United States, wherein our dominance is reasserted in humiliating fashion.  After all, we created the crisis, then somehow managed the solution in such a way as to benefit ourselves while damaging the economies of others.  Our motivations or our efforts in trying to mitigate Y2K's global impact will matter some, but coming on the heels of the Global Financial Crisis of 1997-98, it will seem like every global game is increasingly tilted to the advantage of the U.S. and the disadvantage of emerging economies.

In the next worst outcome for the U.S. (Bad for the U.S. and Not So Bad for the World), we predict that Y2K could trigger a strong isolationist streak in the United States.  By Atlas Shrugged, we suggest that the U.S. would, in a fit of peak, essentially "take its ball and go home," being unwilling to "play" anymore in the global economy in the same free-wheeling and no-holds-barred manner of the 1990s.  In effect, the Y2K Crisis would be a crisis of confidence for the United States, especially since it would catch us so much off guard and challenge all our suppositions that our mastery of the New Economy made us invincible to severe economic downturns.  Of the four legacy scenarios, this one strikes us as least likely, but because that's so, we find it completely plausible given the shock value.

In the worst outcome for all involved (Bad for both the U.S. and World), we predict that Y2K would have posed a horrible dilemma for the United States: either we would have tried to play System Administrator to the world and worked hard to mitigate Y2K's damage around the globe, probably at huge cost to ourselves, or we would have--at some point--thrown in the towel, pulled up the Firewall around our nation, and simply ignored the rest of the world's pain.  The key question here (beside the usual one about "How much is Y2K worth to the U.S.?) is which pathway would be less traumatic?  Trying to play superpower to the world and failing?  Or taking a cruelly calculating stance that says, "sometimes Nature just has to take it's course?"  In effect, our dilemma would be between trying to put out all the fires or just letting them burn uncontrollably, for like a raging forest fire, there may be few reasonable choices in-between.

VII. A View From Wall Street

Are We Moving to a New Global Rule Set?

If Y2K had happened back in 1995, it certainly would have been a different beast, and not just for the lack of any accompanying Millennial Mania.  Back in the mid-90s we were talking about the "end of the business cycle" and the New Economy in such bold tones as to suggest that this current era of globalization (the first being from the 1880s to approximately 1929) would seamlessly and quickly knit the planet together in a win-win manner.  In short, everyone was going to make lots of money and everyone was going to move up at roughly the same pace.

Of course, what's happened since then has tempered much of the naive enthusiasm about globalization, emerging economies and the New Economy.  The Global Financial Crisis (Asian Flu of 1997 spreading to Russia and then Brazil in 1998) effectively left the global economy with only two vibrant engines of growth: North America and Europe.  Since that time, Europe has likewise suffered an economic slowdown, leaving really only the United States and its "Goldilocks Economy" (and the U.K., to a certain extent) still riding the great 90's bull market.

When, not too long ago, the conventional wisdom on Y2K was that the most advanced, IT-intensive economies were at greatest risk, the economic worst case scenario on Y2K was that it would cripple the global economy's #1 engine of growth, the U.S.  Today, with our current sense that the least advanced, and least IT-intensive economies are at greatest risk, the economic worst case Y2K scenario is that almost everyone in the global economy suffers badly except the U.S. and a few other, very similar economies (e.g., U.K., Australia, Canada, Israel).  So while the former scenario predicted a near-instantaneous, TEOTWAWKI-like collapse of the U.S. economy stopping the global economy in its tracks, the latter scenario predicts a slower and broader Y2K-induced global slowdown eventually lapping up on U.S. shores and ultimately derailing the Goldilocks Economy.  In essence, the shift in global recession/depression Y2K scenarios has been from "pay me now" to "pay me later," at least as far as the U.S. is concerned.

Slide 28: Time for a New Rule Set for the International Economy? (repeat of Slide 3)

No matter which scary scenario prevails, or even if neither comes to pass, it's reasonable to say that we're currently living in a rather fragile global economy, certainly one far more fragile than we assumed back in the mid-1990s.  Thus, the big picture argument for why Y2K could play a crystallizing role in terms of forging a new global consensus for international financial reform (e.g., more controls over capital flows, greater transparency among hedge funds, better accounting in emerging economies, revamping the IMF and World Bank, dollarization of certain economies) arises less from the notion that Y2K in and of itself is THE cause of a global downturn than the notion that any associated slowdown tags Y2K as an identifiable culprit that crystallizes in many people's minds all that's wrong with the current global financial system (i.e., too given to wild periods of breakneck speculation and financial tumult).  This argument was originally suggested in Slide 3, and is repeated above in Slide 28.

To repeat the basic argument:  the origins of the current Global Rule Set dates back to the Great Depression of the 1930s, which ended the planet's first great period of globalization from roughly 1880 to 1929.  That global economic downturn constituted a drastic systemic stress that gave way to World War II.  Following that experience, the great powers (at least in the West) essentially swore, "never again," and decided to erect a new international order, or rule set (e.g., Bretton-Woods, GATT, U.N., IMF and World Bank), to prevent the 1930s style economic nationalism or protectionism from ever occurring again.   Led by the United States, the Western great powers were eminently successful in this effort, and the lasting fruit of their collective labor was and is the globalized economy we now enjoy.  This feat, far more than the story of the Cold War, represents the greatest historical legacy of the post-WWII period.

The question that arises in the late 1990s, however, is whether this new, globalized, IT-driven economy has advanced to the point of outgrowing the "new rule set" of the late 1940s and early 1950s, in effect creating the need for a new rule set for the New Economy.  Those who make this call basically point to the systemic instabilities since 1997 (or even back to Mexico's peso crisis of 1994) as evidence that the old post-WWII rule set is now antiquated, thus endangering this second great period of globalization to the same fate as the first.  So it's into this somewhat shaky rule-set environment that Y2K appears as 1999 draws to a close, the basic question being, With the global economy so fragile right now, how big of a disruption would Y2K need to be to throw a wrench into the world's financial machinery, finally crystallizing a broad-scale effort to rewrite its operator's manual?

Will There Be A "Flight to Quality" Prior to 010100?

In our May workshop in New York City, hosted by the brokerage firm Cantor Fitzgerald, we presented out six-phase Y2K Event timeline to a group of Wall Street investment experts, traders, bankers, brokers and research/media types, exploring the complex question, How would global financial markets adjust to, and process the unfolding of, such a broad, stressing scenario?

Slide 29 presents "what we heard" from Wall Street in terms of the Mania and Countdown phases, or basically the build-up toward the 010100-threshold.  In this phase pairing, we proposed that Flight to Quality was the most likely global financial dynamic in response to the looming Y2K Event.  While simplifying some of the arguments greatly, we arrayed the major points offered by participants into two distinct camps--here, pro-panic and anti-panic.

Slide 29: What We Heard--Mania & Countdown (Key Issue Defined as "Flight to Quality")

We'll start with the pro-panic arguments, the first of which is the standard grip about the great bull market of the 1990s--namely, all this success makes everyone feel like they're geniuses and thus the market's never had so many idiots spending their money so foolishly as right now.  While that's been the standard cry of many "bears" for several years now, it certainly carries a lot more weight after the near-global meltdown of 1997-98, when the global market run-up in emerging markets reached great "bubble" proportions and finally collapsed in on itself.  Naturally, when the most disastrous bet made was spearheaded by a highly respected U.S. hedge fund fronted by two Nobel Economics Prize winners (Long Term Capital Management), the notion that the average investor may be in well over his or her head becomes a lot more believable.

Another pro-panic argument says that the U.S. financial markets are long overdue for a correction, noting that much of the recent run-up in stocks has been concentrated within a very small pool of highly successful New Economy firms such as Microsoft, the Silicon Valley giants (e.g., Oracle), the Internet constructor firms (Cisco), and all those "anything.com" IPOs.  Naturally, if so much of our optimism about our collective economic future is tied up in IT firms, then certainly a IT-triggered global economic shock would strike deep into the heart of investor confidence concerning the so-called Nifty Fifty.

Looking more to the U.S. investor, concern was expressed that all this "doom and gloom" flying over the media airwaves (e.g. AM radio) might trigger many to withdrawal their funds from the stock market as the year wound down, and as goes the U.S. flagship markets, so too could go the rest of the world's.  In short, given the slim foundations of this very long-in-the-tooth bull market in the United States, it wouldn't take much in terms of investor jitters to trigger a significant stampede out of equities.

Finally, there was a nagging sense that the U.S. Congress would never muster enough will to pass a liability-limit bill that would survive a presidential veto, a bit of pessimism that already seems unwarranted, as it now seems inevitable that such a bill will be signed by President Clinton.  Still, much criticism has been voiced concerning the compromise, with many strong-voiced opponents labeling the law a sell-out to big IT corporations at the expense of small and medium enterprises.

Among the anti panic arguments, the most compelling comprehensive argument was that the 1997-98 global financial crisis served to vaccinate markets against the flight to quality threat.  The argument here was many sided:

• There's a lot less "gypsy" or "hot" capital streaking around the world now
• Hedge funds have come under a lot more scrutiny after the Long Term Capital Management debacle
• Emerging markets have cleaned up their act a lot by adopting far more transparency in terms of market operations, banking, and general financial accounting practices
• Global investors are now much less naive about emerging markets
• International Financial Institutions like the IMF and the World Bank have learned much from the process, and, along with the U.S. Treasury, now act more preemptively to stave off currency crises, such as the recent rescue package for Brazil
• Markets and market players have, in general, learned much about the pitfalls of the globalizing New Economy, therefore acquiring many of the skills needed to weather whatever financial tumult Y2K might toss in their direction.

In sum, this argument states that the 1997-98 Global Financial Crisis was sort of a dry run or dress rehearsal for Y2K.

A second anti-panic argument states that even if a flight to quality occurs, it will simply "even things out" financially by moving more money into securitized debt markets in general and, within equity markets, away from the so-called New Economy heavyweights into small and middle capital firms and those old market standard bearers, the cyclicals (i.e., more industrial-era firms specializing in production).  While this shift might burst the Internet bubble, that's hardly the end of the world as we know it, and really only proves that no great laws of economics have been repealed by the Information Revolution.  In short, much ado about nothing.

A third anti-panic argument points to the clear readiness of the U.S. Federal Reserve to keep money plentiful and cheap as 1999 draws to a close.  The unprecedented step last December by Chairman Alan Greenspan to print out an extra $50 billion for injection into the U.S. currency supply signaled that in spades.  In short, this will be exactly the sort of experience the Fed was designed to mitigate, and with the impressive Greenspan at the helm, all is likely to be well in the world's financial center of gravity.

Finally, Europe feels Y2K okay as a result of going through their own vaccination-like experience: preparing for and introducing the European Monetary Unit, or Euro.  Now, the oft repeated counter to this notion is that Europe's preoccupation with the Euro's introduction in January 1999 served as a huge distraction that diminished its Y2K remediation effort, thus exposing it to more danger come 010100, but many in Europe feel--much like Wall Street does about the 1997-98 Global Financial Crisis--that much good came out of the Euro experience in terms of preparing them for new levels of coordination among state governments and financial markets.  Again, many Europeans feel the Euro's introduction taught them much of the New Economy skill set needed to deal with a systemic challenge such as Y2K.

To sum up this section, we note that the majority opinion here lay with the anti-panic arguments.  In effect, whatever financial knee jerks Y2K could trigger were seen as falling within the normal, sometimes roller coaster-like parameters of major markets in our IT-driven, globalized New Economy--definitely not for the weak hearted, but not out of the ordinary for today's financial environment.

Could Markets Go Broke in Post-010100 Meltdowns?

Slide 30 moves us on to the Onset and Unfolding phases, or basically the first several weeks past the 010100-threshold.  In this phase pairing, we proposed that Markets Going Broke was the most likely global financial dynamic in response to the Y2K Event initial unfolding.  Again simplifying the arguments, this is what we heard in terms of pro- and anti-crash rationales.

Slide 30: What We Heard--Onset & Unfolding (Key Issue Defined as "Market Liquidity")

The biggest pro-crash argument concerned oil, and the argument was an unusual one.  Most participants were sanguine about the oil companies themselves and the shipping of oil over the seas, whereas the biggest concern revolved around the transshipment ports and specifically, the record keeping or "admin."  The reality is that it doesn't take much of decrease in the flow of oil, for example, into the United States to trigger short-term price rises. A slowdown in the range of only 5 percent is sufficient to send gasoline prices significantly upward, according to Department of Energy representatives, and once that happens, the economy adjusts accordingly to account for higher cost in such a crucial commodity.  In short, that price rise alone is enough to make Wall Street sit up and take notice of the possibility of a Y2K-induced downturn.

Another pro-crash argument centered around the enterprise software systems that allow for the just-in-time supply chain margins that have come to define the New Economy.  We can sum up the Wall Street thinking here rather easily: This will be a big test of enterprise software systems. If they work, they will have proven themselves in a very profound way, but if they don't, the economy could be in for a nasty surprise.  Along with manufacturing, this argument points in the direction of the Flood Onset Model, i.e., the slow but inexorable "gumming up" of the supply chain "works," especially among critical component suppliers.

Another pro-crash argument concerned countries with xenophobic tendencies.  In short, those states that have a hard time letting outsiders help may be in for the harder times.  Taking into account that Y2K is ultimately a localizing affair to the extent it's significant, most participants assume the U.S. and Europe will do reasonably well, leading to the possibility of providing immediate help to lesser-developed countries suffering worse. Thus, to the extent that such countries are politically open to this aid (i.e., "Western help for a Western problem"), they may weather the "storm" like any other complex emergency.  However, if cultural norms or political values such as the desire for autarky ("We solve our own problems without the West's help!") predominate, the interconnected nature of the Y2K Event may force the West, along with neighboring states, to effectively "quarantine" the state in question, thus exacerbating the ongoing situation in a multiplicity of ways.

Finally, there was the sense that International Financial Institutions like the World Bank and IMF would be forced, for lack of funding, to turn a deaf ear to those states suffering Y2K-induced economic crashes that had not "cleaned up their acts" following the 1997-98 Global Financial Crisis.  In short, if you "firewalled" your economy off from the world a bit in response to IMF calls for reform, don't expect to find yourself at the top of the list for it's attention come 010100.

Moving on to the anti-crash arguments, the first and most obvious one offered was that the markets would naturally take Y2K into account when forecasting 1st Quarter earnings estimates, with consideration given to firms that experience unusually high volume in the last two quarters of 1999 and suffer a dearth of sales in the first due to a combination of Y2K disruptions and the inevitable draw down of stockpiled supplies.  In other words, so long as there's enough realistic thinking on Wall Street concerning vulnerable firms, there'll be no surprises, and since the market basically responds to "current events six months into the future," 1st Quarter activity will reflect the view of the inevitable recovery in the 2nd or 3rd Quarters, and not the immediate difficulty of the first.  In sum, losses aren't the problem, surprises about earnings are the problem.  But no surprises should happen if Wall Street firms and other markets do their homework.  Of course, this gets us back to the problem of all that self reporting that goes into generating those Gartner Group (and others) reports, but "putting on a good face for the investors" isn't exactly a Y2K-specific problem, now is it?

A second anti-crash argument cites a perceived but not yet proven IT "lockdown" by major firms, meaning a freeze on IT purchases through the last two quarters of 1999 until Y2K passes.  On this point, participants noted that IT firms had taken this dynamic into account already, and we're planning to unleash a torrent of new products during 2000.  In effect, Silicon Valley saw this lull coming and is prepared to jump start the market ASAP once the Y2K Event recedes into the background.  If Y2K turns out to be minor, then confidence regarding Silicon Valley and the Internet stocks should soar in combination with the expanding market moment for hardware and software firms.  In short, this argument is not only anti-crash, but pro-boom.

Another anti-crash argument notes the usual "January effect" whereby markets, responding to positive earnings reports from the previous year's 4th Quarter, tends to look rather optimistically toward the future year, especially if the markets end up in positive territory after the first business week (historically a good sign of positive returns for the year).  A corollary to this may be a rapid influx of cash from individual Americans who, having taken substantial amounts out of equities in weeks prior to 010100, now feel reassured enough to put their money back into play.

Finally, participants predicted that the IMF, World Bank, and the US Treasury would work hard to protect those emerging economies that had suffered much in 1997-98 but had "cleaned up their acts" as a result.  A good example of this would be the story that Thomas Friedman repeats in his book, The Lexus and the Olive Tree, where he notes how far South Korea's Ministry of Finance has come since late 1997 in terms of transparency to the outside world. In December 1997, when the country's currency was under attack by international speculators, international organizations seeking to help Seoul inquired as to the state of their foreign currency reserves, only to be lied to by the Ministry of Finance, which had claimed three times as much as it actually possessed.  Learning from that mistake, and the pounding it took from the "Electronic Herd" when the truth came out, the Ministry of Finance now sends out an email at the end of every business day detailing its foreign currency reserve holding down to the last penny.  In short, Y2K will show the price of secrecy and the promise of transparency.

To sum up this section, we note that the majority opinion here lay with the anti-crash arguments.  In effect, however Y2K unfolds over the 1st Quarter, Wall Street thinks it and other global super-markets can adjust accordingly, with the caveat being that "you're only as smart as the information you possess."

What's the Likely Long-Term Market Impact from Y2K?

Slide 31 wraps us up with the Peak and Exit phases, or basically the first several weeks past the 010100-threshold.  In this phase pairing, we proposed that Small and Medium Enterprises (SMEs) Failing was the most likely global financial dynamic in response to Y2K's peak experience.  Again simplifying the arguments, this is what we heard in terms of pro-downturn and pro-boom rationales.

Slide 31: What We Heard--Peak & Exit (Key Issue Defined as "SME Failures")

The first pro-downturn argument centered on consumer and investor confidence within the United States, and the potential for Millennarian-engendered social unrest to sap the public's optimism about the future.  For example, what would be the social climate in the U.S. if November and December witnessed several Littleton-like shooting sprees, several "Heaven's Gate" mass suicides, and one or more Waco-like standoffs between federal police forces and a Millennarian group.  It would not be overstating the possibilities to say that such a confluence of seemingly "crazy" tragedies would shove the country's collective psyche into levels of fear we haven't experienced since the 1968.

A second argument is more general, noting that the current global economic picture features really only one solid engine of growth--the United States.  As Secretary of the Treasury Robert Rubin warned repeatedly during his last weeks in office, it's simply not enough to hope that the U.S. economy can keep the global economy moving all on its own, especially given the rather slim foundations upon which recent stock market rises have occurred (i.e., the concentration on the Nifty Fifty, or New Economy/Internet/".com" firms).  Moreover, it's dangerous to assume that the IMF could do much more than help out a small handful of affected nations, given its limited resources.

Another argument turns a previous one on its head: namely, worse-than-expected 1st Quarter earnings could trigger a mass exodus out of equities, given the scary long-term perspective those numbers might create among individual investors (i.e., "Wall Street had no idea how bad it was going to be!").  Linking back to the previous negative argument concerning oil, we'd note the consensus view that no commodity cost increase could throw off earning estimates more than a rapid jump in oil prices.  More obviously, a peak Y2K environment would provide the average investor with more than enough signs that the future was uncertain above and beyond what was happening in the markets.

Switching to pro-boom arguments, many participants argued that most large firms--especially US ones--looked at the Y2K Event more as an opportunity to expand market shares than a threat to their existence.  In effect, they're defining Y2K as a sped-up market experience, not some one-of-kind exogenous catastrophe that affects all equally.  So-called New Economy firms stand at the forefront of this aggressive thinking, believing that the organizational and marketing skill sets they've mastered to flourish in the New Economy are well-suited to coming through the Y2K Event in good enough shape to capture market shares lost by less agile competitors.  In short, they don't view Y2K as something to sit out, but rather as an inevitable set of dynamics they will encounter again and again as the New Economy matures.  In their minds then, there's no escaping Y2K, so why get as good as you can at dealing with this sort of market experience?

A second pro-boom argument basically discounts the economic "threat" of high SME failure rates, noting that this dynamic is increasingly part and parcel of the New Economy anyway, where a winner-takes-all mentality prevails.  We could call it a sort of "T Rex" economy, where a relatively small number of behemoths regularly gobble up (acquire or bankrupt) smaller dinosaurs (firms), which in turn are constantly being replaced by new species, i.e., start-up firms promoting a singular service or product that eventually draw the attention of the giants.  If, many of our participants argued, the Y2K Event forces a higher SME failure rate for some significant length of time, then all we'll see is a faster concentration of wealth and market shares in a few giant firms in each industry, but no more of a concentration than would have happened without Y2K's intervention.

Another pro-boom argument says that if fortressing occurs, much of it will be time-based rather than business partner-based, i.e., you won't ditch your long-term partner, but you may force him to engage in some wholesale IT upgrade if his current system fails the Y2K test.  In effect, this has happened in many firms throughout the remediation period, as many simply found it cheaper to replace than to fix.  If this dynamic must be repeated for those who fail post-010100, it'll be hard on them financially, but doable in many instances.  And for those who can manage this, efficiencies will naturally accrue.

Finally, there is the general pro-boom argument that has long been offered regarding Y2K, especially in terms of the lengthy remediation effort leading up to the 010100-threshold: namely, all this preparation for Y2K constitutes a "great IT housecleaning" for almost all firms, organizations, and government entities--one that was long overdue.  In many instances, firms and governments have bought into the IT Revolution with little planning or forethought, resulting in a mishmash of systems and poor overall understanding of architecture and best practices.  Y2K's arrival has force many efficiencies in this regard and, in the long run, the economy will benefit greatly from them.

To sum up this section, we note that the majority opinion once again lay with the more positive perspective, making it 3 for 3.

While it's easy to brush aside such optimism as reflecting the narrow, profit-obsessed perspectives of these oft described Masters of the Universe, there are a number of good reasons to believe their opinions are not misplaced:

• Wall Street firms place a lot of emphasis on good intelligence
• They've got tremendous financial exposure on Y2K (i.e., incentive) and tremendous financial resources to deal with it (i.e., remediation)
• They are greatly familiar with the dynamics of the New Economy, and think Y2K (as a threat) is part of that paradigm they've spent so much time and money seeking to understand
• They're not naive about the risk, just confident that the markets can process that rise
• They see the recent Global Financial Crisis as a wake-up call that a good portion in the industry took seriously, especially in the United States.

Summing Up An Optimistic Wall Street:  Market Indicators

As a way of summing up the Wall Street perspective on Y2K as we found it, we'll present the participants' sense of where the markets would go if Y2K turns out to be significant (meaning these are not their predictions for markets if Y2K turns out to be less than significant). We won't offer any hard numbers here, just gross directions, although we'll note that none of the cumulative percentage swings were greater than roughly 10 percent, meaning the group as a whole did not foresee great market instability out of line with the last year or so.

Table 2 below presents the directions predicted in a significant Y2K Event across nine key market indicators based on the price levels recorded at the close of business, 30 April 1999 (last market day prior to the workshop).

INDICATOR   @ 043099	NET DIRECTION   @ 123199   Vs 043099 CLOSE	NET DIRECTION   @ 033100   Vs 123199 ESTIMATE	NET DIRECTION  @ 063000   Vs 033100 ESTIMATE
Gold   (286.40)	Higher	Higher	Lower
Oil--Brent   (16.70)	Higher	Higher	Lower
Nikkei   (16701.53)	Lower	Lower	Lower
Dow Jones  (10789.04)	Lower	Lower	Higher
Yen/Dollar   (119.40)	Higher	Higher	Lower
Dollar/Euro  (1.06)	Higher	Lower	Lower
2-Year Note  (5.05)	Lower	Lower	Higher
30-Year Bond  (5.66)	Lower	Lower	Lower
Fed Discount Rate   (4.50)	Higher	Lower	Lower

Table 2: Market Indicators in a Stressing Y2K Scenario

For purposes of clarity, we explain the results in the following method.  If the global Y2K event was significant and destabilizing, then we would expect the following trends:

• Gold would rise in cost through the start of next spring and then decline
• Oil would rise in cost through the start of next spring and then decline
• The Nikkei would decline throughout all scenario phases
• The Dow Jones would decline through the start of next spring and then rise
• The Yen would weaken against the Dollar through the start of next spring and then strengthen
• The Dollar would weaken against the Euro through the end of this year and strengthen thereafter
• The return on a 2-Year Treasury Note would decrease through the start of next spring and then increase
• The return on a 30-Year Treasury Bond would decrease throughout all scenario phases
• The Fed Discount Rate would increase through the end of this year and then decrease thereafter.

Again, in none of the nine cases did the group consensus predict a cumulative swing of more than ten percent, reflecting the overall positive tone of the workshop regarding the ability of markets to manage the global risk presented by Y2K.

Spotlight: Have We Asked Too Much of Emerging Economies Lately?

All our research to date suggests that the Emerging Economies of note (e.g., Argentina, Brazil, China, India, Indonesia, Mexico, Poland, Russia, South Africa, South Korea, and Turkey) represent a sort of "swing vote" for Y2K's ultimate global economic impact.  There seems little doubt that the most advanced economies will largely do well and that the least advanced economies will largely do poorly, so the key question remains, "What happens with the Emerging Economies?"

What troubles us and some on Wall Street with regard to this Y2K "referendum" on Emerging Economies is that it comes right on the heels of a number of other challenges that we in the West has tossed in their general direction (see Slide 32).

Slide 32: Emerging Economies in the 1990s

At the beginning of the 1990s we asked most Emerging Economies to democratize their political systems--and be quick about it!  The Berlin Wall had fallen and most in the West had rather unrealistic expectations in this regard, despite some heroic (and not-so-heroic) responses to this huge challenge by key states.  Once President Clinton came into power in 1992, the U.S. (largely led by then National Economic Council director Robert Rubin who later became Secretary of the Treasury) pushed an aggressive agenda overseas to have the Emerging Economies open themselves up dramatically to U.S. financial markets.  Succeeding in this effort dramatically over the next 5 to 6 years, the Clinton Administration provided rocket fuel to the course of globalization, freeing up the global movement of investment funds in unprecedented ways and, by doing so, creating some of the conditions that led to the Global Financial Crisis of 1997-98.  Once the Asian Flu had started, the West, again led by the U.S., pushed hard to have many Emerging Economies "clean up their acts" and reform economic practices almost overnight.  And then comes Y2K in 1999, and once again the Emerging Economies are being asked to "fix things up" and be damn quick about it!

In short, it has been one tough "row to hoe" for most Emerging Economies across the 1990s.  The amount of change they been asked to endure and promote is immense.  To the extent that Y2K proves to be a "separation point" between IT- or New Economy-competents and incompetents, one is tempted to ask whether or not too much has been asked of Emerging Economies as of late, and whether the West is really setting itself up for dangerous economic times ahead by adding Y2K compliancy to what already is an overstuffed and overly ambitious agenda of reform for these relatively fragile states.

Y2K As a Sped-Up Market Period: Winners and Losers

One of the themes of the workshop was the notion that Y2K represented a sort of deadline for entry into the New Economy of the 21st Century, with the natural question for any country being, "Are you ready?"

To the extent that one can speak of winners and losers or a "global scorecard," Wall Street definitely has some opinions about who they'd expect to do well or poorly with Y2K, which we've summarized below in Slide 33.

Slide 33: A Global Y2K Scorecard on 010100?

The first thing we can say about probably winners is that they'll look more like the U.S. than different.  By "like" we mean they'll tend to have some or most of the following characteristics:

• Proficiency in English
• Former English colony
• Democracy; federated political structure
• Distributed economic structure; free market orientation
• Wide open social scene that's accustomed to processing a certain amount of "chaos" with aplomb
• Distributed network systems (more "parallels" than "sequentials")
• Problem-solving culture that enjoys challenges as "finest hours."

Obviously, the countries that tend to have the most difficult relationships with the U.S. tend to be the states least like the U.S., so there's where you might look for countries destined for harder Y2K experiences.

Another key attribute of probable winners is lots of transparency and rules regarding domestic and international economic behavior.  The more Thomas Friedman's Electronic Herd can access in terms of good information about your national economy, the more likely it is that you'll be treated fairly (i.e., according to objective economic criteria), whereas the worse the access to good information, the more likely the Electronic Herd will interact with your economy on the basis of half-truths, rumors, and false information.

Since Y2K is considered part and parcel of the New Economy (i.e., the sort of system perturbation one just has to get used to in a globalized, IT-driven economy), the more you've mastered the skill set associated with the New Economy (e.g., ability to swap out partners at the drop of a hat, strategic alliances to hedge against uncertainty, rapid adaptation to market shifts) the better off you'll be with Y2K.  Conversely, the more your economy is based on long-term relationships that do not easily change or adapt, the harder Y2K is likely going to be for you.

Wealthier states or firms will, in general, do better with Y2K due to the resources they can free up and bring to bear in terms of both remediation pre-010100 and consequence management post-010100.  But even more important that resources is IT-savvy, since competency is the "long pole" in the tent, so some less wealthy states such as Ireland, a rising "virtual tiger economy" in its own right, should do well.  On the other hand, poor and IT-backward economies are far more likely to be blind sided by Y2K.

Finally, among the emerging economies (about 80 percent of the global population), those who have learned most and best from the 1997-1998 Global Financial Crisis (basically moving more in the direction of the previous four bullets above) will do far better than those who suffered much during the crisis and have done little to change.  In short, Wall Street views the 1997-98 crisis as a wake-up call for having your house in order regarding Y2K in that the skill sets required to deal with each crisis are similar (i.e., the "basic fundamentals").

To sum up, there's not a lot of mystery, as far as Wall Street is concerned, regarding likely winners and losers with Y2K.  Scorecards are already being prepared in global financial super-markets, and judgments are likely to be swift.

VIII. Some Cosmic Conclusions About Y2K

Our Y2K Meta Model: Connecting the Dots

While we won't pretend that we always knew where we were going with this project, it recently dawned on us that, in pursuing our various models and scenarios across our four workshops, we actually created what could be described as a Meta Y2K Model, i.e., a model of models.  Slide 34 arrays our various models, grids, etc., in what we hope is a coherent pattern.

Slide 34: Year 2000 International Security Dimension Project "Meta Model" of Y2K

We explain the growth of this Meta Model as such:

• In October 1998 we developed our Onset Models (Tornados, Flood, Hurricanes, Ice Storm) to help us and others wrap their minds around the concept of what it would feel like when Y2K began to appear.
• In December 1998 we held our first workshop, the Scenario-Building Workshop, where our functional experts helped us populate a series of generic Outcome Models (Run of the "Mille"; Humans 1, Computers 0; Houston, We Have a Problem, Y2 KO!).  At that point, we felt we had a decent sense of some "going in" (Onset Models) and "coming out" (Outcome Models) scenarios, but very little sense of the dynamics in-between, i.e., the playing out of the Y2K Event itself.
• In January 1999 we held our second workshop, the Scenario-Dynamics Workshop, where our regional experts helped us populate a generic, composite, six-phase timeline Y2K Event scenario.  The resulting framework, which we dubbed our Scenario Dynamics Grid, become our Black Box Model for explaining the range of possible dynamics that could be in play, in various combinations at various phases in the timeline, during any one country's Y2K Event experience.
• In March 1999 we held our third workshop, the Consequent Management Workshop, where our political-military experts helped us explore potential CINC strategies for dealing with Y2K-induced and related crises within individual theaters of operations around the world.  In effect, we collectively examined how the U.S. Military could influence the playing out of the various scenario dynamics captured within our Black Box Y2K Model.
• In May 1999 we held our fourth and final workshop, the Economic Security Workshop, where our financial experts helped us explore how global markets would respond to and thus shape Y2K-induced or related economic crises around the world.  Here we likewise collectively examined how Wall Street and other global super-markets could influence the playing out of the various scenario dynamics captured within our Black Box Y2K Model.
• Finally, what we hope to do in the Fall of 1999 is hold one or more additional workshops with Pentagon officials to examine Y2K Legacy Models. Here we plan to explore low probability, high impact "wild cards" that may emerge from the Y2K Event. By doing this we hope to explore two key issues:
  • How much is Y2K worth to the U.S. Government in a long-term sense?
  • What is the next Y2K-like system-wide IT perturbation upon which we should next focus our attention?
  • This is also a substantial chance that we will recongregate a portion of the participants from our four previous Y2K workshops for a Post-Y2K Analysis Workshop sometime in the late Spring or Summer of 2000 (all things going as planned!).

The Miniature Meta Model: We Call It . . . Mini Me!

Now, while we're happy that we can actually array all our models in a manner that seems to make some sense to us, we thought it made even more sense to try and distill that complex arrangement into something a bit more elegant.  This Miniature Meta Model, or what we like to call our "Mini Me" Model, boils down to two simple questions (presented below in Slide 35):

• Hardware Question:  How distributed is your country?
• Software Question: How "New Economy" is your economy?

Slide 35: Miniature "Meta Model" of Y2K, aka Mini Me

Those two questions yield four outcome boxes, which, harkening back to our original X-Y axis, allows us to string together a series of individual judgments from our various models and workshops:

• More New Economy + More Distributed = Best Case
• More New Economy + Less Distributed = Next Best Case
• Less New Economy + More Distributed = Next Worst Case
• Less New Economy + Less Distributed = Worst Case.

Which countries go where?  Well, we obviously see the U.S. and countries close to it in overall appearance and functioning to end up in the Best Case box.  On the far extreme of that, we'd expect mono-political, mono-economic, mono-cultural, centralized states like an Iran or North Korea to be potential Worst Case situations, remembering our constant admonitions about asking the "So What?" question.

The in-between cases, of course, present the most intriguing situations.

A country like Japan or France could well end up in the Next Worst Case box as countries that are fairly distributed in terms of their networks, economies, etc., but are not yet adept at the playing the "New Economy" game that stresses rapidly shifting business relationships.

Most difficult to select are examples of countries that exhibit a lot of New Economy potential or capacity, but still have fairly centralized or collective economies married to unitary political states.  These Next Best Case countries will inevitably be surprises, since they will be hit hard by Y2K, and yet seem to emerge stronger and more confident for the experience.  In this light, one thinks of possibly South Korea or even China.

Conclusion #1--How You Describe Y2K Depends on From When You View It

People who describe Y2K as "different in kind" from anything humanity has ever experienced, or something that is unique, tend to look at the event from the perspective of the past century.  But those who look at Y2K from the perspective of the coming century, exhibit the exact opposite tendencies: they tend to describe Y2K as only "different in degree" from the sort of system perturbations humanity will increasingly face as we become more interconnected and interdependent on a global scale.  In their minds, then, Y2K is a genuine harbinger of next definitions of international instabilities or uncertainty, in effect a new type of crisis that leaves us particularly uncomfortable with its lack of a clearly identifiable "enemy" or "threat" with associated motivations.

Our bottom line (paraphrasing Rick in Casablanca): We'll always have Y2K . . ..

Conclusion #2--Y2K Moves Us From Haves-vs-Have Nots to Competents-vs-Incompetents

Success at dealing with Y2K has a lot to do with resources, and anyone who believes otherwise is painfully naive. And yet, defeating the challenge of Y2K says as much or more about one's competency than it does about one's wealth.  The rich can survive Y2K just fine, but only the truly clever can thrive in Y2K, which IT competents tend to view as a sped-up market experience within the larger operational paradigm of the New Economy.  The rise of "virtual tigers" such as India's software industry, Ireland's high-tech manufacturing, or Israel's Wadi Valley, tell us that it doesn't necessarily take a wealthy country to succeed in the New Economy, just a very competent one.  Y2K may well serve as a microcosmic experience that drives this new reality home to many more around the planet: it's less about what you have than what you can do.  For in the end, Y2K is less about vulnerability and dependency, then dealing with vulnerability and dependency.  You can buy your way toward invulnerability and independency, but you can also work around vulnerabilities and dependency.

Our bottom line: Competents will thrive, while incompetents nosedive.

Conclusion #3--Y2K As A Glimpse Into the 21st Century: Divisions Become Less Vertical and More Horizontal

The 20th Century featured an unprecedented amount of human suffering and death stemming from wars, and these conflicts came to embody humanity's definition of strife--namely, state-on-state warfare.  The divisions that drove these conflicts can be described as "vertical," meaning peoples were separated--from top to bottom--by political and geographic boundaries, known as state borders.

If the 20th Century was the century of inter-state war, then the 21st is going to be the century of intra-state or civil strife.  Divisions of note will exist on a "horizontal" plane, or between layers of people that coexist within a single state's population.  These layers will be largely defined by wealth, as they have been throughout recorded history.  But increasingly, that wealth will depend on competency rather than possession of resources.

Y2K will help crystallize this coming reality by demonstrating, in one simultaneous global experience, who is good at dealing with the New Economy, globalization, the Information Revolution, etc., and who is not.  And these divisions will form more within countries than between them, as borders will become increasingly less relevant markers of where success begins and failure ends.  The coming century of conflict will revolve around these horizontal divisions.

Our bottom line:  We have met the enemy, and they is us.

Conclusion #4--Y2K Will Demonstrate the Price of Secrecy and the Promise of Transparency

Those who are more open and transparent and share information more freely will do better with Y2K than those who hoard information, throw up firewalls, and refuse outside help.  Secrecy will backfire in almost all instances, leading to misperceptions and harmful, stupidly self-fulfilling actions.  Governments must be as open with their populations as possible, or suffer serious political backlashes if and when Y2K proves more significant for their countries than they had previously let on.  People's fears about "invisible technology" will either be conquered or fed by how Y2K unfolds.  This is a pivotal moment in human history: the first time Information Technology has threatened to bite back in a systematic way.  In a very Nietzschean manner, Y2K will either "kill" us or make us stronger, and the balance of secrecy versus transparency will decide much, if not all, of that outcome.

Our bottom line: The future is transparency--get used to it!

Conclusion #5--Our Final Take on Y2K:  As It Becomes Less Frightening, It Becomes More Profound

The more you accept the notion that Y2K represents the future and not some accident of the past . . . the more you see it as different in degree than in kind from the challenges we will increasingly face . . . and the more you realize that it's part and parcel of the globalized, IT-driven New Economy than some exogenous one-time disaster, then the more profoundly will Y2K loom in your psyche even as it becomes less frightening with regard to the 010100-threshold.   Why?  Because the more it becomes associated with the broader reality of our increasingly interconnected and interdependent world, the more inescapable it becomes.  In short, you can sit out the Millennium Date Change Event and all the hoopla surrounding it, but there's no avoiding Y2K in the big-picture sense, because the skills it demands from humanity are those same skills needed for our not-so-collective advance into the brave new world of the 21st Century.

Our bottom line:  There's no escaping Y2K.

Appendix Y: List of Workshop Participants

3-4 December 1998 Scenario-Building Workshop @ Decision Support Center, U.S. Naval War College, Newport RI

The following individuals participated in the workshop:

• Wayne Bennett, lawyer, Bingham Dana LLC
• Suzanne Bergman, senior project engineer, Boeing
• Robert Bosnak, psychoanalyst, The Newport Institute
• Charles Cameron, fellow, The Arlington Institute
• Donald Clark, maritime data expert, I2 Technologies
• George Esper, journalist, Associated Press
• ADM William Flanagan, USN (ret), securities director, Cantor Fitzgerald LP
• Martin Gerra, management professor, College of Notre Dame of Maryland
• Philip Ginsberg, financial director, Cantor Fitzgerald LP
• Norm Green, deputy national intelligence officer for science & technology, National Intelligence Council
• Kent Harrington, media expert, The Harrington Group, LLC
• Michael Harrington, Y2K expert, MITRE Corporation
• Ethan Kapstein, professor of political economy, Univ. of Minnesota
• Paul Kourtz, technology expert, CIA
• Richard Landes, millennial history expert, Boston University
• Don Linford, banking official, Chase Manhattan
• Frank Mahncke, chief analyst, Dept. of Defense Joint Warfare Assessment Center
• Kenneth Malpass, telecommunications consultant, Stanford University
• Eugene Miasnikov, physicist, Moscow Institute of Physics and Technology
• Kathy Parker, social ecologist and long-time consultant to USAID
• Jeffrey Scannell, Y2K remediation expert and information technology consultant
• John Weiss, environmental affairs expert, CIA
• Nicholas Zvegintzov, software expert, Software Management Network.

13-15 January 1999 Scenario-Dynamics Workshop @ Clairborne Pell Center, Salve Regina University, Newport RI

The following individuals participated in the workshop:

• Robert Bosnak, psychoanalyst, The Newport Institute
• Mark T. Dudman, director of software development, Comverse Network Systems
• Julia B. Gippenreiter, professor of psychology, Moscow State University
• Paula Gordon, visiting research professor, George Washington University
• Gabriel Gutierrez, economic consultant, UN Economic Commission for Latin America
• George Honadle, consultant, numerous international economic development agencies
• Michael Harrington (speaker), Y2K expert, MITRE Corporation
• Paul Kourtz, technology expert, CIA
• Richard Landes, millennial history expert, Boston University
• Jennifer Lee, Latin America specialist, Department of State
• Douglas MacIntyre, oil market analyst, Department of Energy
• Sipho Veli Mahlangu, risk analyst, National Year 2000 Decision Support Center of South Africa
• Angus McCrone, economic writer and consultant, Center for Economics and Business Research (UK)
• John Noer, project director, Center for Naval Analyses
• Kathy Parker, social ecologist and long-time consultant to USAID
• Daniel Pipes, editor, Middle East Quarterly
• Tony Pryor, Africa Bureau, US Agency for International Development
• Jeffrey W. Schneider, South Asia specialist, Department of State
• Paul S. Triolo, Asian specialist, Department of State
• Mitzi Wertheim, senior manager, The CNA Corporation.

4 March 1999 Scenario-Strategies Workshop @ The CNA Corporation, Alexandria VA

The following individuals participated in the workshop:

• CDR Charles Adams, Y2K liaison, U.S. Coast Guard
• Ken Alnwick, Director of Gaming and Simulation Programs, Kapos Associates Inc.
• CAPT Joe Bouchard, staff member, National Security Council
• Jim Caverly, Office of Science and Technology Policy, Department of Energy
• VADM Arthur Cebrowski, President, U.S. Naval War College
• Ed Deagle, chairman, Potomac Finishing Company
• LTC Bill Finehout, J7 staff member, Joint Staff
• Jeff Gaynor, Director of Y2K Operations, OASD C3I
• CAPT Bill Gravell, staff member, CNO Executive Panel (N00K)
• Michael Harrington (speaker), Y2K expert, MITRE Corporation
• Paul Kourtz, technology expert, CIA
• Richard Landes, millennial history expert, Boston University
• Jennifer Lee, Latin America specialist, Department of State
• Maureen Lischke, administrator, U.S. Army National Guard
• Frank Mahncke, chief analyst, Dept. of Defense Joint Warfare Assessment Center
• Jim Melnick, J2 Y2K Working Group member, Joint Staff
• John Osterholz (presenter), Director of Information Integration and Interoperability, OASD C3I
• Daniel Pipes, editor, Middle East Quarterly
• RADM John Sigler, Director of Strategic Plans and Policy (J5), CENTCOM
• Olen Sisson, senior analyst, Department of Navy
• Paul S. Triolo, Asian specialist, Department of State
• Mitzi Wertheim, senior manager, The CNA Corporation
• Robert S. Wood, dean, U.S. Naval War College.

3 May 1999 Economic Security Workshop @ Cantor Fitzgerald LP, World Trade Center, New York NY

The following individuals participated in the workshop:

• Bill Bone, Year 2000 administrator, NASD
• Dan Casey, IT administrator, Paribas
• Jim Caverly, Office of Science and Technology Policy, Department of Energy
• Len Costa, reporter, FORTUNE
• ADM William Flanagan, USN (ret), securities director, Cantor Fitzgerald LP
• Philip Ginsberg, financial director, Cantor Fitzgerald LP
• Calvin Gooding, trader, Cantor Fitzgerald LP
• Norm Green, deputy national intelligence officer for science & technology, National Intelligence Council
• Damien Hart, chief trader, West Deutschelandes Bank
• Kent Karosen, director, Cantor Fitzgerald LP
• Glenn Kirwin, senior trader, Cantor Fitzgerald LP
• Carolyn Landry, banking and finance analyst, National Intelligence Council
• RADM Peter Long, Provost, U.S. Naval War College
• Paul Nicholas, staff member, U.S. Senate Special Committee on the Year 2000 Technology Problem
• Michael J. O'Connor, Y2K administrator, Merrill Lynch
• John Rice, U.S. Treasurer, Citicorp Bank
• William G. Roe, syndicate manager, Melhado, Flynn & Associates
• CDR Gary Shrout, public affairs officer, U.S. Naval War College
• Richard R. Snape, COO, Telerate
• Robert Stevens, National Information Protection Center, FBI
• Mitzi Wertheim, senior manager, The CNA Corporation
• Robert S. Wood, dean, U.S. Naval War College.

How to contact Professor Thomas P.M. Barnett

phone:

401.841.4053

email:

barnettt@nwc.navy.mil

mail:

Dr. Thomas P.M. Barnett, Code 39 (McCarty-Little Hall/DSD), US Naval War College, 686 Cushing Road, Newport RI 02841

Blast from my past: U.S. Naval Institute Author of the Year (2002)

Dr. Thomas Barnett named Proceedings 'Author of the Year'

By Lt. David Ausiello

Copyright: The Newport Navalog (5 April 2002)

Newport, R.I., April 3, 2002 -- If you are looking for Tom Barnett on a Saturday afternoon this summer, you may not have to look any further than Second Beach.  Chances are you will find him there, showing his 7 year-old son, Kevin, the fine art of boogie-boarding.  Locating him during the week, however, could prove to be a little more difficult.  You could try his office at the Naval War College, where he is a Senior Strategic Researcher in the Decision Strategies Department.  Then again, you could look in Washington D.C., where he works as an assistant to Retired Vice Adm. Arthur Cebrowski in the Office of Force Transformation.  If you still haven't been able to track him down, try calling him on one of the two cell phones he keeps firmly attached to his belt.  One organization that undoubtedly possesses one of these numbers, is the U.S. Naval Institute.  For the past nine years, Tom Barnett has been writing articles for their Annapolis-based magazine, Proceedings, and on April 3rd of this year, he was honored as their 'Author of the Year' for 2001.

Vice Adm. Dennis V. McGinn (center), Deputy Chief of Naval Operations for Warfare Requirements and Programs presents Prof. Tom Barnett (left) with the Naval Institute's 'Author of the Year' award as Rear Adm. Rodney P. Rempt (right), Naval War College President looks on during a ceremony in Annapolis, MD.

Although a contributor to Proceedings for close to a decade, Barnett readily admits that his production for the magazine increased dramatically in 2001.

"I began pitching articles (to the Naval Institute) in February about the post cold war era, and then again last summer after I returned from India's International Fleet Review.  By the fall, they were calling me.  It's become a relationship where they trust what I write." 

In the early part of 2001, Barnett was in the midst of a two-year project centered on security issues in the new globalization era.  This endeavor took him up and down the East Coast, but mainly he found himself speaking to audiences at the two centers of security and globalization in America: The Pentagon and The World Trade Center.  Ironically, he was scheduled to brief in the Navy's Command Center Sept. 18th, which was completely destroyed exactly one week earlier.  On Sept. 25th, Barnett was scheduled to meet with members of Cantor-Fitzgerald for a briefing on the 105th floor of World Trade Center Tower One.  Obviously, neither meeting took place as scheduled, and since Sept. 11th, Barnett's focus has gone through a serious transformation.

One of the first calls Barnett received after Sept. 11th was from Proceedings editor, Fred Rainbow. 

"We were on deadline on Sept. 11th for the October issue.  We decided to make room for some thoughtful reflections on different aspects related to the attacks," said Rainbow.  "We called six people, gave them 24 hours to write 1,000 words…Professor Barnett was one of those authors we called and he produced."

Barnett, who worked closely with many members of Cantor-Fitzgerald who perished on Sept. 11th, describes writing about the effects of the attack as a "cathartic" experience.

"Personally, it felt like such an amazing attack on the work that I had been doing.  Sept. 11th in general ended the project I was working on because so many lives were lost.  The project was kind of shot out from under me."

According to Barnett, a major issue raised by Sept. 11th revolves around the nature of combat in the present day.

"Is it a uni-polar moment and are we just waiting for a great power to rise up in a traditional way, or do we find ourselves going down a dramatically different path where there are those who can accept globalization versus those who can not?  It puts the whole context of naval power in a different light.  What was a post cold-war era starts to look, all of a sudden, very dramatically like a globalization era," said Barnett.

One of Barnett's current positions is as an assistant to his previous boss, Retired Vice Adm. Arthur Cebrowski.  Cebrowski was appointed by Secretary of Defense Donald H. Rumsfeld this past November to be the Director of Force Transformation for the Department of Defense.

According to Barnett, his relationship with Cebrowski, who retired from the U.S. Navy in October 2001 after serving as the president of the Naval War College in Newport, R.I., got off to an awkward start.  Just prior to his arrival at the Naval War College, Barnett authored an article for Proceedings entitled, "The Seven Deadly Sins of Network Centric Warfare."  Cebrowski has been called the "father of network-centric warfare" for helping to initiate the concept that has become one of the centerpieces of the Defense Department's transformation planning.

"My article definitely could have been interpreted as being openly critical of Network Centric Warfare.  (Adm. Cebrowski's) article was quite historic and sometimes I see mine paired with it as a sort of counter-position.  It got the idea started that we were at odds," said Barnett.  Cebrowski's article, "Network-Centric Warfare: Its Origin and Future," appeared in the January 1998 issue of Proceedings, and was co-authored by John J. Garstka.

"Proceedings did a lot of good by publishing articles about Network Centric Warfare because it recognized it as a serious, debatable issue…and a healthy debate enabled the best ideas about Network Centric Warfare to rise," continued Barnett.

One of the first projects Barnett and his boss, Cebrowski, were involved with was Y2K.  And even though Y2K did not materialize into a catastrophic global event, the results of their research were extremely prophetic.

"We predicted a lot of things about what a negative Y2K situation could be and it is interesting to look at those predictions and see how much of the reality of Sept. 11th and its aftermath we captured," said Barnett.

Barnett describes his position (Assistant for Strategic Futures) within the Department of Defense as one in which he is responsible for helping bring a larger context to the debate of the "direction, content and pace" of transformation.

As for the future of the Navy, Barnett sees the service defining itself less in terms of what we have to do to defeat other naval forces, but more in terms of what our capability to control the seas gives to us.

"No other country is trying to control the ocean anymore, it is ours.  So the starting position (of thought) is, because we control the oceans, what can we do?"

According to Barnett, the nature of the transformation is evident in our current war on terrorism because the Navy has been called upon to do "new and unusual things to support operations on land."

For someone who obviously possesses 'Washington Insider' knowledge, Barnett claims life in Newport has given him the "best of both worlds."  After spending 14 consecutive years in big cities, the last 8 in the beltway, Barnett was "burned out" and anxious to escape the "allergies of Washington."  In Newport, he has found a different pace of life and an opportunity to spend more time with his family.  He and his wife Vonne have three children, Emily, 10, Kevin, 7, and Jerome, 2.

Describing himself as a "triple threat," Barnett acknowledges the Naval War College has enabled him to concentrate on three different professional areas.  Specifically, in Newport, Barnett has found time to pursue entrepreneurial interests while still concentrating on his main work in both public policy and national security research.

"Just like Harvard, to my great delight, the package exists at the Naval War College to fulfill yourself professionally."

Barnett also said both Rear Adm. Rodney P. Rempt, President of the Naval War College Rempt, and Rear Adm. Barbara McGann, Provost of the Naval War College, have kept the organization extremely relevant and have enabled the staff to come to Newport and be really ambitious.

In comparing life in Newport to his previous assignments, Barnett offered, "There is a great appreciation here, like anywhere, for delivering content on time.  However, if at 4 o'clock on a Wednesday afternoon in July, I have had enough for the day, you can find me on the beach boogie-boarding with my son."

As for being named 'Author of the Year,' Barnett is extremely grateful to the U.S. Naval Institute, and he indicated his relationship with Proceedings will continue.

"There are a lot of big issues on the table now, and it's a fun time to be writing."

A link to Barnett's Proceedings articles can be found at the following website: www.nwc.navy.mil/newrulesets.

Blast from my past: "Asia: The Military-Market Link" (2002)

Asia: The Military-Market Link

by

Thomas P.M. Barnett

China could be the world's largest auto market by 2020, increasing its oil needs by 40%.  The Pentagon and Wall Street must understand their interrelationship: economic and political stability are crucial to reducing energy market risk.

COPYRIGHT: The U.S. Naval Institute, 2002 (January  issue, pp. 53-56); reprinted with permission

There is a real push within the Department of the Navy to enunciate the presumed linkage between the Navy’s worldwide operations and economic globalization. Some of this analytic effort is dismissed as pouring old wine into new wineskins, because many Navy-as-the-glue-of-globalization formulations sound an awful lot like the old bromides about the “Navy as the glue of Asia.” Nice work if you can get it, but given the relative lack of naval crisis response in Asia since the end of the Vietnam War, it is a hard story to sell.

But all that is about to change, if you believe the Department of Energy’s stunning projections of Asia’s growing energy consumption over the next 20 years.1 Because to ensure the region’s much-anticipated economic maturation, a lot of good things must occur over the next two decades in both Asia and the Middle East—and across all paths in between.2 In short, if you want a Pacific Century, you’ll need a U.S. Pacific Fleet—strong in numbers and forward deployed.

Asian Energy: A Globalization Decalogue

As the director of a long-running Naval War College project (NewRuleSets.Project) on how globalization alters definitions of international security, I have had the opportunity to spend a lot of time with Wall Street executives and regional security experts (both military and civilian) discussing Asia’s future economic and political development.3 The following decalogue distills the essential rule sets our project has identified concerning Asia’s energy future.4

1. The Global Energy Market Has the Necessary Resources.

Asia as a whole currently uses about as much energy as the United States, or almost 100 quadrillion British thermal units (Btu).5 By 2020, however, Asia will roughly double its energy consumption while U.S. consumption rises just more than 25%. Asia’s likely increases are significant no matter what the energy category:

• Oil, 88%
• Natural gas, 191%
• Coal, 97%
• Nuclear power, 87% when Japan is included, 178% when it is not
• Hydroelectricity and other renewables, 109%.

This is a genuine changing of the guard in the global marketplace—a shifting of the world’s demand center. Today, North America accounts for just under a third of the world’s energy consumption, with Asia second at 24%. Within one generation, those two regions will swap both global rankings and percentage shares (see chart).

The good news is that there’s plenty of fossil fuel to go around. Confirmed oil reserves have jumped almost two-thirds over the past 20 years, according to the Department of Energy, while natural gas reserves have roughly doubled. Our best estimates on coal say we have enough for the next two centuries. So supply is not the issue, and neither is demand, leaving only the question of moving the energy from those who have it to those who need it—and therein lies the rub. 

2. But No Stability, No Market.

Asia comes close to self-sufficiency only in coal, with Australia, China, India, and Indonesia the big producers. All told, Asia self-supplies on coal to the tune of 97%, a standard it will maintain through 2020. That is important, because virtually all of the global growth in coal use over the next generation will happen in Asia, mostly in China and India.

Natural gas is a far different story. In 2001 Asia used around 10 trillion cubic feet, with Japan, South Korea, and Taiwan representing the lion’s share of consumption. The trick is this: Asia’s demand for natural gas will skyrocket to perhaps 25 trillion cubic feet by 2020, with the vast bulk of the increase occurring outside of that trio. So if those three countries already buy what’s available in-region, that means the rest of Asia will have to go elsewhere—namely, the former Soviet Union (Russia, with 33% of the world total) and the Middle East (Iran, with 16%).

Finally, even though oil will decline as a percentage share for Asia as a whole over the coming years, absolute demand will grow by leaps and bounds. Asia currently burns about as much oil as the United States, or roughly 20 million barrels per day (mbd). Since oil is mostly about transportation nowadays, and Asia is looking at a quintupling of its car fleet by 2020, there is a huge swag placed on this projection. The Department of Energy’s latest forecast is roughly 36 mbd, but even that means Asia as a whole has to import an additional 12 mbd from out of region, or roughly double what it imports today from the Persian Gulf region.6

Asia already buys roughly two-thirds of all the oil produced in the Persian Gulf, and by 2010 that share will rise to approximately three-quarters.7 Meanwhile, the West’s share of Gulf oil will drop from just under a quarter today to just over a tenth in 2010. Strategic upshot? The two most anti-Western corners of the globe are inexorably coming together over energy and money. Increasingly, the Middle East becomes dependent on economic stability in Asia, and Asia becomes dependent on political-military stability in the Gulf. If either side of that equation fails, the energy market is put at risk.

3. No Growth, No Stability. 

As a middle class develops in Asian countries, a significant portion of the global population is being rapidly promoted from an 18th- or 19th-century lifestyle into a 20th- or even 21st-century consumption pattern. If international investors decide to take it all away one afternoon in a flurry of currency attacks and capital flight, the struggling segment of the population that suddenly finds itself expelled from the would-be middle class is likely to get awfully upset.

4. No Resources, No Growth. 

Asia cannot grow without a huge influx of out-of-area energy resources. The quintupling of cars is impressive enough, when you consider that General Motors predicts China will be the world’s largest car market in 2020.8 But even more stunning will be the 250% increase in electricity consumption (300% in China), which will be generated mostly by coal and, increasingly, natural gas. Put those two together and we are talking about an Asia that must open up to the outside world to a degree unprecedented in modern history.

5. No Infrastructure, No Resources. 

Asia’s infrastructure requirements over the next two decades are unprecedented. The combination of a doubling in energy consumption and rapid rises in population, urbanization, and water usage will damage further an already battered regional ecosystem, placing great political pressures on national governments to limit the pollution associated with energy production.

In Asia, the push for energy is really a push for infrastructure, which comes in three forms:

• For the near term, the vast majority of natural gas that flows into Asia will arrive in a liquid form on ships. That means port facilities on both ends of the conduit, plus liquefaction plants on the supplier’s end and regasification plants on the buyer’s end.
• Over the longer haul, pipelines by both land and sea become the answer to meeting the rising demand.
• Finally, there is the domestic infrastructure required to pipe all that gas to the final consumers.

None of this comes cheaply, and as the recent history of regional electricity development makes clear, lots of outside money is required.9

6. No Money, No Infrastructure.

Foreign direct investment (FDI) is the most significant scenario variable for Asia’s energy future. Asia’s energy infrastructure requirements easily will top $1 trillion by 2020, according to many estimates. Such numbers overwhelm the region’s ability to self-finance, and that means Asia will have to open up its energy generation and distribution markets to far more joint or foreign ownership. If it seems inevitable that Asia must turn to the former Soviet Union and the Middle East for energy in the coming decades, it is just as inevitable that it must turn to the West for the money to finance this trade.

7. No Rules, No Money.

Many on Wall Street voice the opinion that Asia has not sufficiently cleaned up its act as a result of the 1997–1998 financial crisis, referring primarily to internationally accepted accounting practices in the financial and corporate sectors.10 Another problem with Asia’s energy investment climate is the current mix of private-sector investments and public-sector decision making. In most Asian economies, the government still plays far too large a role as far as Western financiers are concerned. As long as rule sets lag behind, the rise of private-sector market makers is delayed, for firm rules of play are required before deregulation of state-run energy markets can proceed.

8. No Security, No Rules.

Foreign direct investment does not occur in a vacuum. Long-term certainty is the greatest attraction a country can offer to outside investors, whereas war and political-military instability (especially leftist revolutions) are the best methods to scare them away. Developing Asia readily presents a handful of potential and/or existing security trouble spots that could negatively affect the region’s FDI climate in significant ways.

9. No Leviathan, No Security.

Many international experts agree that Asia’s current security situation belongs to what Thomas Friedman calls the “olive tree” world, where backward tribes fight over little bits of land, while rising economic powerhouses clearly join the “Lexus” world, producing many of the global economy’s best high-end technology products.11

In this region there remains a viable long-term market for the services of an outside Leviathan—namely, the United States. The United States enjoys healthier security relationships with virtually every Asian government than any two governments there enjoy with one another. While it is easy to deride the notion of a “four-star foreign policy,” there is little doubt that the commander-in-chief of U.S. Pacific Command plays a unique role in working the security arrangements that underpin the region’s strong record of structural stability over the past quarter century.12 Our forward presence both reassures local governments and obviates their need for larger military hedges. Our presence is a moneymaker on two fronts: they spend less on defense and more on development (the ultimate defense), and FDI is encouraged, however subtly.

10. No U.S. Navy, No Leviathan.

The U.S. government—and the U.S. Navy in particular—faces a far more complex strategic environment in the 21st century than it did during the Cold War, whether or not it yet realizes the change: our national security interests in the Persian Gulf, while increasingly important for the global economy, no longer hold the same immediate importance to our national economy. In effect, U.S. naval presence in Asia is becoming far less an expression of our nation’s forward presence than an “exporting” of security to the global marketplace. In that regard, we truly do move into the Leviathan category, for the “product” we provide is increasingly a collective good less directly tied to our particularistic national interests and far more intimately wrapped up with our global responsibilities.

And in the end, this is a pretty good deal. We trade little pieces of paper (our currency, in the form of a trade deficit) for Asia’s amazing array of products and services. We are smart enough to know this is a patently unfair deal unless we offer something of great value along with those little pieces of paper. That product is a strong U.S. Pacific Fleet, which squares the transaction nicely.

Understanding the Military-Market Connection

The collapse of the Soviet bloc and its long-standing challenge of the Western economic rule set made possible a global rule set for how military power buttresses and enables economic growth and stability. For the first time in human history we have a true global military Leviathan in the form of the U.S. military, and no peer competitor in sight—not even a coherent alternative economic philosophy (although bin Laden’s anti-Westernization resonates with those who fear globalization as a form of forced Americanization). This unparalleled moment in global history both allows and compels the United States to better understand the national security-market nexus.

How do we define this yin-yang relationship between business and the military? First we speak of stability, which flows from national security, and then we speak of transparency, which is both demanded and engendered by free markets. These two underlying pillars form the basis of the single global rule set that now defines the era of globalization. Within those two pillars, the United States plays a crucial role:

• The U.S. government, through the U.S. military, supplies the lion’s share of system stability through its Leviathan-like status as the world’s sole military superpower.
• U.S. financial markets, which lead the way in fostering the emergence of a global equities market, play the leading role in spreading the gospel of transparency—any country’s best defense against the sort of financial currency crises that have erupted periodically over the past decade (Mexico 1994, Asia 1997, Russia 1998, Brazil 1999, Turkey 2001).

It therefore is essential that the Pentagon and Wall Street come to better understand their interrelationships across the global economy. Uncovering and better understanding this fundamental relationship is especially important because the vast majority of the time the security and financial communities operate in oblivious indifference to one another. Ultimately, however, the global economy operates on trust, which is based on certainty, which in turn comes from the effective processing of risk.

In the end, the national security and financial establishments are in the same fundamental business: the effective processing of international risk. Invariably, these two problem sets merge in the historical process that is economic globalization. Understanding the military-market connection isn’t just good business, it’s good national security strategy. Bin Laden understood this connection when he selected the World Trade Center and the Pentagon for his targets. We ignore his logic at our peril.

1. See the Energy Information Administration’s International Energy Outlook 2001, DOE/EIA-0484(2001), March 2001, found at www.eia.doe.gov/oiaf/ieo/index.html.

2. For the purposes of this article I define Asia as extending from Afghanistan to Japan, but not including Australia and New Zealand (Oceania), although I identify Australia as an in-region supplier of energy because of its proximity.

3. The NewRuleSets.Project is a multiyear research effort designed to explore how globalization and the rise of the new economy are altering the basic “rules of the road” in the international security environment, with special reference to how these changes may redefine the U.S. Navy’s historical role as security enabler of U.S. commercial network ties with the world. The project is hosted by the online securities broker-dealer firm eSpeed (an affiliate of Cantor Fitzgerald LP) and involves personnel from the Decision Strategies Department of the Center for Naval Warfare Studies. Adm. William Flanagan, USN (Ret.), and Dr. Philip Ginsberg, of Cantor Fitzgerald (senior managing director and executive vice president, respectively), serve as informal advisors to the project, actively participating in all planning and design. The first three joint Wall Street-Naval War College workshops in the series involved energy, foreign direct investment, and the environment in Asia. Follow-on events are planned for food and water, information technology, and human capital. All research products relating to this effort are found at www.nwc.navy.mil/newrulesets. 

4. All the energy data presented in the decalogue, unless otherwise specified, comes from the Department of Energy’s International Energy Outlook 2001.

5. A good rule of thumb for thinking about quadrillion Btu is that you can take the annual number for a region, divide it by two, and get the rough equivalent in millions of barrels of oil per day the region would need to burn if it was achieving that entire energy amount by oil alone. For example, North America used 116 quadrillion Btu in 1999, which would equate to 58 million barrels of oil per day (mbd) if that entire amount was achieved by oil alone. For point of comparison, the United States currently uses about 20 mbd, importing roughly half that number. 

6. For an excellent exploration of this, see Daniel Yergin, Dennis Eklof, and Jefferson Edwards, “Fueling Asia’s Recovery,” Foreign Affairs, March/April 1998, pp. 34–50. 

7. The Middle East currently accounts for roughly 90% of all Asian oil imports; on this see Fereidun Fesharaki, “Energy and Asian Security Nexus,” Journal of International Affairs, Fall 1999, p. 97.

8. Cited in Clay Chandler, “GM’s China Bet Hits Snag: WTO (Car Shoppers Await Discount from Trade Deal),” The Washington Post, 10 May 2000, p. E1.

9. See “Foreign Investment in the Electricity Sectors of Asia and South America,” International Energy Outlook 2000, pp. 120–21. 

10. On this, see Andreas Kluth, “A Survey of Asian Business: In Praise of Rules,” The Economist, 7 April 2001, pp. 1–18 (insert).

11. Thomas Friedman, The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar Strauss Giroux, 1999).

12. For an excellent exploration of this concept, see Dana Priest, “A Four-Star Foreign Policy? U.S. Commanders Wield Rising Clout, Autonomy,” The Washington Post, 28 September 2000, p. A1. See also the second and third articles in the series (29–30 September). 

Dr. Barnett is a professor at the U.S. Naval War College, currently serving as the Assistant for Strategic Futures in the Office of Force Transformation within the Office of the Secretary of Defense. 

Blast from my past: "Globalization Gets a Bodyguard" (2001)

Globalization Gets a Bodyguard

by

Thomas P.M. Barnett and Henry H. Gaffney, Jr.

Definitions of U.S. national security never will be the same after 11 September 2001.  Americans now have a costly bodyguard in the form of a Homeland Security Council which could impact globalization on many fronts.

COPYRIGHT: The U.S. Naval Institute, 2001 (November  issue, pp. 50-53); reprinted with permission

To the vast majority of the world, the United States represents the leading edge of globalization—a harbinger of a future where efficient markets, political pluralism, and individual choice reign supreme. Moreover, as the new rules of this new era emerge and governments step in to regulate the markets, the United States (especially its Treasury Department) plays chief rule-maker. In the meantime, the U.S. military has remained strong, saving most countries the trouble of having to finance big or expeditionary militaries, leading the coalitions that tidy up those conflicts on the edges of globalization, and containing the trouble-makers who threaten to disrupt it.

Think about what an unprecedented combination that is: the world’s most open society, most vibrant economy, and strongest military power. And the United States had maintained a careful, stable balance among those elements.

Then consider how much has changed as a result of 11 September:

• The rear admiral and pilots of the Enterprise (CVN-65) Battle Group operating in the Arabian Sea ask reporters not to use their names for fear that such publicity might endanger their families.
• The Coast Guard conducts its largest port defense operations since World War II.
• National Guard personnel stand watch in every major domestic airport.
• Debates rage in the Pentagon and in Congress about creating a “combat command”—“CinCAmerica”—to fight terrorism within our borders, in  support of the domestic agencies.
• Military intelligence agencies poll Hollywood screenwriters for their best ideas on where and how terrorists will strike next.

But most telling of all, American citizens just got a permanent bodyguard in the form of a Homeland Security Council. Not a military escort but a civilian bodyguard, the centrality of this new political entity will indicate how the United States may balance homeland introspection with world interactions in the coming years.

On the one hand, Osama bin Laden has challenged the United States to retreat from the world (or at least from his world, which stretches from Sierra Leone to the Sulu Archipelago). On the other hand, we have found a world community beyond unilateralism.

Osama's Real Victory

Until 11 September, there was a clear consensus in this country that “national security” meant the Defense Department’s four military branches operating in forward deployments around the world, or being ready to do so. “Defense” was an “over there” concept, something we paid military professionals to perform overseas. The forces were deployed or “expeditionary,” not homeland defense forces. Even missile defense was no longer to be simply “national,” but worldwide.

Following the September terrorist attacks, we now have a dual definition of national security, largely because our confidence concerning the ability of our deployed and expeditionary forces to defend the United States forward has been shattered.

DoD covered both the forward and homeland defense portfolios during the Cold War by assuring our domestic strategic security vis-à-vis Soviet missiles while containing Soviet bloc expansion around the world with our forward-deployed forces. But that world is gone. Our forward-deployed military was proven essentially irrelevant when it came to defending our strategic security on 11 September. Yes, DoD will hunt down bin Laden in Afghanistan, and other agencies and countries ultimately will roll up bin Laden’s terrorist network overseas. But as far as this country’s domestic strategic security is concerned, the Pentagon has just been demoted to subcontractor to the Homeland Security authority.

That stunning turn of events represents Osama bin Laden’s real victory over the United States and its regular military establishment—one that no amount of well-aimed cruise missiles can erase.

Downstream Effects from 9/11

As anyone in the private security business will tell you, bodyguards cost plenty. As a cost of doing the nation’s business, this charge will be too large for state and local governments to absorb, signaling an expansion of federal power and spending not seen since Franklin Roosevelt declared, “The only thing we have to fear is fear itself.”

Homeland security will grow—as a concept, strategy, bureaucracy, and budget—in direct proportion to our society’s ballooning fear concerning terrorism. George W. Bush cannot win this “new war”—or a second term—merely by producing bin Laden’s head. He can only prevail in this strategic struggle by restoring Americans’ sense of personal security.

Up to now, Americans have largely looked after themselves for personal security, augmenting our reasonably robust local police structure by shelling out their own dollars for personal weapons, home-security systems, gated communities, and the like. But again, bin Laden’s stunning strike has merged definitions of strategic and personal security, and that conflation will long be felt in the Congress’s willingness to redirect federal discretionary spending toward restoring our collective personal security and away from all this international engagement we had become accustomed to during the Cold War and in the decade after it.

When President Bush announced the homeland security entity, it was first described as just an “office,” but soon we learned it would grow into a “council” on a par with the National Security Council. How much more authority might it gain, and what budgetary resources will it command?

Clearly this will be an event-driven process largely beyond DoD’s control. Another 5,000 dead, say, in Chicago or Los Angeles, and we shortly will have a Homeland Security Agency or even a Department that absorbs command of elements of DoD—an interior ministry like many other countries have.

After 11 September, this pathway is conceivable, and in many ways, it may be inevitable given the opportunities for terrorists to infiltrate the United States in this globalization era. At the very least, it is a greater long-term likelihood than Governor Tom Ridge ending up as just another “drug czar.” That is because our continued consumption of narcotics threatens no one in the world except ourselves, whereas the terrorists want to kill Americans to drive us out of the huge Islamic world they dream of someday running like the Taliban’s Afghanistan.

In short, our collective determination to not let “them”—the terrorists—change our way of life is met with their equal determination to not let “us”—American-led globalization—destroy their way of life. That is why this war may well rival or exceed the length of our Cold War standoff with the Soviets. Terrorism has been around for a long time and has excelled at dispatching monarchs, but the world neither has seen anything on the scale of 11 September, nor have the opportunities to slip in and out of countries been so easy since the 18th century.

Assuming that this conflict will drag on year after year, it is inevitable that the federal homeland security effort will demand a larger share of the federal discretionary budget. At first, this trend will plunge the U.S. Government back into the universe of deficit spending. DoD will benefit substantially from the generalized boost in “security” spending in 9/11’s immediate aftermath, but that plus-up likely will be short-lived, meaning a couple of years.

Now, and continuing to the 2004 presidential election, we likely are to face an economy experiencing nowhere near the record growth rates of the booming 1990s. Say goodbye to the record revenue flows and say hello to the additional costs—both real and opportunity—associated with all this expanded internal security and the consequent restrictions on international traffic entering the United States. Meanwhile the nation will be growing older, as the leading edge of the boomer generation hits the 60-year mark, leading to a further squeeze on the discretionary budget in favor of mandatory social security programs.

After the campaign in Afghanistan is over, whenever that happens, DoD’s budget inevitably will be squeezed. In a three-way race among taking care of elders (who vote), taking care of our personal and domestic security, and resuming the task of maintaining regional stability somewhere “over there,” guess which funding stream gets squeezed the tightest?

The Vision Thing

Many in the national security community who declare that we just experienced another Pearl Harbor likewise assume that the American public inevitably will remain wedded to the notion that this country must stay forward engaged militarily—no matter what the relative cost. That is a huge assumption worth examining.

First, we tend to idealize the “greatest generation’s” selfless willingness to endure the privations and sacrifices of World War II—especially on the home front.

• It was fairly easy to demonize our enemies in that declared war, for those national regimes were truly demonic. We have a much finer line to tread in this virtual “war” against nonstate actors, for no other reason than to avoid the appearance of a generalized “clash of civilizations” with Islam itself, something bin Laden obviously seeks to promote.
• Americans knew it was an us-or-them fight; either our country would prevail or we would have found ourselves largely isolated in a fascist-dominated world. Radical Islam offers no realistic world view. It basically just wants the West—and especially U.S. forces—out of the Middle East.
• World War II lasted a mere four years as far as the United States was concerned. This “war” is likely to drag on far longer. As both the United Kingdom and Israel have shown in recent decades, it is possible to live with ongoing terrorist challenges, but the societal tensions are dramatic and costly. None of this increased domestic security is going to be cheaply achieved and maintained.

Second, since the end of the Cold War, the American public and their representatives in Congress have been clear that they are uncomfortable with the role of global policeman. Some claimed that it was a more dangerous world after the Cold War, and that we had to police it since no one else was going to. They did not have in mind fighting a war like the Soviets did in Afghanistan. It was more like containing the rogues, making a few interventions in internal conflicts once truces had been arranged, and the occasional show of force off Taiwan.

Now, if forward presence and interventions become identified with retaliation by terrorists that results in periodic civilian casualties numbering in the thousands, we should expect strong domestic opposition to emerge and force a debate about the role of the U.S. military in regulating the international security environment. Yes, our collective sense of revenge/justice will propel us sufficiently along to eliminate bin Laden and roll up his al Qaeda network, but there is no guarantee that Americans will remain united beyond that discrete goal.

Third, we just endured a direct attack against our homeland in which roughly as many people died as in the bloodiest day of our nation’s history—the Civil War’s Battle of Antietam. The Bush administration did not panic, but slowly and patiently formed an international coalition and planned carefully prior to beginning military strikes. But think about what that says about what a complex world in which we live.

Bin Laden just killed 5,000 of ours and other countries’ citizens, but our retaliation and our capturing of bin Laden and tracking down his cells in 60 countries mean we have to go out there and do it. We can not do all that from the sea and Whiteman Air Force Base. Bin Laden may have struck us, but a lot of the advanced countries, and Russia and China too, could be struck next. All the countries benefiting from globalization are in this together.  This is a complex international security environment where unilateralism simply does not work.

Fourth, there will be no unlimited pie for “national security,” especially as the mounting deficit is recognized, so any rise in resource requirements for Homeland Security will inevitably eat into the Pentagon’s budget. Less money means either fewer operations, less purchases, or smaller force structure, or diversion of force structure (military personnel) to homeland defense. In any case, U.S military capabilities would be spread more thinly, assuming Americans still think we should be policing the world.

We will need to take some different perspectives on what we thought were going to be threats to our interests. Some interests may not seem so vital anymore, some relationships not worth pursuing to the same degree. But this is not because of the thinness of the forces—they will still be the strongest, most capable forces in the world. It is because of the new perspective of what is most important to the American people.

Finally, there are the dilemmas posed to the Navy itself. The Navy may be tempted in the coming months and years to prove how useful it is in homeland security, just as it was in jumping on the national missile defense bandwagon. Homeland defense in U.S. coastal waters is the job of the U.S. Coast Guard, and it may well benefit from some of the resources diverted from DoD. The U.S. Navy probably does not want to lower its technological sights, but then these roles are not its choice, but the nation’s.

The United States has kept a global navy of great capability, and this has permitted most other countries in the world to concentrate on their “coast guard” navies. If the United States starts operating its navy like a coast guard, we abdicate our role as the world’s navy, and maybe then bin Laden will have succeeded beyond his wildest dreams. Saddam and the Iranians would be happy too.

But we do not need to do that. Under any conditions, the United States has much more navy than needed for homeland defense. The U.S. Navy has a critical role in the Persian Gulf and in adjacent waters. It also has a highly symbolic role in maintaining East Asian stability. And we have this broader coalition that we have rediscovered, of which navy-to-navy cooperation plays an important part. There is no reason for the United States to retreat from the world now.

Whither Transformation?

Before 11 September, the strategic debate in defense was between policing the world in the here-and-now and transformation to face an unknown peer competitor, or simply to take advantage of changing technology. But now, it appears that U.S. forces as they exist—with the addition of C4ISR (command, control, communications, computers, intelligence, surveillance, and reconnaissance) improvements and more precision-guided munitions—are more than adequate for the war against terrorism. More important may be their new roles in homeland versus international defense:

• The U.S. Army, especially the National Guard and Army Reserve, is taking a big role in homeland defense, and may get to administer the resources for a national missile defense.
• The Air Force, which had organized well for expeditionary responses (AEFs), takes on more a dual role in continental air defense as well as expeditionary operations.
• The Marine Corps proposes a super brigade for domestic and overseas antiterrorism operations.
• With the Coast Guard watching the coasts, the Navy still patrols the Persian Gulf and Asia.

This is not the kind of radical technological transformation most had in mind before 11 September.

The Newer World Order

It is fair to say that when the Bush administration came into power it really did not have a foreign policy, just a firm notion that Clinton’s approach to globalization was far too focused on the broad architecture of free trade.  The anti-Clinton foreign policy basically was a my-way-or-the-highway unilateralism.

In the new administration’s world view, Russia and China were back to being more front-and-center concerns, and India could be a new friend if it signed off on our missile defense. Japan and our European allies were expected to fall in line, even though we were not going to give an inch on things like Kyoto or the World Court. Iran and Iraq were told there was a new sheriff in town, unafraid to crack the whip of tighter sanctions.

That was then, this is now:

• The other NATO members are ready to defend us!
• Japan is gearing up to make real military contributions.
• Moscow is advising us on how to take down Afghanistan.
• China is openly approving a U.S. military intervention in Asia.
• India is asking us for help with Kashmiri terrorists.

Do not think for a minute that all this support will not come with price tags, but clearly we are experiencing an historic moment not seen since Iraq invaded Kuwait. So the question for the Bush administration is this: What world architecture are you going to build to consolidate this groundswell of cooperation?

In effect, we will now see how Bush the Younger’s edition of a New World Order might surpass the aborted version of Bush the Elder. There is good reason to believe that this time that wildly ambitious slogan will stick—both in name and substance. All of the world’s great powers understand that a strong antiglobalization backlash is brewing, threatening the long-term growth and prosperity of all. Before 9/11, Seattle Man was this movement’s scariest face, but he looks laughably impotent compared to the still-rippling global economic shock wave bin Laden unleashed with his World Trade Center/Pentagon attacks.

By making it clear that the major powers are not going to stand by idly while terrorists try to sow systemic disruptions, the East and West may come together to discover a sense of global community that proves to be globalization’s version of “soft power.”

The Navy is a versatile tool for assisting in the sort of security networking among great powers that globalization needs now. So while its key task right now is suppressing the Taliban so others can track down bin Laden, the Navy’s longer-term vision must be twofold:

• Contributing where it can to homeland defense, depending on national decisions on missile defense and the patrolling of coastal waters
• Containing and suppressing those who would disrupt peace and economic progress—the essence of globalization—forward, especially in the Middle East arc of crisis.

It appears that U.S. naval technological capabilities, as they may be incrementally improved, will be adequate for these tasks. The greater challenges may be to take good care of naval personnel, who may be tasked for long stays in distant waters, maintaining adequate readiness, and keeping numbers of ships instead of striving for the ultimate in technologies.

Dr. Barnett is a professor at the U.S. Naval War College, serving as a senior strategic researcher in the Decision Strategies Department of the Center for Naval Warfare Studies.  Dr. Gaffney is a research manager at The CNA Corporation, serving as Team Leader in the Center for Strategic Studies.

Blast from my past: "Globalization is Tested" (2001)

"Globalization is Tested"

by

Thomas P.M. Barnett

COPYRIGHT: The U.S. Naval Institute, 2001 (October issue, p. 57); reprinted with permission

Globalization has taken some serious hits in recent years.  Now, with the terrorist strikes in New York and Washington, it is fair to say that globalization faces its greatest test yet.

The extreme antiglobalization wing represented by terrorist Osama bin Laden is not interested in debating the pace of globalization; it wants it stopped dead in its tracks.  For bin Laden, U.S.-led globalization represents the worst possible corruption of his ideal Muslim society.  It is expressed politically in our support for Israel, culturally in our military presence in Saudi Arabia, and financially in our ability to isolate Iraq and Iran through sanctions.

Bin Laden's symbology of attack could not have been expressed more clearly:

• Operating from one of the most isolated--and least globalized--countries in the world (Afghanistan)
• Using icons of our international connectivity as weapons (United, American Airlines)
• Wreaking unprecedented destruction on our financial and military nerve centers (World Trade Center, Pentagon), while just failing to land a similar blow against our political command center (White House).

How will the United States respond to the challenge?  This question is not adequately answered by any immediate military response.  Rather, it is answered by our willingness to forge a new international rule set, much as we did following World War II. Our goal then was preventing a reoccurrence of the economic nationalism that killed the first wave of globalization (1870-1929).

Today, it is not so much economic nationalism that threatens globalization as cultural nationalism--the assumption that globalization equal forced Americanization.  How does the United States combat that fear? Three steps move us in the right direction.

First, we need to expand dramatically the dialogue between Wall Street and the Pentagon regarding how globalization changes our definitions of national security. Over the past several years, the Naval War College has collaborated with the broker-dealer firm Cantor Fitzgerald in conducting a series of Economic Security Exercises examining scenarios such as a terrorist strike against Wall Street, the Year 2000 Problem, and Asia's future energy needs.

These pioneering wargames are the brainchild of retired Navy Admiral William J. Flanagan, Senior Managing Director of Cantor Fitzgerald, which until 11 September had its international headquarters in the uppermost floors of the World Trade Center. It is not hyperbole to call the September terrorist strike a new form of warfare.  Cantor Fitzgerald's catastrophic human loss (roughly two-thirds of the 1,000 employees headquartered in the World Trade Center) only underscored the paradigm shift.  These individuals were killed not only to terrorize the American people, but also to disable U.S. financial markets and, by doing so, diminish global investor confidence in their long-term stability.

Second, we need a better understanding of which countries are the real enemies of globalization--and thus the United States. Samuel Huntington, in Clash of Civilizations, mistakenly lumped Asia with Islam as "challenger civilizations." Nothing could be further from the truth.  Developing Asia desperately needs two things in the coming years: energy from the Middle East and capital from the West. If either of these two global markets breaks down, Asia cannot move forward and instability will ensue.

Until September, the Bush administration clearly focused national security strategy on Asia in general and China in particular. This was a huge mistake in the making, but the danger has not yet passed. As the United States pursues this war against international terrorism, we must be aware that the West and Asia can either come together or be driven apart by events in the Middle East. Remember this: as far as globalization is concerned, China is not the problem; it is the prize.

Finally, both Washington and the American public need to come to grips with the inevitable reality that this war on terrorism only will cement our nation's role as global policeman.  There will be a rather scary blurring of the lines between external war fighting and internal policing roles--not only abroad but within the United States.

Since the Cold War, the U.S. military has bifurcated progressively into a high-tech strike force designed for state-on-state war and a lower-tech mobile police-state forces designed for military operations other than war. This war on terrorism only will exacerbate that emerging split and render it permanent, with much of the change coming under the guise of "homeland defense."

Dr. Barnett is a professor at the U.S. Naval War College, serving as a senior strategic researcher in the Decision Strategies Department of the Center for Naval Warfare Studies.

Blast from my past: "India's 12 Steps to a World-Class Navy" (2001)

India's 12 Steps to a World-Class Navy

by Thomas P.M. Barnett

The International Fleet Reviews in February showed off its impressive fleet; now the Indian Navy must determine how it wants to use it.

COPYRIGHT: The U.S. Naval Institute, 2001 (July issue, pp. 41-45); reprinted with permission

In February of this year ...  
I had the pleasure of attending the Indian Navy’s first-ever International Fleet Review in Mumbai, where I made a presentation to a symposium audience of 16 chiefs of naval staff and dozens of flag officers from an additional 13 navies. This fleet review, which went by the motto “Bridges of Friendship,” essentially was the Indian Navy’s “coming out” party after many years of building up and modernizing its force structure, mostly through foreign purchases.

You may ask, “Coming out for what?” Frankly, that was the real theme of the high-powered symposium, as well as of numerous discussions I had with Indian flag officers, both active and retired. In many ways, this grand celebration was the swan song for a generation of Indian admirals who propelled this once humble coastal force to its current heights as the world’s fourth-largest navy. Not only do they want the international community to take note and show some respect, but they also are looking for some clear sense of where their Navy fits in this messy post-Cold War security environment.

Future Pathways of the Indian Navy

It is fair to say that every Indian admiral I spoke with represented his own school of thought, but I sensed two broad strategic factions, which I dub the Soviet School and the British School. This division recalls not only the perceived operational disparity between the Eastern and Western fleets (the former long considered the “Russian half” of the Indian Navy; the latter the “British half”) but also the difference between a land-oriented great power’s strategic employment of naval force and that of a sea-oriented one. Not surprisingly, most of the British School admirals I met had studied at the U.S. Naval War College. Conversely, I could discuss my love for Russian poetry—in the original—with those of the Soviet School.

I further subdivide each school into two wings: those admirals who believe the Indian Ocean “belongs” to the Indian Navy (and not to any “meddlesome outsiders,” including the U.S. Navy) and those who believe the Indian Navy “belongs” to something larger—typically, the collective good of global maritime security.

Putting those two axes together, I see four future pathways for the Indian Navy:

• Minimum-Deterrent Navy (Soviet School/regional focus). This is the weakest long-term outcome because it relegates the Navy to an adjunct to the Army and Air Force in India’s continuing nuclear arms race with Pakistan. This tendency most recently is demonstrated in New Delhi’s declaration to remain “equal” to any Pakistani move to put nuclear missiles on its submarines.[1]  Recalling the Soviet Navy’s bastion strategy, this is a go-nowhere, do-little navy.
• Sea-Denial Navy (Soviet School/global ambition). This is an anti-China navy that seeks to export an antiaccess strategy to the South China Sea. Like the old Soviet fleet, it focuses on antiship capabilities with an emphasis on attack submarines. In its most aggressive form, it might be construed by some as an anti-U.S. navy in terms of its modest capacity for power projection toward the Persian Gulf. During the fleet review’s grand finale, Indian naval commandos demonstrated their quick-strike skills by planting explosive charges on three mock oil rigs in Mumbai’s Back Bay. They demolished the platforms to the delight of the huge crowds lining the shore, providing the VIP audience of foreign admirals a none too subtle reminder of where India resides, namely, right along the sea route that carries the majority of the world’s energy traffic from the Middle East to developing Asia.
• Sea Lines of Communication–Stability Navy (British School/regional focus). This is the polar opposite of the sea-denial navy, for it takes as its prime task the preservation of the Indian Ocean as a safe transit for global commerce. This Indian Navy seeks to supplant the U.S. Navy as the region’s sea-based Leviathan, not so much because it wants the United States out, but because India believes this is an appropriate regional security role for it to fill as its economy emerges. Another way to describe this navy is the “Mini-Me Navy,” or the Indian Navy’s regionalized version of the U.S. Navy—same rough spread of capabilities, just one-eighth the size.
• International Coalition Navy (British school/global ambition). This is the most ambitious navy, for it assumes two key developments: (1) a lessening of the land-based rivalries with Pakistan and China; and (2) a far bigger share of the Indian defense budget going to the navy, which now receives around 15%. In a practical sense, this is a “niche navy,” or India’s version of the current Royal Navy: a pro-international norms force that can deploy with some genuine reach when combined with the U.S. Navy in a multinational naval coalition. On the face of it, some nations might instinctively fear an Indian Navy of such capability, but such a long-term development would signal a secure and confident New Delhi looking to do its part for global security maintenance. As a rule, dangerous powers field large armies and air forces, not large navies.

Which navy India will end up with is anyone’s guess. Based on everything I heard in Mumbai, strong rationales exist within the Indian Navy for each outcome. But clearly, for India to achieve a world-class navy, its leaders have to move beyond viewing the fleet as a supplemental tool in New Delhi’s long-standing rivalries with its neighbors, toward an expansive security vision that takes into account the nation’s global economic status as an emerging information-technology superpower.

A 12-Step Program for the Indian Navy

India’s naval development has progressed to where its leaders need to elevate their vision beyond what the force can provide the country in terms of security to the larger issue of what it can provide the world in terms of stability. I see this as a 12-step program, borrowing liberally from the self-help literature so popular in the United States today. In effect, the senior officers of the Indian Navy need to:

1. Admit they are powerless over the Army and Air Force in determining national security priorities. Over the years India’s best and brightest did not join the Navy; there were a lot more opportunities to launch glorious military careers in the north against either the Pakistanis or the Chinese. But even if the ground pounders rule the military roost, their definition of national security is mostly internalized (what happens here), whereas the naval definition should be almost exclusively externalized (what happens over there). By my scoring, India is not a legitimate great power until it generates a surplus of external security—beyond what it needs to protect the country from outside attack. Once achieved, either New Delhi markets that surplus externally as a collective good or it ends up scaring the hell out of the neighbors. So let the Army and Air Force set India’s national security priorities, but the Navy needs to establish India’s international security priorities because only the Navy can make that sale.

2. Believe that a greater power—globalization—can elevate their force to strategic vision.  As one Indian commander complained, “We are strategic suckers!” What passes for grand strategy in the Indian military is nothing more than “J & K tactics”—India’s long-simmering, high-altitude version of trench/guerrilla warfare with Pakistan over the disputed Jammu and Kashmir region. Nuclearizing the fleet on Karachi’s say-so might seem the prudent tit for tat, but it hardly constitutes a strategic naval vision when the leaders in your industry have long since turned in their tactical nukes and loaded up on precision-guided missiles. Globalization is splintering the concept of national security, generating new markets for both supranational and subnational security, two venues in which naval forces offer unique response attributes. Through its information technology sector, India is becoming a major player in the process of globalization, sporting more millionaires than any country in the world.[2] At some point, it will be asked to give something back, and a visionary internationalist navy will answer the mail nicely—so long as it is good for something other than humping lots of nukes around territorial waters.

3. Make a decision to turn their Navy’s operational focus toward influencing events ashore.  I was both gratified and amazed to hear so many Indian admirals refer to the 1992 white paper, “. . . From the Sea” as a great turning point in naval strategy—gratified because I had a small role in shaping that document, amazed because I always had assumed the Indians looked more to Gorshkov than Mahan. Granted, there was some waxing nostalgic about the “spectacular Soviet Navy,” and more than a few Indian admirals revealed bitterness about Washington’s efforts to “demonize” the Indian Navy because of its old Soviet (and now Russian) ties. But by and large the flags revealed a real admiration for the U.S. Navy’s effort to shift from a blue-water to a littoral focus. Actually, it was almost an envy, simply because the U.S. Navy seems to know what it wants to do once it gains access to “events ashore,” and the Indians have not really made that cognitive leap. They know they want the capability; they just are not sure yet how they would use it. Again, this is because the Indian military acts as though security is something they import, like so many Russian subs, not something they export to the world.

4. Make a searching and fearless inventory of their lack of involvement in recent international coalitions.  In his impressive symposium presentation, retired Indian Navy Rear Admiral K. Raja Menon noted how the Indian Navy has avoided numerous opportunities over the past generation to join multinational maritime coalitions in response to significant regional instabilities (e.g., tanker wars, Iran-Iraq war, Persian Gulf War), even though the Indian Army has long played a significant peacekeeping role in U.N. operations. In short, he argued, the Indian Navy for far too long has pursued an excessively narrow interpretation of the role of navies in regional and international security. As he wryly stated, regional power is a lot like sex appeal: no matter how often India admires itself in the mirror, it isn’t a regional power until outside powers recognize it as such. Or as I would put it, India seems less the regional power precisely because it does not employ its navy in the manner of a sea-based great power. A small power may have regional interests, but only a great power has regional responsibilities.

5. Admit their mistakes in force structure planning.  Despite the scrappy genius of their plug-and-play approach to purchases of foreign platforms and systems, the Indians have not made much of a transition to a post-Cold War naval environment. As some younger officers complained, the Indian Navy still remains far more suited to the sort of open-sea ship battles associated with World War II than to the littoral-focused strategies of network-centric warfare. In a nutshell, the Indian Navy remains an antiship missile in a cruise missile world. It talks a good game on influencing events ashore, but it continues to buy for sea denial. But maybe that is an inevitable outcome from purchasing the bulk of your naval platforms from the world’s great land power.

6. Understand they are a relatively young navy, with the shortcomings that come from a lack of international experience.  I was struck by how many retired Indian flags kept referring to their navy as young, or even adolescent. Despite a naval tradition going back to antiquity, Indian admirals will tell you that their beloved institution still has a lot of growing up to do. In their minds, it takes a century to mature a navy, so February’s grand celebration marked just the rough halfway point to what they dream the Indian Navy is capable of becoming. I could not help but imagine the Indian Navy as a young man who, having been abandoned in his infancy by his father (Royal Navy), was forced to spend his youth with his eccentric aunt (Soviet Navy) but now wants to break out and see the world for himself—or perhaps with his rich, world-wise uncle (U.S. Navy). And if that makes it sound like the Indian Navy has a complex, conflicted, almost love-hate relationship with all three navies, then it is an apt metaphor.

7. Expand their nation’s security paradigm beyond the “sacred soil syndrome.”  This is another golden nugget from Admiral Menon, who describes this “cult of the land forces” as stemming from past wars with China (1962) and Pakistan (1965, 1971). Strangely enough, it is possible to argue that no other state in the world should care either more or less than India about the sanctity of its borders. On one hand, no nation has lost more land since World War II (e.g., Pakistan, Bangladesh). On the other hand, no economy today better demonstrates the “death of distance” associated with information technology—India produces roughly half of the world’s software, literally phoning it in to the rest of the global economy. In New York Times columnist Thomas Friedman’s lexicon, India is at once a leading “lexus” economy (i.e., high-technology producer) and a classic “olive tree” society (i.e., still fighting over seemingly meaningless bits of land).[3] Granted, the sacred soil syndrome is not going to disappear anytime soon, but some strategic balance is needed. And in the military world, such vision can come only from the naval service.

8. Improve their relationships with all small littoral neighbors.  In many ways the Indian Navy would like to supplant the U.S. Navy as the Indian Ocean’s naval, networking Leviathan—the trusted big brother everyone can turn to in moments of trouble. In some ways, this will never happen. By definition, any region’s smaller powers want and need a distant friend who can stand up to the neighborhood bully, and for many small littoral states, India comes closest to fitting that pejorative title. From India’s perspective, they’re damned if they do and damned if they don’t: if they try to act the part of regional hegemon, they will only scare smaller powers into closer reliance on U.S. naval power, and yet in the absence of any productive input, India has a hard time demonstrating to its neighbors that it can play a useful, leading role in enabling regional security. In sum, India possesses too large a navy not to play a bigger stabilizing role in the Indian Ocean—especially as the waterway’s role in world energy transfers increases—but it needs to build relationships of trust with its smaller neighbors slowly over time.

9. Make some amends to regional rivals.  The obvious candidates here are Pakistan and China, neither of which made it to the fleet review, and that’s too bad. Pakistan was not invited, and China refused to come because its ally was excluded. India can build all the “bridges of friendship” it wants across Asia, but so long as those two countries remain quasi enemies or at least heated rivals, it is hard to see India achieving the sort of progressive, stability-enhancing regional role it desires for its growing navy. And again, that’s too bad, for no ocean is in need of strategic stability more than the Indian Ocean, which is arguably the most nuclearized of the seven seas.[4]

10. Make an inventory of the global maritime insecurities they need to play a more prominent role in reducing.  The Indians are fond of pointing out that not only do they sit astride the two most important commercial straits in the world (Hormuz and Malacca), but they also are situated smack dab between two of the most important narcotic centers—the Golden Crescent to the West and the Golden Triangle to the East. Toss in the fact that modern high-seas piracy is especially concentrated in the Indian Ocean and South China Sea, plus all the overlapping sovereignty claims in both, and you have a sizeable security agenda for any would-be regional naval power. And when you get all those houses in order, get ready to tackle environmental damage, rising ocean levels, and altered weather patterns. In sum, India’s growing naval power could be put to good use across a very broad range of regional collective security needs.

11. Seek an expanded navy-to-navy relationship with the world’s sole military superpower.  U.S. naval presence in the Indian Ocean littoral isn’t going away any time soon. There are simply too many states there that want the collective good the U.S. Navy is selling, and it is a trusted brand with a long, solid reputation. If you look at U.S. naval crisis response over the past quarter-century, it is apparent that this area is the Department of Navy’s operational center of gravity. As former Indian foreign secretary J. N. Dixit commented about increased U.S. naval presence in southwest Asia following the Persian Gulf War: “These are the facts of life.” India becomes a genuine naval regional power only in conjunction with the U.S. Navy—not in opposition to it, or even as a marketed alternative. The U.S. Navy is the Microsoft of world navies; it simply sets too many operational standards and protocols to be ignored.

12. Having achieved this awakening from the strategic isolation of the Cold War, carry their new message of internationalism to the world.  This year’s International Fleet Review was a great start. The Indian naval leadership brought me to this star-studded gathering to—as one retired vice admiral put it—“say something about the future to the junior officers in the back of the hall.” But they also brought me to Mumbai, just as they brought all those foreign flag officers, to impress upon me a sense of all they have accomplished in building this navy over the past five decades, and what they hope to do with it in the future. And I did go away impressed, not only with the Indian Navy, but also with the incredible diversity, vibrancy, and ambition that is today’s India.

Why India Matters

As noted diplomat Sashi Tharoor argues, India is probably “the most important country for the future of the world.”[5]  If globalization succeeds in the United States or the European Union, no one will be too surprised. After all, globalization demands less change of these countries than it does of the world around them. And if globalization fails in China or Russia, many likewise will be unsurprised, for it requires much change from both societies—perhaps too much too quickly.

But whether globalization succeeds in India should interest just about everyone around the world. For if globalization can succeed in a democratic society where half the population is illiterate and terribly impoverished, then it can succeed just about anywhere. Conversely, if it can’t succeed in a free-market economy that features the world’s largest pool of information technology workers, then there is little hope for much of the world’s population.

Not too long ago Secretary of Defense Donald Rumsfeld characterized India as a country that is “threatening other people, including the U.S., Western Europe and countries in West Asia.”[6]  In my dealings with Wall Street as part of a Naval War College project on globalization, I have spoken with a number of financial executives about India and its role in the global economy, and naturally I have found quite a different appreciation there.[7] In fact, besides China, there is no country in the world about which there is such a huge gap between how the U.S. security establishment and the U.S. financial establishment view—respectively—the security “threat” and the economic “opportunity.”

India suffers some profound military insecurities—the sort that often derail a society’s best attempts to open itself to the outside world. The Indian Navy is the country’s best near- and long-term instrument for positively asserting itself as a force for both regional and global stability. The Bush administration needs to think seriously about what sort of security relationship it wants with India in the coming years.  Deputy Secretary of State Richard Armitage’s May trip to New Dehli was a huge step in the right direction, signalling an easing of the restrictions on military contacts imposed by the Clinton Administration following India nuclear weapons tests in 1998.  Let’s hope it jump starts a far broader menu of strategic cooperation.

[1] As India’s Defense Ministry spokesman P.K. Bandopadhyay declared, “We are also fully prepared for the deployment of nuclear missiles by them.” See The Associated Press, “Pakistan Planning Fleet With Nuclear Weapons: India Vows to Match Submarine Deployment,” International Herald Tribune, 23 February 2001, p. 1.

[2]  Good estimates vary from 15 to 20 million millionaires. India is estimated to possess a middle class of about 200 million.

[3]  See Friedman’s The Lexus And The Olive Tree: Understanding Globalization (New York: Farrar Strauss Giroux, 1999).

[4]  Among the nuclear powers whose navies ply this ocean are the United States, United Kingdom, France, Russia, China, India, Pakistan, and Israel.

[5]  Sashi Tharoor, India: From Midnight to the Millennium (New York: Harper, 1998 paperback), p. 3. Tharoor actually quotes British historian E. P. Thompson with this phrase.

[6] This quote was run on the front page of The Times of India during the fleet review. See Siddharth Varadarajan, “Stop supply of N-fuel to India, U.S. tells Russia,” The Sunday Times, 18 February 2001, p. 1.

[7] To learn more about the Naval War College’s NewRuleSets.Project and to access its reports, visit us online at <www.nwc.navy.mil/newrulesets>.

Dr. Barnett is a former professor at the U.S. Naval War College, and served as a senior strategic researcher in the Decision Strategies Department of the Center for Naval Warfare Studies. He thanks Professor Bradd Hayes, Professor Hank Kamradt, Rear Admiral Michael McDevitt, USN (ret.), and Dr. Lawrence Modisett for their input to, and feedback on, this article.

Blast from my past: "Top Ten Post-Cold War Myths" (2001)

Top Ten Post-Cold War Myths

by

Thomas P.M. Barnett and Henry H. Gaffney Jr.

As a mobile, sea-based containment force, 
the U.S. Navy will continue to play an 
important role in the nation's foreign policy, 
but its missions will mirror the clustered responses 
in Iraq and Yugoslavia, not the 
obsolete two-major-theater-war standard.

COPYRIGHT: The U.S. Naval Institute, 2001 (February issue, pp. 32-38); reprinted with permission

As we begin . . . 
a new presidential administration, it is time to look over the recent past to see what we have learned about this new era of globalization.  Americans entered the Clinton administration with a lot of hope about an outside world where so many positives had emerged with the end of the Cold War.  The United States was the sole military superpower; what could go wrong?

Depending on whom you listen to, either a lot or not too much.  Those experts who focus on the global economy see plenty to celebrate, but most who track international security see lots of threatening chaos in the world.  How can these views be so different?  Are there no connections between global economics and security? How can the former flourish if the latter is deteriorating? 

We’ll say it up front: we don’t think international security has worsened over the past eight years.  Instead, we think too many political-military analysts—in an attempt to justify the retention of Cold War forces—have let their vision be clouded by a plethora of post-Cold War myths, the biggest of which is the two-major-theater-war (2-MTW) standard.  It was the best strategy placeholder then-Secretary of Defense Les Aspin could come up with to put a floor on force structure, but 2-MTW doesn’t capture the reality of the globalization era, the migration of conflict to the failing states outside that globalization, and the continued technological advances U.S. forces are introducing, which no other country pursues.  In short, it is not connected to the world at all.

In our decades-long hair-trigger standoff with the Soviets, U.S. strategists became addicted to “vertical” scenarios, meaning surprise situations that unfold with lightning speed in a specific strategic environment that is, by and large, static.  By static, we mean all potential participants are expected to come as they are.  No one is really changed by the scenario, and no evolution is possible in their response.  In this poker game, we expected everyone to play the single hand in question straight up: no bluffing, no hedging, and no changes of heart.  In essence, we had to assume the two main players were rational actors.  The only thing that seemed to change in this static picture was the race to add better technology.  We always feared the Soviets had gotten there first, or were about to—a fear we subsequently transferred to the rogues.

This approach made sense in the Cold War, when we had to make certain gross assumptions about how both Soviet Bloc forces and our NATO allies would behave at the outbreak of World War III, but it just does not apply in the globalization era.  If the last eight years have taught us anything, it is that political-military scenarios in the post-Cold War era will unfold “horizontally.”   Situations will evolve over time with few clear-cut turning points, typically lapsing into a cyclical pattern that nonetheless features dramatic differences with each go-around.  Think of our dealings with Saddam Hussein and Slobodan Milosevic and you’ll get the picture. 

In horizontal scenarios, everything—and everyone—is free to evolve over time, meaning positions change, allies come and go, and definitions of the “real situation” abound.  In this strategic environment, sizing and preparing one’s forces according to vertical scenarios isn’t just inappropriate; it is dangerous.  It fosters a confidence in packaged solutions employing packaged forces armed with packaged assumptions—the 2-MTW standard in a nutshell—so that anything else you do with the forces reduces your readiness for those 2 MTWs.

Both the 2-MTW standard and the high-tech wannabes, with their nostalgia for "imminent" Soviet breakthroughs, suffer from slavish adherence to a collection of myths concerning the post-Cold War era.  If we are ever going to move beyond their vertical scenarios to a better understanding of where the military fits in the globalization era, these myths must be punctured and discarded.  Our top ten list of myths is:

10. There are far more conflicts and crises in the world after the Cold War! The number inflation on this one is unreal: suddenly every terrorist shoot-out and ten-person liberation movement is a “low intensity conflict.” When we count the significant conflicts and crises of the 1990s and compare them to those of the 1980s, however, we don’t find the stunning increase some analysts do.  In the 1980s, we see one system-threatening conflict (the Iran-Iraq War), and in the 1990s we see two (Desert Storm, the Congo War—the latter a stretch).  In the 1980s, we count 6 significant state-based conflicts and 24 internal conflicts, compared to 7 and 28, respectively, in the 1990s.^[1]  In sum, we’re looking at an overall increase of 6 cases, or fewer than one a year.  Worth worrying about?  Yes, since internal warfare these days involves failing states and generates lots of refugees.  But a new world disorder?  Hardly.

What political-military analysts should recognize in globalization is a remaking of the international economic order that rewards the most fit and devastates the least ready—in the same society.  In advanced countries, the resulting conflict will be mostly political, but in some developing societies, these horizontal tensions will turn bloody in scattered instances. If you’re looking for a defining conflict, check out Indonesia’s disintegration following the Asian economic crisis.

9. The Soviet Bloc's collapse unleashed chaos!

The myth is that, with the stabilizing hand of the Soviets removed, conflicts have bloomed across the globe. This issue needs to be divided into its constituent parts: Soviet support to the Third World, Eastern Europe, and the former Soviet republics.  In every instance the balance of the news is positive.

Looking at the old Third World, we view the collapse of Soviet assistance as an absolute good.  Central America is certainly quieter for its absence, as is southern Africa as a whole, though Angola still burns.  In the Middle East, Yemen is reunified, Qaddafi has stopped playing the Arab bad boy (for now), and the PLO lost Moscow's support. Granted, Soviet arms beneficiary Iraq reached a use-it-or-lose-it moment in 1990, and went for broke, but the same cannot be said for Syria.  Afghanistan still stinks as a place to live, and Vietnam still goes its own way, but in sum, it's a pretty good deal for global order.

Some people insist on calling Eastern Europe a security vacuum, but the balance is very positive, with the obvious exception of the former Yugoslavia.  But if Gorbachev had come to us 15 years ago and said he could arrange for the collapse of the Warsaw Pact, the peaceful reunification of Germany, and the absorption of several former satellite states into NATO, but the cost would be a bloody civil war in Yugoslavia . . . well, you get the idea.  Moreover, Balkan experts will tell you that Yugoslavia's demise had nothing to do with the fall of the Soviets.  It was a disaster waiting to happen once Tito passed away.

Finally, when looking at the former Soviet republics, we are sobered by events in Chechnya, the rest of the Caucasus, and Tajikistan, but still view the overall evolution as far more conflict free than anyone could have expected. Remember when we feared Russian invasions of the Baltic republics?  Or Ukraine’s imminent Anschluss with Moscow?  Or a wave of radical Islamic fundamentalism sweeping the “Stans?"  (Okay, we are still watching that one.)    Best yet, whatever violence has occurred here has been left to the Russians to figure out—unlike the Balkans.

8. We are swamped with failed states! 

“Failed states” is another label that’s bandied about far too loosely. Reading some reports, you’d think they were spreading like wildfire across the planet.  But there always have been failed states; we just never called them that.  Instead, we used to call the Somozas and Siad Barrés “valued friend” and “trusted ally,” even as we helped to prop up their flimsy dictatorships.  The Russians had a fancier phrase, “countries of socialist orientation,” but that was just Sovietese for flimsy communist dictatorships.

 What defines a failed state in the globalization era is its failure to attract foreign investment.  When none appears, or the leaderships steals it, the same feeble government that somehow muddled through the Cold War with superpower (or French) help now simply collapses.  In the early 1990s, when the United States led what became U.N.-sanctioned interventions into Somalia and Haiti, there was optimistic talk of a new model—namely, the United Nations serving as midwife to these tortured societies’ slippery transition to stable economies and government.  But the ill-supported United Nations proved a poor substitute for a superpower propping up a government with arms and military training.

Of the 36 countries in which internal conflicts occurred across the 1990s, the United States decided—after much angst—to intervene in only four: Somalia, Haiti, Bosnia, and Kosovo.  So why did the decade seem so chock-full of U.S. interventions?   Those four situations accounted for about half of all naval responses overseas and the bulk of the ship days involved in such operations.^[2]  To put it bluntly, advanced countries can safely ignore failed states (except maybe Indonesia), until “those damned Seattle people,” with their silly “values,” embarrass them.

7. Transnational actors are taking over the world! 

This bugaboo must also be disaggregated to make sense of it.  Starting with terrorists, the hype ignores historical data.  According to the State Department’s annual report on terrorism, the phenomenon peaked in the second half of the 1980s, when it averaged 630 international attacks a year.  Then the Soviet Bloc’s support system disappeared and so did much of the terrorism.  Since 1989 terrorists have averaged 382 attacks per year—a 40% drop.^[3]

Drug cartels and Mafia syndicates do not seek to disrupt global economic or political stability, but merely to generate profits. In effect, they desire macrostability within and among nation-states in order to create and exploit microinstabilities—i.e., illegal markets. These criminals are not interested in destabilizing or capturing political institutions, but in influencing them for their own ends. Granted, Colombia represents an odd turn, as the Marxist guerrillas there are now dependent on drug proceeds.  But in general, the drug kingpins prefer to stay out of politics.

The same could be said for illegal aliens, who are looking for economic opportunity. Too rapid a migration can destabilize, but immigration is far from out of control in developed countries: seven out of eight immigrants now settled there arrived legally.^[4]  As for refugees displaced by conflicts, they are by-products of local chaos, and their "transnational" effects largely are limited to the next country over.

Finally, you have to wonder about the tendency of some national security strategists to lump transnational corporations (TNCs) in with this motley crew.  TNCs not only represent the future of the global economy, they also account for the bulk of our 401ks.  Anyway, it is a myth that TNCs act with indifference to their birth nations: every one has a home base, and almost all members of their boards come from that home.  But the big point to remember is that TNCs invest overwhelmingly in countries where there is firm rule of law.

6. Technology proliferation is out of control! 

This myth is sold in two sizes: rogue states and asymmetrical warriors.  The funny thing is, in both instances, everyone usually ends up talking about the same sorry list of old Soviet-client survivors.

With the rogues, the biggest concern is that they are either buying or selling nuclear and missile technology.  We also worry about them developing chemical and biological weapons, but that is not really high-tech anymore (nor have they made any of it work).  Then again, their missiles aren’t state of the art either, as everything passed around this gang tends to use old Soviet technology.   

Now, many of the “new security” types will try to sell you on the notion that missile proliferation is rampant among unspecified “potential adversaries” (their fear mongering would dissolve if they had to say who), but they’re really stretching here.  Over the past decade more countries have just said no than yes. 

Again, it is the four rogues who are proliferating (Libya, Iraq, Iran, and North Korea), and none is really doing very well at it.  This quartet lives off of three suppliers who are in it for the bucks—Russia, China, and North Korea.  U.S. diplomats are all over the three suppliers to join the civilized world of functioning economies, leaving it to the Pentagon to keep the pressure on the rogues.  That does not sound like an out-of-control problem to us.

The “asymmetrical warriors” or “potential adversaries” are implied to exist in vast numbers, although few, if any, have ever been spotted in the wild.  Nonetheless, we are told that all they need nowadays is a credit card and Internet access and voila—almost any dangerous technology can be picked up on e-Bay!  This is the “silver bullet” concept taken to extremes: these warriors are presumed to deftly deny our access to conflicts by negating our high-tech advantage with their Radio Shack stuff.  Meanwhile, we spend on military research and development alone more than what the rogues spend on their entire militaries.

5. China is the new Soviet Union! 

China is not the Soviet Union.  It remains a communist-governed country and retains major elements of a command economy, it mostly decollectivized its agriculture two decades ago and now sports a massive private sector.  This mixed economy makes it unlikely that China will undertake anything like the single-minded military-industrial effort the Soviets made. Moreover, its defense technology is primitive and there are no signs it is embarking on anything like the Soviets’ high-level, concentrated scientific efforts.

China never presumed to offer an alternative world system and has no satellites, although it wants Taiwan back.  Other than that myopic focus, it is fair to say that its relations with other Asian states are still evolving.  China doesn’t aspire to conquer its neighbors and doesn’t pretend to spread communism, but it still worries about Western nations encroaching from the sea, as they did in the 19^th century.

We kid ourselves when we cast China as this century’s Soviet menace.  China desperately needs our direct investment for its skyrocketing energy requirements and our market for its low-tech exports.  

4. Speed is everything in crisis response!

This concept is ingrained in our psyche because of our Cold War fears and the experience of Desert Shield. We have become addicted to speed of response because we are a reactive nation and have a long way to travel to any conflict.  But here is where the world’s sole military superpower may be underestimating its power. 

First, as the world’s Leviathan, what we bring to the table is not so much speed as the inevitability of our punishing power.  The speed demons will counter that we have to rush in precisely because our foe will deny us the access we need to bring all that power to bear.  This is an argument that strings a lot of little fears together into one big phobia:

• The Air Force fears we will be denied access to bases by cowed allies—an improbable scenario if we’re coming to defend them.
• The Marines fear we will have no choice but to perform forcible-entry amphibious landings because we don’t have any allies at all—cowering or not (tell that to the South Koreans).
• The Navy fears it won’t be able to operate in the close-in littoral in a timely manner and without losses, and will thus lose out to . . . the U.S. Air Force. 

Two underlying realities render this debate moot: First, we are living in an age of horizontal scenarios where nothing really comes out of the blue anymore. If we don’t see the crisis coming, it is because we choose not to pay attention.  Second, other than the unlikely cases involving extensive direct attacks on the United States, we are stuck with only surprise attacks by Iraq and North Korea (even China issued the required Notices to Mariners before testing missiles over Taiwanese waters in 1996). Sure, there could be other surprises, but none so system threatening.

Simply put, outside of Iraq or North Korea, administrations no longer have the writ to commit this country to large-scale violence without some sort of debate. The Cold War featured stand-offs with the Soviets (e.g., Berlin, Cuba) where the President was pretty much on his own, but those days—and that dire strategic environment—are long gone.

3. We cannot handle all these simultaneous crises!

At first glance, the Navy looks mighty busy across the 1990s, meaning three to five simultaneous naval responses across multiple theaters for much of the decade.  Look deeper and you see a different picture: lengthy strings of sequential operations clustered around just Iraq, Somalia, Haiti, and Yugoslavia.  Using traditional counting methods, these four situations account for roughly half of all naval responses in the decade.  Almost all the rest were noncombatant evacuations or responses to natural disasters, except for brief shows of force off Taiwan and Korea.

How we interpret the strategic environment determines how we prepare to meet its challenges, and clearly, these “response clusters” represent serious change.  During the Cold War we contained the Soviet Union along the entire breadth of Eurasia, concentrating our permanently stationed forces at such key points as the Fulda Gap and the Korean demilitarized zone.  Meanwhile, the U.S. Navy balanced the Soviet Navy in the Mediterranean, Gulf, and Western Pacific. But the bipolar age, with its unified containment strategy, yielded to a more scattered and shifting sort of containment in the 1990s.  In effect, we think the Somalia, Yugoslavia, Haiti and Iraq represent a new response category: drawn-out minicontainments designed to stabilize individuals regions.

2. We are doing more with less!

Just talking naval forces, ship numbers are down over the 1990s, while responses to situations—measured in the traditional manner—are up.  Behind all this numerology (e.g., a noncombatant evacuation operation counts as much as a Desert Storm), however, lurks a persistent myth: naval forces are therefore grossly underfunded and suffering serious operational strain.  Analysts pushing this argument are simply barking up the wrong tree.

Most of the stress on naval forces comes from the Persian Gulf and our near continuous operations there since 1979.  The Pacific, meanwhile, has been quiet—in terms of responses to situations—for the last quarter century.  Both the Mediterranean and the Caribbean were reasonably busy in the 1990s, but like the Gulf, the bulk of the activity involved one lengthy situation each (Yugoslavia and Haiti).  The numerologists see response totals as way up, but in reality the Navy spent the 1990s focused on just those four big situations. And it was not alone: Navy-only responses dropped from 74% in the 1970s to 35% in the 1990s, the rest being joint or combined.

Amazingly, despite being tied down in the Gulf and working the rest of the world with fewer ships, the U.S. Navy is breaking neither operational nor personnel tempo.  All of the responses are being conducted by regularly deploying ships (Desert Storm is the great exception). Ship schedules are definitely disrupted and some port calls missed.  Speed of advance for some transits has been accelerated, but turnaround ratios for carriers have lengthened.  In sum, we have not needed to deploy ships ahead of schedule, nor are we short a carrier when we really need one. 

In sum, the U.S. military is handling the current response load with dexterity, with the exception of high-demand/low-density assets (e.g., Navy EA-6Bs, Army civil affairs specialists).  But that particular problem only highlights the illogic of centering all our strategic planning on the abstraction known as the 2-MTW standard.

1. All we can plan for is complete uncertainty!

Trying to capture global change by looking at U.S. military history is like looking through the wrong end of a telescope: our interventions are but a thin slice of a much larger reality, most of which is wrapped up in globalization.  Moreover, the military deals mostly with the seamy underbelly of an otherwise pretty good world, which gives it a peculiar perspective.  The biggest global events of the past eight years were the explosive rise of the Internet and international financial flows, the Asian economic crisis, and last year’s Y2K drill, none of which involved the defense community in any significant way.  Instead, the military got stuck largely with watching the store on Iraq, Somalia, Haiti, and Yugoslavia—the losers of the world.

Some like to describe the 1990s as a time of chaos, identifying uncertainty as our new foe. Many take the Clinton administration to task for merely reacting to events and having no coherent foreign policy, as if that were different from previous administrations.  But anyone who lived through the tense and constant confrontations with the Soviet Union should be grateful for this sort of “uncertainty.” 

When we look over these years, we detect a clear routinization of what used to be legitimately described as crisis response, not some growth of uncertainty.  For the Navy, its presence in the Gulf has become routine. Its drug patrols has become routine.  Its presence in the Western Pacific is stabilizing as far as everyone but the Chinese are concerned, but this has practically nothing to do with “responses” since the end of the Vietnam War—thus it is routine.  Even last decade’s clustered responses in the eastern Mediterranean assumed a familiar routine, dragging on for years until Milosevic finally fell.  As for Africa, we have seen this nation and its leadership shy away, passing up lots of opportunities to intervene.

But was there any grand strategy that linked together all these choices? Not really.  And maybe that’s what irks us political-military strategists most: as this circus parade known as globalization winds it ways around the planet, the military is mostly left to clean up what the elephants of the advanced world would just as soon leave behind and forget.   As such, we think it is relatively easy to predict what the U.S. military will be called upon to do over the next ten years: several of these minicontainments plus the usual scattering of minor responses.   

Moving Naval Strategic Planning Beyond Mythology 

The world is not a more dangerous place after the Cold War.  Chaos, it turns out, is not as fungible as we once thought, and uncertainty, like all politics, is local.  But adjusting to this brave new world does not necessarily equate to a reduced role for the military in U.S. foreign policy, especially naval forces.  Rather, it means we now have a broader and more flexible basis on which to plan.  The new national military strategy clearly lies somewhere between our recent extremes—neither matching the Soviet Union nor policing the Soviet-less world.

Finding that middle ground means moving away from the abstractions embodied in the 2-MTW standard.  Simply put, we have gathered enough data points across the 1990s to plot out this decade’s navy, if not the navy after next:  

• It is a naval force that lives in, and deals with, the present world, one that is always likely to afford the United States several opportunities for lengthy, minicontainment operations.  We will not address all of them, but pick and choose as we see fit, with the key determining factor being that situation’s potential disruption of the global economy.
• This force is comfortable with uncertainty, because these response clusters will come and go, meaning multiple operational centers of gravity that shift with time.
• This force plays an important, if largely background role in enabling globalization’s continued advance, especially in developing Asia, by embodying the closest thing the world has to a true Leviathan—the undeterrable, always familiar military giant.
• This navy lacks any real peers and hence can confidently plan for the future, which means staying just enough ahead on technology to discourage the rest of the world from trying to keep up.
• Above all, this naval service should take good care of its ships, aircraft and people, without using them up and exhausting itself.  Outside the Persian Gulf, the world does not need it that much, and when it does, we will have warning time.      

The Navy has moved far enough beyond the Cold War to understand its “new” role in international stability.  If it seems familiar, it is because the base of our operations has remained essentially unchanged, even as the superstructure of the Cold War’s bipolarity came and went.  The U.S. Navy works the watery seam that both divides and links the planet’s northern and southern economic zones.  As these huge civilizations and individual societies bump against one another in the tectonic inevitability that is economic globalization, U.S. naval forces will play an important stabilizing role within this country’s overall foreign policy—that of a mobile, sea-based containment force. 

Response clusters such as Iraq and Yugoslavia will remain a stubborn facet of the future international security environment, representing the essence of the naval forces’ mission.  As such, it is time to end our dependency on abstract planning measures such as the 2-MTW standard, come to grips with the world as we have come to know it, and do right by our sailors and Marines. 

^[1] The 1980s conflicts (31) are Guatemala, El Salvador, Nicaragua, Panama, Colombia, Peru, Grenada, Falklands, Northern Ireland, Poland, Turkey-Kurds, Nagorno-Karabakh, Western Sahara, Libya, Sudan, Chad, Ethiopia, Uganda, Angola, Mozambique, Lebanon, Syria, Israel, Iran-Iraq, Sri Lanka, Burma, Afghanistan, Kashmir, Cambodia, Philippines, and China-Vietnam.  The 1990s conflicts (37) are Mexico (Chiapas), Guatemala, El Salvador, Colombia, Peru-Ecuador, Peru, Haiti, Northern Ireland, Former Yugoslavia, Turkey-Kurds, Georgia, Chechnya, Nagorno-Karabakh, Algeria, Chad, Sierra Leone, Sudan, Liberia, Zaire, Somalia, Ethiopia-Eritrea, Burundi, Rwanda, Angola, Mozambique, Lebanon-Israel, Yemen, Iraq, Tajikistan, Sri Lanka, Afghanistan, Kashmir, Cambodia, Burma, China-Taiwan, Indonesia, and East Timor.

^[2] Somalia accounted for seven responses, Haiti for six, Bosnia/Kosovo for 12 and Iraq for 13.  That’s 38 total, or almost half of the decade’s total of 81 naval responses.

^[3] Find this report at <www.state.gov/www/global/terrorism/1999report>.

^[4] Demetrios G. Papademetriou, “Migration: Think Again,” Foreign Policy, no. 109 (Winter 1997-98), p. 16.

Dr. Barnett is a professor at the U.S. Naval War College, serving as a senior strategic researcher in the Decision Strategies Department of the Center for Naval Warfare Studies.  Dr. Gaffney is a research manager at The CNA Corporation, serving as Team Leader in the Center for Strategic Studies.  Professor Bradd C. Hayes provided valuable feedback.

Blast from my past: "Force Structure Will Change" (2000)

Force Structure Will Change

by

Thomas P.M. Barnett and Henry H. Gaffney, Jr.

COPYRIGHT: The U.S. Naval Institute, 2000 (October issue, pp. 30-34); reprinted with permission

Each service stands to win—or lose— 
depending on what national security visions 
the new administration embraces.  
System visions favor air forces; 
nation-state visions favor naval forces; 
subnational visions favor ground forces

In January 1993, we wrote an article in Proceedings about the election-year debate on foreign policy and its implications for U.S. Navy force structure planning.[1]  The piece later was cited as one of the journal’s best during its 125th anniversary celebration.  Emboldened by such recognition, we decided to update our analysis to see what the Clinton years have accomplished in shaping the major arguments about what sort of crises and enemies we should focus on—and plan U.S. force structure around.

This endeavor might strike some as quixotic (Clinton had no foreign policy and the world is thus a mess!), but we think the debate has faded into an inertia favoring the status quo of incremental modernization, albeit more by trial and error than by grand strategy.  In addition, we think this election’s non-debate on foreign policy demonstrates just how comfortable the public has become with a consensus that the United States is neither the global policeman nor a 911 force—that the U.S. military rather should be a selective enforcer of “mini-containment strategies” against regional troublemakers.

What does that mean for force structure planning?

• Despite calls for full-speed ahead on a revolution in military affairs (RMA), the “creeping incrementalism” approach to modernization is not going away soon.

• The defense budget definitely has a floor, and a yet-to-be-determined ceiling not far above it, and this means stable service shares, which also means each service “transforms” within its own resources.

• The Navy and Marine Corps keep the general course established back in 1992 in “. . . From the Sea”—a warfighting-focused, forward-deployed swarming force that sacrifices some numbers and technology to maintain its day-to-day readiness for quick crisis response.

Incrementalism in the Defense of Force Structure Is No Vice

Wistful Cold War memories have left many U.S. military experts and strategists yearning to continue technological revolutions.  They are alarmed by what has happened in the world in the 1990s, sensing great international disorder combined with confusion in U.S. foreign policy.  The real history is far more benign:

• Bush and his wise men ably wage the Persian Gulf War, leading many to hail a new form of high-tech war.  The administration’s real accomplishments, however, are forming the coalition that fought the war and masterfully riding along with the Soviet Bloc’s dissolution.  The New World Order really is about the North’s advanced countries cooperating in new ways, with the losers of the world relabeled as “rogues.”  Bush and Cheney start the proportional, incremental shrinkage of the Cold War force, and Desert Storm buttresses the Powell Doctrine’s “overwhelming force” concept.  Then Somalia beckons . . ..
• Clinton I interprets Bush’s New World Order too expansively, and plunges into humanitarian interventions where our national interests seem nil.  Instead of focusing on defense relations with allies, his administration plays ambulance to the Third World, turning the doctrinal spotlight on military operations other than war.  Aspin tries to set a floor on force structure in the Bottom-Up Review, but the maintenance costs associated with Cold War readiness standards create a squeeze, especially on procurement.
• Clinton II backs off from the Southern Strategy.  So it is a reluctant “yes” to the Balkans but a quiet “no” to Africa.  The Defense Department refocuses on the fault lines between North and South, and, by playing firewall, settles down to a series of mini-containments that necklace the planet—Cold Warrior reborn as Rogue Warrior.  Aspin’s force levels nearly are reaffirmed in the Quadrennial Defense Review, and the rising costs of sustaining that military squeeze both modernization and force structure.

Across all three periods, each service seeks to adapt itself to the changing security market, though largely through repackaging its product in new “expeditionary” wrappers.  But through it all, each buys—in ever-smaller numbers—those platforms and systems deemed essential to a “full-service” force, meaning one simultaneously:

• Warfighting oriented (ready for two major theater wars)
• Globally engaged and military-operations-other-than-war capable
• High-tech.

As the decade ends, the Pentagon budget features:

• A fairly static top line, as the deficit is cured and surpluses arrive
• Rock-solid service shares
• Continued force structure shrinkage as platform prices and support costs rise. 

In short, despite the hullabaloo about “the” RMA, the supposed brilliance of those “asymmetrical warriors,” and something called network-centric operations, incrementalism still rules force planning.  In addition, if you ask the services what their number one priority is, it’s always personnel and their care.

What might be the alternatives?  We see three competing national security visions, each with a geostrategic focus that favors one service marginally over time.

I. It's the Great Powers, Stupid! 

Those who view the world more as a complex system of security relationships focus on:

• How the advanced countries get along
• Number of “poles” in play (uni-, bi-, or multipolar)
• Whether Russia and China really can be brought into this playpen. 

Geostrategists worry about the big pieces and let everything else fall in line.  Sure, the G-7 runs the economic side of the house, but presidents must lead in these all-important dyad relationships, and they think Clinton played “trade president” to distraction.   This is the cry of George W. Bush’s “Vulcans,” where everything old is to be renewed again—except arms control.  Pointing to proliferation of missile technology that clearly bears the imprint of our old Communist foes, they call for national missile defense, promising (wink, nudge) to protect allies as well.

This camp sees the main foreign policy task of the next decade being the processing of Russia and China into the great power fold on our terms—meaning they learn to play by our rules.  Once the North is in order, the South should fall in line, especially since the rogues would not have anyone of consequence to supply them in their nefarious activities.  However, there is a danger in getting too explicit with Moscow and Beijing about “acceptable behavior.”  While ostensibly trying to consolidate the community of advanced countries, we may end up casting Russia and China into the gap as globalization’s bad boys.

II. Mind the Gap! 

Those who view the world more as an economic system focus on:

• Troublemakers (rogues) who challenge the status quo
• Regional balances of power that might disrupt economic flows
• Other regional disruptions that affect the global economy (e.g., a failing Indonesia).

These risk analysts treat every region with sensitivity for its unique vulnerabilities but calculate U.S. interests primarily along financial lines.  Some countries count in the globally networked economy and others do not.  Instability involving the former must be contained, but that involving the latter can be routinely ignored or treated with palliative measures.

This is the réaleconomik of the second Clinton administration after Somalia.  A successor Gore administration probably would take the same approach.  In this vision, rogues are something for the military to take care of while the rest of the government attends to domestic and international economic affairs.  Countries that disregard markets, such as Iraq and Serbia, will always represent either potential economic disruptions or something to be contained.  So when it comes to missile schemes, there is more support for theater defense than national defense.

This camp sees the main foreign policy task of the next decade being the effective management of the economic and technological gaps dividing North and South.  You keep the North’s economic expansion on track by making sure nothing—and no one—in the South messes it up.  When situations down there get really ugly, you do what you have to, but you avoid serious involvement unless key economic fault lines are involved.  This group also will agonize more about human tragedies in failing states, but they will use U.S. military forces only as catalysts to mobilize other nations’ forces.

III. Leave No Failed State Behind!

Those who view the world as a collection of “tribes” focus on:

• Rising anti-Westernism and the specter of “clashing civilizations,” with key disruptive agents being terrorists and drug traffickers
• Commodity-dependent economies withering away in globalization’s harshly competitive environment
• Societies under siege from destructive transnational forces (e.g., narcotics, AIDS, pollution, climate change). 

These social activists believe that the United States needs to care far more about the world’s “backward” economies, where most of the planet’s births and violent deaths will occur.  Forget your pork barrel Star Wars, and shift funds to something more useful!

It is the cry of Seattle Man, and it finds occasional, if sometimes ironic resonance in the campaigns of Pat Buchanan and Ralph Nader.   Antiglobalization types feel pain erupting all over the world from predatory free-trade practices that expose Old Economy sheep to New Economy wolves.  They have seen the enemy and “they is us!”—the International Monetary Fund, World Bank, and World Trade Organization.  This unlikely coalition sees the adaptation of the global to the local—not vice versa—as the next's decade's main foreign policy task.  The South needs help now, and if it does not get it, it will bring its pain to us—one way or another.  Slowing down globalization’s march also will give much-needed breathing space to the New Economy’s “losers” in the North (e.g., low-tech labor).

Three Visions, Three Militaries

So to sum up the three competing political visions, either the United States concentrates on:

• The North’s advanced-power relationships—system-level vision
• The troubled “arc of instability” between North and South—the unruly nation-state level vision
• The South’s chronic pain—subnational-level vision. 

Admittedly, these are ideal representations that, while reflecting the general thrusts of various elite groups in the United States, offer few firm predictions as to how any one administration would behave once in office.  Anyway, reality usually occupies the mushy middle, where ideal types are rarely to be found. The base case always is continued incrementalism.  Still, it is useful to track how such visions would logically skew force structures to favor one service over another, for it is through such what-iffing that we learn to be careful—lest we get what we wish for.

System visions favor air forces.  The system vision employs the longest, over-the-horizon perspective.  It is concerned with maintaining the United States’ high-tech lead, and that emphasis naturally favors the Air Force as the Future Force.  This approach merges air, space, and cyberspace into a seamless whole, with the operational paradigm being that of system administrator—less warfighting Leviathan and more air traffic controller.  Interventions increasingly are virtualized: we enable or manipulate the combat expectations of others (both allies and foes), but go out of our way to avoid real in-theater presence.  This is the Kosovo air campaign taken to its logical extreme, with force structure planning emphasizing effects-based weapons, stand-off delivery, and networking capabilities.

In this vision, the United States seeks a future of niched advanced-country militaries that play “spokes” to our “hub” (i.e., we worry about major security disruptions and they take the lead on local ones).  The information umbrella replaces the nuclear one, and a Northern Hemispheric Security Zone finally realizes the Vancouver-to-Vladivostok dream of the Baker-Shevardnadze era.  Once joined in interlocking fashion, the North’s countries (United States, other NATO, Japan, Russia, and eventually China and maybe even India) effectively criminalize warfare in the South, policing all such outbreaks as simply “illegal” in the globalized economy.  This is the mergers and acquisition approach to international security—we effectively buy out our competition over time.

Nation-state visions favor naval forces.  The nation-state vision addresses the actual and potential messes created by an Iraq or other unruly state at the North-South boundary, along which much of the advanced world’s lines of communication lie.  It is concerned with maintaining the United States’ capacity to project power rapidly around the world, possibly in a unilateral fashion.  That emphasis naturally favors the Navy and Marine Corps as the Response Force.  This approach blends responses to rogue states and their putative antiaccess/asymmetrical strategies into a littoral strategy, with the operational paradigm being that of the SWAT team.  Coalitions serve as window-dressing during conflicts, but later as an important source of stay-behind, on-the-ground, peace enforcers.  Interventions are increasingly routinized and drawn out into lengthy, sequential containment operations.

This is the Iraqi containment process taken to its logical extreme, with force structure planning emphasizing platform survivability, the capacity for loitering and constant surveillance, and the day-to-day application of discrete force at will—thus to contain any and all challengers to the North’s growing Zone of Peace.  Meanwhile, the South’s Zone of Conflict is largely tolerated because it lies outside the pale of globalization’s New Economy.  In the lexicon of Thomas Friedman, the United States concentrates on making sure the “Lexus” world keeps functioning smoothly, applying military power in those few areas of the “Olive Tree” world where local instability might cross the gap.[2]  This is the outsourcing approach to international security—we do what we do best (high-end, rapid power projection) and then subcontract follow-on operations to local firms.

Subnational visions favor ground forces.  The subnational vision has the shortest and most real-time perspective of never-ending messes that lie outside the community of advanced countries.  It is concerned almost exclusively with keeping the violence “over there,” while adopting the emergency room credo of “treat ’em and street ’em.”  There is no sense of eventual rehabilitation, just a desire to stay on top of the flow by keeping sufficient numbers of boots on the ground, an emphasis that naturally favors the Army and National Guard as the Constabulary Forces.  This approach merges military operations other than war, cooperation with nongovernmental organizations and private voluntary organizations, and U.N.-sponsored peacekeeping coalitions into one big sloppy whole.  All interventions are quagmires on some level, because we always are treating chronic cases.  This is the Haiti humanitarian operation taken to its logical extreme, with force improvements emphasizing logistics, infrastructure restoration capacity, and nonlethal technologies.

In this vision, the United States seeks to prevent a future known as The Coming Chaos, where the South’s bad neighborhoods simply swell beyond capacity and eventually pour into the North’s great gated community.[3]  Some inevitabilities along this path are:

• The development of regional police forces leading to an eventual global one, probably sponsored by the advanced nations cooperating in the United Nations
• The increasing use of mercenaries or contract military personnel in peacekeeping operations
• The evolution of U.S. ground forces toward greater reliance on reserves. 

This is the privatization or divestiture approach to international security: we effectively spin off the military-operations-other-than-war portfolio from the Defense Department, with the Army’s constabulary forces as catalysts for multinational interventions that limit our involvement.

What Really Matters to Key Constituents 

How does the United States choose among these alternatives, if it decides to choose at all? We have talked mostly about the services, because they have to build and manage the forces, but there are many other players: the Office of the Secretary of Defense (OSD), unified commanders, the defense industry, Congress, and the American public.  Practically none of these voices, however, is really engaged in the outside (i.e., economic) world or thinks in grand strategic terms.  They are fundamentally domestic or inwardly looking constituents.

Across the Clinton years, OSD has been scared away from having a focused strategic outlook.  Thus, it has let all strategies bloom in a crowded seedbed, with none emerging to full stature.  In addition, OSD suffers from an internal clash between the acquisition types, who—in cahoots with defense industry—want all the great new technologies, and the bean counters, who struggle with the services in balancing programs under the flattened top line.  In all, OSD is torn among all three visions.

The unified commanders have been searching for a post-Cold War role.  Recently they have begun presenting engagement in a diplomatic vein to justify maintenance of last year’s forces.  The problem is, they don’t know whether to engage more with new states or with old friends.  Distant from Washington, they cling to the past—stridently asking to keep the forces they used to have.  They are torn between the national and subnational visions, not quite knowing which gives them a better play in the game.

For defense industries, survival is most important.  Yet they fight for a limited pot.  They still are the source of innovation in technology, so they naturally favor the system vision.

The Hill thinks about people, bases, and the defense industry—all domestic concerns.  As deliberative bodies of elected representatives, they do not have “strategic vision.”  They repeatedly make clear that “perfect readiness is never having to use the forces overseas.”  They are constrained between the administration’s budget submission and their own budget committees.  If they had a choice, they would buy the system vision, for it means high technology and no messy international involvements.  The marginal upward changes they make to budgets are mostly in this direction, when they are not otherwise concerned with military pay and benefits.

The public is relatively indifferent to these debates.  They are torn between pride in technology and humanitarian concerns about the South.  This leaves them relatively indifferent to the state-level, mind-the-gap, vision.

What This Suggests for Naval Force Structure Planning

The defense community concerned with these debates is a very narrow group, not well connected to the public—and they are split in all three directions.  There is a great opportunity for leadership to clarify direction, but at the same time, there is no clear pressure from the external environment as to what the choice might be.

We know there are constraints that, until broken, mean all strategies cannot be serviced.  These constraints include:

• The top-line defense budget—the prospective (and dubious) federal surpluses all have been allocated by the candidates, with very little additional for defense
• The legacy forces and the personnel that operate them—one of the United States’ great strengths, but a force that constrains innovation and change
• Presence commitments abroad—for the time being, the United States will station nearly 100,000 military personnel in both Europe and East Asia, with maybe 25,000 containing Iraq
• Service shares—in the absence of clear strategic choice, they remain the same. 

As noted, the domestic drivers currently are stronger than the international ones.  Oddly enough, the domestic constituents do not line up strongly on the vision favoring naval forces, even though they enjoy a slight advantage in budget shares.

Naval forces, then, will end up hedging against several strategies—within the cited constraints.  They cannot afford the forces they have right now, much less to recapitalize them at the pace and to the extent they want.  They may well have to give up a little on both input (less of the most advanced technology) and output (more shrinkage in force structure), but this still leaves them in a great position to support the mind-the-gap vision as the United States’ premier Response Force.

^[1] Thomas P. M. Barnett and Henry H. Gaffney, “It’s Going to Be a Bumpy Ride,” U.S. Naval Institute Proceedings, January 1993, pp. 23-26.

^[2] See Thomas L. Friedman, The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar Straus Giroux, 1999). 

^[3] Read anything by Robert Kaplan and you’ll get the general picture.  See The Coming Anarchy: Shattering the Dreams of the Post Cold War (New York: Random House, 2000); or his The Ends of the Earth : From Togo to Turkmenistan, from Iran to Cambodia, a Journey to the Frontiers of Anarchy (New York: Vintage Books, 1997).

Dr. Barnett is a professor at the U.S. Naval War College, serving as a senior strategic researcher in the Decision Strategies Department of the Center for Naval Warfare Studies.  Dr. Gaffney is a research manager at The CNA Corporation, serving as Team Leader in the Center for Strategic Studies.  They would like to thank Professor Bradd C. Hayes for his feedback on an earlier draft of this essay.

Blast from my past: "Life After DoDth or: How the Evernet Changes Everything" (2000)

[Note:  This is the first published reference to the concepts that became the SysAdmin and Leviathan forces]

Life After DoDth or:

How the Evernet Changes Everything

by

Thomas P.M. Barnett

COPYRIGHT: The U.S. Naval Institute, 2000 (May issue, pp. 48-53); reprinted with permission

The relevance of DoD has declined steadily since the end of the Cold War.  Coming to grips with its passing won't be easy, but the Navy is working through the five stages of grief and toward a future in cyberspace.

First the unpleasant truth:

the Department of Defense's raison d'être died with the Cold War.  No one likes to talk about it, but that's what happened.  Created in the National Security Act of 1947, the DoD is wholly a creature of what eventually became the United States' hair-trigger during the nuclear standoff with the Soviet Union.  Prior to that, we basically stuck to the Constitution's mandate to "provide and maintain a Navy" on a constant basis and to "raise and support Armies" as the situation demanded.

The Cold War's odd combination of nonwar (we never fought the Soviets) and nonpeace (we constantly mixed it up in proxy conflicts and arms races) forced the merging of our republic's two historically distinct security roles:

• Maintain and protect our economic networks with the outside world
• Defend against direct threats to our national territory.

The two functions became one in the Cold War strategy known as containment, when we decided to extend our sense of territorial integrity to the entire Free World, thus subordinating economic rationales to security imperatives.[1]

But that strategy died with the start of the globalization era. Now, security rationales are subordinate to economic imperatives.  So why haven't we seen, as Joseph Nye might say, the "return of history" in the U.S. national security establishment?[2]  Why haven't we repealed the 1947 National Security Act and thrown away this outmoded unification of two defense concepts that constantly compete against one another—to the detriment of both?

I'm not saying jointness is a bad idea.  I'm saying it's the worst possible idea, precisely because it papers over the huge functional cleavages that logically separate the Army and Navy, leaving the Air Force to its own sad form of service schizophrenia.[3]

But I'm getting ahead of myself.  If we are going to come to grips with this death in the family, we will need to go through all the phases Elisabeth Kubler-Ross laid out in her seminal book, On Death and Dying:

1. Denial and isolation
2. Anger
3. Bargaining
4. Depression
5. Acceptance (followed by Hope).[4]

The good news is that we've spent most of the 1990s flailing away at the first three; we're beginning to see symptoms of the fourth (depression, otherwise known as the shipbuilding and conversion account); and acceptance (e.g., the Secretary of the Navy's search for a "transformation strategy") seems just around the corner.  And hope?  That's the Evernet part—a back-to-the-future outcome that represents the Navy's salvation and return to its historical roots.  But before we jump ahead, let's review the purgatory that was the 1990s.

Denial & Isolation

For this part, I'll use Kenneth Waltz's "three images" framework from his influential 1954 study, Man, the State and War, in which he investigated the causes behind interstate war across three distinct levels (see Figure 1):[5] 

1. Individual
2. State
3. International system.[6]

In the Cold War, things were fairly straightforward, as both the international system (through blocs) and individuals (through ideologies) were kept in strict subordination to the state-centered superpower conflict.  So when the Pentagon looked abroad, all it saw was "us" and "them" states, with that pesky nonaligned gang in between.  The focus on states remains to this day.  I call it the "Willie Sutton effect," after the famous bandit who, when asked why he robbed banks, replied, "Because that's where the money is."  Nation-states have long served as the preeminent collection point (i.e., taxes) for collective security efforts (militaries), but that has begun to change.

The United States has not yet adjusted its state-centered defense policy to account for the two biggest security trends of the globalization era:

• Power and competition have shifted upward, from the state to the system (in the form of the global economy, culture, and communications grid).
• Violence and defense spending (e.g., small arms races, private security firms) have shifted downward, from the state to the individual.

Worldwide state defense spending and arms transfers are down dramatically from their 1987 Cold War peaks, leaving the DoD in denial about its growing disintermediation from the global security environment—in other words, its almost complete irrelevancy to the rising market of system perturbations (e.g., financial crises) and its perceived impotence in responding to the booming market of civil strife.  Meanwhile, other international and private organizations increasingly step in to provide the same sort of ground-floor chaos containment that was DoD's bread and butter during the Cold War.

Nothing signals DoD's growing isolation more than its continued insistence on focusing so much planning on the so-called rogues, who, when stacked on top of each other, don't amount to a hill of beans in this strategic environment of rapid globalization. And yet, what is the hot security topic as the new millennium dawns?  National missile defense, of course!

So where can a military fit in this new global environment, where almost all the important crises are either too global or too local for most states to tackle with military force?  In a world featuring both integrating globalization and dis-integrating localization, the great challenge facing governments is fostering compromises between the two, otherwise known as glocalization—adapting the local to the global in ways that improve the former's living standards.  Naturally, this can be fairly contentious, with many societies resisting what Thomas Friedman calls "revolution from beyond."[7]

In short, glocalization is the containment of the globalization era—sort of a dot.communism, love it or leave it.  If you have a hard time thinking of how DoD fits into a U.S. foreign policy focused on promoting this nebulous concept, then you're beginning to move into . . .

Anger

The best example of post-Cold War anger comes from the Department of the Navy, which became so mad after its "poor showing" in the Persian Gulf War that it immediately struck out in search of a post-Cold War vision.  With the Soviet blue-water navy speeding toward the dustbin of history, it was Desert Storms for as far as the eye could see.  Right?

Many of us "best and brightest" were thinking exactly that when we assembled in late 1991 for the Naval Force Capabilities Planning Effort, which eventually begat ". . . From the Sea."  Faced with a system-level security environment in which the United States reigned supreme and a subnational one in which it seemed like all hell (i.e., ethnic bloodletting) was breaking loose, most of the assembled officers expressed disgust for the dilemma the Department of the Navy faced—namely, with sea control a given, it was either "influence events ashore" or wait for a peer competitor.

Not surprisingly, we chose the former and quickly replaced the Soviets with the best enemy we could get our hands on at the time—the Air Force.  Given that Washington's way of using the Air Force for crisis response (bomb first, talk later) correlates best to the mini-Hitler type exemplified by Saddam Hussein and Slobodan Milosevic, the bureaucratic stage was set for a decade-long Navy-Air Force face-off on who could deliver the most crushing blow the fastest—or at least a sexy PowerPoint briefing "proving" the same.

The problem with our choice?  Over the course of the 1990s, it became clear that "bolt from the blue" regional crises were hardly the norm.  The large majority of DoD's crisis-response activity involved Somalia, Haiti, and the Balkans (not to mention the Saddam sequels), and not only weren't they bolts from the blue, not a single one involved an enemy of stature.  Our one encounter with a "near peer" (China over Taiwan) was mere shadow boxing—a virtual conflict befitting a virtual age.

So, after redirecting itself to battling serious hegemons, the Navy spent the entire decade doing almost anything but.  Meanwhile, the Marines chased their particular vision of the "three block war," and both Army and Air Force reconfigured to accommodate their increasingly robust military operations other than war (MOOTW) market shares.[8]

In short, the 1990s have left the Navy in a post-DoDth limbo: it buys one navy (high-tech, which drives down numbers) while operating another (global presence force, which needs big numbers).[9]   By trying to cover both bets while competing with the Air Force on rapid response, the Navy has channeled its post-Cold War anger into a negotiating stance on force structure it cannot sustain, which gets us to . . .

Bargaining

The contours of the Navy's bargaining are best captured by Hank Gaffney's notion of the "Three-Way Stretch," which basically states that the U.S. military, and the Navy in particular, is killing itself trying to cover all three slices of DoD's now highly fragmented market.[10]  Unable to move beyond DoD's functional demise, the Navy ends up replicating its death spiral, and to me, that's throwing the baby out with the bathwater.

Using Waltz's three levels as touchstones, I paraphrase Gaffney as follows:

• On the system level, the Navy works hard to maintain its high-tech edge against would-be peer competitors capable of generating global instabilities.  This is the future force of "silver bullets" and networked technologies, featuring deep strike and emphasizing speed.  It is your basic research-and-development Navy, and it's very expensive.
• On the state level, the Navy struggles to maintain its bread-and-butter warfighting edge against would-be rogues capable of triggering regional instabilities.  This is the surge force full of sealift and blue-green power projection, featuring anti-antiaccess stratagems and emphasizing inevitability.  It's your Navy held to the two-major-theater-war standard, and it takes a lot of care and feeding.
• On the individual level, the Navy labors mightily to maintain its operational edge against a world of so-called transnational actors capable of instigating all manner of civil strife and nefarious activities.  This is the presence force of many platforms and MOOTW skills, featuring military-to-military ties and emphasizing operations tempo.  It's your see-the-world Navy, and it wears out faster than you think.

If all that sound like too much, it is.  The Navy's stretch not only leaves the institution increasingly exhausted but also drives its never-ending search for a grand unifying theory that will somehow result in a high-tech navy of robust projection capabilities and manned by a smaller, smarter workforce that is easier to retain.  Network-centric warfare is the theory du jour, but it will never go the distance so long as it aspires to be all things to all threats.

Just tracking the title inflation of the Department of Navy's white paper gives you all the macrostrategic data you need to make the case on overreach:

• First it was just ". . . From the Sea," which seemed simple enough.  We'd be a power-projection navy that influenced events ashore.
• Then it ballooned into "Forward . . . From the Sea," lest anyone think we weren't still the be-everywhere-all-the-time navy.
• Now we pump up the volume still more to "Power and Influence . . . From the Sea," just to make it clear that we'll remain hypertech, too.

But as any psychologist will tell you, the Superman Syndrome leads to overload, then to breakdown, and finally to . . .

Depression

It is depressing to be a sailor today—and DoD has the polling data to prove it.  Maritime service is simply too draining, too demanding, and not enough fun.  Worst yet, we are not attracting—much less keeping—the best and the brightest needed to bring network-centric warfare to reality.

A key reason it is becoming so hard to attract new talent to the Navy is that young people increasingly perceive it as a career cul-de-sac.  They want to be part of something that's growing toward a brighter future, and they just don't see one in the works for the Navy.  And they're right.

Eventually, the Navy will succumb to the strain of the three-way stretch, and when it does, it will be forced into the same box it climbed into in  ". . . From the Sea"—a state-focused crisis-response strategy.  What's wrong with that?  Plenty.

Harkening back to Waltz's three levels, power and competition migrate upward from the state to the system, and violence and defense spending migrate down to the level of the individual.  This pushes the nation-state more into the role of a relationship and information broker and away from the industrial era's resource and power brokering, signaling the advent of what Richard Rosecrance calls the "virtual state."[11]  Or, as Thomas Friedman says, globalization isn't about bigger or smaller government but about better government.[12]

But no matter how you describe it, future conflicts won't be concentrated at the level of nation states but rather at the supranational and subnational levels, where globalization and localization collide.  Sure, some Lenin-after-next may figure out how to turn all that individual anger at the system into political revolution, and yes, the information age is likely to spawn the Next Ideology, just as the Industrial Age did [13]—but these new political movements won't concentrate their strategies at the nation-state level but rather will aim above (international organizations seeking new rule sets for the global economy) or below (microstate collections of individuals looking to drop out and go it alone).

So what happens to the Navy and its sister services?  You'll see a clear division of labor emerge, with each given its own corner of DoD's highly fragmenting market:

• The Air Force becomes the future high-tech force that rules air, space, and cyberspace and plays "system administrator" to the global security environment.
• The Navy and Marine Corps become the classic surge crisis-response force that separates belligerents in state-on-state war and punishes would-be hegemons who break the rules.
• The Army becomes the boots-on-the-ground, day-to-day, low-tech presence force that works in those offline regions where backward types still fight over little bits of land.

Sound okay?

Not by my way of thinking, for I see the Air Force's market as booming, the one on which the U.S. government focuses a lot of attention trying to keep virtual systemic crises—usually triggered by financial tumults—from blossoming into real conflicts among states.  In comparison, although the Army's market probably won't grow, it is historically stable.  Globally there have been a good three to four dozen conflicts every year since World War II that generate 1,000 or more casualties.[14]  And while these conflicts are real, U.S. interests tend to be virtual, affording us the flexibility to choose the ones we want to deal with (e.g., Bosnia and Kosovo) and to turn a blind eye to those we don't (e.g., Rwanda and the Congo).

Meanwhile, the Navy and Marines' market will slowly dry up.  The early 20th century's high volume of state-on-state warfare will not carry over into the 21st.  Nuclear weapons ended great power-versus-great power warfare back in 1945, and as John Keegan predicts, the future belongs far more to civil strife than traditional war.[15]

But there is hope, especially once you move toward . . .

Acceptance

Security in the future will a lot broader than anything a one-stop DoD can provide.  The signs are all around us:

• The biggest system instability of the 1990s—the global financial crisis of 1997-98—showed who is really in charge of deterring international chaos:  the Department of the Treasury, the Federal Reserve, and the International Monetary Fund.[16]
• The Y2K Problem, described as the biggest global management challenge since World War II, saw DoD play a minor supporting role to corporate turnaround specialist John Koskinen's star turn, signaling a new era in government-industry cooperation on computer security.[17]
• The G-7 expands to G-8 and now to G-20, leaving the United Nations, NATO, and the rest of the politico-military alliance system in its wake while demonstrating the supremacy of economics in creating summit opportunities today (transforming arms control into the "Waldo" of the international scene).

In general, more and more of DoD's assumed "lesser includeds" (terrorism, computer hacking, electronic warfare) are being reclassified by an increasingly net-aware Washington as global law enforcement areas, with the relevant federal agencies aggressively building networks of international cooperation, buttressed by a worldwide explosion in private security firms.  Increasingly, when one scans the international security environment's to-do list, DoD looks like a cyber-age dinosaur.

I see merit in the efforts of the Secretary of the Navy and others to plot out a "transformation strategy," but transform to what?  Too much of what I see coming out of the Pentagon today seems hopelessly focused on future high-tech shootouts among trade-bloc-toting hyperpowers.  I'll hold open the possibility that Globalization II (1946 and counting) could disintegrate in ways similar to Globalization I (1870-1929), but we need a game plan that covers both the mother-of-all-global-financial-meltdowns scenario and the far greater likelihood that it is the international security environment itself that is being revolutionized and not merely DoD's increasingly irrelevant tool kit.

Better yet, we need two separate game plans.  Accept that notion—and with it the functional demise of DoD—and the Department of the Navy finally moves out from the Cold War's shadow and into the light of the globalization era.  We are going to have to make the break sometime, so why not talk about it openly and plan ahead?

The Coming Evernet

The planet is undergoing a broad economic transformation that is loosely described as the rise of the New Economy.[18]  This jarring makeover of virtually every business model we hold dear is exemplified by the astonishingly global spread of the Internet and e-commerce.  But that is just the tip of the iceberg in DoD's path, for whenever economics changes, politics must follow.

The defining achievement of the New Economy in the globalization era will be the Evernet, a downstream expression of today's Internet, which most of us still access almost exclusively through bulky desktop personal computers anywhere from a few minutes to several hours each day.  Over the next ten or so years, this notion of being "online" versus "offline" will completely disappear, because of:

• The computing industry moving to molecular-based computer circuitry
• The breaking up of the desktop computer's functions into a myriad of tiny gadgetry that humans will wear or have embedded throughout their living spaces and work environments—and ultimately even their bodies via nanotechnology
• The maturation of ultra wideband wireless technologies that link all of these sensors, gadgets, satellites, computers, and grids
• The continued development and extension of the earth-based portion of the Global Information Infrastructure (GII), especially the so-called last mile
• The coming revolution in near-space (earth-to-moon) information infrastructure—quadrupling of satellites by 2010, then vast waves of nano/picosatellites—that provide real-time wireless coverage across the entire planet
• The migration of vast portions of human commerce, social, educational, religious and political activity to the Internet and World Wide Web, which come to encompass all current personal and mass communication media.[19]

In other words, we go from today's limited-access Internet to an Evernet with which we will remain in a state of constant connectivity.  We will progress from a day-to-day reality in which we must choose to go online to one in which we must choose to go offline.  This is not some distant fantasy world.  Almost all the technology we need for the Evernet exists today.  It mostly is just a matter of achieving connectivity.

The rise of the Evernet will be humanity's greatest achievement to date and will be universally recognized as our most valued planetary asset or collective good.  Downtime, or loss of connectivity, becomes the standard, time-sensitive definition of a national security crisis, and protection of the Evernet becomes the preeminent security task of governments around the world.  Ruling elites will rise and fall based on their security policies toward, and the political record on, the care and feeding of the Evernet, whose health will be treated by mass media as having the same broad human interest and import as the weather (inevitably eclipsing even that).

Eventually, the Evernet and the Pentagon will collide, with the most likely trigger being some electronic Pearl Harbor, where DoD is unmasked as almost completely irrelevant to the international security environment at hand.[20]

The result?  DoD will be broken into two separate organizations:

• The Department of Global Deterrence (DGD), to focus on preventing and, if necessary, fighting large-scale conventional and/or weapons-of-mass-destruction-enhanced warfare among nation-states
• The Department of Network Security (DNS), to focus on maintaining the United States' vast electronic and commercial connectivity with the outside world, including protection and large-scale emergency reconstitution of the Evernet, and to perform all the standard crisis-response activity short of war (with a ballooning portfolio in medical).

In effect, we will split DoD into a warfighting force (DGD) and a global emergency-response force (DNS), with the latter aspiring to as much global collaboration as possible (ultimately disintermediating the United Nations) and the former to virtually none.  To put it another way, DGD is deterrence; DNS is assurance.

Who gets the "kids" in this divorce?

DGD includes:

• U.S. Army (ground & armored)
• U.S. Air Force (combat)
• U.S. Navy (strategic)

DNS includes:

• U.S. Army (airborne)
• U.S. Air Force (mobility and space)
• U.S. Marine Corps
• U.S. Navy (rest)
• Air/Army National Guards.[21]
• DNS also picks up the U.S. Coast Guard, U.S. Agency for International Development, U.S. Information Agency, U.S. Customs, and a host of other specialized units from other federal agencies (e.g., Justice, Treasury).

DNS will discard the traditional notion of military service separate from civilian life.  For most personnel, it will adopt a consultancy model, whereby the agency rents career time versus buying entire lifetimes (essentially the National Guard model).  DNS's officer corps will remain career managers, but with frequent real-world tours of duty in technology, industrial, and business fields.  This organization will be networked in the extreme, because networks will be what it is all about.  This means no separate legal system and the end to posse comitatus restrictions.

New Rules for a New Navy

This vision of the future probably will strike many as far too revolutionary, and much of what I describe is admittedly beyond the current bureaucratic purview of a Secretary of Defense, Chief of Naval Operations, or Commandant of the Marine Corps.  Nonetheless, there are steps the Department of the Navy can take to position itself for what lies ahead:

• Focus on conflict paradigms favoring the many and the cheap over the few and the costly.[22]
• Focus network-centric warfare on crisis prevention and termination, leaving high-end conflict to others.
• Reach out to and build cooperation with all federal agencies that provide system- and individual-level security services; use military-to-military programs to do the same abroad.
• Accept that external information-technology networking is more important than internal networking (no LAN is an island).
• Get involved in global information infrastructure security efforts in every way possible.
• Get involved in space control in every way possible.
• Go as lean as possible on sea control, freeing resources for space and cyberspace.
• Rethink aircraft carriers and attack subs into cyber-age motherships, but everything else is up for grabs.[23]
• Recast naval information warfare to focus more on generating and reconstituting networks than on taking them down.
• Don't indulge the naval strategic community, for they must eventually leave the nest.

Hope for the Afterlife

When Encarta first appeared on the scene a few years ago, Encyclopedia Britannica blithely brushed off the notion that this upstart could ever threaten its position as the preeminent marketer of English-language reference compilations.  After all, Encyclopedia Britannica was the industry standard—the best seller of hard-copy reference material marketed directly to households.

At first, Encyclopedia Britannica simply could not imagine being disintermediated from its customer base, because it simply could not reimagine themselves as anything but the seller of hard copies.  Today, Encyclopedia Britannica is on the web, practically giving away the same information for which it previously charged so much.  Apparently, they finally reimagined themselves into some new and different—perhaps just in time.

So ask yourself, Department of the Navy, what is it that you really do?  Are you just ships and sea control?  Can you remember life before DoD?  Can you imagine a sweet hereafter?  And what you would do once you got there?

The Navy's new holy trinity is sea, space, cyberspace.  I suggest we all start worshipping today.

[1]    Extending the nuclear umbrella to both Western Europe and Japan is the best example of our redefinition of territorial integrity. The Marshall Plan, the promotion of a military-industrial complex, and the severe restrictions on trade with the East Bloc are just some of the examples of subordinating economics to security.

[2]    Joseph S. Nye, Jr., "In Europe, The Return of History," The New York Times, 26 November 1989. 

[3]    Examples of USAF schizophrenia are found in its internal debates over manned versus unmanned, air versus space, bombers versus fighters.

[4] Elisabeth Kubler-Ross, Elisabeth, On Death and Dying (reprint, New York: Collier, 1997).

[5]    A version of this slide first appeared in my The U.S. Marine Corps and Non-Lethal Weapons in the 21st Century: Annex B—Briefing Slides, Quick-Response Report 98-10 (Alexandria VA: Center for Naval Analyses, September 1998).

[6]    Kenneth Waltz, Man, the State and War (New York: Columbia University Press, 1954).

[7]    Thomas L. Friedman, The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar, Straus and Giroux, 1999), ch. 8.

[8]    Military operations other than war, which I define broadly as all operations short of war—meaning, if it ain't called a "war," it's a MOOTW.  The Air Force's reconfiguration is seen in its reorganization into air expeditionary forces, and the Army's comes in its moves to go as light and mobile as possible. We can argue whether either service made the moves willingly or under duress, but they clearly are adjusting to changes in their respective "markets."

[9]    For analysis of this notion, see Henry H. Gaffney Jr., Thomas P.M. Barnett, and Micky Tripathi, Three Visions of the Future With Corresponding Naval Force Structures, Annotated Briefing 95-100 (Alexandria VA: Center for Naval Analyses, October 1995).

[10]    H. H. Gaffney, "Alternative Evolutions of U.S. Forces," CNA, 99-1364, Working Paper of December 1999.

[11]    Richard Rosecrance, The Rise of the Virtual State: Wealth and Power in the Coming Century (New York: Basic Books, 1999).

[12]    Friedman, The Lexus and the Olive Tree: Understanding Globalization, ch. 7.

[13]    On these speculations, see Graham E. Fuller, "The Next Ideology," Foreign Policy, Spring 1995, pp. 145-58, and Fred C. Ikle, "The Next Lenin: On the Cusp of Truly Revolutionary Warfare," The National Interest, Spring 1997, pp. 9-19.

[14]    Thanks to Art Money, ASD C3I, for this observation.

[15]    See "War Ca Change: The End of Great Power Conflict," Foreign Affairs, May/June 1997, pp. 113-116.

[16]    See Joshua Cooper Ramo, "The Three Marketeers," Time, 15 February 1999, pp. 34-42.

[17]    Look for future international computer security regimes to be even more industry dominated, as network-monitoring services outgrow the military and large corporation markets to encompass e-commerce and the Internet as a whole.  The security model here?  ADT Security Services—the home burglar alarm company.  See John Markoff, "Beyond Computers in Computer Security," The New York Times, 3 April 2000.

[18]    The best description of the New Economy is found in Kevin Kelly's New Rules for the New Economy: 10 Radical Strategies for a Connected World (New York: Viking Penguin, 1998).

[19]    For an excellent and imaginative description of this future reality, see Michael Vlahos, "Entering the Infosphere," Journal of International Affairs, Spring 1998, pp. 497-525.  The proposed merger of AOL with Time Warner is a serious first step in the direction of the Evernet.

[20]    Thanks to Dave Freymann for the idea of the "electronic Pearl Harbor." For the briefest hint at this future, see Thomas L. Friedman, "Boston E-Party" The New York Times, 1 January 2000.

[21]    See Thomas P.M. Barnett and Henry H. Gaffney Jr., A Critique of the National Defense Panel Report, Occasional Paper (Alexandria VA: Center for Naval Analyses, April 1998).

[22]    See Thomas P.M. Barnett, "The Seven Deadly Sins of Network-Centric Warfare," U.S. Naval Institute Proceedings, January 1999, pp. 45-47.

[23]    I applaud VAdm. Arthur Cebrowski's effort to reimagine surface combatants via the Streetfighter concept.  See VAdm. A.K. Cebrowski, USN, and Capt. Wayne Hughes Jr., USN (Ret.), "Rebalancing the Fleet," U.S. Naval Institute Proceedings, November 1999, pp. 31-34.

Dr. Barnett is a senior strategic researcher at the U.S. Naval War College.  Visit him at www.geocities.com/ResearchTriangle/Thinktank/6926.  He would like to thank John Dickmann, Dave Freymann, Hank Gaffney, Bradd Hayes, Hank Kamradt, Lawrence Modisett, Pat Pentland, and Mitzi Wertheim for their feedback on earlier drafts of this essay.

Blast from my past: The Seven Deadly Sins of Network-Centric Warfare

The Seven Deadly Sins of Network-Centric Warfare

by Thomas P.M. Barnett

COPYRIGHT: The U.S. Naval Institute, 1999 (January issue, pp. 36-39); reprinted with permission

Most of us . . . read Vice Admiral Art Cebrowski's seminal 1998 Proceedings article on network-centric warfare (NCW), and if some detected a confidence too bold, that is only to be expected.  Visions of the future invariably rankle, especially when they seem inevitable.  Quoting Liddell Hart, "The only thing harder than getting a new idea into the military is getting an old one out," Admiral Cebrowski and coauthor John Garstka threw down the gauntlet and dared anyone to prove them wrong.

Would that I could, but the best I can muster is a devil's advocate take on what I see as network-centric warfare's seven deadly sins.  Note that I don't say "mortal sins."  As with any transgression, penance can be made.

1. Lust

NCW Longs for an Enemy Worthy of Its Technological Prowess

If absence makes the heart grow fonder, network-centric warfare is in for a lot of heartbreak, because I doubt we will ever encounter an enemy to match its grand assumptions regarding a revolution in military affairs.  The United States currently spends more on its information technology than all but a couple of great powers spend on their entire militaries.  In a world where rogue nations typically spend around $5 billion a year on defense, NCW is a path down which only the U.S. military can tread.

Meanwhile, our relatively rich allies fret about keeping up, wondering aloud about a day when they won't be able even to communicate with us.  These states barely can afford the shrinking force structures they now possess, and if network-centric warfare demands the tremendous pre-conflict investments in data processing that I suspect it does, then the future of coalition warfare looks bleak indeed.  Not only will our allies have little to contribute to this come-as-you-are party, they won't even be able to track the course of the "conversation."

As for potential peer competitors, forget about it—and I am not just talking money.  I am a great believer in the "QWERTY effect," by which technological pathways are locked in by market victories of one standard over another.[1]   No one would argue against the notion that the United States is QWERTY Central, or that our military feeds off that creativity.  So the reality facing, any potential enemy is that he either has to get in line behind our QWERTY dominance or satisfy himself with chintzy knockoffs from our far-distant past.  So when Iran gets itself some North Korean missile technology, let's remember that it is only a poor copy of old Chinese technology, which is a poor copy of old Soviet technology, which is a poor derivative of old Nazi-era German technology—and, as everyone knows, our German scientists were better than their German scientists!  This is why proliferation is always a lot slower than suggested by too many hyperbolic experts.

Once you get past the potential peer competitors, you are entering the universe of smaller, rogue enemies that many security experts claim will be able to adapt all this information technology into a plethora of brilliant asymmetric responses—the Radio Shack scenario.  Frankly, it stretches my imagination to the limit to conjure up seriously destabilizing threats from resource-poor, small states, unless we let our lust for a bygone era distort our preparations for a far different future.

2. Sloth

NCW Slows the U.S. Military's Adaptation to a MOOTW World

Military operations other than war (MOOTWs) are the closest thinly to a sure-bet future the U.S. military faces right now, and network-centric warfare does not yet answer that mail.  Beyond the affordability issues, there is the larger question of what "networked" should mean for the U.S. military:  Wiring-up among ourselves?  Or wiring ourselves up more to the world outside? 

This is not an esoteric question for naval forces, because I see a future in which the establishment of, and support to, information networks is the crucial U.S. naval product delivered overseas to internal crises, where confusion, complexity, and chaos are the norm.  We are far more likely to be called on to be the deliverers of clarity and context than sowers of blindness and vertigo, and we are far more likely to be asked to settle down all sides in a conflict than to decimate one particular side.  This is where NCW's "lock-out" phraseology misleads: we will be interested in opening up pathways to resolution, not closing down pathways of conflict.  That reality speaks to non-lethal approaches, reversible effects, and keeping open the channels of communication.

Increasingly, naval forces will be called on to serve as a "node connector," rather than a "node destroyer."  I am talking not only about bringing crisis-involved regions back on line, but also about the military acting as Network Central for the wide array of U.S. and international agencies that populate any U.S.-led response to complex humanitarian emergencies.  Just as important as our ability to talk among ourselves during, the generation and coordination of large-scale violence will be our ability to generate and coordinate the conversations of many outsiders in the prevention of small-scale violence.

Correctly focused, network-centric warfare would allow the U.S. military to come into any crisis situation and establish an information umbrella to boost the transparency of everyone's actions.  Incorrectly focused, it might hamstring us along the lines of the Vietnam War.  In sum, NCW's quest for information dominance is self-limiting in an era that will see the U.S. military far less involved in network wars than in mucking around where the network is not.

3. Avarice

NCW Favors the Many and Cheap; the U.S. Military Prefers the Few and Costly

Many experts rightly claim that network-centric warfare is nothing new as far as the U.S. Navy is concerned.  By its nature, our worldwide, blue-water Navy always has been a networking environment.  Of all the major services, it should find the onset of NCW least discombobulating.  But it is no secret to anyone who has followed Navy force structure decision making this decade that we consistently have sacrificed ship numbers to technology, even as we decry the resulting stress on operational tempo and global presence. 

What we are ending up with is a Navy poorly situated for an NCW era in which the network's crucial strength is its flexibility to degrade gracefully.  Some point out that cruise missiles and unmanned aerial vehicles are good fixes because they allow surface combatants to operate in a standoff mode.  But the future fleet cannot consist of a dozen huge platforms sitting in the middle of the ocean remotely directing operations because we as a country cannot risk losing any of these hyper-tech behemoths.  NCW's bottom line must be that no node can be worth more than the connectivity it provides.

Because we are far more likely to encounter targets of influence operating in the "few and cheap" paradigm, what we should bring to the table are "the many" as opposed to "the costly."  Why?  The few-and-costly approach puts us in no-win situations, where our entry into crises is self-limited by our tendency—and our opponent's knowledge of that tendency—to treat the loss of any significant network node as grounds for one of two equally bad pathways: escalation or withdrawal.  Because our interests typically are limited, escalation usually is the last thing we want.  But because the world values our Leviathan-like role as global force of first response and last resort, a pattern of withdrawals over relatively small losses costs us dearly over the long run.  A superpower navy too valuable to risk force structure losses is not one worth having.  Does that mean we risk more lives?  Only if we insist that the U.S. Navy primarily is about projecting destructive power ashore.

4. Pride

NCW's Lock-Out Strategies Resurrect Old Myths about Strategic Bombing

Ever since Giulio Douhet's Command of the Air (1921), we have heard that massed effects against an enemy's centers of gravity can lead swiftly to bloodless victory.  And every war since then has seen this theory's vigorous application and subsequent refutation.  Yet the notion persists and now finds new life in network-centric's "lock-out" strategy.  Whether NCW's proponents admit it or not, what lies at the core of this strategy is the spurious notion that punishment equals control.

Can we, by destroying our enemy's information technology "village," somehow save it?  I think not.

First, one man's information warfare is another man's international terrorism.  If any hostile power tried even a smidgen of what we propose to do en masse via NCW, we would be hurling all sorts of war crimes accusations.  The collateral damage associated with this "information technology decapitation" strategy simply is too complex to control from afar.  Who dies?  Society's weakest and most vulnerable.  Unless we are talking total war or some antiseptic battlefield out in the middle of nowhere, we need to own up to the reality that such massed effects are closer to weapons of mass destruction than we care to admit.

Second, our bomb-damage assessment capabilities are nowhere near capable enough to measure the massed effects of NCW's souped-up brand of information warfare.  Some assume that the smaller a society's information technology quotient, the greater our ability to understand the impact of information warfare.  But in my mind, less information technology equals greater social capacity for low-tech work-arounds that either negate or complicate information warfare immeasurably.

Third, while bowing to complexity theory, NCW adherents toss it out the window once they rhapsodize about lock-out strategies.  Somehow, our mastery of our enemy's complexity will translate into a capacity to steer his actions down one path or another, despite the fact that NCW's game plan includes large amounts of irreversible impact.  What we may well end up with in some blossoming conflict is a "dialogue of the deaf" that precludes effective communication with the other side concerning conflict resolution or—more important—avoidance of unnecessary escalation.  And when that happens, we may wonder which side really had its pathways locked out.

Fourth, NCW is guilty of mirror imaging: we theorize about our own information technology vulnerability and then assume it is the same for others.  In reality, our distributed society is far stronger than we realize.  In truth, is there any other country in the world where you would prefer to live through a natural disaster?  As for less-advanced countries, our arrogant assumptions about their limited work-around capacity say more about us than about them.

Fifth, to the extent that network-centric's immense capabilities can be harnessed to a lock-out strategy, the military needs to relate better to the universe of relevant data and subject-matter experts outside the usual realm of political-military thinking.  We do not possess the decision-assessment tools at this point to steer an opponent via information dominance.

5. Anger

NCW's Speed-of-Command Philosophy Can Push Us into Shooting First and Asking Questions Later

The unspoken assumption concerning speed of command seems to be that because we receive and process data faster, we have to act on it faster.  Not surprisingly, this virtuous circle can turn vicious rather quickly if commanders allow themselves to become slaves to their own computers, which essentially are dumb machines that count incredibly fast.  Rushing to bad judgment is the danger.

Most worrisome are network-centric's assumptions concerning getting inside the enemy's decision loop.  This makes sense as a goal, but the real focus should be on what we do once inside, not just on the blind pursuit of faster response times.  Why?  We always are talking about potential enemies with less advanced information technology architectures, so the potential for miscommunication and misperception is huge.  We may find ourselves acting so rapidly within our enemy's decision loop that we largely are prompting and responding to our own signals, which our beleaguered target cannot process.  In short, we could end up like Pavlov's dog, ringing his own bell and wondering why he's salivating so much.

It takes two to tango, so, yes, we want sufficient speed of command to get inside our opponent's decision loop, but too much speed turns what we hope is a stimulus-response interaction into a self-stimulating frenzy.  The potential irony is telling:

We rapidly fire signals to a target of influence, who does not pick them up, in part because of the strategic blindness we have inflicted on him.

• Our target’s lack of response is interpreted as signifying "X" intent.
• We respond to perceived intent "X" with signal "Y," which also is missed by our target, who, perhaps, is just getting a grip on earlier signals.
• Our target's response "Z" seems incomprehensible, or we assume it is a rejection of sorts to our previous signals.
• Before you know it, we are way beyond "Z" and into some uncharted territory, but we are making incredible time!

The networked organization's great advantage is that the processing and distribution of data are sped up considerably.  What this should translate into is increased time for analysis and contemplation of appropriate response, not a knee-jerk ratcheting down of response time.  The goal is not to shorten our decision-making loop, but to lengthen it, and, by doing so, improve it.  Otherwise, all we are doing is generating two suboptimal decisions to his one.

Now, some will declare that the enemy's decision loop is being shortened by his increasingly rapid incorporation of information technology into his command-and-control architecture.  But this Chicken Little approach misleads: yes, he will improve his decision-loop timelines constantly, and so should we.  But the point is not to engage in some never-ending speed race with our own worst-case fears, but rather to concentrate NCW on how best to exploit the delta between our loop time and his.  Speed is not the essence here, only the means to an end.  Forget that and you might as well be acting in anger.

6. Envy

NCW Covets the Business World's Self-Synchronization

There is no defense establishment more concerned with everyone singing off the same sheet of music than the U.S. military.  Why?  No military in the world seeks to decentralize crucial decision-making power as much.  It is both our calling card and our greatest weapon—our operational flexibility.  So if any military will adapt itself to NCW's ambitious goal of self-synchronization, it will be us, though we are not likely to reach the ideal state of affairs desired by network-centric warfare, which I believe seeks a dangerous slimming down of the observe-orient-decide-act (OODA) loop. 

The implied goal of self-synchronization is that information technology will facilitate such a rapid movement of information as to obviate the time requirements of the "00" portion, allowing commanders to exploit speed of command.  But in my mind, NCW's capacity to collapse timelines for the processing of operational data should lengthen the observe and orient portions of the loop, not encourage their virtual disappearance by outsourcing that cognitive function to silicon units.  During the Cold War, a sort of "DADA loop" was forced on the U.S. military by certain bolt-from-the-blue warfighting scenarios involving the Soviet Union.  But I am hard-pressed to envision post-Cold War scenarios where the U.S. military should be encouraged to deemphasize the rational thinking that must periodically interrupt whatever courses of action our commanders in the field are empowered to pursue.

NCW's envy for the business world's market-responsive notion of self-synchronization is understandable, for there are few things in this world as complex as a major military operation.  But this envy is misplaced; we create governments to deal precisely with those thorny aspects of social life that we do not trust private firms to manage under the ultimate self-synchronizing motivation known as profit seeking.  And among the thorniest aspects are those we reserve for the military, entrusted as it is with the assets that generate big violence.

In addition, the crisis scenarios the U.S. military faces grow ever more ambiguous as far as U.S. national interests are concerned.  Other than a rerun of Desert Storm, I don't see any crises where the United States would be well served by its military focusing on self-synchronization.  A MOOTW world should encourage greater externally focused networking.  So even if the U.S. military could achieve self-synchronization, neither the likely scenarios nor the partners we engage in them are well suited to this slam-bang approach.  In fact, in many MOOTW scenarios, it is the military that should use its mighty information technology power to generate the "00" portion of the decision loop for others who ultimately will take the lead in deciding and acting.

7. Gluttony

NCW's Common Operating PictureCould Lead to Information Overload

The term "common operating picture" is apt for network-centric's vision of all players at all levels working off the same mental model.  There is little doubt that computer-mediated visual presentations will shape much of the commander's perception of operational realities.  That, in and of itself, is not new.

What is new is the potential for inundating all participants with an ever-increasing flow of data masquerading as information because it has been slickly packaged within the common operating picture.  The danger lies in the picture's collapsing all participants' perceptions of what is tactical versus operational versus strategic, and, by doing so, creating strong incentives for all to engage in information overload in an attempt to maintain their bearings in this overly ambitious big picture.  In sum, I am concerned that the push for speed of command and self-synchronization will drive all participants to an over-reliance on the common operating picture as a shared reality that is neither shared nor real. 

The common operating picture cannot really be shared in the sense that ownership will remain a top-down affair.  What is scary about NCW's ambition is the strain it may put on commanders at various levels to integrate the commander's intent from all other commanders and not just up the chain of command.  NCW promises to flatten hierarchies, but the grave nature of military operations may push too many commanders into becoming control freaks, fed by an almost unlimited data flow. In the end, the quest for sharing may prove more disintegrating than integrating.

The infusion of information technology into hierarchical organizations typically reduces the traditional asymmetries of information that define superior-subordinate relationships.  Taken in this light, the common operating picture is an attempt by military leaders to retain the high ground of command prerogative—a sort of nonstop internal spin control by commanders on what is necessarily a constantly breaking story among all participants, given their access to information that previously remained under the near-exclusive purview of superior officers.

That gets me to the question of the common operating picture's "realness," for it suggests that the picture will be less a raw representation of operational reality than a command-manipulated virtual reality.  At worst, I envisage command staff engaging in a heavy-handed enforcement of commander's intent, all in the name of shaping and protecting the common operating picture.

The temptation of information gluttony always will be with NCW.  Salvation lies in the concept of information sufficiency by level of command.

*                    *                    *

I seek not to praise network-centric warfare, nor to bury it.  To the extent that NCW marries the military to a networking paradigm, it moves America's defense establishment toward a future I view as inevitable. However, focusing NCW on the application of large-scale violence, or past wars, is a mistake—especially for naval forces. On a global scale, both organized violence and defense spending have migrated below the level of nation-states. For our military to remain relevant, it must reach out to that subnational environment. Networking is the answer, but it needs to be focused outwardly.  This was the natural role of naval forces in U.S. history.  It can be again, but only if the Navy frees itself from its Pacific War past and pointless competition with the Air Force in power projection.

[1] QWERTY refers to the first six letters on the upper left of the typewriter keyboard.  This layout was adopted in the 19th century to minimize jamming of mechanical striking arms.  It quickly became the universal standard and remains so to this day, despite being less efficient than other designs.

Dr. Barnett holds an appointment as Professor and Senior Decision Researcher at the Decision Support Department, Center for Naval Warfare Studies, U.S. Naval War College.  This article is adapted from an essay he wrote for the Center for Naval Analyses, where he served on the Research Staff from 1990 to 1998.  Dr. Barnett holds a Ph.D. in Government from Harvard University.  He would like to thank the following individuals for their comments on earlier drafts: Jack Batzler, Lyntis Beard, Gary Federici, Hank Gaffney, Bradd Hayes, Lawrence Modisett, Hank Kamradt, Rob Odell, Pat Pentland, and Mike McDevitt.

Blast from my past: "It's Going to Be a Bumpy Ride" (1993)

It's Going to Be a Bumpy Ride by Thomas P.M. Barnett and Henry H. Gaffney, Jr. The Navy is in for some heavy seas if its leaders fail  to adopt a defense vision that gets them in the Washington game  and positions them well with the star players—Senator Sam Nunn,  Congressman Les Aspin, General Colin Powell, and President-elect Bill Clinton COPYRIGHT: The U.S. Naval Institute, 1993 (January issue, pp. 23-26); reprinted with permission Conspicuously absent . . . from this year's election cycle was a coherent debate on the future of U.S. defense policy. Admittedly, in light of this country's domestic difficulties and the general improvement in the world security situation, this debate does not warrant priority right now. But since further big cuts in the defense budget seem inevitable—with renewed efforts to reduce the deficit and fund domestic programs—the next administration and Congress must provide some vision and fashion some policy consensus quickly if they are to avoid mindless reductions by budgetary incrementalism. Actually, the term "incrementalism" is misleading. When the budget agreement's "fire walls" and "caps" dissolve, come consideration of the fiscal year 1994 budget, Congress will no longer be restrained from shifting defense funds to domestic programs. Capitol Hill may balance the reductions, because many principals there still believe in a strong national defense. But these cuts are likely to be anything but incremental. And if Senator Sam Nunn (D-GA) gets his way, a serious revision of roles and missions among the services will turn a downward glide path into dramatic changes. This is going to be one bumpy ride, and where the defense establishment will end up remains very sketchy.   Three Defense Visions Three possible defense visions are out there, each suggesting a certain slant for military force structure into the next century. The incoming administration of President Bill Clinton and the new Congress, however, eventually will have to sort out just one, since they and the rest of us believe we cannot afford all three. The visions carry the marks of how far their advocates peer into the future: The Transitioneers focus on the near term. They see a world minus the Soviets as still quite dangerous and seek to "assure the transition" to a safer era. The Big Sticks look ahead to the next regional dustup. They foresee some dangerous conflicts that could upset the new world order, and echo Theodore Roosevelt's advice to "speak softly and carry a big stick." The Cold Worriers take the long view. They worry that internal preoccupation will lead to the dismantling of U.S. military strength, especially in technology, which will render us helpless against the next "global threat," however remote that may seem today. While the camps differ in the length of their visions, their arguments intersect over three basic questions: How much should we reduce the military forces inherited from the Cold War? How should we operate these forces in the new era? Most important, what future world do we seek, and how does military power help us get there? The Transitioneers The Transitioneers' answer to the size question is that the United States should hold onto what has proved to be the best military force in the world by protecting force structure over procurement. Their enemy is global fragmentation, punctuated by ethnic and religious conflicts. The Transitioneers' nightmare is the "Balkans scenario" spreading into the former Soviet republics, where the nukes are. The big backers here have been the George Bush White House and most top Pentagon officials, and their attitude has been "Why change a winning hand?" As for operations, the Transitioneers emphasize forward presence and quick crisis response. That means troops stationed abroad and naval forces operating around the globe. Examples are "911 calls" involving humanitarian relief, antiterrorism, and rescuing U.S. citizens. Peacetime operations are the crux here, with Transitioneers focusing their day-to-day activities on hotspots of the world. Lately the Persian Gulf has been the focus, but now they are also agonizing over how the United States and other nations might seek to use military power to resolve the appalling situations in the Balkans and Somalia. It is not easy to be the 911 force-cum-SWAT team. The Transitioneers' long-run strategy is maintaining U.S. access and influence around the globe. Why? The new world order is very shaky, despite the thwarting of aggression in the Gulf War. If this order is to survive at all, the world's sole superpower must lead the ongoing, often painful transition from the still-dissolving Cold War status quo. TheTransitioneers' mantras are influence, stabilization, and deterrence, none of which is working in Yugoslavia or Nagorno-Karabakh right now, but may be working in Korea, Cambodia, and Central America. The Big Sticks The Big Sticks' approach to the size of military forces is that the United States should preserve the combat power needed to disarm regional bullies threatening our vital interests. Potential enemies include such well-known troublemakers as North Korea, Iran, Iraq, and Libya. Worst cases here are proliferation combined with religious radicalism—the nightmare of a united "Islamic Belt" stretching from Casablanca to Jakarta, armed with nukes. The Big Sticks' strongest advocates are Congressman Les Aspin (D-WI) and Chairman of the Joint Chiefs of Staff General Colin Powell, and their shared attitude is "Let's make sure America wins big when the call goes out." This sits well with younger officers and their families, who want to strike hard, not get killed, and come home soon, if they have to fight at all. For operations, the Big Sticks stress the surge of power projection with bombers, naval forces, and expeditionary land forces. The concept here is to strike out from the U.S. homeland, dominate any regional battle space, and take the offensive at the time of our choosing. They would ensure that ample investments be made in mobility and lift. Day-to-day operations matter less to them than "regional contingencies," with Operation Desert Storm as the template. The Big Sticks focus on the Middle East, but they will go anywhere, anytime. Citing the superpower status of the United States as prerequisite for any new world order, the Big Sticks focus on preserving core combat capabilities despite declining budgets. These warfighters look to scare off or squash most aspiring regional kingpins. In their view, this approach also keeps the peace so countries that wish to live in peace and prosper can forgo military buildups of their own. But the Big Sticks believe in international support and coalition operations, and will take the time to line one up before striking. The public reports on the Pentagon's Defense Policy Guidance reflect this rationale. Regional aggressors are anathema to the Big Sticks, while their mantras are credibility and decisive force. The Cold Worriers The Cold Worriers' view on the size of military forces is that the United States must move from guns to butter and renew itself internally to secure its continued global leadership. The enemy is uncertainty, plus U.S. complacency and retreat from the world. Their nightmare is a fiscally frail United States yielding to economic powerhouses in Europe and Asia. The Cold Worriers' loudest proponents are congressmen whose attitude is "Let's meet our real national security needs by putting America first." While not isolationist, the Cold Worriers show little interest in managing current events with military power. Ethnic troubles? See Los Angeles. Proliferation? Try handguns, teenage pregnancies, AIDS, and crack. More internal definitions of national security count here, such as Senator Nunn's plan to have military personnel augment social programs. Viewing industrial jobs, military bases, and reserves as important political links to the public, the Cold Worriers turn the U.S. vision inward to its slow growth rate and decaying infrastructure. For Cold Worriers, stemming global chaos is secondary to getting our own house in order. As for regional troublemakers, Team USA just waxed the world's fourth-largest army in nothing flat. In their opinion, the best way to keep our global leadership is to dispel the stench of decline. Things are safe for now, so they would take advantage and preserve those capabilities the United States needs most for building the military of the future. They are especially proud of U.S. technological prowess and do not want to lose it. The Cold Worriers' mantras are dual-use, industrial base, and competitiveness. Connections to Strategy and Force Structure Those are the highfalutin' national security concepts, but how do they translate into military strategy and force structure? The Transitioneers favor the beat-cop or community-policing analogy: the United States must be out there deterring crime and promoting peace. Otherwise we get called in later to clean up the mess, usually at higher cost. Platform numbers count more than sophisticated weapons, since we need large numbers to cover the world on a regular basis. The Navy and Marine Corps are featured players in this posture. The Big Sticks like the SWAT-team analogy: the United States gets called out only for the really nasty jobs that local authorities cannot handle. Warfighting and readiness are crucial, meaning we keep our edge in people and technology. The Air Force and Army are heavy hitters in this military, although naval forces may set the stage by arriving first and can contribute to the big effort as well from a different direction. The Cold Worriers employ the analogy of the Lone Ranger armed with small, high-tech, silver-bullet forces. Keys include reserves, prototypes, limited production runs, and breakthrough technologies. The domestic side of defense spending plays heavily through jobs and spin-off technologies. The winners here include advanced platforms such as the V-22 tiltrotor aircraft, the Seawolf (SSN-21) submarine or its successor, the AX bomber, and any missile-defense system. All three camps stress the unique U.S. capacity—and thus responsibility—for global leadership, especially in the security sphere. But the Gulf War experience, the new domestic atmosphere, and constrained federal budgets all conspire to force our political leaders to set priorities. It seems clear the United States cannot afford all three defense visions, nor does it make sense to assign one vision to each of the services. Hard choices will have to be made within each service, however, if they hope to keep pace with the public's still-evolving definitions of U.S. national security, not to mention surviving the likely budgetary bloodbath beginning in fiscal year 1994. Looking at the Navy and Marine Corps So how does the Department of the Navy play in these different visions, with their competing goals? One thing is clear: naval forces cannot go their separate ways anymore. They have been strongly admonished to join the nation. The Goldwater-Nichols Act, the riots in Los Angeles, and the Tailhook scandal all say that they have to be sensitive to U.S. culture and economy, and to work closely with their fellow services, the new administration, and Congress. Any other approach is just asking for trouble. With the collapse of the Soviet threat, many defense experts foresaw a decidedly maritime slant to U.S. force posture—no matter what the budgetary outcome—since most of our overseas forces were being pulled home and even disbanded. By default, the Navy and Marine Corps would be the forces left out there to perform the great bulk of day-to-day security tasks. But as time passes, the United States still maintains sizable forces in Europe, Korea, and Japan, so it is not yet clear which are the prime forward forces. More evidence came during Desert Shield and Desert Storm, when the Navy and Marine Corps seemed disappointed that they were not asked to run the show all by themselves. The truth was that the United States could readily defeat a regional power like Iraq only by applying overwhelming force, that is, by using a very large portion of its military assets. Most telling of all, however, is the emerging reality that most of the messy situations cropping up in the Cold War's wake (Yugoslavia, Somalia, the Kurds, etc.) are conflicts internal to states, where the adversaries rarely pay much heed to naval forces steaming on the horizon, however menacing. Since the Cold War's end, senior Navy leaders, as well as the surface community, have tended to favor the Transitioneer argument, because concepts such as presence, access, and influence pervade it and because it requires large numbers of platforms. They see naval forces as the only forces truly deployed forward—the glue of the Mediterranean and the Pacific. The tendency here is to believe the Navy can almost single-handedly assure the transition to a more peaceful world where commerce flows freely. After all, the United States is a maritime nation that communicates with the world only across the seas. But as Desert Storm reminded the Navy and Marine Corps, the Big Sticks have the upper hand now, and the name of the game is overwhelming force applied in joint fashion both over land and from the sea. Desert Storm shifted the focus from numbers of platforms for open-ocean warfare to what you do with those platforms in littoral warfare to influence events ashore directly. The naval contribution can still be quite substantial, as Desert Storm showed, even if naval forces cannot do the whole job themselves. Within the naval communities, the Marines are most drawn to the Big Sticks' approach because of its emphasis on projecting power ashore, something that should force more blue-green integration (i.e., more blue support for green operations). For now, this debate between the Transitioneers and Big Sticks has left the guardians of the U.S. military's finest technological achievement—nuclear-powered submarines—out in the cold. Subs were not a very convincing presence during the Persian Gulf crisis, and they could not deliver as many Tomahawks as surface ships could during Desert Storm. But they have emerged as the premier U.S. nuclear-deterrent force, which is warm comfort for the Cold Worriers. The submarine community also found surprise congressional allies who rose to defend the two or three Seawolf submarines under construction out of concern for the jobs (and votes) it represents for the country's economic (and their own political) future. Given their common fears about the industrial base, the Cold Worriers and the Navy could be natural allies in preserving and advancing technology for an unknown and possibly adverse future. Finally, the much-troubled naval aviation community seems to be split between the medium- and long-term visions. Some aviators like the Big Sticks' emphasis on air power, but they fear the focus on jointness will diminish the role for carrier air. Others prefer theCold Worriers' push for silver bullets, of which the AX would certainly be one, but worry that the new domestic focus will deprive the Navy of the large funds it needs to keep all those carriers stocked with such costly aircraft. It is probably unreasonable to expect the Navy to be any closer to the consensus about the future of U.S. defense vision than either the government or the public. But while the Navy Department has expended much energy developing a new internal vision over recent months, the long-postponed budgetary debate over the post-Cold War U.S. defense posture has finally arrived. One hopes that reorganization and the White Paper " . . . From the Sea" will help the Navy join the fray, because the Base Force has clearly reached the end of its life span. The Choices Ahead We return to the basic point: these visions, taken together, are unaffordable. Choices and compromises are inevitable, especially within the Department of the Navy. Naval forces will probably find the broadest range of satisfaction if they cast their lot with the Big Sticks, rejoining the nation by becoming truly joint team players, as the White Paper has declared. They also can retain their first-class status as warfighters by maintaining their power-projection capabilities. If the touch choices are made on procurement (and they will be unpleasant), naval forces also should be able to improve their technology by preserving a reasonably good share of their current investment budget. The submariners have the greatest problem, but Congress is apparently not inclined to dismantle their technological base. So that capability may yet survive as we grope toward a better future. Even under the most dire budgetary predictions, the United States will still have a Navy second to none, even with substantial reductions in platform numbers. This still sizable force will deploy freely around the world, maintaining its knowledge of the sea and coastal environments and staying in contact with the navies of other nations. Our sailors will not be deprived of their chance to see the world. And they will enjoy more harmonious relations with the other services and U.S. political leadership. But maintaining the best balance among ships, aircraft, modernization, readiness, and deployments will be tricky within the inevitably lower budget levels. The Department of the Navy will be able to manage such a feat only if it continues to regroup the various naval communities and plays the Washington game wholeheartedly. Dr. Gaffney is Director of Concepts Development at the Center for Naval Analyses.  He was Director of Plans for the Defense Security Assistance Agency from 1981 to 1990.  Dr. Gaffney holds a Ph.D. in Government from Columbia University and served in the U.S. Navy from 1956 to 1959. Dr. Barnett serves on the Research Staff of the Center for Naval Analyses. He is the author ofRomanian and East German Policies in the Third World: Comparing the Strategies of Ceausescu and Honecker (New York: Praeger, 1992), and has written for both The Washington Post and The Christian Science Monitor.  Dr. Barnett holds a Ph.D. in Government from Harvard University.

Blast from my past: Wall Street Journal front-page profile

At The Pentagon, Quirky PowerPoint Carries Big Punch: In a World of 'Gap' States, Mr. Barnett Urges Generals To Split Forces in Two;
 Austin Powers on Soundtrack

Wall Street Journal
May 11, 2004 
Pg. 1

By Greg Jaffe, Staff Reporter Of The Wall Street Journal

In 1998, Thomas Barnett, an obscure Defense Department analyst, teamed up with senior executives at the Wall Street firm Cantor Fitzgerald LP to study how globalization was changing national security.

One scenario they studied was a meltdown caused by the Y2K computer bug followed by terrorist attacks designed to exploit the chaos. Mr. Barnett posited that Wall Street would shut down for a week. Gun violence, racially motivated attacks and sales of antidepressants would surge. The U.S. military would find itself embroiled in brushfire conflicts across the developing world.

His theories were met with skepticism. "People began referring to me as the Nostradamus of Y2K," Mr. Barnett says.

Then came the Sept. 11 terrorist attacks. Suddenly Mr. Barnett didn't look so crazy.

At the urging of his Pentagon bosses, Mr. Barnett overhauled the concept to address more directly the post-9/11 world. The result is a three-hour PowerPoint presentation that more resembles performance art than a Pentagon briefing. It's making Mr. Barnett, 41 years old, a key figure in the debate currently raging about what the modern military should look like. Senior military officials say his decidedly controversial ideas are influencing the way the Pentagon views its enemies, vulnerabilities and future structure.

Mr. Barnett's military is a far cry from the shape of today's armed forces. Instead of a single force to wage wars and rebuild nations, Mr. Barnett envisions two. The first, which he dubs "Leviathan," would be hard-hitting, ready to take on conventional foes such as Saddam Hussein on a moment's notice. The second, more unconventional force of "System Administrators" would focus on bringing dysfunctional states into the mainstream through the type of nation-building operations seen in Iraq, the Balkans and Eastern Africa. It wouldn't only mop up after wars but would travel the world during peacetime building local security forces and infrastructure.

This blueprint for America's defense force comes wrapped in a presentation devised by Mr. Barnett that samples the "ching ching" sound effect from the television series "Law & Order," borrows lines from the Sopranos and features the voice of movie character Austin Powers calling out "Oh yeah, baby!" to punctuate a key idea. At one point, upsetting some, Mr. Barnett refers to 9/11 as the "first live-broadcast, mass snuff film in human history."

"Tom polarizes people with his brief. They either love it or they hate it," says retired Navy Capt. Bradd Hayes, a professor at the Naval War College, where Mr. Barnett also teaches.

With the military struggling in Iraq and Afghanistan, it's possible the American public could lose its appetite for anything that smacks of intervening in troubled states. But it's precisely these problems that are prompting senior officials to listen more closely to the pitch. A group of strategic planners from the Pentagon's Joint Staff invited him to kick off a two-day retreat in April for senior officers. Afterward they told Mr. Barnett they wanted him to brief a more senior group. The Navy's top admiral recently e-mailed an essay written by Mr. Barnett to the service's top brass.

Rep. Mac Thornberry, a Republican and a senior member of the House Armed Services Committee, says Mr. Barnett has shaped his view on China, global trade, foreign aid and national defense.  "Since the fall of the Soviet Union we haven't had a global strategy with bipartisan appeal that can survive changes in administration and in Congress," the lawmaker says. He thinks this could fit the bill.

Mr. Barnett conjured up his vision at the urging of Retired Vice Adm. Arthur Cebrowski. After 9/11, Defense Secretary Donald Rumsfeld tapped the admiral to run a new office in the Pentagon, dubbed the Office of Force Transformation, focusing on changing the military, one of Mr. Rumsfeld's pet projects. Adm. Cebrowski turned to Mr. Barnett because he first wanted a better idea of what a post-9/11 military was supposed to do. During the Cold War it was designed primarily to contain Communism. "The Soviet Union was the principal designer of our force," the admiral says.

Adm. Cebrowski, a 61-year-old former naval aviator, flew 158 combat missions in Vietnam and commanded an aircraft carrier in the Persian Gulf War. He's a devout Catholic who attends Mass every day and raves about Mel Gibson's "The Passion of the Christ."

Mr. Barnett, by contrast, studied at Leningrad State University in the mid-1980s, taught Marxism among other subjects at Harvard, and voted for Al Gore for president. He maintains his own Web page (thomaspmbarnett.com) that features his wife's poetry, a eulogy he wrote on his father's death and a book-length chronicle of his eldest daughter's successful battle with cancer.

For much of the 1990s, Mr. Barnett worked for the Center for Naval Analyses, a federally funded research center. He is currently a senior professor in the Warfare Analysis department of the Naval War College in Rhode Island, where Adm. Cebrowski served as president until 2001.

In Mr. Barnett's world, countries are divided into two categories. His "core" countries are part of a global community linked by trade, migration and capital flows. Europe, the U.S., India and China fall into this group. Then there are "gap" countries that either refuse to join the global mainstream (such as Saudi Arabia and Iran), or are unable to because they have no central government or are struggling with debilitating crises (such as Iraq, Afghanistan, Somalia, and much of sub-Saharan Africa).

"The "gap" is a petri dish of grief, repression, terrorism and disease," says Adm. Cebrowski. "And 9/11 shows we can't wall ourselves off from it."

To join those worlds together, Mr. Barnett envisions two different military forces. The Leviathan force consists of stealthy submarines, long-range bombers and highly trained soldiers who are "young, unmarried and slightly p----- off," Mr. Barnett says.

The System Administrator force is named for the technology wonks who run corporate computer networks. This force is focused on training "gap state" security forces, stamping out insurgencies and rebuilding basic infrastructure such as legal systems and power grids.

That force would include lightly armored soldiers, the Marine Corps and officials from the State, Justice and Commerce departments along with the U.S. Agency for International Development. Its troops would be older and more specialized than the Leviathans. The purpose of the System Administrators would be to bring order to a country, but the force would also be strong enough to defend itself.

This concept relies on a key assumption: The power of the U.S.'s nuclear and conventional arms, plus increasing global economic interdependence, has made war between superpowers a thing of the past. It also assumes that wars with less-powerful states are less likely to occur.

Instead, the U.S. is more likely to find itself embroiled in dysfunctional parts of the world battling terrorists and rebuilding failed states, something it doesn't do very well. "You guys can do two or three Iraq wars a year, no problem," Mr. Barnett recently told a group of senior officers from the Joint Staff. "But you can't do one occupation."

It's not clear what Mr. Rumsfeld thinks of Mr. Barnett's vision. Adm. Cebrowski has briefed the Pentagon chief on key aspects as recently as last month and says he got a warm reception. A Pentagon spokesman says the press office wasn't able to determine Mr. Rumsfeld's reaction to the briefing.

Many worry Mr. Barnett's concept leaves the U.S. unprepared to fight a big war with countries such as China and North Korea. "What if we are misreading China's intentions the way we misread radical Islam?" asks Michael Vickers, a national-security analyst and former CIA officer who does consulting work for the Pentagon.

Mr. Barnett bets that advanced technologies will allow the U.S. to fight wars with smaller, high-tech formations. Some military analysts, such as retired Marine Corps Lt. Gen. Paul Van Riper, think that's naive. Gen. Van Riper, who plays the enemy in Pentagon war games, says enemies could too easily hide from the Leviathan force's sophisticated surveillance. He also thinks the System Administrator force wouldn't be strong enough to defend itself in places such as Fallujah.

"I admire Adm. Cebrowski," he says. "But this is absolute nonsense from folks who are thinking about war as they want it to be, not as it actually is. War is a terribly nasty, brutish business."

The Pentagon has a history of taking intellectual cues from unexpected sources. In the 1970s and 1980s Andrew Marshall, a low-profile Pentagon analyst who runs an office similar to that of Adm. Cebrowski, argued that wars could be revolutionized by precision bombs, unmanned planes and wireless communications that would allow the U.S. to destroy enemies from a distance.

Mr. Marshall, who cultivated a network of prominent military officers and civilians, rarely spoke in public and almost all his papers are classified. But his ideas have informed the way the U.S. military fought high-intensity wars in Iraq and Afghanistan. "Andy Marshall's kind of like a rabbi," says Mr. Barnett.

Mr. Barnett has delivered his brief some 150 times since 9/11. Pearson PLC's Penguin Group published it earlier this year as a book, "The Pentagon's New Map," and Mr. Barnett penned a shortened version for Esquire magazine.

On a spring day in Washington, Mr. Barnett stepped into a room full of generals, admirals and colonels from the Pentagon's Joint Chiefs of Staff. His job was to kick off a two-day retreat where the military would debate his ideas.

In the room was the deputy director of operations for the U.S. Central Command. A few seats away sat the Army colonel whose battalion led the famous "Thunder Run" into Baghdad that toppled Saddam Hussein. Seated across the room was an Air Force brigadier general -- one of only a handful of U.S. fighter pilots to have shot down an enemy plane in combat over the past two decades. Mr. Barnett recognized none of them.

The lights dimmed and Mr. Barnett, clad in a dark turtleneck and khakis, launched into his brief. He soon flashed up on a screen a picture of a mock personal ad that he found taped to a Pentagon wall in the late 1990s.

"ENEMY WANTED: Mature North American Superpower seeks hostile partner for arms racing, Third World conflicts and general antagonism. Must be sufficiently menacing to convince Congress of military financial requirements...Send note with pictures of fleet and air squadrons to CHAIRMAN JOINT CHIEFS OF STAFF/PENTAGON."

In the early days of the current Bush administration, senior Pentagon officials thought China, with its growing arsenal of ballistic missiles and increasingly sophisticated submarine fleet, might fill this role.

Mr. Barnett's work with Cantor Fitzgerald, which stemmed from a long-standing relationship between the firm and the Naval War College, convinced him otherwise. China was buying U.S. debt, angling to join the World Trade Organization and growing increasingly dependent on foreign direct investment. "China isn't the problem, it's the prize," he told the officers.

He displayed a map of the sprawling "gap," which includes most of Africa, Central Asia, the Middle East and a big chunk of Central and South America. "This is globalization's ozone hole," he said.

In the past, Mr. Barnett's pitch for a System Administrator, or nation-building force, was often greeted with howls of disapproval from military crowds. A year of faltering progress in Iraq has made his ideas more palatable. One Army colonel in the audience compared the Iraq nation-building mission to a screw that needs to be driven into a wall. "Right now all we've got is a hammer and we are driving that screw into the wall with our hammer as best we can. But it won't set right. What we really need is a screwdriver," he said.

An Air Force general suggested the bifurcation of the force recommended by Mr. Barnett was already quietly happening. The Army National Guard, a force comprising part-time soldiers, used to be indistinguishable from the regular Army. Today, it's trading weaponry used in high-intensity conflicts for military-police units to restore law and order.

One Army colonel balked at the presentation, suggesting it might not be possible to save some societies, such as Saudi Arabia, or even Iraq and Afghanistan.

"Aren't you assuming the people in the 'gap' think like you and want the same things as you?" he asked.

"Everyone wants a better future for their kids," said Mr. Barnett.

"I've been around a lot of people who don't think like us," the officer replied.

After the meeting, the group—led by a team of one- and two-star admirals and generals—decided to recommend that Mr. Barnett brief the military's most senior four-star generals at a retreat later this year.

It's not likely that the Pentagon will officially split the military into a Leviathan force and a System Administrator force. But acceptance for the general concept is growing. "I used to be afraid to pitch the Sys Admin force," Mr. Barnett said after his speech to the Joint Staff officers. "I literally would worry that I'd get laughed off the stage."

Blast from my past: "Asian Energy Futures" report from the NewRuleSets.Project

Asian Energy Futures Event Report

Decision Event Report I

Of the

NewRuleSets.Project

Dr. Thomas P.M. Barnett

With

Prof. Bradd C. Hayes

And imputs from

Dr. Lawrence Modisett
Cdr. Carl Carlson, USN
Prof. Gregory Hoffman

Originally posted 29 June 2001 at http://www.nwc.navy.mil/newrulesets/AEFreport.htm

(I):
Project overview and introduction

 

This annotated briefing serves as the Decision Strategies Department (DSD) Report for the Asian Energy Futures decision event held in New York City on 1 May 2000.

As of April 2001, this summary brief of the NewRuleSets.Project (both an overview of the project and a summation of the 1 May event) has been presented on over 50 occasions to a variety of Washington think tanks, government agencies, and Wall Street firms. Future briefs are still being scheduled, so contact Tom Barnett directly if you are interested in receiving the brief.

The original draft of the Asian Energy Futures report was posted on the Naval War College’s web site on 29 June 2000. The first hard copy publication was dated August 2000. We decided to update and revise both our hard-copy and online versions in April 2001 to include the Department of Energy’s most recent long-term projections, which appeared in the March 2001 International Energy Outlook, available on the web at <www.eia.doe.gov/oiaf/ieo/index.html>. Comments on this revised version are welcome from all quarters, but especially from the workshop’s participants and anyone who’s seen the brief in person. Comments should be emailed directly to Tom Barnett, the project’s director <barnettt@nwc.navy.mil>). He can also be reached by phone at 401.841.4053.

The Asian Energy Futures event was the fourth in a series of Economic Security Exercises that the DSD has conducted in New York City with the support of Cantor Fitzgerald, the world's largest broker of U.S. Government securities, Eurobonds, and sovereign debt. These events are designed to bring together the worlds of finance and national security to explore issue areas of common interest and, by doing so, build mutual understanding. 

For more than 25 years, Cantor Fitzgerald has played a pioneering role as a private-sector intermediary for the fixed income markets. In the early 1970s, Cantor developed the world's first screen-based marketplace for the trading of U.S. government securities. In 1998 it created Cantor Exchange, the first U.S. electronic futures exchange for U.S. Treasury futures. Just last year Cantor launched a new division known as eSpeed to operate all of its electronic markets. All told, Cantor’s business operations involve financial flows of approximately 50 to 70 trillion dollars a year. 

Cantor Fitzgerald provided significant analytic and organizational support to the first three Economic Security Exercises in the series: 

• December 1997 event focused on a dual cyber terrorism/disruption of the sea lines of communication (SLOC) scenario involving Wall Street and Southwest Asia, respectively (hard copy of event report is available from the DSD by calling 401-841-1798) 
• June 1998 event focused on a dual financial crisis/SLOC disruption in Asia involving Indonesia (hard copy of event report is available from the DSD by calling 401-841-1798) 
• May 1999 event focused on the potential financial repercussions of a substantial Year 200 Problem (find the report online at <http://www.nwc.navy.mil/y2k/y2krep.html>).             

eSpeed has stepped to the fore on the NewRuleSets.Project, and will serve as Cantor’s support lead for all five of the planned Economic Security Exercises envisioned in this project, beginning with the Asian Energy Futures event.

The NewRuleSets.Project is a two-and-a-half-year, five-workshop effort designed to explore how globalization and the rise of the New Economy are altering the basic "rules of the road" in the international security environment, with special reference to how these changes may redefine the U.S. Navy's historic role as "security enabler" of America's commercial network ties with the world. Not a data gathering effort, this project lives and dies with the participants we bring together at our workshops—from throughout the global financial and national security communities. The project has five main goals: 

• Explore how globalization and the rise of the New Economy are generating new rule sets with regard to how nation-states and national economies interact with one another 
• Determine how these new rule sets alter the basic "rules of the road" in the international security environment 
• Link these changes in the international security environment to the U.S. Navy's current quest for a "transformational strategy," with special reference to how these changes may redefine the U.S. Navy's historic role as "security enabler" of America's commercial network ties with the world              
• Translate these changes in the international security environment into conceptual paradigms of use to strategic planners in the international financial community 
• Generally deepen the cross-cultural understanding both sides--the Pentagon and Wall Street--bring to the table during periods of overlapping geo-strategic and geo-economic instability.               

Dr. Thomas P.M. Barnett serves as project director. He is currently a Professor/Senior Strategic Researcher in the DSD. Other DSD personnel involved in the project include: 

• Prof. Bradd Hayes, Senior Strategic Researcher, DSD
• Dr. Lawrence Modisett, Chariman, DSD
• CDR Carl Carlson, USN, Deputy Chairman, DSD
• Prof. Gregory Hoffman, Associate Researcher, DSD.

 

The global rule set that has characterized international relations throughout the Cold War period finds its roots in the systemic stresses of the 1930s—namely, the Great Depression and the rise of fascism in Europe. These twin developments led inexorably to the Second World War, from which sprang the hope that "never again" would the international community allow itself to engage in the sort of economic protectionism that destroyed most of the global economic connectivity achieved by “Globalization I” (roughly, 1870 to 1929). 

Based on that "never again" spirit, the postwar Western great powers, led by the United States, attempted to "firewall off" the experiences of the 1930s by creating a new global rule set, whose main attributes were exemplified by such international organizations as the General Agreement on Trade and Tariffs, the UN, the International Monetary Fund (IMF) and the World Bank (WB). 

This new global rule set engendered the second great period of economic globalization, creating what we've come to know as the globally networked "New Economy." As this New Economy spreads across the planet, it has suffered significant "growing pains" (e.g., Mexico ’94, Asia ’97-’98, Russia ’98, Brazil ’98-’99), leading some to question whether the postwar rule set is still appropriate for the 21st Century. In other words, as national economies become increasingly intertwined in this information technology-driven New Economy, legitimate questions arise as to whether or not a new global financial architecture is in order and, if so, what it might entail. 

While not focusing specifically on any of the ideas currently forwarded by economists for such a new financial rule set, our project takes as its starting premise that the current era will witness great change in the planet’s economy, and that these changes will eventually alter our definitions of national security. 

NOTE: A portion of this text is adapted from Thomas P.M. Barnett et. al, Final Report of the Year 2000 International Security Dimension Project, DSD Report 00-5, pp. 15-16, found online at <http://www.nwc.navy.mil/y2k/y2krep.html>.

As our starting point for analyzing how an emerging new global economic rule set could alter U.S. definitions of national security, we employ the three-tiered analytic perspective introduced by Kenneth Waltz in his seminal 1954 book on the theory of the causality of war entitled, Man, the State and War (New York: Columbia University Press). Waltz’s approach to this eternal question (“Why do interstate wars start?”) was simply to “view” the matter from three separate perspectives, which he labeled “images”:  

• The first image, or “bottom up” perspective, is that of humanity itself, or better stated, human nature. In other words, the question he posed was, is it the essential nature of humanity to engage in violence?
• The second image, or “straight on” perspective, involves the nation-states themselves. In other words, do certain types of states instigate wars while others do not?
• The third image, or “top down” perspective, involves the all-encompassing international system within which these wars between states occur. In other words, does the current structure (i.e., lacking Thomas Hobbes’ Leviathan, or authoritative enforcer of global order) simply allow or even encourage conflict among states?    

In essence, Waltz used these three perspectives to test—or poke holes in—conventional wisdom concerning the presumed complicity of man, states and the international system in fomenting war. 

We likewise employ Waltz’s analytical framework in discerning the future of inter-state relations in the post-Cold War era, which we will label the Era of Globalization. We think this three-tiered approach forces a certain discipline to our analysis by pushing us to dis-aggregate the emerging global rule sets according to the “location” of the needs they seek to address—namely, the international system, state governments, or individuals. 

NOTE: A portion of this text is adapted from Thomas P.M. Barnett et. al, The U.S. Marine Corps and Non-Lethal Weapons in the 21st Century: Annex A—Alternative Global and Regional Futures, Center for Naval Analyses Quick-Response Report 98-9, September 1998, pp. 2-3.

It is our baseline contention that most militaries—but especially the U.S. military—are largely “frozen” in Waltz’s nation-state image. Why so? 

In the Cold War, things were fairly straightforward, as both the international system (through blocs) and individuals (through ideologies) were kept in strict subordination to the state-centered superpower conflict. So when the Pentagon looked abroad, all it saw was "us" and "them" states, with that pesky nonaligned gang in between. The focus on states remains to this day. We call it the "Willie Sutton effect," after the famous bandit who, when asked why he robbed banks, replied, "Because that's where the money is." In other words, nation-states have long served as the preeminent collection point (i.e., taxes) for collective security efforts (militaries), but that has begun to change. 

The United States has not yet adjusted its state-centered defense policy to account for the two biggest security trends of the globalization era: 

• Power and competition have shifted upward, from the state to the system (in the form of the global economy, culture, and communications grid). 
• Violence and defense spending (e.g., small arms races, private security firms) have shifted downward, from the state to the individual.      

Worldwide state defense spending and arms transfers are down dramatically from Cold War peaks, leaving some observers to wonder if the U.S. military is being disintermediated from the global security environment—namely, the perception that it is both irrelevant to the rising market of system perturbations (e.g., financial crises) and largely impotent in responding to the booming market of civil strife. While this is a decidedly harsh judgment, we think it’s important to consider the possibility that the U.S. military is—in effect—losing its market share as global security is transformed by the New Economy. 

NOTE: A portion of this text is adapted from Thomas P.M. Barnett, “Life After DODth or: How the Evernet Changes Everything,” U.S. Naval Institute Proceedings, May 2000, p. 48.

Our take on the future stems from our appreciation of the different trends we see unfolding across the three Waltzian perspectives. First and foremost, we see a future of fewer interstate wars. The early 20th century's high volume of state-on-state warfare will not carry over into the 21st. Nuclear weapons ended great power-versus-great power warfare back in 1945, and as John Keegan predicts, the future belongs far more to civil strife than traditional war. 

However, on the international system level we’ll see the U.S. government focusing a lot of diplomatic attention on trying to keep systemic crises—usually triggered by financial tumults—from blossoming into real conflicts among states. Much of this future potential for system-based conflict arises from threats to the global information infrastructure (GII). We get only the slightest hint of this possible future through the emergence of worldwide computer viruses such as the “Love Bug” virus of early 2000. For now, such disruptions seem relatively minor, and since no focused motivations lie behind the acts, little danger is perceived. But it only makes sense that as Information Age economies become increasingly dependent on the movement of raw data, much as Industrial Age economies depended on the movement of raw materials, system-based conflict will be characterized by focused and well-motivated attacks on GII functioning. In short, this is a growing market. 

In comparison, real conflicts below the level of the nation-state (i.e., civil strife) should remain fairly constant in the future. Globally there have been a good three to four dozen conflicts every year since World War II that generate 1,000 or more casualties. And while these conflicts are real, U.S. interests tend to be virtual, affording us the flexibility to choose the ones we want to deal with (e.g., Bosnia) and to turn a blind eye to those we don't (e.g., Rwanda). 

NOTE: A portion of this text is adapted from Barnett, “Life After DODth,” p. 51.

So where can a military fit in this new global environment, where almost all the important crises are either too global or too local for most states to tackle with military force? In a world featuring both integrating globalization (i.e., we are all drawn together by the Internet, transportation, mass media, e-commerce, etc.) and dis-integrating localization (so why then do so many societies and economies seem to be coming apart at the seams?), the great challenge facing governments is fostering compromises between the two, otherwise known as glocalization—adapting the local to the global in ways that improve the former's living standards. 

Naturally, this can be fairly contentious, with many societies resisting what Thomas Friedman calls "revolution from beyond” (see his The Lexus and the Olive Tree; New York, Farrar Straus Giroux, 1999). In many societies, globalization is looked upon as forced Americanization, and frankly, that’s too much for most people to swallow. Localization, then, becomes a largely anti-Western rejection of the social homogenization fueled by globalization. In turn, any rejection of globalization constitutes a rejection of the concept of a single global rule set, meaning you tell the world, “Hey, in this corner of the planet we do things differently!” You can call it “Asian values,” or “Chinese characteristics,” but in effect you’re just saying that local identity still matters, even as your region may increasingly embrace globalization and all the social and political change that it ultimately forces. 

In short, glocalization is the containment of the Globalization Era—sort of a dot.communism, love it or leave it. This individual choice, made again and again in societies throughout the world, will define the ideological conflict of this age: Davos Man (globalization) versus Seattle Man (localization). 

NOTE: A portion of this text is adapted from Barnett, “Life After DODth,” pp. 49-50.

All of the published analytic output connected with the NewRuleSets.Project is available online at the Naval War College’s web site at the following address: http://www.nwc.navy.mil/newrulesets.

The web site provides a Project Summary, which we will update on a regular basis as the multi-year research effort unfolds.

For each decision event, such as the Asian Energy Futures event, we will post three products:

• Read-ahead package that details the event from a procedural standpoint
• Copy of the brief slides
• Event report, such as this annotated briefing.               

The web site also offers links to various related sites:

• Naval War College
• Center for Naval Warfare Studies
• Decision Strategies Department
• Biographies of NewRuleSets.Project personnel
• eSpeed.

The web site also offers direct email to project director Tom Barnett for the purposes of commentary and feedback.

The Asian Energy Futures event is only the first of at least five Economic Security Exercises we plan on conducting for the NewRuleSets.Project. Our current schedule is as follows:

• Asian Energy Futures (conducted 1 May 2000)
• Foreign Direct Investment (conducted 16 October 2000)
• Special Decision Event with the National Intelligence Council (conducted 6 December 2000 at the Center for Strategic Studies, Alexandria VA)
• Asian Environmental Solutions Futures (planned for 4 June 2001)
• Special Decision Event with the Naval War College Foundation Board of Trustees (planned for 14 June 2001)
• Food and water resources (tentatively Fall 2001)
• Critical assets of the New Economy (tentatively Spring 2001).

Beyond the June 2001 events, the schedule is tentative and subject to change. We may also add additional events as the research warrants.

Each of the decision events—unless otherwise noted—will occur in one of two places:

• Windows on the World conference center, World Trade Center, New York City
• Decision Support Center, McCarty-Little Hall, U.S. Naval War College, Newport, Rhode Island.     

If you or someone you know is interested in attending one of these events (space is extremely limited), please feel free to contact project director Tom Barnett with your nominations.

We designed the Asian Energy Futures decision event with these major goals in mind: 

• Generate "new maps" of global energy market relationships based on a clearer understanding of the developmental challenges faced by major Asian economies over the coming decade 
• Delineate the key scenario variables and dynamics likely to emerge as Asia's energy needs balloon in the coming years, focusing on possible regional flashpoints 
• Construct comprehensive downstream scenarios capturing both the regional and global adjustments to Asia's energy expansion.               

The event involved two dozen participants drawn equally from the financial community, the political-military community, and the regional expert community. The point of the effort was not to amass the most impressive collection of energy and Asian experts, but to bring together a diverse array of experts, decision makers, and opinion leaders from both the public and private sectors, and let the synergy of their intellectual interactions serve as the fundamental analytic output. In short, this event’s calling card was a “clash of paradigms,” and not a rigorous forecasting effort. 

The event unfolded over four major sessions. Each session involved both facilitated discussion by the group as a whole and individual participation in collective brainstorming tasks, in which we employed a decision software system known as GroupSystems. Using GroupSystems, each participant entered ideas anonymously via a dedicated laptop, while simultaneously commenting on each other’s inputted ideas asynchronously via a portable Local Area Network, or LAN. In effect, then, we interspersed facilitated discussion with a LAN equivalent of a “chat room” where we explored numerous specific ideas in greater detail.

The Asian Energy Futures event basically explored, over four substantive sessions, a rough "influence net" model that we’ve constructed regarding the key dynamics of Asia's energy future and its impact on the global economy and security environment: 

• Concerning “The Choice,” we conducted one session called “You Make the Call! Participants were shown the current energy profile of the country(ies) in question (expressed as percentage breakdown by major category—namely, oil, natural gas, coal, and renewable), as well as the expected total energy requirement for 2020, and were asked to propose a new percentage breakdown for the 2020 timeframe. We did separate mini-sessions on Japan, India, China, the rest of Asia, and Asia as a whole.
• Concerning “The Players,” we conducted a session called “The List” (based on the cable network VH-1's show of the same name). Participants were asked to nominate countries and/or non-state actors for the following "best awards": Best New Villain, Best New Ingénue, Best New Odd Couple, Best New Long-Distance Romance, Most Likely to Get Hitched, and Most Likely to Get Dumped (these categories are explained in detail in later slides). 
• Concerning “The Unfolding,” we conducted a session called “Scenario Flashpoints,” where participants wrote advisory emails to the leaders of countries involved in three crisis scenarios: oil blockade/sanction vignette, gas pipeline disruption vignette, and coal emissions/air pollution vignette.
• Concerning “The Adjustment,” we conducted a session called “Headlines from the Future,” where participants named four long-term outcome scenarios for Asian energy developments, brainstormed likely headlines found along each pathway, and decided which Asian states are most likely to end up in each scenario.

All of these participant brainstorming sessions were captured in the GroupSystems software program for our subsequent analysis. They form the basis for the analysis we present in this report.

Our participants can be grouped in the following manner:

Foreign Policy

• Dr. David Gordon, National Intelligence Council
• Cdr. Mark Montgomery, USN, National Security Council
• Mr. Robert Randolph, U. S. Agency for International Development

Military

• Under Secretary of the Navy Jerry Hultin
• Dr. Leif Rosenberger, U.S. Pacific Command
• Dr. Alberto Coll, Center for Naval Warfare Studies
• Amb. Paul Taylor, Center for Naval Warfare Studies
• VAdm. Arthur Cebrowski, USN, U.S. Naval War College.

Financial

• Adm. William Flanagan, USN (ret.), Cantor Fitzgerald
• Dr. Philip Ginsberg, Cantor Fitzgerald
• Mr. Doug Gardner, eSpeed
• Mr. Lundy Wright, Morgan Stanley Dean Witter
• Mr. Neal Wolkoff, New York Mercantile Exchange
• Mr. Roy Nercesian, Poten Partners
• Mr. Mike Feeley, Sino-American Development Corporation.

Energy

• Mr. Jim Caverly, Department of Energy
• Dr. David Jhirad, Department of Energy
• Mr. Jim Bishop, Caithness Energy
• Dr. Dennis Eklof, Cambridge Energy Research Associates.

Research

• Capt. Dave Duffie, USN, Council on Foreign Relations
• Dr. Minxin Pei, Carnegie Endowment for International Peace
• Dr. Ellen Frost, Institute for International Economics/National Defense U.
• Dr. David Baldwin, Columbia University
• Dr. Katsuaki Terasawa, University of Mississippi.

This graphic serves as both table of contents for the presentation of analysis to come and as rough theoretical model for the NewRuleSets.Project as a whole. 

On the question of Asia’s future energy requirements, we break the process down into five distinct stages (moving from left to right across the graphic): 

• We begin with the Here and Now time period, which encompasses the Starting Line environment (i.e., current global energy market), the dialectical relationship between Plans (what Asian states hope to achieve in energy consumption by 2020) and Realities (the roadblocks they may face in that quest), and the Altered States (new roles, new relationships) that may result from whatever gap arises between what is planned and what actually unfolds.
• Moving from the Here and Now into New Rule Sets, we describe the transition point as Asia’s fundamental acceptance of, and adaptation to, the energy Rules of the Road, meaning certain underlying realities, trends, and “iron laws” that cannot be ignored if progress is to be achieved in meeting most or all of Asia’s planned energy needs up to the 2020 timeframe.
• In the New Rule Sets time period, we define two possible pathways: one where Asia Finds [its] Way to achieving its ambitious energy growth plans, and one where countries Lose [their] Way. Rather than trying to present an all-encompassing theoretical model of how those pathways unfold, we offer instead a “black box” model, or Scenario Dynamics Grid that displays a matrix listing of the key economic, political, technological, cultural, environmental, and security dynamics involved in Asia’s expected energy expansion.
• Moving from the New Rule Sets to the There and Then, we describe the transition point as a series of Tipping Points, or paradigm shifts that we think Asia must undergo before being able to achieve its energy growth targets within the 2020 timeframe.
• In the There and Then time period, we lay out a series of possible sign posts (here, projected newspaper headlines) for both positive (Good Signs) and negative (Bad Signs) outcome scenarios. We also present an X-Y axis with four major outcome scenarios, or Landing Paths, and wrap up this model with a simple prediction of “who ends up where?” (Kto Kovo?, or the Russian phrase meaning, Who gets whom?).  

We begin our analysis with the Starting Line.

We begin our Starting Line analysis by noting the best current estimates of global oil reserves, as defined by the Energy Information Administration (EIA), U.S. Department of Energy (DOE), at their web site <http://www.eia.doe.gov/emeu/iea/table81.html> (last updated on 02/05/2001).

EIA data divides up the world into seven major categories:

• North America
• South America (to include Central America)
• Europe (i.e., Western Europe only)
• Former Soviet Bloc (Eastern Europe & Former U.S.S.R., to include what we now identify as Central Asia)
• Middle East
• Africa
• Asia (Far East and Oceania).*

As the data makes clear, the Middle East dominates global oil supplies, with Saudi Arabia as the largest player in the global market (26 percent).

* For the purposes of this report, we’re defining Asia to include the following states: Afghanistan, Bangladesh, Bhutan, Brunei, Cambodia, China, Fiji, French Polynesia, Hong Kong, India, Indonesia, Japan, Kiribati, Laos, Malaysia, Macau, Maldives, Mongolia, Myanmar, Nauru, Nepal, New Caledonia, Niue, North Korea, Pakistan, Papua New Guinea, Philippines, Samoa, Singapore, Solomon Islands, South Korea, Sri Lanka, Taiwan, Thailand, Tonga, Tuvalu, Vanuatu, and Vietnam. Note that Australia and New Zealand are not included in this definition. Like Japan, they are considered part of "Industrialized Asia," but we exclude them on the basis of the strong political and cultural ties to the West—meaning they already adhere to a Western-defined rule set.

Next we note the best current estimates of global natural gas reserves (which does not include any estimates of undersea methane hydrate deposits). This data is likewise drawn from the EIA’s web site, and can be accessed at the address <http://www.eia.doe.gov/emeu/iea/table81.html> (last updated on 02/05/2001).

As the data makes clear, the Middle East and Former Soviet Bloc combine to account for almost three-quarters of the known proven gas reserves, with the Russian Federation as the single most dominating presence in the global market (33 percent).

Iran leads the Middle East with 16 percent of the global total.

Finally we note the best current estimates of global recoverable coal reserves (both anthracite/bituminous, known as the "cleaner" coal, and lignite/ subbituminous, known as the "dirtier" coal). This EIA can be accessed at the address <http://www.eia.doe.gov/emeu/iea/table82.html> (last updated on 01/31/2001).

As the data makes clear, coal is the one great energy source not concentrated in the Middle East, but spread rather evenly between three main regions:

• North America
• Former Soviet Bloc
• Asia.

To the surprise of many, it’s the United States which stands as the single largest presence in the global coal market, with 25 percent of the total. The U.S. holds the greatest amount of both types of coal.

Russia is the largest former Soviet Bloc player at 16 percent, and China leads Asia at approximately 12 percent of the global total.

Here we present the regional breakdown of total energy use for 1999 and expected demand for the year 2020. The measure used is quadrillion British thermal units (Btu).

A good rule of thumb for thinking about Quad Btu is that you can take the annual number for a region, divide it by two, and that would give you the rough equivalent in millions of barrels of oil per day the region would need to burn if it was achieving that entire energy amount by oil alone. For example, North America used 116 Quad Btu in 1999, so that would equate to approximately 58 million barrels of oil a day (mbd) if that entire amount was achieved by oil alone. For point of comparison, we’ll note that the United States currently uses about 20 mbd, importing roughly half that number.

The major impression one takes away from the data is that a changing of the guard is happening in global energy consumption, if the projections regarding Asia are to be accepted. Currently, North America accounts for the largest regional share of energy use at 30 percent of the global total. Asia stands in second place for 1999 at 24 percent.

By 2020, however, Asia will surpass North America and occupy the top share at 31 percent, while North America will decline to 26 percent. The other regions of the world will shift only a percentage point or two, keeping the same order throughout the time period.

This data was obtained from the Energy Information Administration’s annual International Energy Outlook, the March 2001 edition with projections to 2020. It is available online at <http://www.eia.doe.gov/oiaf/ieo/index.html>.

LEGEND: NA = North America, WE = Western Europe, AUS = Australia, EE/FSU = Eastern Europe/Former Soviet Union, ASIA = Asia (excluding Australia), SWA = Southwest Asia, AFR = Africa, LAC = Latin America/Caribbean

Global energy use is expected to increase by roughly 60 percent from 1999 to 2020, but the bulk of that increase will be centered in Asia, where energy demand is expected to roughly double by 2020 (103 percent). In comparison, the world minus Asia will increase only 45 percent over the same timeframe.

Asia’s expected plus-ups are significant no matter what the energy category:

• Oil increases by roughly 88 percent
• Natural gas, 191 percent
• Coal, 97 percent
• Nuclear, 85 percent when Japan is included, but 178 percent when it is not
• Hydroelectric/renewable, 109 percent.*               

When members of the Western financial community talk about Asia’s economic development between now and 2020, they describe it as basically the greatest massing of private capital in human history. As these numbers suggest, much of that capital employment will focus on meeting the region’s burgeoning energy requirements, primarily in terms of generating the massive growth in energy distribution infrastructure required to reach these very ambitious targets.

We decided to focus our first NewRuleSets decision event on Asian energy precisely because of the huge numbers involved: not only in terms of energy growth, but the unprecedented external capital flows needed to pull it off over a relatively short historical time frame. In short, new rule sets will inevitably emerge from this much structural change in the global economy.

* Calculated from EIA’s International Energy Outlook 2001, pp. 175-83.

Projecting ahead from our current starting line to Asia’s expected energy requirements in 2020, we begin our cursory review with coal.

Currently, Asia gets virtually all of its coal from in-region, with the four largest suppliers being:

• China (which mostly supplies itself)
• India (which mostly supplies itself)
• Indonesia
• Australia (which, given it’s relative proximity, we consider to be part of Asia proper in this regard).

Asia’s relative autonomy on the subject of coal will continue through 2020, as it will "self-supply" almost all of its expected coal requirements, which are projected to roughly double over that time span.*

In essence, Asia has all the coal it needs within the region to meet both its current and projected needs. To the extent that coal is the answer, there are no difficult questions regarding access to supply in this decade or the next.

* Calculated from EIA’s International Energy Outlook 2001, pp. 76.

Our review of natural gas offers a similarly sanguine picture regarding near-term access to supply. By way of example, Japan currently accounts for the largest share of natural gas use in Asia (almost a third). It imports methane almost exclusively in liquid form (liquid natural gas, or LNG) via tankers, with the overwhelming bulk (79 percent) coming from just four in-region countries:

• Malaysia
• Indonesia
• Brunei
• Australia.*             

In terms of the total gas exports shipped by those four countries, Japan imports almost three-quarters (72 percent). That means not only does Japan get the vast majority of its gas from these four in-region states, but it buys the vast majority of their exports (the rest going almost exclusively to South Korea and Taiwan).**

If, as expected, the region’s natural gas demand increases 191 percent by 2020, the bulk would apparently have to come from out of area, since three Asian states currently buy up 99+ percent of what’s available for sale in region. Where does that additional amount of roughly 16 trillion cubit feet come from? Logic says it comes from SW Asia and the Former Soviet Bloc states.

Assuming it would be too large a bulk to import exclusively via LNG shipping, then Asia is looking at significant infrastructural expansion in intra- and inter-regional gas pipelines, and that means foreign direct investment in very large sums.

* The remainder comes from the United States, Qatar, and the United Arab Emirates.

** Calculated from EIA’s World LNG Imports by Origin, 1999 (Billion Cubic Feet), available online at <http://www.eia.gov/emeu/international/LNGimp99.html> (last updated on 09/25/2001).

Before we discuss where Asia will get its oil over the next decade, we want to explain how we arrive at these million barrels per day (mbd) numbers.

For purposes of comparison, we start with the U.S.’s oil equation for the year 1998, which, as you will see, is very similar in rough numbers to that of Asia as a whole.

The United States used roughly 19 million barrels per day in 1998. It achieved that number by producing roughly half and importing roughly half. The one "barrel" it sold went in the form of refined oil products.*

* Calculated from EIA’s World Petroleum Supply and Disposition, 1998, found online at <http://www.eia.doe.gov/emeu/iea/table31.html> (last updated on 01/29/2001).

Turning to Asia’s equation for the same year, we see a similar requirement at 19 mbd, with roughly the same percentage of both production and imports (because most of what’s sold by Asia remains in region).

So, from today’s perspective, Asia and the U.S. are essentially similar in terms of oil profiles:

• Roughly half is produced at home
• Roughly half is imported from "outside" (defining "outside" for Asia as out-of-region).
• Total usage is approximately 20 mbd.*               

The big difference is that, of the roughly 10 mbd each imports from "outside," 90 percent of what Asia imports comes from the Middle East, while about one-fifth of U.S. imports originate from the Persian Gulf.** The U.S. gets the bulk of its imports from four western hemispheric sources (in descending order of volume):

• Canada
• Venezuela
• Mexico
• Colombia.***               

* Calculated from EIA’s World Petroleum Supply and Disposition, 1998, found online at <http://www.eia.doe.gov/emeu/iea/table31.html> (last updated on 01/29/2001).
** As noted in Fereidun Fesharaki, "Energy and the Asian Security Nexus," Journal of International Affairs, Fall 1999, vol. 53, no. 1, pp. 90 & 97; also EIA’s International Energy Outlook 2000, p. 38.
*** Calculated from Matthew Wald, "The United States, OPEC and Oil: A Snapshot," New York Times, 26 March 2000, p. B3. Saudi Arabia exports oil to the U.S. at a rate roughly equivalent to that of Canada, or 1.5 mbd.

Asia’s import requirements diverge significantly from that of the U.S. come 2020. While the U.S. is expected to use a total of 26 mbd in 2020 (importing in the range of 18 mbd, or roughly two-thirds), Asia’s total requirement is expected to jump to 36 mbd. As estimated by Cambridge Energy Research Associates, Asia will be fortunate to produce approximately 8 mbd at that point (their expected peak rate for 2000-2005), meaning a shortfall of approximately 28 mbd that will have to be met from extra-regional sources.*

While the U.S. import requirement will increase by 7 mbd by 2020, only 2 of that 7 will come from the Persian Gulf, meaning U.S. dependency on the region will remain relatively stable over the time frame, measured as a percentage of imports. The Mideast’s share of Asian imports cannot increase much from its currently high percentage (90%), but clearly the volume is likely to jump dramatically higher (upwards of 12 mbd). Is this an unrealistic projection of the Mideast’s productive capacity? Most experts say no. In short, it’s not the geology that generates the uncertainty here, but the politics and the economics.

But one thing is clear: Asia will have less control over its energy future. Today it produces roughly 40 percent of what it needs in oil, but in 20 years it will produce somewhere between a quarter and a third of what it needs.

* These calculations are obtained from EIA’s International Energy Outlook 2001, p. 39, Fesharaki, "Energy and the Asian Security Nexus," p. 97; and Daniel Yergin, Dennis Eklof & Jefferson Edwards, "Fueling Asia’s Recovery," Foreign Affairs, March/April 1998, pp. 38-39.

If Asia is already overwhelmingly dependent on the Persian Gulf for its oil imports, then conversely the Persian Gulf is becoming increasingly dependent on Asia as its primary market.

In 2000, the Persian Gulf will export roughly 19 mbd, of which almost two-thirds (63 percent) will be exported to Asia. The West (defined here as the U.S. and Western Europe), in contrast, will account for only 24 percent of the Gulf’s global market.*

In short, the Persian Gulf is largely Asia’s oil and not—as is commonly assumed—the West’s. So, if Asia is rightly described as hooked on Gulf oil, we can likewise describe the Gulf as hooked on Asia’s energy market. This relationship, while increasing in strategic importance, is hardly one-sided, but rather a co-dependency that portends rising Asian interest in Middle East stability and rising OPEC interest in Asia’s continued economic growth.

By definition, the rise to primacy of an Asian interest in Middle East peace would constitute a dramatically different political-military rule set.

* These calculations are obtained from Fesharaki, "Energy and the Asian Security Nexus," p. 90.

Moreover, the balance of Western versus Asian national interest in Middle East stability will shift increasingly in the latter’s favor, as this slide suggests.

By 2010, the Persian Gulf is expected to produce 26 mbd for export, with just over a tenth destined for the West, while Asia’s share will jump sharply from roughly two-thirds to three-quarters.

In absolute terms, Asia’s Gulf connection will be almost six times larger than that of the West’s (18.8 mbd to 3.2 mbd).*

To demonstrate the difference here, let’s imagine that Persian Gulf exports were completely cut-off in 2010 for some disastrous reason. In that case, the West would have to replace something on the order of three-to-four percent of its total energy requirement (3.2 mbd equals roughly 6.5 Quad Btu, which is 3.2 percent of the West’s expected 2010 Quad Btu total of 204). In contrast, Asia would need to replace upwards of 28 percent of its total energy requirement (18.8 mbd equals roughly 38 Quad Btu, which is more than a quarter of Asia’s expected 2010 Quad Btu total of 137).

* These calculations are obtained from Fesharaki, "Energy and the Asian Security Nexus," p. 90.

Having completed our cursory tour of Asia’s Starting Line energy environment, let’s now turn our attention to the dialectics of Plans versus Realities. The analysis presented in this section comes directly from the GroupSystems sessions and facilitated discussions of Session II(A) of the 1 May decision event, which we labeled, "You Make the Call!"

In this session, we put the participants through an alternating series of GroupSystems exercises and facilitated discussions for each of four subjects:

• Japan
• India
• China
• Asia as a whole.               

The process, in each case, unfolded as follows:

• First we showed the participants the subject’s current (1997) percentage spread among energy categories (oil, gas, coal, and "other"—meaning nuclear and renewables).
• Then we showed EIA’s predicted Quad Btu increase from 1997 to 2020 and asked the participants to vote collectively as to the likely changes in percentage spread among the energy categories resulting from this overall increase.
• Once voting was complete, we engaged in a 20-minute facilitated discussion of the likely roadblocks the subject would face in trying to achieve the 2020 Quad Btu target.
• We concluded each mini-session with a GroupSystems brainstorming session where participants entered the roadblocks each felt would be most significant.

The updated DoE projections (not available at the time of the event) for 2020 are presented in this revised edition. In the cases of Japan and India, the baseline update from 1997 to 1999 was statistically insignificant, but in the other two cases (China and Asia As a Whole), it was not only significant in terms of the baseline, it also reflected dramatically different DoE projections for 2020. We will compare and contrast the 2000 and 2001 data from DoE for China, Asia as a Whole, and India (whose long-term projections have likewise changed dramatically despite no significant change in baseline numbers).

As an initial point of comparison, we show the percentage spread across major energy categories for the United States in 1999 and the expected shares for 2020. The Quad Btu growth in this case is from 97 in 1999 to 127 in 2020—a 31 percent increase.*

The modesty of the U.S. growth rate (roughly half the global average) is reflected in the relatively minor percentage share shifts than occur over the 21-year time frame:

• Oil and coal essentially retain the same percentage shares
• Upward movement in natural gas (23 to 28 percent) and downward slide in nuclear and renewables (15 to 11 percent).

This is clearly the profile of an advanced economy enjoying predominately intensive growth (i.e., greater productivity) vice extensive growth (i.e., more resources employed).

* All energy data presented in this section comes from the EIA’s International Energy Outlook 2000, pp. 169-77 and International Energy Outlook 2001, pp. 175-84.

In our first case, Japan, we see an Asian economy that is distinguished by a very small reliance on coal (13 percent) and a relatively high reliance on "Other" (22 percent), which reflects the country’s extensive employment of nuclear power. Compared to the similarly advanced economy of the United States, Japan uses substantially more oil (although per capita use of oil in the U.S. is much higher) and a bit more than half the percentage share of natural gas.

Despite the small percentage share of coal, Japan remains the world’s biggest importer of coal, with a quarter share of the global market. As such, it has had an historically substantial influence over the global price of coal, as—according to the EIA—"other Asian markets also tended to follow the Japanese price in settling contracts." Japan’s influence is no longer what it was following a 1996 revision of its benchmark pricing system, which marked an Asian-wide shift from contract purchases to greater reliance on the spot coal market.*

Japan is also "by far the world’s largest importer of LNG," according to the EIA, which, when combined with its heavy reliance on imported coal and oil, makes it one of the world’s most energy-dependent nations—and basically all of it is shipped.**

Looking at Japan’s overall Quad Btu growth, we see a most modest rise of just under 20 percent.

* EIA’s International Energy Outlook 2000, pp. 79-80.
** EIA’s International Energy Outlook 2000, p. 119.

In our "handicapping" section (top half of slide), we offer a three-way comparison between:

• DOE’s percentage share breakdown for Japan’s energy use in 1999
• DOE’s percentage share breakdown for Japan’s expected energy demand in 2020
• The collective vote by the workshop participants as to Japan's likely percentage share breakdwon in 2020.               

DOE’s latest prediction is basically that Japan will swap oil for gas, reducing the former’s percentage share to 46 (from 53) and increasing the latter’s to 16 (from 12). Our workshop participants essentially agreed with this prognosis in their vote, but then backtracked substantially in the subsequent discussion (as signified by the white arrows at the far right), where many doubts were raised about Japan’s commitment to further expansion of it nuclear power industry, largely as a result of its increasingly poor safety record. Several of our energy experts noted that Japan was in the process of drastically downsizing its plans for new plants in the coming decade, signaling perhaps a new era in Japanese energy planning. Given these concerns, we think it’s fair to say that the group’s final consensus on Japan’s energy profile in 2020 was that it would be forced toward greater reliance on coal and natural gas to produce electricity, and that the "Other" share would decline.

Turning then to "handicaps," we cite three (arrayed in Waltzian fashion):

• On the system level, we see the Kyoto Protocol’s limits discouraging the use of coal . . .
• Which, when combined with the rise of the domestic nuclear NIMBY (not-in-my-back- yard) sentiment in Japan . . .
• Puts even more pressure on Japan to rely on natural gas or--more specifically for now--LNG shipping.  

* The 1997 shares we displayed to our participants at the actual event differed only in Oil (54 percent) and Coal (12 percent).
** International Energy Outlook 2001 projections. The 2000 edition projections were: Oil, 50 percent: Natural Gas, 17 percent; Coal, 12 percent; and Other, 21 percent).

Turning now to India, we note a 1999 energy profile that—when compared to Japan’s advanced economy—is clearly far more dependent on coal. If we think in terms of "high carb" versus "low carb" (i.e., carbon emissions), then India’s economy is just over four-fifths high carb (52% coal + 33% oil = 85% high carb), compared to a Japan that is only two-thirds high carb (13% coal + 53% oil = 66%).*

The upshot is that low carb elements (natural gas, nuclear, and renewables) remain marginal within India’s overall energy profile, although EIA predicts an almost 10 percent decline in India’s carbon intensity over the 1999-2020 time period.**

It only makes sense that India’s high-carb diet will change, given the predictions of increased energy use through 2020. India, according to the EIA, should more than double its energy needs in the coming generation, meaning that even if the current shares were held constant, all would have to grow 100 percent or more.

* As a point of comparison, the U.S.’s 1997 high-carb share was just 58 percent (19% coal + 39% oil).
** EIA’s International Energy Outlook 2001, p. 164. Carbon intensity is measured as millions of metric tons of carbon equivalent per quadrillion Btu. India’s carbon intensity in 1999 is 19.88, and is predicted to drop to 18.23 in 2020. China, in comparison, will see its carbon intensity drop 5 percent over the same time frame (20.92 to 20.01). The U.S.’s carbon intensity will actually increase 3 percent by 2020, rising from 15.62 to 16.06.

When handicapping India’s future energy profile, our workshop participants basically agreed with DOE’s prediction that the country would substitute natural gas for coal, primarily in terms of electricity generation. However, our experts were far less sanguine about the size of that percentage share shift, given the tremendous overall rise in energy consumption.

While access to natural gas is not considered a problem for India (e.g., neighboring Bangladesh possesses substantial amounts), attracting the necessary foreign capital is. As one participant noted, China attracts about 25 times more foreign direct investment (FDI) than India (although FDI there has increased dramatically in the last couple of years), signaling an overall lack of investor faith in a political system that is marred by center-regional government tugs-of-war over subsidies (e.g., electricity) and substantial amounts of corruption at all levels of administration.

Sub-nationally, state governments seem caught between a rock and a hard place on infrastructural investments: unreliable miners (who often strike) push them to move off coal, and yet, their poor state of finances makes investing in natural gas difficult. Meanwhile, India’s electrical transmission system remains porous and in great need of upgrading, as EIA estimates that a fifth of the country’s electrical power is lost en route to consumers. Worst still, much of this loss is through "nontechnical" means (theft, bad accounting, etc.).*

One result of this poor state of affairs is that India’s booming high-tech industry, the shining star of its economy, has taken—in many instances—to do-it-yourself energy generation, meaning the construction and operation of stand-alone electrical generation and transmission systems. While this answers the short-term specific needs of one economic sector, it bodes poorly for India’s long-term potential to meet it’s growing energy requirements.

* The 1997 shares we displayed to our participants at the actual event differed slightly in Oil (31percent), Coal (53 percent), and Natural Gas (8 percent).
** EIA’s International Energy Outlook 2000, p. 118.

The Energy Information Agency’s International Energy Outlook 2001 presents radically different projections for India in the year 2020 from that of the previous year’s edition. Dramatically curtailed projections for both natural gas (a full 2 trillion cubic feet less) and coal (roughly 100 million short tons less) combined with a projected 40 percent increase in the oil requirement (up from 4.1 million barrels a day to 5.8) makes for a very different energy share profile.

What gives? On oil, DoE’s explanation is a revised appreciation of the impact of automobiles in India’s future. The vast bulk—or 86 percent—of the projected increase from 1999 to 2020 is accounted for by transportation. With its demand increasing an average of 5.4 percent a year, India basically leads the global pack over the next generation.* Simply put, car ownership is seen in India as a sign of wealth, and enough wealth is emerging there to cause this dramatic shift over time.

On natural gas, DoE says the following:

Many LNG import schemes are proposed for the country, and there are frequent announcements about them, but few are under construction or making concrete progress. To facilitate gas development, India needs and continues to pursue comprehensive policies for natural gas and, specifically, LNG. However, related policymaking and reform are proceeding slowly in India’s complex democracy.**

As regards coal, DoE notes that India is moving to deregulate its domestic production market, which up to now has been dominated by a single company, Coal India Limited. Projected long-term consumption is presumably expected to decline as prices increase.***

* International Energy Outlook 2001, p. 30.
* International Energy Outlook 2001, p. 59.
* International Energy Outlook 2001, p. 71.

Turning now to China, we encounter a high-carb profile in the extreme, as just under 90 percent of the country’s energy needs are met with coal and oil (61% coal + 28% oil = 89%). Given the projected huge increase in overall energy usage by 2020 (163 percent), any reduction of that combined percentage share would require massive investment in energy infrastructure for natural gas, nuclear, hydroelectric (e.g., Three Gorges Dam project), and other renewables.

What complicates this picture even further is the projected five-fold increase in China’s per capita motorization (i.e., ownership and use of cars). While this increase, if it occurs, would still leave China several times removed from the U.S.’s per capita rate (54 cars per 1,000 compared to 797 in the U.S.), the pressure it would place on the nation’s poorly developed road network would be substantial, generating competition for scarce public funding that might otherwise be employed in energy.* This "motorization" of China’s transportation system likewise creates certain pressures for more oil use.

But the biggest driver by far for China over the next generation is the more than three-fold increase predicted in electricity consumption (1,084 billion kilowatt-hours in 1999 to 3,331 in 2020). By 2020 China will be consuming as much electricity as the U.S. is today.**

Foreign direct investment has, in the words of the EIA, "played a critical role in financing the expansion of China’s electric power infrastructure and is expected to play an even more important role in the future," despite being restricted—for now—to strictly joint ventures involving less than 50 percent ownership.*** The question is whether such an approach can accommodate a three-fold increase in power generation requirements.

* EIA’s International Energy Outlook 2000, p. 133.

** EIA’s International Energy Outlook 2001, p. 184.
***EIA’s International Energy Outlook 2000, p. 120.

On this slide, we will show you exactly the numbers we presented to our participants, which were based on the 2000-edition DoE International Energy Outlook. The next slide will contrast that year’s projection with the 2001 edition.

In 2000, DOE predicted China would seek to swap coal for gas in very large absolute amounts, resulting in an 7-point percentage share decline for coal and an almost five-fold percentage share increase for natural gas (representing more than a ten-fold increase in trillion cubic feet). In discussion, our workshop participants displayed a hefty skepticism regarding China’s ability to increase its use of natural gas so dramatically over a single generation, and yet arrived—on their own—at the same 2020 percentage share of 10 percent predicted by DOE.

Where our experts differed from DOE’s projections is that they predicted an even steeper decline in the percentage share of coal. As the discussion unfolded, we discerned four rationales for this vote: 

• Given China’s already substantial environmental problem set connected to the burning of coal (to include individual burning for purposes of cooking), doubt that the country could increase its absolute consumption by 140% over the time period (e.g., social costs would simply be too high to ignore)
• Skepticism on China’s ability to increase its consumption of natural gas limited their willingness to increase its 2020 percentage share beyond 10 percent.
• Appreciation of China’s booming domestic transportation demand made them reticent to reduce the oil percentage share (they actually increased it by three points)
• Optimism that official Chinese pronouncements on wanting to better protect their environment and focus more on renewable energy sources were not just all talk.

In terms of handicaps, participants voiced much concern over a perceived "coming train wreck" between China’s immense need for FDI and the reality of its technically bankrupt banking system. In short, something’s got to give, leading to an overall strong skepticism about China’s ability to achieve the Quad Btu increase currently projected by DOE within the 2020 time frame.

DoE’s 2001 International Energy Outlook not only drastically alters its 2020 projections for China, it details significant shifts in the country’s energy profile in just the last two years (1997 to 1999).

The first two columns above detail the shifts that have occurred since 1997:

• Significant uptick of over 10 percent in oil
• Huge cut of 30 percent in coal
• Dramatic increases of almost a third in nuclear and other renewables.               

What these shifts say about China is that the country is very serious about weaning itself off coal, and that the impact of the emerging car culture is already being felt. Of course, we may be underestimating China’s use of coal, as official statistics may not capture unsanctioned mining operations.

Looking to 2020, we see equally dramatic shifts in DoE projections that reflect the changes of the past two years:

• An additional million barrels a day of oil has been added.
• Just over 1,000 million short tons of coal has been cut from the 2020 total, or roughly the same amount as the rest of Developing Asia is expected to burn that year
• The projection for nuclear power (billions of kilowatthours) is increased by almost a third and the projection for hydroelectricity and other renewables is increased by almost half!

DoE offers no special explanations for these dramatic shifts in projections in the 2001 edition. In reality, these shifts just demonstrate how today’s changes can be amplified over tomorrow’s expected growth trajectory. But note this: DoE’s projections are now much closer to those of our workshop participants, who are looking far more prescient with time—at least on China.

Turning now to Asia as a whole, we see a high-carb quotient of 79 percent (36% coal + 43 % oil = 79%), although that coal number is largely a reflection of India and China alone, rather than the region as a whole. Asia’s oil and "Other" ratios are roughly similar to that of the U.S. Asia’s energy consumption is predicted to roughly double over the next generation, with electricity and transportation being key drivers.

As the EIA 2001 report states, "The most rapid growth in electricity use is projected for developing Asia, at 4.5 percent per year." At that growth rate, "Developing Asia" (not including Japan) will see it’s share of global electricity consumption leap from 18 percent in 1999 to 26 percent in 2020. That represents a 250-percent increase in total electricity consumption, with coal expected to maintain its current 50+ percent share of generation input.*

EIA’s take on transportation in Asia is equally bullish, stating that the sector’s growth "is expected to be among the fastest-growing" through the 2020 time frame. While per capita motorization rates will skyrocket, most of the region’s countries are starting at a very low baseline. Still, given that we’re talking about roughly half the world’s population, any sizeable per capita increase will, in EIA’s words, "have an enormous impact on world fuel markets."**

As we noted earlier, the latest consensus predictions of Asia’s oil import needs foresee an increase of roughly 12 million barrels a day by 2020. Factoring in EIA’s estimate that total transportation energy use in Developing Asia will expand from 6 mbd to 16 (or an increase of 10 mbd),*** that transportation growth will account for the lion’s share of Asia’s increasing oil import requirement over the coming decades (understanding that oil is not much used for electricity generation anymore).

* EIA’s International Energy Outlook 2001, pp. 119-22.
** EIA’s International Energy Outlook 2000, p. 140.

***EIA’s International Energy Outlook 2001, p. 137.

In the 2000 edition of the International Energy Outlook, DOE predicted a swapping of oil for gas through the 2020 timeframe, with coal’s percentage share not declining (meaning a rough doubling in absolute terms).

We asked our workshop participants to vote on Asia’s 2020 energy shares both pre- and post-discussion of the various subsets (Japan, India, China). Prior to these discussions, participants differed from DOE’s take by emphasizing a strong coal for gas swap. As a result, our participants calculated no substantial shift in oil’s percentage share, reflecting their oft-stated sense of uncertainty surrounding Asian transportation demand.

In post-discussion voting, participants enunciated the same basic shift, albeit a more muted one, with coal coming down less and gas going up less. This shift reflected the participants’ growing appreciation of the challenges involved in increasing Asia’s use of natural gas to the extent they originally imagined. When this final participant prediction is compared to DoE’s latest (2001) projections, their reasoning seems more than sound.

The main challenge participants cited was the lack of sufficient rule sets throughout the Asian economies to attract the necessary amount of FDI. In short, the argument offered was that the region had not sufficiently "cleaned up its financial act" as a result of the Asian Flu of 1997-98.** As such, participants were openly skeptical of the Asian governments’ ability to rationally allocate resources in the absence of better market mechanisms and greater financial accountability. In a word, there’s not enough transparency to make FDI flow at rates commensurate with envisioned growth trajectories.

* The 1997 shares for Asia As a Whole were 38 percent Oil, 10 percent Natural Gas, 42 percent Coal, and 10 percent Other.

** At the beginning of the workshop, we asked participants (using GroupSystems) to give us the year of the next Asian financial crisis and tell us why it would occur. The consensus opinion was that one was highly likely within the next five years and that poor banking/financial market practices would be the main cause.

Having explored the dialectical tension between Asia’s best laid plans and the realities these countries will likely encounter along the way to 2020, we now turn our attention to how these challenges could alter our perception of the roles played by these countries both within the region’s political arena and on the international stage.

In this session, we played a variation on the theme of VH-1’s late-night cable show, "The List":

• First we asked the participants to nominate countries and/or non-state actors for six "best" awards in a GroupSystems brainstorming session.
• Then we spent approximately 45 minutes in facilitated discussion exploring the various generated lists. 
• We wrapped up the session by having the participants revisit the six individual lists and vote for their favorite in each.

The six awards were as follows:

• Best New Villain—country or non-state actor most likely to prove disruptive to Asian energy markets/development
• Best New Ingenue—country or non-state actor most likely to seek U.S. security assistance/guarantees as a result of Asian energy developments
• Best New Odd Couple—unusual in-region country pairing that occurs as a result of Asian energy developments
• Best Long-Distance Romance—pairing of in-region country with out-of-region country that occurs as a result of Asian energy developments
• Most Likely to Get Hitched—countries most likely to erect cross-border pipelines
• Most Likely to Get Dumped—countries most likely to see energy market/development (either productin or consumption) disrupted.

In the category of Best New Villain, or the country or non-state actor most likely to prove disruptive to Asian energy markets/development, we received a trio of messages, which we categorize along Waltz’s three-tier perspectives.

On the system level, the non-state actor most cited as likely to prove disruptive were NGOs, or non-governmental organizations. When we probed more deeply in discussion, what we heard tended to center on environmental groups, such as a World Wildlife Fund or a Greenpeace. In short, given Asia’s burgeoning healthcare and environmental "bill" stemming from years of unrestrained economic and energy growth, our participants voiced the expectation that transnational advocacy groups would inevitably play a larger role in voicing green-based "public good" concerns regarding future economic development. Probably because Asia itself has few such groups with any real political weight, it was assumed that existing international groups would step into this arena from outside—thus the potential for perceiving them as "villainous," i.e., presumptive application of the West’s post-industrial environmental concerns when Asia remains quite "industrial age."

On the nation-state level, China was cited as most likely to prove disruptive, in large part because of the consensus opinion that so much would be required on its part in terms of greater transparency to attract FDI, that natural tensions with the West would result from time to time.

On the individual level, corruption and criminality were the chief concerns, reflecting the oft-stated sense that Asia had not sufficiently "cleaned up its act" in banking and financial sector markets, allowing for still too much "crony capitalism" and the corruption that entails.

In the category of Best New Ingenue, or the country or non-state actor most likely to seek and/or receive U.S. security assistance or alliance, the biggest vote-getter by far was India. Based on the day’s discussions and various GroupSystems inputs, we’ve strung together a variety of rationales for why so many participants foresee a significantly closer U.S.-India relationship in coming years:

• India as a strategic counterweight to China
• India as the more "moderate," or "reachable one" regarding the burgeoning nuclear stand-off with Pakistan
• India as a democracy in a region with few
• India taking a distant backseat to China in attracting FDI and U.S. Government attention, thus precipitating behaviors designed to get Washington to "notice it" more
• India’s naval build-up signals that it can play a serious stabilizing or destabilizing role in the all-important maritime SLOCs between the Mideast and Southeast Asia
• India as the obvious kingpin power in South Asia
• Compared to others in Asia, India is more likely to fail in its quest for planned energy development
• India is upwind of a lot of Asia, so the coal-burning issue looms
• India, like China, is simply too big to ignore, but, unlike China, there’s no sense of an emergent peer-competitor relationship
• India, like the U.S., is a former British colony, so there are good historical reasons for closer ties
• India’s burgeoning role as computer software powerhouse in the global IT economy, and the surprisingly large role of Indian ex-patriates in the U.S. IT sector, both of which inevitably lead to greater influence for India and Indian-Americans in U.S. foreign policy decision making.

In the category of Best New Odd Couple, or in-region pairings of states resulting from developments in Asian energy, participants focused on three dyad relationships involving three states. The most popular dyad was Russia and Japan, which makes a lot of sense when you think of it. Japan’s energy future is greatly dependent on accessing natural gas, and Russia has more than anyone else. So it’s a pairing of a state that has plenty to sell and needs the cash badly (Russia) with a state with plenty to buy and good credit (Japan).

The next most popular dyad was Russia and China, which make sense in the same way, although here the buyer’s credit is somewhat suspect over the long term. An additional factor is the military sales relationship whereby Russia has become—once again—the significant source of major combat platforms.*

The third most popular dyad was China and Japan, and here the logic centered around three key interests:

• Japan as a key source of FDI in China
• China as a possible transit point for pipelines from Russia and/or Central Asia
• China as a key source of upwind pollution and acid rain.               

Of course, in all three instances we’re talking about dyad relationships that carry a great deal of historical baggage, which is why they’re somewhat "odd," despite the underlying logic. In short, the economic rationales are clearly there, it’s more a question of whether the politics can catch up.

As a side note, we point out that India was not selected by anyone for a significant pairing with another regional or bordering power. We found this odd given India’s relative importance to the region as a whole, and yet, it dovetailed nicely with India’s selection as Best New Ingenue.

* In recent years, China and India have accounted for 60 percent of Russian military exports, and deliveries to both countries are expected to double within the next two years, according to new Russian Deputy Prime Minister Ilya Klebanov, quoted in Nikolai Novichkov, "Russia's Deputy PM Reveals Rescue Plan," Jane's Defense Weeking, 19 July 2000, found online at <http://ebird.dtic.mil/Jul2000/s200007109russias.htm>.

In the category of Best New Long-Distance Romance, or the pairing of an Asian state with some extra-regional power, we received two very incongruous pairings, suggesting a possible pivot point in U.S. relations with both Asia and the Mideast.

On the one hand, the most popular pairing involved China with either Iran or Iraq, or both. This was viewed primarily in terms of Chinese military sales in exchange for Iraqi and Iranian oil, with the former bringing instability to the Mideast and the latter energy stability to the Far East. If that sounds like a oxymoronic coupling of effects, then you’re just starting to get warm, for the second-most frequently mentioned long-distance romance was China and the U.S., purportedly over Washington’s growing interest in making sure Beijing feels confident about its future access to energy supplies.

Now, given the state of bilateral affairs between the U.S. and these two Persian Gulf powers over the very issue of that region’s stability, it’s clear we’re looking at the beginning of a very complex trilateral relationship among these states and China. Some of the key issues in this triangle include:

• The continuing U.S.-Saddam Hussein stand-off regarding sanctions and WMD, and China’s role in the UN Security Council regarding both
• The emerging thaw in U.S.-Iranian relations connected with the rise of moderate President Mohammad Khatami in Iran (begging the question, when does "Nixon" finally go to Teheran?)
• The U.S.-China trade relationship versus China’s military ties to both Iran and Iraq
• The changing importance of Persian Gulf oil to both the U.S. and Chinese economies
• With regard to Middle East peace, there are the complicating roles played by Israel, the PLO, Syria, and Jordan (the last two featuring new, largely unknown young rulers)
• The emerging Israeli military cooperation with China.

In the category of Most Likely to Get Hitched, we see essentially a replay of the Best New Odd Couple pairings, with one key exception.

The two replays involve Russia-Japan and Russia-China, with both focused on north-to-south natural gas pipelines that would greatly deepen already existing trade in Russian LNG (currently moved by rail to China and by ship to Japan).

With regard to Russia and Japan, while many observers cite the lack of a World War II peace treaty and the continuing territorial dispute over the Kurile Islands as roadblocks, our workshop participants viewed neither as significant, and virtually everyone saw some pipeline relationship as inevitable given the economic incentives.

With regard to Russia and China, far more suspicion was voiced about cross-border infrastructural development due to:

• The relatively shaky finances of both states
• Their long-standing love-hate relationship that seems highly dependent on who's in power in both capitals.               

The new element separating this award from that of Best New Odd Couple was the oil connection envisioned between China and the Central Asian states (aka, the "Stans"). Of the three pipelines cited, this was seen as being least likely to achieve full fruition due to the great costs involved (i.e., difficult terrain), the long distance covered (i.e., getting the oil to China’s eastern coast), and the availability of cheaper sea-transit alternatives. As such, participants spoke of the likelihood of a modest pipeline relationship between western China and Central Asia, with the "spread" into China limited by the country’s less-developed railroad and motor vehicle networks.

In the category of Most Likely to Get Dumped, or the country most likely to have either its production or consumption of energy disrupted, participants focused their concerns on three separate situations.

In terms of external disruptions to energy consumption or imports, Japan received by far the largest number of votes. This only makes sense given the fact that Japan is the world’s largest importer of both coal and gas. Likewise, Japan accounts for about half of Asia’s purchases of Persian Gulf oil, virtually all of which is shipped through the exceedingly narrow and busy SLOCs of the Indonesian archipelago, a country currently featuring significant levels of instability.

In terms of internal disruptions to energy supplies, Russia was cited as the state most likely to experience some sort of internal chaos leading to diminished capacity for export. Given the central role Russia could play in both Japanese and Chinese demand for foreign gas, this perception does not bode well for attracting foreign investment.

Finally, in terms of the actual threat of war, Pakistan and India were cited for their current nuclear stand-off, although much hope was also expressed for a market logic that would—in the end—bind these two countries economically with others in southwest, central and south Asia for the purposes of creating gas and oil pipelines that would take advantage of that combined region’s significant energy resources. Along these lines, participants voiced the notion that India’s security situation with Pakistan would likely push it in the direction of greater economic cooperation with Bangladesh to take advantage of that country’s large natural gas reserves.

Moving from the Here and Now of Asian energy to what we perceive to be its emerging New Rule Sets, we begin with a quick review of what we’re calling the Rules of the Road for Asian energy development over the next couple of decades. We present these "rules" as a sort of inescapable reality with which all of the region’s powers must grapple in the coming years, and to which any interested external powers must pay attention if they are to play a useful role in encouraging regional stability.

We present these "rules" in six paired couplings so as to suggest a ying-and-yang-like tension between trend lines that can often be viewed as both complementary and competing. The couplings are grouped according to Waltz’s three-tiered perspective.

On the system level:

• We note the decarbonization trend line of human history, moving from wood to coal to oil to methane to hydrogen. Complementing that trend—in an aggregate sense—is the Kyoto Protocol on greenhouse gases, which encourages movement "down" that trend line, even as the CO2 regulatory regime allows some to trade "up" or "down," depending on assigned ceilings and means to purchase additional allowances from others.
• There is the perceived "catch 22" between Asia’s need for large amounts of FDI and the resistance many countries display there regarding the transparency Wall Street and other super-markets require for the sort of long-term faith required in infrastructure investments.

On the nation-state level:

• We note the crux of the entire Asian energy problem set: all that infrastructure development will primarily entail private sector money, but too much of the decision making will be performed by government bureaucrats—never a great combination in Wall Street’s opinion.
• It’s also important to remember that Asia is a region still beset by powerful inter-state rivalries and some particularly complex political-military flashpoints that can sour the FDI climate with some alacrity. The four key sources of instability in the coming decade will be: Pakistan-India, China-Taiwan, the Koreas, and Indonesia.

On the individual or subnational level:

• We note that much of the predicted energy growth will depend on individual consumption and usage patterns connected to appliances, electronics, and car transportation. Moreover, the choice to fuel all that electricity demand is often a by-product of economic times, with gas being an easier choice when times are good and coal a last resort when times are hard.
• Finally, workshop participants, while disagreeing on the extent to which green movements would arise in Asia over the coming decades, all agreed that environmental damage (especially health-related concerns from poor air quality) would prove to be an important constraint on many countries’s energy ambitions—unless greater attention was paid to this collective good.

Having enunciated our sense of the rule sets connected with Asian energy developments, we now offer two competing decalogues: one that expresses the positive pathway of achievement according to the new rules (Find Way), and one that expresses a potentially vicious circle of failure (Lose Way).

How Asia achieves its ambitious energy development plans by 2020:

• The starting-point proposition is that the world possesses more than enough resources to accommodate Asia’s energy growth requirements. There is enough coal, oil and gas to make all those projections come true, and they all exist in sufficient amounts right on the Eurasian continent. So it’s not the resources themselves that are in doubt here, just the economic and political transactions required to move them from A to B.
• Along those lines, so long as the markets work, the resources will flow, but the markets require a certain amount of stability—a sense that economic relationships will pay off over the long haul.
• The biggest input to stability is continued economic growth across the Asian market. Populations have been placed on steep consumption trajectories, and expectations of "better days ahead" have been widely instilled. So long as things progress, no matter how slowly, stability is likely to remain.
• The energy resources are the key to future growth patterns. The only energy Asia has in abundance is coal, whereas oil and gas must come largely from out of region to accommodate future growth requirements.
• The movement of all this energy into the region will require great infrastructure development, especially as the region shifts ahead to greater natural gas use.
• All that infrastructure development will necessitate large amounts of foreign direct investment—of the long-term variety.
• That money will not flow in sufficient amounts unless Western financial institutions see sufficient transparency, accountability, and rule of law.
• That general transparency stems first and foremost from an overarching sense of security across the region. When countries feel threatened, they necessarily become more opaque to the world at large, erecting more firewalls between themselves and the outside they fear.
• Because serious rivalries still exist across the region, and because multilateral security arrangements are non-existent compared to Europe, the region’s closest thing to a Leviathan is the bilateral security relationships most major players currently possess with the U.S.
• If you remove the U.S. military from Asia, you negate the U.S.’s ability to play Leviathan, and thus threaten the underlying security upon which all this development ultimately depends. Right now the U.S. provides the lion’s share of the collective good of Asian security. It is, in many ways, our main export to the region.

How Asia fails to achieve its ambitious energy development plans by 2020:

• The starting-point proposition is that the current global security system is based on universal adherence to—or at least deference to—a single global economic rule set. For most of the last century, the world was divided into two competing rule sets, but that basically ended with the fall of the Soviet Bloc. Now, only a single rule set remains (capitalism), although philosophical struggles remain about the Anglo-Saxon model of capitalism.
• The single global rule set ends if Asia becomes truly insecure—either internally (state on state) or externally (region versus outside world). If Asia’s regional security collapses, the global rule set collapses along with it, for once Asia’s development path is seen as unique, then markets will work one way in Asia and another way elsewhere in the world.
• The internal stability of the region’s major states (and key neighbors) is essential to the security of the region as a whole. Six major players—in addition to the U.S.—seek spheres of influence along largely overlapping definitions of national interest (Russia, China, Japan, India, Indonesia, Australia). Instability in a major regional power therefore invites the perception of vacuum, upsetting the region’s sense of a balance of power.
• Increased consumption is a key component of the internal stability of states across Asia. 
• Energy growth is required to fuel this consumption growth, defined increasingly by ballooning demands for electricity and transportation requirements. Most of this new energy demand will have to be met with outside resources.
• Moving all this energy into the region requires great infrastructure development.
• The movement of all this energy into the region will require great infrastructure development. 
• All that infrastructure development will necessitate large amounts of long-term FDI. 
• That money will not flow in sufficient amounts unless Western financial institutions see sufficient transparency, accountability, and rule of law.
• That level of reform is unlikely to occur in Asia without a serious pain trigger in the form of an economic downturn of major proportions or a broad financial panic that crumbles years of economic advance. So long as countries can muddle through without real reform, they will. 
• If such an immense pain trigger were to occur, the shock to Asia’s body politic could be profound enough to call into question it’s ability to adhere to the concept of a global rule set. In short, major portions of the regional economy could—in effect—drop out of the rule set for indeterminate lengths of time—a sort of firewall capitalism. At that point, all bets would be off regarding the West’s willingness to finance Asian energy developments.

We now turn to the Scenario Dynamics Grid, which is our "black box" model of sorts. Here we seek to arrange, in a systematic fashion, those broad scenario elements that we think—in aggregate—offer us the majority of the explanatory power we need to analyze how this huge process of change unfolds over the coming decades.

The scenario elements we cite here are obviously not the only ones in play, and we don’t pretend that this 3X6 matrix encompasses the universe of change that will be Asian energy from here to 2020. Rather, we choose to focus on these 18 scenario elements because we think it’s important to tackle the subject with both vertical depth (i.e., drilling down through Waltz’s three levels) and horizontal breadth (i.e., our six global "lenses" of economics, politics, technology, culture, environment, and security*).

These 18 scenario elements are, so to speak, signposts directing us to where the change connected with Asian energy developments is most likely to be concentrated—in terms of causality. Naturally, the more we research the subject, the better our signposts become in terms of clarity, but for now, these are the best 18 scenario elements we can identify.

The scenario dynamics grid as a whole should be viewed as a sort of smorgasbord: we think all of these elements are potentially in play for all of the countries in question, but obviously each country’s path will be a selection of sorts from the larger menu of possibilities. As such the grid is purposely defined in a rather generic fashion, so as not to concentrate too much explanatory power on just one country to the detriment of others.

* The six global "lenses" roughly correspond to Thomas Friedman’s notion of "six-dimensional" thinking about globalization, as expressed in his The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar Straus Giroux, 1999), see the chapter, "Tourist With an Attitude," pp. 3-24.

ECONOMICS

Beginning with the economic lens and focusing first on its nexus with the international system, we note that foreign direct investment is the preeminent scenario element for Asia’s energy future. To the extent the region seeks to move off coal (the past) and into natural gas (the future), FDI will be the most important constraining and enabling factor provided by the global economy. To the extent it flows, we see a virtuous circle whereby greater transparency yields greater FDI, which yields more energy infrastructure, which yields greater economic interdependency with the outside world, which yields even more transparency, and so on and so forth. In short, Asia can seek economic autonomy from the global economy only by remaining in the past (coal).

At the level of the nation state, we note the all important question of what sort of energy elasticity the countries exhibit as they seek to roughly double their energy consumption over the coming generation. As a rule of thumb, an underdeveloped country grows one percent of GDP at a "cost" of one-plus percent of increased energy consumption, a developing country exhibits an elasticity of roughly 1:1, and a developed economy 1:<1. The question of Asia’s’ actual elasticity is a tough one because the official statistics of one of the region’s largest economies, China, leave many experts feeling quite skeptical (i.e. China claims the elasticity of a developed economy, but most Western experts believe it’s far closer to 1:1 or worse). The elasticity question is huge because any slight movement up or down that scale significantly alters the region’s overall energy demand. It also signals the extent to which the region is graduating from extensive to intensive economic growth.

Finally, at the individual level, we note urbanization rates. Asia as a whole is rapidly urbanizing, and this is important on two levels with regard to energy. First, concentration of population increases the need for energy infrastructure (e.g., gas pipelines, electrical grids). Second, urbanization actually leads to less overall energy consumption due to the economies of scale.

POLITICS

Turning to politics and focusing first on its nexus with the international system, we note the World Trade Organization and its future potential impact on how Asia interacts with the outside world. Does Asia adhere ever more to the notion of a single global rule set? Accepting the concepts of accountability, transparency and rule of law that that adherence represents? Or does the WTO become a political battle ground pitting the Anglo-Saxon model against the "Asian values" model, or a capitalism "with Chinese characteristics?" A lot depends on whether or not the WTO is viewed by the world as an imposition of Western values (like many view the IMF), or a venue through which the broad forces of globalization (often viewed as "Americanization") and localization can reach compromises.

On the level of the nation-state, we cite the dynamic of pipelines as a measure of genuine acceptance of cross-border interdependency. It’s one thing to buy LNG on the spot market and ship it to your ports, but it’s a far different thing to commit to a permanent pipeline and the bilateral market relationship it entails. It is our simple proposition that "good pipelines make good neighbors." We think this has been proven in East Central Europe over the 1990s, and we think it can be proven yet again in Asia in the next decade.

Finally, at the level of the individual, we focus on the emergence of local green movements and the redefinition of environmental issues as a public good worthy of great political attention. We frankly scoff at the notion that such movements are not "the Asian way of doing things," for we heard similar notions about Russians, for example, under Soviet rule, only to see environmental groups spring up with a vengeance once they were given the political freedom to make their voices heard. In short, we expect Greens to become a potent political force in Asia over the next generation, as is already being seen—in embryonic fashion—in Japan on the issue of nuclear power.*

* For a good example of this sort of grass roots environmentalism, see Elisabeth Rosenthal, "Pollution Victims Start to Fight Back in China," The New York Times, 16 May 2000, p. A1.

TECHNOLOGY

Turning to technology and focusing first on its nexus with the international system, we note the extractive capacity of the global energy market, meaning our collective capability to keep finding and exploiting—at bearable cost—new supplies of oil and natural gas. Pessimists have long predicted the "end of cheap oil" (or even the end of oil, period), only to be proven wrong decade after decade. So long as these Cassandras continue to be proven wrong, we stick to our essential assumption that more than enough gas, oil and coal exists to fuel Asia’s growth over the coming generation. In fact, the wild cards here tend not to be about future shortages, but the possibility of future abundances, as in the case of methane hydrates, which some experts think will eventually dwarf natural gas reserves once a cost-effective method is found for extracting these reserves from the sea bed.

Dropping down to the nation-state level, we cite the importance of a government’s choice in public work projects, such as China’s Three Gorges Dam or Japan’s recent scaling back of plans for future nuclear plant construction. By these choices, governments not only stimulate research and development into particular technologies, but they also reduce the likelihood of other options simply by the fiscal "space" they occupy (e.g., what else could China have done in terms of exploring renewable resources if they hadn’t spent so much money on Three Gorges?). In short, while hardly encompassing the breadth of the market potential for energy development, government choices on energy infrastructure investment generate a strong legacy effect.

Finally, on the individual level, we note the importance of transportation patterns, or more specifically, the choices involved in adopting a car culture. For example, with its low per capita motorization level, it’s possible that Asia could: (a) follow America’s "power car" culture, (b) leap over that to a hybrid culture that deemphasizes all-combustion engines, or (c) focus on mass transit.

CULTURE

Turning to culture and focusing first on its nexus with the international system, we highlight the potential for Kulturkampf along the lines suggested by Samuel Huntington in The Clash of Civilizations and the Remaking of World Order (New York: Simon & Schuster, 1996). This is not to say that we predict great power conflict as a result of Asian energy trends. Rather, we think it’s important to realize how Asia’s growing energy needs can only draw closer together the two civilizations of the world which are the least Western and, conversely, most resistant to the homogenizing process of globalization (seen in the oft-heard question, "Does globalization mean we all have to become Americans?"*). Does this necessarily mean more global conflict? No. Does it complicate the process of globalization? We say yes.

Dropping to the nation-state level, we focus on the culture of a country’s leadership. How do leaders view the energy:security paradigm? Do they, like the U.S. in the 1970s, feel they need to "own the barrel?" Or have they "matured," if we can be so bold to say, to the point where they, like the U.S. in the 1990s, understand that "it’s the price, stupid!" In short, do they still view energy security primarily in terms of bilateral strategic relationships designed to secure access, or do they trust the global markets to always deliver the goods, albeit at a fluctuating price? Is risk defined as disruption or high cost? Much depends on the outlook of the leadership in question. For example, a China led by Li Peng favors the classic security perspective, while a China led by Zhu Rongji clearly belongs to the market school of thought.

Finally, on the individual level we cite the importance of demographic pressures in determining energy futures. With China and India, you’re already talking about the bulk of the world’s future population growth, so small changes in these trajectories have huge implications for the planet as a whole.

* Thomas Friedman quotes a Cairo professor asking this in his article, "One Country, Two Worlds: Egypt Between Nile and Net," The New York Times, 28 January 2000, p. A27.

ENVIRONMENT

Turning to the environment and focusing first on its nexus with the international system, we zero in on global warming and the more specific subject of greenhouse gases. The Kyoto Climate Change Protocol on Greenhouse Gas Emissions, while still not ratified by any of the industrialized, "Annex I" states, does put in place a CO2 trading regime that could have profound implications for the future of global environmental regulation. If it succeeds in fostering a fluid and transparent market for carbon credit trading under a solid global ceiling, then global warming’s potential for generating inter-state tensions may be greatly obviated. More importantly to Asia, the success of such a regime would point to a future of market-based regimes for limiting CO2 emissions, a global subject-area that will inevitably target such coal-intensive emerging economies as China, India, and Indonesia.

Descending to the nation-state level, we note the issue area of acid rain, which is intimately connected to rising demand for electricity and the tendency of most states in the region to fuel such plants with coal. For example, coal-fired electricity plants in northwest China generate substantial amounts of acid rain for Japan’s northern forests. By choosing to rely so heavily on coal, China only "converts energy insecurity into environmental insecurity," in the words of workshop participant Dennis Eklof.* Eventually, this environmental insecurity provides additional inter-state pressure to shift into heavier dependence on natural gas.

Finally, on the individual level, we cite the obvious health issues connected to the region’s relatively heavy reliance on coal, not only for electricity generation but also for cooking.** In combination with high smoking rates, Asia is staring at a huge health care bill over the coming generation.

* See Eklof et. al, "Fueling Asia’s Recovery," p. 41.

** According to a recent study published in the Proceedings of the National Academy of Sciences, 800 million of China’s 1.2 billion people use coal in their homes. Cited by the Associated Press, "Study: Coal Fumes Poisoning Chinese," The New York Times on the Web, 30 March 1999, <http://www.nytimes.com/aponline/I/AP-Coal-Poisoning.html>.

SECURITY

Turning to security and focusing first on its nexus with the international system, we cite the growing network connectivity between East Asia and Southwest Asia, meaning first and foremost the far heavier use of sealines of communication to move all that oil and—increasingly—all that natural gas by tankers. With regard to the SLOCs of Southeast Asia, there are predictions of a rough tripling or more of ship traffic through the various straits, all of which are straddled by an Indonesia now wracked with fragmenting civil strife. These waters also feature some of the highest frequency of piracy seen in the world today, not to mention significant naval build-ups by two of the largest powers—India and China. In short, the region's maritime system is undergoing significant stress at this time, only to be assured of even greater amounts given the region’s burgeoning requirements for Middle East energy exports.

Dropping to the nation-state level, we focus on the long-standing issue of overlapping territorial claims in the South China Sea. Although many-sided maritime disputes exist throughout the region (e.g., from the Arafura Sea between Indonesia and Australia all the way up to the Northern Sea of Japan bordering Russia), the South China Sea dispute, centering on the Spratly Islands, receives by far the most international attention due to the confluence of hydrocarbons and sea-lane defense. Military forces from Vietnam, China, Taiwan, the Philippines, and Malaysia currently "occupy" various portions of this island chain, and minor military skirmishes have occurred over the past two decades.* But the bottom line remains: no serious exploitation of the area’s oil reserves will occur without multilateral resolution of the dispute.

Finally, on the individual level, we note the general lack of significant strategic energy reserves across the region. Japan is the most notable exception, and China has recently made moves in this direction.  We place this issue on the subnational level because this is where the impact is most acutely felt during times of disruption.

* See Mark J. Valencia, "Energy and Insecurity in Asia," Survival, Autumn 1997, pp. 85-106.

Moving into the third and last of our "diamond dialectics," we now turn to the subject of Tipping Points, a concept we borrow from Malcolm Gladwell’s recent book by the same name.*

In a nutshell, we’re employing the term tipping point to mean a pinnacle moment in the adoption of a new understanding or perception (i.e., a paradigm shift), beyond which we can speak about a "new rule set" becoming thoroughly embedded in a country’s (or region’s) political and economic culture.

To illustrate this point, we employ the imagery of Sisyphus (see following slides), the legendary king of Corinth who was condemned, according to Greek myth, to roll a heavy rock up a hill in Hades only to have it roll down again as it nears the top—ad infinitum. While not wanting to insinuate that these tipping points are, by any stretch of the imagination, unachievable, we do want to impress upon the reader our sense that these "journeys" will not be easy ones.

We will propose six tipping points, corresponding to our six global lenses.

* Malcolm Gladwell, The Tipping Point: How Little Things Can Make a Big Difference (New York: Little Brown & Co., 2000).

Our first tipping point involves the perception of oil’s dominant standing in the economics of global energy markets, when in reality, the current struggle across Asia is between coal (the past) and natural gas (the future). Oil as a percentage of energy source is predicted to decline across most Asian states through the 2020 timeframe. This is because oil’s importance to the economy is increasingly limited to transportation, which, as a whole, is rather underdeveloped in Asia compared to the West. The biggest driver for energy growth in Asia is electricity, and there we’re talking about the choice between coal-fired and gas-fired plants, since oil is little used in this regard anymore.

As a tipping point, we thus propose the pinnacle moment when Asia (and the world) moves from thinking of oil as THE energy to thinking about natural gas as THE energy. We consider this shift important not only in signaling the planet’s further progression down the "decarbonization chain," but likewise in highlighting the first half of the 21st Century as the Age of Gas.

The measure we choose to express this shift from "medium carb" oil to "low carb" gas is to note the point at which a country’s percentage share of oil is equaled by the combined share of gas and "Other" low-carb (or no-carb) renewables such as nuclear, hydroelectric, solar, and wind. The U.S. is already close to achieving this tipping point, as DOE data from 1999 displays: oil’s 41 percent share is only slightly higher than "gas + other" (23 + 15 = 38%).* As shown in the inset above, most of Asia (India is a notable exception) will experience a similar shift away from oil to lower-carb energies, with the "gap" for Asia as a whole dropping from 22 percentage points in 1999 to 15 in 2020.

* The vast majority of new electricity generation plants planned in the U.S. will be fueled by natural gas.

Our second tipping point involves the perception of the state’s dominant standing in the politics of national energy infrastructure development. Here we’re talking about a shift from a less-mature market environment where state-directed monopolies are required to build network grids to a more-mature market environment where private-sector firms step in to run these grids more efficiently than any state can. In short, we see a natural historical progression here: monopolies are often needed to build grids, but competitive markets should later run them.

As a corollary, we see Asia’s political climate changing from a less-mature market environment where foreign direct investment is limited to minority-share ownership in joint ventures to a more-mature market environment where FDI can involve majority ownership of private-sector energy generation and distribution firms, if not the networks themselves.

Therefore we chose as our pinnacle moment the complete privatization of state power networks, for once power grids reach a certain level of maturity in terms of reach and market saturation, market competition then offers the best chance for maximum long-term service efficiency.

Our third tipping point involves the perception of technology as a source of environmental problems versus technology as a solution for environmental problems.

It is said that the U.S. government in general, and the Environmental Protection Agency in particular, underwent a paradigm shift on the technology:environment nexus over the past generation. Where, for example, in the 1970s, EPA sought to tame technology and its environmental damage through regulations, sanctions, and prohibitions, by the 1990s EPA has come to view technology as less the question (How do we tame it?) and more the answer (How do we employ it?). A big part of this is shifting from regulatory regimes to trading regimes, or from rules against undesirable behavior to markets that reward desirable behavior by allowing players to bank their efficiencies (e.g., my factory stays under my emission ceiling and so I can sell my unused credits to a less-efficient factory).

Asia, unfortunately, hasn’t advanced much even up the regulatory chain, tending to pursue technology purely for growth’s sake and let the environment be damned. But bills are coming due, especially in terms of healthcare, water, and damaged forests, so that even a vigorous pursuit of regulatory regimes wouldn’t—at this late date—prove decisive in and of itself.*  Leap-frogging ahead to a new paradigm that lets markets reward firms for technological advances in defense of the environment must become a large part of Asia’s "green growth" solution set. So we choose as a pinnacle moment the shift from ineffective and poorly enforced regulatory regimes to market-incentivized trading regimes that allow efficiencies to be monetized.

* For an example of such attempts, see Clay Chandler, "Hong Kong Acts to Reduce Rising Pollution: Taxes, Regulations Aimed at Keeping Both Residents and the Economy Healthy," The Washington Post, 10 May 2000, p. A21.

Our fourth tipping point involves the perception of energy as a key component of national security. Throughout the Cold War, energy security was pursued by most states in terms of strategic bilateral relationships where both amounts and price were largely a function of government negotiations. Markets were, in many respects, rather closed affairs where the drives of demand and supply took a back seat to definitions of national security. In sum, to feel secure, most states wanted to "own the barrel" the second the oil came out of the ground.

In the post-Cold War era, advanced economies have largely come to realize that oil is now bought and sold under truly global market conditions, where price—and not state relationships—determines access. Risk is redefined from disruption of supply to "disruption" of cost. This paradigm shift is an enormous one, for it takes a key commodity that for decades has been viewed by state governments as a choice for autonomy and a trigger for confrontation and turns it into yet another medium through which market-based interdependency spreads, transforming oil into "just another commodity" that is traded on a daily basis all over the world.

Asia’s tremendous expansion of energy demand over the next two decades will force key regional powers such as India and China to accept far greater levels of cross-border energy dependency, and this will constitute a new cultural mindset for leaders long accustomed to viewing energy primarily as a security vulnerability. As such, we choose as our pinnacle moment the shift from buying natural gas via LNG ships to erecting permanent pipelines that create long-term energy interdependencies.

Our fifth tipping point involves the perception of the environment as a defined public, or collective good that’s worth preserving in and of itself, not only in terms of quality-of-life issues for the society as a whole, but because it is perceived—in a long-term sense—as an essential input to continued economic growth and sustainable development.

Much of Asia’s economic development of the past several decades has focused on extensive growth, meaning more resource inputs and outputs, increased infrastructure, and an increased percentage of the population working. In this model, the environment is viewed as a relatively inexhaustible source of material, to be exploited to the full extent possible. Shifting to intensive growth means a greater focus on more efficient use of resources, more sophisticated and responsive infrastructure, and a smarter, more productive labor pool. In this post-industrial model, the environment is something to be sustained like a trust, whereby the "principle" is maintained at all cost so that the "interest" can be drained off in a dependable fashion. The definition of risk, therefore, shifts from environmental fall-out (and clean-up) to loss of principle stock (i.e., that which is defined as required for sustainable use).

Asia cannot achieve the economic or energy growth currently envisioned while treating the environment as a bottom-of-the-list lesser-included. Green issues must rise to the level of defined public goods, for which political leaders are willing to spend political capital in exchange for assuring long-term economic growth potential. Therefore we choose as a our pinnacle moment the shift from green movements (which are often fairly non-partisan) to green candidates (who define their partisanship by these issues), and we point to the experience of Western Europe over the past generation as proof that green parties can have substantial impact on a country’s political and economic agenda (e.g., Germany today, where environmentalism is the consensus).

Our sixth tipping point involves the perception of energy as a key component of U.S. national interest in the Persian Gulf. Of the six tipping points, this is the only one that focuses on a paradigm shift within the U.S. government vice those in Asia, and that’s because, as we noted earlier, the U.S. military truly plays the role of regional Leviathan in Asia via its bilateral security ties with all of the major players.

U.S. national security policy began a slow but pronounced shift of geographic focus from Southeast Asia to Southwest Asia following the end of the Vietnam Conflict in 1975. By the time Central Command was established in the early 1980s, U.S. deployments and crisis response activity had been dramatically concentrated around the Eastern Mediterranean, the Arabian Sea, and the Persian Gulf, with a key instigator being tanker escort operations connected with the lengthy Iran-Iraq War (Earnest Will being the most well-known operation). By the end of the 1980s, for example, the U.S. Navy was spending three out of every four "crisis" operation days in the Mideast theater, meaning the underlying "oil equation" accounted for roughly three-quarters of our global security interest.*  Soon after we went to war with Iraq in 1991 to protect Western access to Gulf oil, opening us up to the charge of "blood for oil."

Moving into the future, however, we see that such a presentation of U.S. security interests in the Gulf will become largely untenable—at least in a direct sense. The next war in the Gulf will not be about protecting Western economies, but those of the East, and while there are still very good rationales for doing so, the causality chain will not only grow longer in explanation, but far more complex. As such, we choose as our pinnacle moment the shift from the "blood for oil" charge to one of "blood for globalization."

* For detailed analysis of this shift, see Thomas P.M. Barnett and LCdr. Linda D. Lancaster, USN, Answering the 9-1-1 Call: U.S. Military and Naval Crisis Response Activity, 1977-1991, Center for Naval Analyses Information Memorandum #229, August 1992.

Shifting from Tipping Points to signs of what life might be like in the There and Then of Asia’s energy future as the region approaches the year 2020, we present on the following slide a series of paired examples (Good Signs plus Bad Signs) of newspaper headlines we might encounter in downstream scenario pathways.

These headlines were generated by the workshop participants as a way of populating a series of outcome scenarios (to be presented subsequently). Of the several hundred notional headlines provided, we selected twelve that we felt captured the lion’s share of our participants’ concerns and/or desires regarding Asia’s future energy paths.

Starting at the top and working our way down:

• The first pair (China Joins Japan … and Japan Starts Massive ...) speaks to the dynamic between free-market competition and the focus on the bottom line. We speak of Asia needing to privatize its energy sectors in order to attract FDI, and yet all that competition will bring enormous pressures to bear on costs, which ironically can lead to greater reliance on older, dirtier energies such as coal.
• The second pair (Con Edison … and Cleaner Coal …) speaks to a similar sort of "be careful what you wish for" dynamic, whereby technological breakthroughs in using older, dirtier energies can retard movement to newer, cleaner ones.
• The third pair (China’s Coal Deaths … and China and India ...) speaks to the fear that these two large, relatively poor economies will be sorely tempted to rely on indigenous supplies of coal to remain cost competitive in global markets, but, by doing so, only generating environmental-security tensions in the region.
• The fourth pair (Mitsubishi Sets 2010 … and 20 Years Later ...) speaks to the uncertainty surrounding what sort of car culture ultimately prevails in Asia. Certainly a Honk Kong or Singapore proves that Western-style auto gridlock and smog are easily reproducible in Asia. But the opportunity also exists for Asia to leap-frog over American-style car culture directly to a post-combustion (hybrid for now) auto future.
• The fifth pair (Last California Condor … and Japan’s "Chernobyl …) speaks to the collective sense that, while alternative energies are bound to play an increasingly significant role in Asia’s future needs, the nuclear sector is expected to atrophy over the long run.
• The last pair (Japan Buys Chinese … and China and Iran …) speaks to the concern that, short of a miracle technological breakthrough, the sheer numbers involved with China’s ballooning energy requirements will inevitably translate into difficult international political issues.

None of these notional headlines represent predictions of any sort, but are presented merely to illustrate the various fears and hopes presented by our workshop participants regarding long-term outcome scenarios.

We’ll now examine a quartet of rudimentary outcome scenarios for Asia’s potential energy future. We’ll call them "rudimentary" because we won’t present any great detail as to the alternative futures they portend. Rather, we’ll offer them up more as a way to capture the varying degrees of skepticism exhibited by workshop participants regarding the likelihood of each pathway’s unfolding.

The scenarios were framed in the following fashion:

• We constructed the X-Y axis beforehand and presented it "ready-made" to the workshop participants at the beginning of the "Outcome Scenarios" session
• The participants then spent several minutes brainstorming—via GroupSystems—notional headlines for each of the four scenarios
• Following facilitated group discussion of the four scenarios, participants were asked to propose—via GroupSystems—which Asian nations would end up in which scenarios (the Kto Kovo, or the "who ends up where?" segment to follow).
• Following more facilitated group discussion, participants nominated—via GroupSystems—titles for each of the four scenarios, and then voted for their favorites.

The X-Y axis is constructed of two simple questions:

• What is the balance of the overall energy content?
  • High-carb diet = more weighted to coal and oil 
  • Low-carb diet = more weighted to natural gas and renewables.

• What is the balance of the overall decision-making mechanism?
  • State-based strategies = more decision-making control is left to public entities
  • Market-based strategies = more decision-making control is left to private entities.

The four resulting scenario titles are as follows:

• Pipe Dreams (Low-carb diet + Market-based strategies) reflected the participant’s strong skepticism about such a positive outcome combination. It also captured the consensus opinion that gas pipelines would signal movement in this direction. The skepticism stemmed from the participants’ sense that too much cultural change was needed (and too quickly) to achieve the transparency that would, in turn, trigger a sufficient FDI flow for this outcome to unfold.
• Air Today, Gone Tomorrow (High-carb diet + Market-based strategies) reflected the concern of many participants that an unfettered free-market approach would lead to a spoiling of the "commons"—most notably the air. In short, markets promote cost-cutting behavior and Asia’s path of least resistance here is coal-fired electricity.
• Gaz Kapital (Low-carb diet + State-based strategies) reflected the opinion of most participants that, in many instances, it’ll take a strong state to force the sort of monopolistic approach to infrastructure building that a gas-heavy future would require. So, in effect, participants cited this scenario quadrant as a possible transition stage prior to achieving the preferred Pipe Dreams outcome.
• Coal Day in Hell (High-carb diet + State-based strategies) reflected the pessimism most participants held concerning state-dominated economies with large domestic coal supplies. In effect, they believed the temptation to "burn your own" would be too great for power-consciousness bureaucracies to resist. Naturally, this was seen as the worst possible environmental outcome for states with limited political freedom, since no strong venues would exist to promote the public good.

Having outlined the four outcome scenarios, we now present how our participants’ voted in terms of Kto Kovo--or, to loosely paraphrase, who ends up where?

Again, these calls are far from predictions, and need to be considered within the context of the day’s events. In short, they represent the participants’ gut reactions after a long day of debating a very wide range of issues.

Our participants displayed a real sense of differentiation in their calls--to wit, their treatment of the Koreas question:

• North Korea was definitely viewed as falling into the Coal Day in Hell scenario, given its repressive regime and seeming total disregard for environmental cost.
• South Korea was voted into the Air Today, Gone Tomorrow scenario, displaying the participants’ concern about a state that perhaps places too strong an emphasis on growth. [The arrow represents the second-most voiced opinion.]
• But a United Korea was proposed as falling into the Pipe Dreams scenario, to a certain extent because a reunified Korea might attract greater attention as a transit venue for pipelines from mainland Asia to the Japanese islands.

Of the major powers in the region:

• Japan was the only one considered a likely candidate for the Pipe Dreams scenario quadrant.
• Australia was associated with the Air Today, Gone Tomorrow scenario due to its reputation as a frontier economy with a less-than-stellar approach to the environment, and its large coal reserves.
• No major powers were considered likely to end up in the Gaz Kapital scenario. Indeed, one of the proposed scenario names for this quadrant was "Not Enough Lee Kuan Yews to Go Around."*
• China and India were considered shoe-in’s for the Coal Day in Hell scenario, due to a combination of state-dominated economies, large coal reserves, and insufficient FDI to achieve anything more than a marginal reduction of their long-term dependency on coal.
• Indonesia was considered to be a complete wildcard, with votes evenly distributed across all four scenarios, reflecting the great uncertainty about the archipelago’s political integrity and the fact that the country as a whole possesses significant energy resources in all three major categories. In short, much depends on whether the country stays together or not, and how that issue plays out in the exploitation of the country’s indigenous resources, which some experts considered ill-utilized up to now.**

* Lee Kuan Yew was prime minister of Singapore for 31 years (1959-1990). Following his resignation in 1990, he remained in the government as a senior minister in the premier’s office. Many Asian experts believe he is still the "power behind the throne."
** On Indonesia, see Brian Barry, "A Survey of Indonesia: The Faltering Firefighter," The Economist, 8 July 2000, pp. 1-16.

Having worked our way through our conceptual model and presented the output from the Asian Energy Futures event, we’d now like to wrap up this report with a handful of what we call "cosmic conclusions" about the future(s) of Asian energy development.

The first cosmic conclusion concerns the high SWAG (scientific wild-ass guess) factor involving any predictions of Asian energy development over the next two decades. Frankly, the numbers are simply too huge for the region to swallow without something giving first. Four issues complicate our ability to predict what’s going to happen in Asia on energy, and all four find good expression in China, which accounts for the bulk of Asia’s energy growth:

• First off, there is the issue of economic growth indicators. Financial accounting in Asia is simply not up to Western standards in many instances, rendering not only current and past statistics on growth a little suspect, but calling into question many of the ambitious state pronouncements on what lies ahead.
• Secondly, there is the potential swing factor of population growth, where Asia accounts for a very significant portion of future global increases. China, for example, has long had a one-child policy that has—by official accounts—dramatically slowed the number of new births, and this data goes a long way to explaining recent revisions of predictions for global population growth through the first half of this century. And yet, as a recent New York Times article demonstrated, once you get out of the main cities, where Chinese officials are far more strict in enforcing this regulation, you find the countryside littered with families of several kids.*
• Third, there is the question of how dysfunctional Asia’s banking systems still are as a result of the superficial reform undertaken by too many states following the financial crisis of 1997-98. As we noted earlier, China’s banking system is essentially bankrupt, having taken in huge sums of money from individuals in the form of pensions, only to lend those funds back out to state-run enterprises that teeter on the edge of bankruptcy. This is essentially a shell game designed to forestall the massive unemployment that would result if these enterprises failed, and yet, this dubious practice only delays the inevitable pain.
• Finally, there is the question of how the region moves ahead on transportation, which includes air travel but is mostly about the nature of the car culture that will inevitably unfold over the coming generation. For example, General Motors predicts that China will develop into the world’s largest auto market within two decades.**

* See John Pomfret, "China Losing ‘War’ on Births: Uneven Enforcement Undermines One-Child Policy," Washington Post, 3 May 2000, p. A1.

** Cited in Clay Chandler, "GM’s China Bet Hits Snag: WTO (Car Shoppers Await Discount From Trade Deal)," Washington Post, 10 May 2000, p. E1.

Our second cosmic conclusion concerns the rise of a new system nexus, one that’s likely to recast our appreciation of what constitutes international stability in the 21st Century. Just about everyone who participated in the workshop came away from the day’s discussions deeply impressed by the potential for environmental stress to lead to inter-state tension and even conflict. While none were so bold as to predict future wars over resources, all were certain that a new definition of security would inevitably emerge in Asia over the coming decades: that of environmental security.

The reasons for this growing awareness are several, but the bottom line is basically this: you can’t combine that much population increase with that much economic growth and rising energy consumption and not end up with some serious environmental difficulties in a space that tight (in terms of population density).*

Carbon dioxide (CO2) emissions become a lighting rod subject due to the combination of the Kyoto Protocol (which, although it does not involve many of the Asian economies, portends a future where international agreements will increasingly target environmental issues) and the reality that so much of the region’s future energy growth will inevitably be achieved through coal.

On an international scale, the CO2 issue becomes a divisive point between the post-industrial West (which, in effect, has already burned it’s way through its "high carb years") and the emerging economies of the South and East (which face many more years of such a "bad diet." Will the U.S., which will still burn more coal over the next two decades than anyone in the world save China, scold the region on this subject? You bet, and therein lies the rub. In short, the subject of environmental stress will become part and parcel of international security debates in the 21st Century, and Asian economic growth will drive much of this discussion.

* For an influential article on the subject of environmental stress leading to conflict, see Thomas Homer-Dixon, "On the Threshold: Environmental Changes as Causes of Acute Conflict," International Security, Fall 1991, pp. 76-116.

Our third cosmic conclusion centers on the central role played by China’s energy choices in how the Era of Globalization unfolds over the next decade. To put it succinctly, the decision of how much China adapts itself to the global economy (vice Beijing's preferred approach of asking the global economy to adapt to it) will be largely driven by the choices the country makes on energy.

If China chooses to remain, as much as possible, in the "past" with coal, this decision will essentially delay its full-fledged absorption into the global economy. This is clearly the path of least resistance for Beijing, and there lies the temptation, for the perception of autonomy afforded by coal allows China to remain more opaque to outside scrutiny, to retain more control over its energy future, and to continue the more easily top-down directed path of extensive growth.

If China chooses to move—as much as possible—into the "future" with natural gas, this decision will essentially speed up its full-fledged absorption into the global economy. This is obviously a far more difficult path, because it opens the country up to greater interdependency with the outside world, forces more transparency upon its financial systems, asks it to trade control for calculated risk (nothing is guaranteed in the free market), and demands of it a far greater push for intensive-style economic growth.

Make no mistake, this decision will not occur one afternoon, but unfold over the course of many years, and will involve many internal debates and struggles within the Chinese leadership.*  Staying in the past allows China to enjoy the illusion of its own rule set (capitalism "with Chinese characteristics") and indulges its historical tendency toward parochialism (the "Middle Kingdom" mindset). Striving for the future means acceptance of the one global rule set and all that the New Economy entails. In the end, then, China’s choice on energy is largely a referendum on how it feels about globalization.

* For a good review of China's economic development, see Dominic Ziegler, "A Survey of China: Now Comes the Hard Part," The Economist, 8 April 2000, pp. 1-16.

Our fourth cosmic conclusion concerns international energy markets and the emerging reality of quasi-hemispheric market patterns. As we noted earlier, what Asia needs in terms of future energy requirements is entirely available either in-region (e.g., coal) or from the central portion of the Eurasian landmass (gas and oil from the Persian Gulf, Central Asia and Russia). These distances are all feasibly conquered by pipelines, and most of the involved SLOCs lie within the reach of what naval forces the major regional powers are likely to possess by 2020.

Meanwhile, the West, which has come to rely less and less on Persian Gulf oil, is likewise becoming more regionally-focused in its energy trade patterns. The U.S., for example, imports more energy supplies from Canada than any other nation, and gets the bulk of its imported oil from North and South America.

None of these statements are meant to suggest that East-vs.-West energy "blocs" are forming. In reality, the regionalization of energy trade occurs precisely because the commodities in question are behaving more and more as one would expect of a globally-traded, highly-fungible good. If price determines all, then reducing transportation distance makes sense.

In the end, all of this regionalization (to the extent it is meaningful to even make this distinction) comes about because energy trade is no longer confined to the sort of strategic bilateral relationships of the Cold War era, so the "new rules" of energy are nothing more than that sector’s joining up with the global marketplace and losing its special status as a strategic asset.

Having said all that, the U.S. government (and the U.S. military in particular) faces a different security environment in the 21st Century, whether or not it yet realizes the change: our national security interests in the Persian Gulf, while still preeminently important for the global economy, no longer hold the same immediate importance to our national economy—and that makes for a more complex strategic environment.

Our fifth and final cosmic conclusion is, in many ways, a larger argument (and advertisement) for the NewRuleSets.Project as a whole.

After each of the Economic Security Exercises we’ve conducted over the past four years, participants walk away from the experience speaking excitedly about a new sense of understanding of the connectivity between the military and economic worlds—namely, how the two work in tandem to provide international stability.

We like to describe this combination effect as the global rule set we’ve come to understand as the ultimate international peace dividend arising from the end of the Cold War. As stated earlier, the collapse of the Soviet Bloc and its long-standing challenge (or rejection) of the Western economic rule set made possible, really for the first time in human history, a truly worldwide rule set for how military power buttresses and enables economic growth and stability.

How so? For the first time in human history we have a true global military Leviathan in the form of the U.S. military, and no peer competitor in sight—not even a coherent alternative economic philosophy (although one is clearly brewing in the anti-globalization protests witnessed recently in such places as Seattle and Washington DC). This unparalleled moment in global history both allows and compels the United States to better understand the military-economic nexus, in large part because of its complete reversal of priority from the Cold War era. During the strategic stand-off with the Soviet Union, economic might was seen as supporting military power, but now that situation is completely reversed: to the extent that the military matters, it matters because of the stabilization role it can play in the global economy.

How do we define this ying-and-yang relationship between the military and economic worlds?

First we speak of stability, which comes from military security, and then we speak of transparency, which is both demanded by, and engendered by, free markets. These two underlying pillars form the basis of the single global rule set that now essentially defines the Era of Globalization.

Within those two pillars, the U.S. clearly plays a crucial role:

• The U.S. Government, through the U.S. military, supplies the lion’s share of system stability through its Leviathan-like status as the world’s sole military superpower.
• The U.S. financial markets, which lead the way in fostering the emergence of a truly global equities market that will inevitably operate 24-7-365, play the leading role in spreading the gospel of transparency, in large part because it’s any country’s best defense against the sort of financial currency crises that have periodically erupted over the last decade (Mexico 1994, Asia 1997, Russia 1998, Brazil 1999, Turkey and Argentina 2001).

As such, it is essential that these two worlds—military and financial—come to better understand their interrelationships across the global economy.

Uncovering and better understanding this fundamental relationship is especially important because—the vast majority of the time—the military and business communities operate in oblivious indifference to one another.

One’s tempted to counter, "So what? They don’t need to be aware of one another on a day-to-day basis."

And in a basic sense, that’s true. But if you consider the rise of system perturbations as a new form of international security threat in the 1990s, and if you understand that most of these perturbations come in the form of financial crises that can engender serious subnational violence (e.g., Indonesia today), then perhaps this connectivity seems more pertinent. Because ultimately the global economy operates on trust, which is based on certainty, which in turn comes from the effective processing of risk.

In the end, the military and financial markets are in the same business: the effective processing of risk.  For the military, it’s the risk of conflict and the disruption of normal life by large-scale violence, while in the financial world, it’s the risk of bankruptcy (insolvency) and the disruption of normal business by large-scale panics or failures.

Invariably, these two problem sets merge in the increasingly interdependent, IT-driven, globalizing New Economy, so understanding the military-economic connection isn’t just good business, it’s good national security.

Blast from my past: "Globalization and Maritime Power" (2002)

Chapter 10

of

Globalization and Maritime Power
Sam J. Tangredi, editor (Washington DC: National Defense University Press, 2003), pp. 189-200.

Asia’s Energy Future: The Military-Market Link

Thomas P.M. Barnett

Globalization has resulted in the expansion of market capitalism throughout much of the world, particularly in East Asia.¹ Even China, with its recent entry into the World Trade Organization, appears poised to open its markets and unleash its commercial potential. China could be the world’s largest auto market by 2020, increasing the oil needs of its enormous population by 40 percent. Obviously, this would have significant effects on the already-globalized energy market. In light of these global effects, both the Pentagon and Wall Street must understand their interrelationship: economic and political stability are crucial to reducing energy market risk.

As is evident in chapter 6, the Department of Navy is continuing its effort to enunciate the presumed linkage between the Navy’s worldwide operations and the progressive unfolding of economic globalization. The goal is nothing less than the Holy Grail of naval presence arguments: proof positive that ship numbers—especially aircraft carriers—matter to international stability.² Some of this analytic effort will be rightly dismissed as pouring old wine into new bottles because many “Navy-as-the-glue-of-globalization” formulations sound an awful lot like the old bromides about the “Navy as the glue of Asia.” Nice work if you can get it, but given the relative lack of naval crisis response in East Asia since the end of the Vietnam War, it is a hard story to sell. Simply put, once the Shah of Iran fell in 1979, U.S. naval crisis response activity quickly became concentrated on Southwest Asia—a pattern that continues to this day.³ As far as “proving” the utility of naval presence, East Asia has long remained the dog that did not bark.

But all that is about to change, if you believe the stunning Department of Energy projections of growing Asian energy consumption over the next 20 years.⁴ Not only do a lot of bad things have to not happen over the next 2 decades, but also a lot of good things must occur in both East Asia and the Middle East—and across all paths in between—to ensure the region’s much-anticipated economic maturation will actually occur. In short, if you want a Pacific Century, you will need a U.S. Pacific Fleet—strong in numbers and forward deployed.

Asian Energy: A Globalization Decalogue

For several years, a Naval War College project (NewRuleSets.Project) on how globalization alters definitions of international security has provided considerable opportunity for an examination of the views of Wall Street executives, as well as of regional security experts (both military and civilian), on Asia’s future economic and political development.⁵ The following decalogue (summarized in table 10–1) distills the essential rule sets our project has identified concerning Asia’s energy future:⁶

Global energy market has the necessary resources

Asia as a whole currently uses about as much energy as the United States, or about 100 quadrillion British thermal units.⁷ By 2020, however, Asia will roughly double its energy consumption, while U.S. consumption will rise just more than 25 percent. Asia’s plus-ups are significant no matter what the energy category, as evidenced in the following current estimates:

• oil consumption to increase by roughly 88 percent
• natural gas by 191 percent
• coal by 97 percent
• nuclear power by 87 percent when Japan is included, but 178 percent for the rest
• hydroelectric and other renewables by 109 percent.

This is a genuine changing of the guard in the global marketplace—a shifting of the world’s “demand center.” Today, North America accounts for just under a third of the world’s energy consumption, with Asia second at 24 percent. But within one generation, those two regions will swap both global rankings and percentage shares. In short, Asia becomes the world’s center of gravity for energy flows, giving it virtually the same market clout as the North Atlantic Treaty Organization countries—or North America and Western Europe combined.

The good news is that there’s plenty of fossil fuel to go around. Confirmed oil reserves have jumped almost two-thirds over the past 20 years, according to the Department of Energy, while natural gas reserves have roughly doubled. Meanwhile, our best estimates on coal say we have enough for the next 2 centuries. So supply is not the issue, and neither is demand, leaving only the question of moving the energy from those who have it to those who need it—and therein lies the rub.

Slide from old NewRuleSets.Project brief

But no stability, no market

Asia comes close to self-sufficiency only in coal, with Australia, China, India, and Indonesia the big producers. All told, Asia self-supplies on coal to the tune of 97 percent, a standard it will maintain through 2020. That is important, because virtually all of the global growth in coal use over the next generation will happen in Asia, mostly in just China and India.

Natural gas is a far different story. In 2001, Asia will used around 10 trillion cubic feet, with Japan, South Korea, and Taiwan representing the lion’s share of consumption. The three of them already buy virtually all of the region’s currently available methane (for example, from Australia, Brunei, Indonesia, and Malaysia). The trick is this: Asia’s demand for natural gas skyrockets to perhaps 25 trillion cubic feet by 2020, with the majority of the increase occurring outside of that trio. So if those three countries already buy what is available in-region, that means the rest of Asia will have to go elsewhere—namely, the former Soviet Union (Russia with 33 percent of the world total) and the Middle East (Iran with 16 percent). This is what futurists might call an historical inevitability.

Finally, even though oil will decline as a percentage share in every major Asian economy over the coming years, absolute demand will grow by leaps and bounds. Asia currently burns about as much oil as the United States, or roughly 20 million barrels/day (mbd). Since oil is mostly about transportation nowadays, and Asia is looking at a quintupling of its car fleet by 2020, there is a huge swag placed on this projection. The latest Department of Energy forecast is roughly 36 mbd, but even that means Asia as a whole has to import an additional 12 mbd from out of region, or close to double what it imports today from the Persian Gulf region.⁸

Asia already buys roughly two-thirds of all the oil produced in the Persian Gulf, and by 2010 that share will rise to approximately 75 percent.⁹ Meanwhile, the West’s share of Gulf oil will drop from just under a quarter today to just over a tenth in 2010. The strategic upshot is that the two most anti-Western corners of the globe are inexorably coming together over energy and money over the coming years. Increasingly, the Middle East becomes dependent on economic stability in Asia, and Asia on political-military stability in the Gulf. If either side of that equation fails, the energy market is put at risk.

No growth, no stability

All this predicted growth engenders social expectations. In other words, Asia’s developing societies have been placed on consumption trajectories that are nothing short of revolutionary. As a middle class develops in these countries (small as a percentage but enormous as an absolute number), a significant portion of the global population is being rapidly promoted from an 18th- or 19th-century lifestyle into a 20th- or even 21st-century consumption pattern—and they will get used to it pretty darn fast.

Moreover, if Thomas Friedman’s “electronic herd” of international investors decides to take it all away one afternoon in a flurry of currency attacks and capital flight, the struggling segment of the population that suddenly finds itself expelled from the would-be middle class is likely to get upset. This is basically what happened in Indonesia following the tumultuous events of the Asian Flu of 1997–1998. Huge portions of Indonesia’s economy had experienced rapid development in the preceding generation, only to see it disappear virtually one fickle market day.

Yes, some good resulted; Suharto’s crony capitalism collapsed, but with it went much of the country’s emerging middle class. Now, as the country disintegrates into pockets of chaos, the machetes are flying as disoriented villagers work nightly to dispatch the “sorcerers” and “black ninjas” purported to be behind this continuing economic decline. In short, Indonesia loses its growth trajectory and suddenly finds itself transported back in time several centuries.¹⁰

No resources, no growth

Asia cannot grow without a huge influx of out-of-area energy resources. The quintupling of cars is impressive enough, when you consider that General Motors predicts China will indeed be the world’s largest car market in 2020.¹¹ But even more stunning is the three-fold increase in electricity consumption, which will be generated mostly by coal and—increasingly—natural gas. Put those two together, and we are talking about an Asia that must open up to the outside world to a degree unprecedented in modern history. Or to put it in another way, Asia’s choice of energy will largely determine its attitude on globalization. China is the classic example here.

One can think of China’s decisions about its pattern of energy consumption as a choice between the past (coal), the present (oil), and the future (methane, or natural gas). If China chooses to remain, as much as possible, in the “past” with coal, this decision will essentially delay its full-fledged absorption into the global economy. This is clearly the path of least resistance for Beijing, and there lies the temptation, for the perception of autonomy afforded by coal allows China to:

• remain more opaque to outside scrutiny
• retain more control over its energy future
• continue the more easily directed top-down path of extensive growth (that is, more inputs versus more productivity).

If China chooses to move—as much as possible—into the “future” with natural gas, this decision will speed up its full-fledged absorption into the global economy. This is obviously a far more difficult path, because it:

• opens the country to greater interdependency with the outside world
• forces more transparency upon its financial systems
• asks it to trade control for calculated risk (nothing is guaranteed in the free market)
• demands a far greater push for intensive-style economic growth.

The bigger point, however, is this: neither China nor Asia as a whole can develop without opening to the outside world economically, and energy is the essential driving force in this process.

No infrastructure, no resources

Asia’s infrastructure requirements over the next 2 decades will be unprecedented in human history. Simply put, never have so many people developed an economy at such a rapid pace in such a concentrated chunk of global real estate. This rough doubling of energy consumption will place extraordinary demands on the environment. The combination of rapid rises in energy consumption, population, urbanization, and water usage (especially for agriculture) will further damage an already battered regional ecosystem, creating great political pressures on national governments—both from within and outside—to limit the pollution associated with energy production.

Cleaner cars and more mass transportation are important, but even more so is the choice of how all that electricity is to be generated. Asia will attempt to grow its nuclear and renewables capacity to the fullest extent possible, but as a combined share of total energy production (that is, 10 percent), these categories will not grow—even as they double in absolute amounts to keep pace with economic development. The story is roughly the same with coal, which stands at just over 40 percent of total energy production now and still will in the year 2020. The real shift in Asia’s energy profile comes in oil and natural gas, with the former declining from roughly 40 percent to 30 percent, and the latter basically doubling from 10 to 20 percent.

This 275 percent increase in the absolute amount of methane energy employed across the region highlights the story-within-the-story of Asia’s energy future: the push for energy is really a push for infrastructure. Regarding natural gas, this infrastructure comes in three forms:

• For the near term, the vast majority of natural gas that flows into Asia will arrive in a liquid form on ships. That means port facilities on both ends of the conduit, plus liquidification plants on the supplier’s end and regasification plants on the buyer’s end.
• Over the longer haul, pipelines become the answer to meet the rising demand—both by land (for example, Kazakstan-to-China, Russia-to-China) and sea (Russia-to-Japan, Iran-to-India).
• Finally, there is the domestic infrastructure required to pipe all that gas to the final consumers.

None of this comes cheaply, and as the recent history of regional electricity development makes clear, lots of outside money is required.¹²

No money, no infrastructure

Foreign direct investment (FDI) is the most significant scenario variable for Asia’s energy future. Energy infrastructure requirements could easily top $1 trillion by 2020, according to many estimates. Such numbers will overwhelm the region’s ability to self-finance, and that means Asia will have to open up its energy generation and distribution markets to far more joint or foreign ownership—a touchy subject, as former global energy giant Enron’s experience in India demonstrated.¹³

Right now, Asian states invest in one another to a very high degree, as many developing regional economies funnel upward of 90 percent of their external capital investments into their neighbors. But their combined resources are very limited compared to the West. A good estimate of Asia’s current outward stock—meaning the cumulative value—of foreign direct investment would be roughly $750 billion. In contrast, the United States and the European Union—even when one discounts intra-European investments—control roughly three times that amount of capital.¹⁴

Until now, Asia has relied on intra-Asian FDI for almost two-thirds of its cross-border capital needs, keeping the West at a certain distance in the mergers and acquisition trade. But this will have to change for Asia’s ambitious energy future to unfold according to plan. On an annual basis, the European Union and the United States routinely account for over 80 percent of all cross-border direct investment flows, far outdistancing their combined share of global gross domestic product, which sits as just under 60 percent.¹⁵ These two economic giants mostly invest in one another (and Europe in itself), creating an unbreakable trans-Atlantic bond. So if it seems inevitable that Asia must turn to the former Soviet Union and the Middle East for energy in the coming decades (the energy triad), it is just as inevitable that it must turn to the West for the money to finance this trade (the capital triad).

No rules, no money

Many on Wall Street voice the opinion that Asia has not sufficiently “cleaned up its act” as a result of the 1997–1998 financial crisis. The buzzword here is transparency, which refers primarily to internationally accepted accounting practices in the financial and corporate sectors. This is a huge challenge for Asia to overcome in terms of attracting the necessary foreign direct investment for future energy needs. Simply put, institutional investors need to feel confident in their ability to get a long-term return ofinvestment and not just a short-term return on investment, and that sort of confidence comes only with the firm rule of law.

Another problem with Asia’s energy investment climate is the current mix of private-sector investments and public-sector decisionmaking—in effect, too many bureaucrats with too much of other people’s money. In most Asian economies, the government still plays far too large a role as far as Western financiers are concerned. For the most part, Wall Street likes to see monopolies build networks but prefers them to be run by market forces once they are operational—their version of having a cake and eating it too. But so long as rule sets lag behind, the rise of private-sector market makers is delayed, for firm rules of play are required before deregulation of state-run energy markets can proceed.

Viewed from this angle, it might be said that the greatest long-term threat to Asia’s energy security is internal: its own proclivities for crony capitalism. Whether it is called Asian values, capitalism with Chinese characteristics, or globalization on ourterms, all Asian claims to a particular brand of capitalism are ultimately self-defeating. In sum, money has to behave in Asia just like it does in the West if the region hopes to attract the investment necessary to secure its energy future.

No security, no rules

Foreign direct investment does not occur in a vacuum. Long-term certainty is the greatest attraction a country can offer to outside investors, whereas war and political-military instability (especially leftist revolutions) are the best methods to scare them away. Not surprisingly, the strongest FDI bonds exist between the three main pillars of the Cold War’s trilateral alliance structure: the United States, Western Europe, and Japan.

This triad controls 80 percent of the world’s stock in foreign direct investment, keeping two-thirds of that total invested in one another. That means the other 90 percent of the global population has to get by on the remaining half of global FDI capital available. In a nutshell, investment follows the flag far more than trade. For example, the United States does about a third of its trade with Western Europe and Japan but concentrates closer to a half of its FDI in these two markets.¹⁶

Developing Asia, in contrast, readily presents a handful of potential and/or existing security trouble spots that could negatively impact the region’s FDI climate in significant ways:

• India-Pakistan nuclear standoff
• Indonesia’s disarray
• The Korean situation (especially the North’s nuclear/missile programs and/or “imminent collapse”)
• China-Taiwan
• Overlapping sovereignty claims in the South China Sea.

Bluntly stated, Asia is still a place where military conflict could dramatically alter the FDI landscape, unlike a Europe where the conflict in the former Yugoslavia had a negligible impact on economic integration and investment flows.

No (benign) Leviathan, no security

Many international experts agree that Asia’s current security situation belongs more to what Thomas Friedman calls the “olive tree” world, where backward tribes fight over little bits of land, even as its rising economic powerhouses clearly join the “Lexus” world, producing many of the global economy’s best high-end technology products.¹⁷ Lacking Europe’s crucible-like history of 20th-century warfare, as well as its currently robust regional security alliances, Asia remains the one place in the world where direct great power warfare seems possible over the next generation. This becomes especially true as previously authoritarian states experience greater amounts of political pluralism, typically the most dangerous time for interstate wars.¹⁸

In this region where the concepts of spheres of influence and security dilemma are still valid, there remains a viable long-term market for the services of an outside Leviathan—namely, the United States. In a part of the world where numerous states are still technically at war (dating back more than half a century), the United States enjoys healthier security relationships with virtually every government than any two governments there enjoy with one another. While it is easy to deride the notion of a “four-star foreign policy,” there is little doubt that the combatant commander of U.S. Pacific Command plays a special—even unique—role in working the security arrangements that underpin the region’s strong record of structural stability over the past quarter century (basically, since Vietnam was reunified).¹⁹

And if there was no U.S. military presence, then what? How comfortable could Japan be with China? Taiwan with China? South Korea with North Korea? India with Pakistan? India with China? Vietnam with China? The list goes on and on. Simply put, the U.S. military occupies both a physical and a fiscal space in Asia: our forward presence both reassures local governments and obviates their need for larger military hedges. Our presence is a moneymaker on two fronts: local governments spend less on defense and more on development (the ultimate defense), and FDI is encouraged, however subtly.

No U.S. Navy, no (benign) Leviathan

As noted earlier, what Asia needs in terms of future energy requirements is entirely available either in-region (for example, coal) or from the central portion of the Eurasian landmass (gas and oil from the Persian Gulf, Central Asia, and Russia). These distances are all feasibly conquered by pipelines, and most of the involved sea lines of communication lie within the reach of the region’s naval forces—for good or ill.

Meanwhile, the West, which has come to rely less and less on Persian Gulf oil, is likewise becoming more regionally focused in its energy trade patterns. The United States, for example, imports more energy supplies from Canada than any other nation, and gets the bulk of its imported oil from North and South America.

None of these statements are meant to suggest that East-versus-West energy blocs are forming. In reality, the regionalization of energy trade occurs precisely because the commodities in question are behaving more and more as one would expect of a globally traded, highly fungible good. If price determines all, then reducing transportation distance makes sense.

In the end, all this regionalization comes about because the energy trade is no longer confined to the sort of strategic bilateral relationships of the Cold War era, so the new rules of energy are nothing more than that sector’s joining up with the global marketplace and losing its special status as a strategic asset.

Having said all that, the U.S. Government—and the U.S. Navy in particular—faces a far more complex strategic environment in the 21st century, whether or not it yet realizes the change: our national security interests in the Persian Gulf, while increasingly important for the global economy, no longer hold the same immediate importance to our national economy.

In effect, U.S. naval presence in Asia is becoming far less an expression of our nation’s forward presence than our exporting of security to the global marketplace. In that regard, we truly do move into the Leviathan category, for the product we provide is increasingly a collective good less directly tied to our particularistic national interests and far more intimately wrapped up with our global responsibilities.

And in the end, this is a pretty good deal. We trade little pieces of paper (our currency, in the form of a trade deficit) for Asia’s amazing array of products and services. We are smart enough to know this is a patently unfair deal—unless we offer something of great value along with those little pieces of paper. That product is a strong U.S. Pacific Fleet, which squares the transaction quite nicely.

Understanding the Military-Market Connection

The collapse of the Soviet bloc and its longstanding challenge (or rejection) of the Western economic rule set made possible—really for the first time in human history—a truly global rule set for how military power buttresses and enables economic growth and stability.

How so? For the first time in human history, we have a true global military Leviathan in the form of the U.S. military, and no peer competitor in sight—not even a coherent alternative economic philosophy (although one clearly brews in the anti-globalization protests that started with Seattle). This unparalleled moment in global history both allows and compels the United States to better understand the national security-market nexus, in large part because of its complete reversal of the priority from that of the Cold War era. During the strategic standoff with the Soviet Union, economic might was seen as supporting military power, but now that situation has been turned on its head: to the extent that the military matters, it matters because of the stabilization role it can play in the global economy.

How do we define this yin-yang relationship between the military and business worlds? First, we speak of stability, which flows from national security, and then we speak of transparency, which is both demanded and engendered by free markets. These two underlying pillars form the basis of the single global rule set that now essentially defines the era of globalization.

Within those two pillars, the United States clearly plays a crucial role:

• The U.S. Government, through the U.S. military, supplies the lion’s share of system stability through its Leviathan-like status as the world’s sole military superpower.
• The U.S. financial markets, which lead the way in fostering the emergence of a truly global equities market that will inevitably operate all day, every day, play the leading role in spreading the gospel of transparency—any country’s best defense against the sort of financial currency crises that have periodically erupted over the last decade (Mexico 1994, Asia 1997, Russia 1998, Brazil 1999, Turkey 2001).

As such, it is essential that these two worlds—the Pentagon and Wall Street—come to better understand their interrelationships across the global economy. Uncovering and comprehending this fundamental relationship is especially important because—the vast majority of the time—the security and financial communities operate in oblivious indifference to one another.

One is tempted to counter, “So what? They don’t need to be aware of one another on a day-to-day basis.” And in a basic sense, that is true. But if you consider the rise of system perturbations as a new form of international security threat, and if you understand that many of these perturbations first appear in the form of financial crises that can engender serious subnational violence (for example, Indonesia today), then perhaps this connectivity seems more pertinent. Ultimately, the global economy operates on trust, which is based on certainty, which in turn comes from the effective processing of risk.

In the end, the national security and financial establishments are in the same fundamental business: the effective assessment and mitigation of international risk. For the military, it is the risk of conflict and the disruption of normal life by large-scale violence, while in the financial world, it is the risk of bankruptcy (insolvency) and the disruption of normal business by large-scale panics or meltdowns.

Invariably, these two problem sets merge in the historical process that is economic globalization, so understanding the military-market connection is not just good business, it is good national security strategy. Osama bin Laden understood this connection when he selected the World Trade Center and the Pentagon as his targets. We ignore his logic at our peril.

Thomas P.M. Barnett is professor and senior strategic researcher at the Naval War College. He directed the NewRulesSet.Project, an effort to draw new “maps” of power and influence in the world economy through collaboration with financial corporations such as Cantor Fitzgerald. Currently, he is serving as the assistant for strategic futures in the recently formed Office of Force Transformation within the Office of the Secretary of Defense. His articles appear with frequency in the U.S. Naval Institute Proceedings, and an abbreviated version of this chapter appeared in the January 2002 issue. The author would like to thank Bradd Hayes and Rear Admiral Michael McDevitt, USN (Ret.), for their comments on the original draft.

Notes

¹ For the purposes of this article, the author defines Asia as extending from Afghanistan to Japan, but not including Australia and New Zealand (Oceania), although he identifies Australia as an in-region supplier of energy (coal and natural gas) due to its proximity. 

²For a good example of this sort of work, see Thomas P.M. Barnett and Linda D. Lancaster,Answering the 9–1–1 Call: U.S. Military and Naval Crisis Response Activity, 1977–1991 (Center for Naval Analyses Information Memorandum 229, August 1992). 

³For the best analysis on this subject, see Henry H. Gaffney, Jr., et al., U.S. Naval Responses to Situations, 1970–1999 (Center for Naval Analyses Research Memorandum DOOO2763.A2/Final, December 2000). 

⁴ See the Energy Information Administration’s International Energy Outlook 2000: With Projections to 2020, DOE/EIA–0484 (2000), March 2000, accessed at <www.eia.doe.gov/oiaf/ieo/index.html>.

⁵The NewRuleSets.Project was a multi-year research effort designed to explore how globalization and the rise of the New Economy are altering the basic “rules of the road” in the international security environment, with special reference to how these changes may redefine the U.S. Navy’s historic role as security enabler of America’s commercial network ties with the world. The project was hosted by the online securities broker-dealer firm, eSpeed (an affiliate of Cantor Fitzgerald LP), and involved personnel from the Decision Strategies Department of the Center for Naval Warfare Studies. Adm. William Flanagan, USN (Ret.), and Philip Ginsberg of Cantor Fitzgerald (then-senior managing director and executive vice president, respectively) served as informal advisers to the project, actively participating in all planning and design. The joint Wall Street-Naval War College workshops in the series involved energy, environmental issues and foreign direct investment in Asia. All research products relating to this effort can be found at <www.nwc.navy.mil/newrulesets>.

⁶ All the energy data presented in the decalogue, unless otherwise specified, comes from the Department of Energy’s International Energy Outlook 2001. 

⁷ A good rule of thumb for thinking about a quadrillion British thermal units (Btus) is that you can take the annual number for a region and divide it by two, giving you the rough equivalent in millions of barrels of oil per day the region would need to burn if it was achieving that entire energy amount by oil alone. For example, North America used about 110 quadrillion Btus in 1997, so that would equate to approximately 55 million barrels a day (mbd) of oil if that entire amount was achieved by oil alone. For point of comparison, note that the United States currently uses about 20 mbd, importing roughly half that number. 

⁸ For an excellent exploration of this, see Daniel Yergin, Dennis Eklof, and Jefferson Edwards, “Fueling Asia’s Recovery,” Foreign Affairs 77, no. 2 (March/April 1998), 34–50. 

⁹ The Middle East currently accounts for roughly 90 percent of all Asian oil imports; on this see Fereidun Fesharaki, “Energy and Asian Security Nexus,” Journal of International Affairs 53, no. 1 (Fall 1999), 97. 

¹⁰ For a frightening description of this situation, see Nicholas D. Kristof’s chapter, “Search for the Sorceror,” in Thunder from the East: Portrait of a Rising Asia, ed. Kristof and Sheryl WuDunn (New York: Alfred A. Knopf, 2000), 5–23. 

¹¹ Cited in Clay Chandler, “GM’s China Bet Hits Snag: WTO (Car Shoppers Await Discount From Trade Deal),” The Washington Post, May 10, 2000, E1.

¹² See “Foreign Investment in the Electricity Sectors of Asia and South America,” in International Energy Outlook 2001, 120–21. 

¹³ For a good description of Enron’s difficulties in the Indian electricity market, see Celia W. Dugger, “High-Stakes Showdown: Enron’s Right Over Power Plant Reverberates Beyond India,”The New York Times, March 20, 2001, C1. 

¹⁴ These figures are derived from United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2000. 

¹⁵ In contrast, Asia accounts for less than 10 percent of global foreign direct investment flows, even though its gross domestic product share sits at 25 percent.

¹⁶ Estimates based on the figures taken from UNCTAD, World Investment Review and CIA, World Factbook, various years.

¹⁷ See Thomas L. Friedman, The Lexus And The Olive Tree: Understanding Globalization (New York: Farrar, Strauss and Giroux, 1999). 

¹⁸ On this subject, see the data analysis by Edward D. Mansfield and Jack Snyder, “Democratization and War,” Foreign Affairs 74, no. 3 (May/June 1995), 79–97. 

¹⁹ For an excellent exploration of this concept, see Dana Priest, “A Four-Star Foreign Policy? U.S. Commanders Wield Rising Clout, Autonomy,” The Washington Post, September 28, 2000, A1. See also the second and third articles in the series (September 29–30).

Blast from my past: PNM's "New Rules for a New Crisis"

[NOTE:  As I slowly rebuild old pages from the old site, I will use this weekly feature for that purpose.]

Deleted Scene #22

Chapter Five: The New Ordering Principle

The Missing Section Entitled: "New Rules for a New Crisis"

Commentary: This twenty-second "deleted scene" was the originally planned third section of the chapter (coming after "The Rise of System Perturbations" and before "The Greater Inclusive"), which Mark Warren cut simply to reduce the size of the chapter. My sense was that he felt the chapter already had more than enough theoretical material and did not need this long detour on rule sets. I include the section here because I really do like the material quite a bit, even as tough as it is to lay out before the reader without lapsing into theoreticalspeak. Plus, this section was my sole capture from the one workshop I ran for the Office of Force Transformation during my stint there, so I feel like the bits of wisdom I pulled from that effort (and all those big brains that attended) should find a home somewhere!

I should note who were the attendees at that workshop in March of 2002. Here's the list:

1) Arthur Cebrowski, Office of Force Transformation
2) John Garstka, Joint Chiefs of Staff C4 Directorate 
3) Stuart Umpleby, George Washington University 
4) Douglass Carmichael, Big Mind Media 
5) John Petersen, The Arlington Institute 
6) David Gordon, National Intelligence Council 
7) Stephen Schlaikjer, Political Advisor to Chief of Naval Operations 
8) Shane Deichman, JFCOM 
9) Ahmed Hashim, Naval War College 
10) Daniel Pipes, Middle East Forum/N.Y. Post 
11) Jeff Cares, Alidade Consulting 
12) Richard Landes, Center for Millennial Studies 
13) Kori Schake, National Defense University 
14) Joshua Epstein, Brookings Institution 
15) Mitzi Wertheim, The CNA Corporation 
16) Tony Pryor, International Resources Group 
17) Hank Gaffney, Center for Strategic Studies 
18) Yaneer Bar-Yam, New England Complex Systems Institute 
19) Lee Buchanan, consultant 
20) Bill Halal, George Washington University 
21) Adam Siegel, Northrop Grumman 
22) Cdr. John Dickman, CNO Strategic Studies Group 
23) John Landry, National Intelligence Council 
24) Jerry Hultin, Stevens Institute of Technology

Here is the agenda of the workshop:

AGENDA FOR 19 MARCH SYSTEM PERTURBATIONS WORKSHOP

0730-0800
Check-in and continental breakfast

0800-0900
Barnett briefs the System Perturbation slide package

0900-0915
GroupSystems warm-up
INSTRUCTIONS: The scenario is this: you are asked by the Mayor of New York City to pen a paragraph on the significance of 9/11 for inclusion in a time capsule to be buried beneath the permanent memorial being erected at Ground Zero in lower Manhattan. In the next 5 minutes please enter your thoughts on the laptop in front of you. At the end of five minutes, you will be encouraged to read the entries of others and enter additional comments on those texts.

0915-1000
SESSION I: Does 9/11 serve as existence proof for the concept of System Perturbations as a identifiable category of international crisis?
INSTRUCTIONS: After some introductory slides on this notion, you will be asked to participated in a GroupSystems brainstorming activity of approximately 5-7 minutes, answering the question, "Please give us examples of System Perturbations in history and explain what each example tells us about this concept." Following that activity, Dr. Barnett will lead a discussion on this question for approximately 30 minutes. At the end of that discussion, you will be asked another GroupSystems brainstorming question, "What are the lasting perturbations to the global system from 9/11?" You will be asked to enter your ideas into 6 separate "buckets": 

1.  Economics
2.  Politics
3.  Technology
4.  Environment
5.  Cultural/media
6.  Security.

1000-1015
Coffee break

1015-1100
SESSION II: Can/should System Perturbations serve as a new ordering principle for U.S. national security?
INSTRUCTIONS: After some introductory slides on potential outcome scenarios for the Global War on Terrorism (GWOT), you will be asked to participated in a GroupSystems brainstorming activity of approximately 5-7 minutes, answering the question, "Give us your description of the defining global conflict paradigm for the next 10-to-20 years." You will be given four, admittedly overlapping "buckets" to choose from in terms of placing your entry:

1.  Division by competency/success
2.  Division by culture/civilization
3.  Division by great power-led camps
4.  Division by ideology.

Following that activity, Dr. Barnett will lead a discussion on this question for approximately 30 minutes. At the end of that discussion, you will be asked another GroupSystems brainstorming question, "What are the new rule sets that emerge as a result of 9/11 and the ongoing GWOT?"You will be asked to enter your ideas into 3 separate "buckets":

1.  Security within our borders
2.  Security at our borders
3.  Security beyond our borders.

1100-1200
SESSION III: Who are the dominant crisis trigger agents in the current global era?
INSTRUCTIONS: After some introductory slides on potential downstream institutional consequences for DoD as a result of 9/11 and the GWOT, you will be asked to participated in a GroupSystems brainstorming activity of approximately 5-7 minutes, answering the question, "What will future enemies of the U.S. learn from 9/11 and the GWOT?" You will be given three "buckets" to choose from in terms of placing your entry:

1.  Super-empowered individuals
2.  Transnational networks
3.  Nation-states.

Following that activity, Dr. Barnett will lead a discussion on this question for approximately 40 minutes. At the end of that discussion, you will be asked another GroupSystems brainstorming question, "What are the long-term institutional ramifications of the home game/away game dichotomy?" You will be asked to enter your ideas into 3 separate "buckets":

1.  A future Department of Homeland Security will someday rival DoD in importance
2.  DoD will remain the predominant national security player in all spheres
3.  DoD will bifurcate into a classic warfighting force and a constabulary force

 (Back to the pre-WWII future).

1200-1300 Lunch break (served in the conference room)

1300-1500
SESSIONS IV-IX: Building the System Perturbation model piece by piece
INSTRUCTIONS: After some review slides on the six proposed categories of the System Perturbation, you will be asked to participate in 6 sequential 20-minute sessions exploring each category. Each 20-minute session will begin with a 5-minute GroupSystems brainstorming activity where you will be asked to offer new or better definitions, examples, analogies, etc. for the category. Following that, you will participate in a facilitated discussion for 15 minutes before moving on to the next category. The six proposed categories are:

1.  Agents
2.  Triggers
3.  Medium
4.  Transmission
5.  Barriers
6.  Consequences.

1500-1515 Coffee break

1515-1645
SESSIONS X-XII: What is to be done by whom?
INSTRUCTIONS: After some introductory slides on the concept of burden-sharing and new linkages with regard to System Perturbations, you will be asked to participate in 3 sequential 30-minute sessions exploring three broad questions:

1.  In responding to future System Perturbations, how much responsibility falls to DoD versus the rest of the US Government?
2.  How much falls to the public sector versus the private sector?
3.  How much falls to the United States versus the rest of the world?

Each 30-minute session will begin with a quick GroupSystems vote, followed by approximately 20 minutes of facilitated discussion, and ending with another GroupSystems brainstorming activity where you will be asked to suggest useful steps the US Government could take in the coming years to meet the challenges associated with future System Perturbations such as 9/11.

1645-1700
SESSION XIII: The Elevator Drill
INSTRUCTIONS: You will be given an opportunity for one last comment, the scenario for which will be revealed at this time.

1700
ADJOURN

Here are the slides that resulted from the workshop:

Finally, here is the deleted scene itself ….

Deleted Scene: Barnett's Rules on System Perturbations

[TEXT BEGINS]

Since I am constantly going on about "rules," it only seems fitting that, along with this definition of a new crisis type, I offer some rule sets regarding how it unfolds and what are good strategies to deal with it. Truth be told, what I will offer here are more observations than rules, but in keeping with my rule that no audience likes a wishy-washy visionary ("Oh, I dunno, it could sort of be like that"), let me display the usual arrogance of the grand strategist and pretend what I am about to tell you are hard rules.

How did I come about these rules? I did the usual thing one does in my business: I held a workshop and invited all my friends, plus some newbies to shake things up. You invite your friends because you want a good conversation, and because you know what they are capable of in terms of big ideas. These are the people that will not fight your ideas and premises tooth and nail because you have a reputation with them. But you do not want a lovefest. Although I always say my workshops are all about making me smarter, you do not want to go overboard in that arena, like it is some communist party congress and your brilliant observations are constantly interrupted by [stormy applause]. No, you want some agitators in the group, or some people who will, by their very nature, anger plenty of others in the room.

The agitators need to be serious experts in the field you are stealing from. I say "stealing from," because I do not pretend to generate original thought, by and large. As my mentor Art Cebrowski likes to describe me, I am a true synthesist, which is a polite way of saying I never really come up with any ideas of my own. But Art is right: I basically weave ideas and concepts together from other sources, other fields, other cultures. I am a concept arbitrager, who learned this skill less from any one field of study than from simply learning a number of languages over the course of my life (French, Russian, German, and Romanian). Can I speak any of them today? Not really. But what I can do almost instinctively is learn new languages quickly -- I mean really plunge into a field and come back out with enough terminology and understanding to manage a dangerous version of its spoken language. I say "dangerous" because, inevitably, my use of that language angers the purists, which is my snotty way of saying people truly expert in the field. That gets me back to the agitators.

I invited a few people truly conversant in complexity and chaos theory to the workshop, knowing that my use of System Perturbation would offend their sensibilities. I mean, they already have loads of fairly firm rules about their ideas, and both these terms (system and perturbation) have specific meanings to them. I wanted to respect their expertise, but only up to a point, because I am engaging in conceptual arbitrage here -- moving concepts from one field to another. Since my field, political science, is essentially a bastard science with almost no good rule sets, it is hard to offend anyone in my neck of the woods. But when I start talking System Perturbations and using words like medium, transmission, etc., I invariably anger the complexity guys, because they believe that, by using their tools, you really can explain the world and how it works -- almost from A to Z. Of course, most of their computer models tend to zero out human emotions, reducing everything to rational choices by rational people, but since I have never really visited their world of rational people always acting rationally, I think I can only do so much damage with a few of their concepts.

Now, the rules I will present here really are not based on complexity or chaos theory, but based on observations I arrived at after listening to a bunch of social scientists discuss the concept of System Perturbation as a new definition of security crisis, with a smattering of complexity theory types in the room to goad and taunt them about their lack of true expertise in the subject-matter. Naturally, I conducted such a deviously designed workshop inside the Beltway, which such behavior is considered quite normal.

What I got from the workshop was a ton of disparate ideas about how vertical and horizontal scenarios play out among vertical and horizontal political systems. That was the weird thing about this workshop: I introduced the concept of vertical and horizontal scenarios and pretty soon everyone in the room was talking about vertical and horizontal societies or political systems. I like those phrases better than "authoritarian" and "democratic," because those phrases come with so much baggage and are so all-inclusive, whereas my workshop participants seemed to use the phrases vertical system and horizontal system with far greater freedom. For example, both China and Russia could be described as having far more horizontal economic systems than political systems, meaning their economies are increasingly built more around ties among firms and among individuals thanbetween the political leadership and firms, or the more vertically arranged patterns of authority and activity under past communist rule. Their political systems may still be quite vertically arrayed, from top to bottom, but their economic systems are far more horizontal.

You might ask, Why not just call them authoritarian market economies? Clearly I could do just that, but I prefer referring to vertical and horizontal systems because, that way, I can talk about how different aspects (i.e., economic versus political, or social versus security) of China might respond to a System Perturbation differently. I think China's economy and society are more horizontal in form than vertical, but I believe the Communist Party and People's Liberation Army remain extremely vertical in form, so a System Perturbation hitting China hits different sectors differently. Why is that important? Well, here I go back to the dinosaurs and mammals notion: a System Perturbation may disrupt or destroy different aspects of different systems across China. For example, SARS was more challenging for the political leadership than for the economy, which in the end proved awfully resilient whereas the Party looked awfully stiff. The mass media displayed a surprising amount of horizontal form, whereas the military assumed its usual stonewall stance. You get the idea. I just want more flexible concepts because I am still fumbling my way around this new strategic concept.

Before I give you the rules, let me spin out this description of vertical and horizontal systems a bit more by offering a series of examples. I will say horizontal systems tend to be replete with elites, meaning they possess multiple types of powerful people: political, business, military, technology, mass media, cultural icons and heroes, and so on. Vertical systems, on the other hand, really only have one elite -- the political leadership. You can tell you are in a vertical system when the political leader is also the military leader, is also the richer landowner, is also guiding hand of the economy, and so on. In vertical systems, you have to join the government to have power and wealth, but in horizontal systems, you typically have to leave the government to get wealth.

A second difference I have touched upon before: horizontal systems rotate leaderships with routine regularity, while vertical systems tend to have permanent leaderships. As such, horizontal systems tend to feature market-dominated economies, while vertical systems tend to feature state-dominated economies.

A third package of differences concerns the nature of communications and dialogue. In the horizontal system, you tend to see universal networks, where everyone can connect up to everyone else. This facilitates a question-based dialogue, where basically all subjects are on the table. The government in a horizontal system tends not to make any effort to steer that discourse, but only to deal with downstream behavior that may result. You want to yell "fire" in a crowded theater and people get hurt in the resulting stampede? Well then, you are going to be in trouble.

Vertical systems are just the opposite on communication. Their networks tend to be drill-down networks, or connectivity that runs from the leader to the led. Instead of letting any and all conversations occur, vertical systems typically feature upstream content control, because the dialogues that are permissible are severely restricted in terms of taboos. In short, it is a world of "don't go there, girlfriend!" I use the feminine here with purpose, since far more of the taboos involve women and restrict their behavior. What do young Iranian women do overwhelmingly when they get on the Internet? They race to Yahoo chat rooms to discuss sex, dating and marriage? Why do they have to go to such effort? These subjects are not discussable in public Iranian society under the mullahs. So what do you talk about in a country like Iran? You mostly talk about what you cannot talk about. That is what I did in the Soviet Union when I lived there briefly: I had lots of conversations with Russians where we talked about all the subjects you could not talk about. We did not actually discuss those subjects, we just talking about Russians' inability to talk about them. Vertical systems are a sort of strange, Seinfeldian universe in that way: all of your conversations really are about nothing.

Now that I have explained my terminology, let me lay out the five questions I seek to answer with these rules:

1) Who's really in charge during a System Perturbation? For example, is the agent which triggers the vertical shock really running the show?

2) What's really at risk during a System Perturbation? Are all systems equally at risk of disruption and crisis?

3) Where are the boundaries of a System Perturbation? Where do these horizontal waves tend to dissipate? What are the natural barriers to transmission?

4) When do we gain the upper hand in a System Perturbation? Which is another way of saying, How do you come out on top after one?

5) How do we deal with other states during a System Perturbation? Who naturally tend to be our friends and who are our natural enemies?

Let me assigns three rules to each of those five questions, starting with question 1 and working my way down.

Who's really in charge during a System Perturbation? 

Rule #1: Super-empowered individuals may rule vertical scenarios, but nation-states still rule horizontal scenarios. I got this one from a senior personal aide to the Secretary of Defense, who made the observation during a brief I gave him and a slew of his colleagues. His point was simple: a terrorist like Osama bin Laden can put together the people, money, and logistics to hijack three planes and fly them into buildings, but that vertical shock will trigger significant long-term responses from the threatened nation-states. The responses from these states are true horizontal scenarios that stretch on for years, like the global war on terrorism. A serious campaign like that takes an enormous amount of resources, which really only nation-states can muster. So, a super-empowered individual like Bin Laden can certainly pull off a "heist" here and there, but the "police" are able to spend years hunting him down. As my old boss Art Cebrowski likes to say, the terrorist has few resources, but lots of will, whereas the state tends to have lots of resources, but difficulty maintaining will, or vigilance. So it is a cat-and-mouse sort of game over the long run: he has to be shifty, we have to be relentless.

Rule #2: Vertical scenarios choose us, but we choose horizontal scenarios. This concept stems from an observation made by an historian of millenarian movements, or groups with apocalyptic agendas. Richard Landes of Boston University says, look back through any nation's history and you will find defining moments, or what he calls "chosen trauma." These events shape the ethos of the society because people there have chosen to mark them as key turning points in their collective history. In the United States, our chosen trauma include the Boston Tea Party, the Battle of Gettysburg, the attack on Pearl Harbor, and now 9/11. Not every bad thing that happens triggers this response. America could have chosen to respond to the 1993 bombing of the World Trade Center to launch a global war on terrorism, but we did not. In general, a chosen trauma can be summarized by the phrase, "Remember the ______!" So Americans "Remember the Alamo!" and "Remember the Maine!" But we do not really chose to remember Columbine or Oklahoma City in the same way. The point of this rule is simply to remind us that we have the ability to say no to responding to a vertical scenario, and that when we do decide to respond, like with a global war on terrorism, that is not a choice forced upon us, but one we make freely -- thus signifying control. It is one of those things we all learned in kindergarten: anyone can hurl an insult or a rock, but you only have to fight when you want to.

Rule #3: Once the vertical scenario plays itself out, control reverts back to nation-states, so long as they stay on the offensive. You could say this one also comes from the Office of the Secretary of Defense, because that has been the basic philosophy they have advocated in America's global war on terrorism. In other words, once the dust cleared after 9/11, it was America's task to keep hounding Bin Laden and Al Qaeda until they are completely destroyed as a threat. Our enemy's goal is clear: they need to keep hitting us with vertical shocks that cumulatively depress our stock of rules, our collective sense of individual security, and our belief in the stability of our system. A vertical shock like 9/11 immediately creates a sense of rule-set void: people are thinking, "We are clearly short of the right rules because if we had had them, this disaster never would have happened in this way." If an Al Qaeda can maintain a certain frequency of shocks, America never really fills that void back in with new rules, because we would be constantly scrambling to understand -- yet again -- "how something like this could happen?" But if we maintain a constant pressure on the enemy, those vertical shocks are few and far between, allowing us to fill in any voids created by our original sense of shock and horror. This is the essential difference between America and Israel since 9/11: we have never been hit again, but Israel keeps suffering the vertical shocks of suicide bombings, thus Israeli society suffers systematic brutalization and thus responds more brutally with time. My point: you take the offensive, you limit the need for brutality in your response. You get the bad stuff over as quickly as possible.

What's really at risk in a System Perturbation?

Rule #4: In response to System Perturbations, horizontal systems tighten up vertically, but vertical systems tighten up horizontally? After 9/11, a horizontal system like the United States will tighten up its rule sets by forging more comprehensive cooperation between local, state and federal agencies, or along vertical lines of authority. Horizontal systems like the U.S. naturally fear that their distributedness is their weakness, when in reality, it is their strength. But tightening up along vertical lines only makes sense, sort of defense-in-depth philosophy that is more logical than, say, states coming together per se. In a vertical system you tend to see the opposite sort of response: when the Great Leader finds his rule under attack, he starts reining everyone in because he is never quite sure who to trust. So you see crackdowns on untrustworthy groups and more palace guards. That was basically Saddam Hussein's tack across the nineties after the U.S. booted Iraq out of Kuwait: he kept creating new, ever more trustworthy troops to surround him, and he put those troops under his most trusted relatives. More generally in response to 9/11, we saw plenty of vertical political systems around the world use the excuse of the global war on terrorism to target dissidents, separatists, and the like, reclassifying everyone as a terrorist and seeking the U.S.'s blessing for that designation. So what is at risk here is basically the civil rights of citizens the world over, because a vertical shock can easily send even the most horizontal systems over the top in their search for security.

Rule #5: Vertical scenarios scare horizontal systems more, while horizontal scenarios scare vertical systems more. People living in horizontal systems typically enjoy significantly larger amounts of freedom, and so it is easier to slap a vertical scenario like a terrorist attack on an open society than a closed one. Naturally, people living in more horizontal systems understand that vulnerability and fear vertical scenarios, or the bolt-from-the-blue, far more than horizontal scenarios, or some slow-developing problem against which you can mobilize your network of resources. 9/11 really shocked America, even though the death total was fairly small when you compare it, say, to deaths from car accidents each year (40 to 50 thousand), but those death unfold in small increments, spread out across the land, whereas 9/11's victims died all at once. Plus, Americans understand the risks of driving; we know those rule sets. But 9/11 triggered the response of "People just shouldn't have to die that way," meaning it offended our sense of rules regarding warfare. Bolts-from-the-blue like 9/11 tend to haunt U.S. strategic planners, because we know there is little we can do to prevent an enemy from getting that first sucker-punch in on America, whereas in a long, knockdown drag-out fight, we are very confident that we will prevail. Vertical systems tend to fear horizontal scenarios more, say, like the slow build-up of resistance to rule. Soviet Russia went nuts over individual dissidents like Andrei Sakharov, because they feared he would slowly "poison" the minds of an entire generation, making both rule and reform impossible. They were right to be afraid. Similarly, the political leadership in China runs scared when a Falun Gong movement develops secretly on its own, using the network connectivity of the Internet to spread its gospel. When several thousand Falun Gong disciples showed up one morning on Tianammen Square, what was frightening to the Chinese leadership was less their non-violent protest than the their obvious self-organizing capabilities. So if horizontal systems fear political assassinations, vertical systems live more in fear of grass roots movements. 

Rule #6: Vertical scenarios harm vertical systems more, while horizontal scenarios harm horizontal systems more. This rule simply says that Rule #5 is basically wrong, despite what people in both systems tend to believe. In reality, vertical strikes can do little damage to truly distributed systems. If someone wipes out the White House, Congress and the Supreme Court one afternoon, nothing would really change in our country in terms of our ability to maintain rule. Yes, it would be a huge shock, but it would not be hard to replace all those leaders rather quickly. I could find you 535 ex-senators and representatives living within a ten-mile radius of the Capitol itself who could easily step back into rule, tell me how hard it would be to find nine lawyers in Washington who think they are smart enough to sit on the Supreme Court! But even beyond those facile examples lies the reality that we have 50 "farm teams" around the country, each complete with their own set of executives, supreme courts, and legislative branches. You if you wipe out our national leadership you do not really kill our capacity for leadership, because we have got more political leaders than we can count! What really stresses out horizontal systems like the U.S. are the horizontal scenarios that never seem to end, like a Great Depression, which really only ended when the vertical shock of Pearl Harbor put the country on another pathway. In contrast, vertical systems like Saddam Hussein's regime can really be dismembered quite profoundly simply by taking out the leadership. Remember the "most wanted" deck of cards? That said we really needed to nail only about 50 bad actors in Iraq and we would have eliminated the bulk of the Baath party rule.

Where are the boundaries in System Perturbations?

Rule #7: Vertical scenarios are always preceded by horizontal scenarios that generated the preconditions for system shock. This one I definitely stole from the complexity guys. Their basic point is that no vertical shock occurs in a vacuum. With 9/11, there were a host of horizontal scenarios on our side that led to all that lax security and our government's downplaying the threat from Al Qaeda. So looking for that one "smoking gun" is always an illusion, despite the fact that we always pretend to ourselves that we have really found one, like the FBI "Phoenix Memo." To believe that one little memo should have turned the tides on all those long-term horizontal scenarios is just fantasy. You cannot turn conventional wisdom on its head without a serious shock. On Al Qaeda's side, 9/11 was the culmination of a slow build-up of capabilities and demonstrated strikes over the years. This group did not appear out of nowhere, nor did their grievances.

Rule #8: Vertical scenarios are invariable followed by horizontal scenarios that generate preconditions for future shocks. This one sort of says, "Be careful what you wish for." Japan attacks Pearl Harbor and hopes it will shock the U.S. into rapid defeatism. Instead, we respond with the Pacific Campaign, or a methodical dismantling of Japan's empire. Hitler thought Germany might conquer Russia with the same blitzkrieg that overwhelmed Poland and France, and he got the Battle of Stalingrad and the Siege of Leningrad instead. Al Qaeda thought America would be shocked into isolation after 9/11, and got a Bush Adminstration hell-bent on transforming the Middle East. Of course, as part of that transformation, we invaded Iraq and toppled Saddam Hussein's regime. That was the "big bang" America put on the Middle East as a whole. But that vertical shock invariably creates its own horizontal scenarios like leaving tens of thousands of U.S. troops trapped in Iraq for the long haul, pulling in jihadists from all over the world to try and kill the "infidels," and forcing the U.S. into an accommodation with the UN it had long sought to avoid regarding postwar Iraq. What new vertical shock comes out of that maelstrom of horizontal scenarios? Good question.

Rule #9: The potential for conflict is maximized when states with differing rule sets are forced into collaboration/collision/clashes. This rule basically defines America's dilemma in pursuing this global war on terrorism: we will constantly be getting into bed with countries whose rule sets do not go well with our own, like Egypt, Saudi Arabia, or even Syria. How does America cooperate with essentially non-democratic states to spread democracy? Then again, if you want converts, you better work among the sinners, yes? But even tougher questions abound in response to 9/11. You could say, for example, that in pursuing this war on terror, America is basically adopting the Israeli approach of an-eye-for-an-eye, which is problematic for most Americans. Israel may, for religious and cultural reasons, be comfortable with that Old Testament approach, but America is basically a New Testament-style democracy, where the "golden rule" of "do unto others as you would have them do unto you" drives most of our rule sets. As I stated earlier, I think the Core-Gap division forces some genuine bifurcation in our security rule sets, and yet, there is no pasting over the reality that this war on terror will cause very profound rule set clashes within America itself.

When do we gain the upper hand in System Perturbations?

Rule #10: A strong offensive strategy can force a certain amount of structure on the most asymmetrical of enemies. Because I believe state-on-state wars are fundamentally a thing of the past, I have strong expectations that the enemies -- whatever form they take -- will be both fairly distributed in their organizational structure and seek to wage war on us in the most asymmetrical means. This enemy could be an Al Qaeda, or a SARS, or an anti-American intifada in Iraq. In these situations, defensive strategies inevitably fail, because all the initiative is left to your enemy. Some might say, "But if you cut off one head of the Hydra, then ten more with appear!" But to be perfectly blunt, I hate arguments that take you down the path of saying in effect: "Whatever we do, let's not piss off the terrorists." If you don't take the fight to the enemy, the enemy brings the fight to you, so we can do this in Manhattan or in Iraq -- and I prefer Iraq. You can counter with, "But what all those soldiers dying in Iraq?" Those lives are no more, nor any less precious than the almost 3,000 we lost on 9/11. But the big difference is that there are soldiers, not civilians. Taking the fight to the enemy forces that enemy to adapt himself to whatever offensive strategy you pursue. If you shoot on sight, then he will hide. If you track him across networks, then he will have to stay mostly off-grid. If you plant yourself in Iraq and Afghanistan, then you will fight him in Iraq and Afghanistan, not New York and Washington.

Rule #11: Our individual plays unfold with utmost speed, but in ignoring any "game clock," we remember that our strength is our inevitability. America's strategic tempo in this global war on terrorism must be deliberate, not rash. We need to line up allies before we strike, not be forced to bribe them afterwards. We want to make clear every time we act, what rule sets we are upholding or proposing. In sum, it is a "rash" U.S. military establishment the advanced world fears most: reckless, trigger-happy, and prone to unilateralism. An inevitable military Leviathan, on the other hand, is what the global system needs most: decisive in its power projection, precise in its targeted effects, and thorough in its multilateralism. So while we will strike with amazing speed, and coordinate our operations with eye toward rapidly dominating any enemy we take on, our strategic choices must be made with great care. Living in an interconnected world, America must understand that almost any time it intervenes militarily overseas, it sets off a series of horizontal scenarios both good and bad. The rest of the Core will invariably have to live with all those resulting scenarios, so they cannot just be forewarned, these countries must be consulted, enlisted, and convinced to the best of our abilities, and that takes effort up front. So tactical and operational speed are doubleplusgood because they save our soldier's lives¸ but strategic speed is fundamentally bad because of its negative effect on the global security rule sets we seek to enhance with every intervention we undertake.

Rule #12: Our efforts to dissipate horizontal scenarios will invariably trigger unintended consequences that take on a life of their own. In the Y2K scenarios, we called this the "Iatrogenic Zone." Iatrogenic refers to "unexpected side-effects that result from treatment by a physician." People who own computers know this one instinctively, whether they realize it or not. Iatrogenic is when you try to download this nice little program from the web to fix this itsy-bitsy problem on your computer, and three hours later you are looking at a complete wipe of your hard drive for your troubles. America's occupation of post-Saddam Iraq places the global war on terrorism in the Iatrogenic Zone. The USA Patriot Act, in many critics' minds, places the Justice Department squarely in the Iatrogenic Zone, where they fear the new powers to fight terrorism will represent a cure worse than the disease. But again, while I cite this rule I see no need to slavishly submit to its logic. All "slippery slope" arguments end up pushing you toward inaction versus action, defense versus offense, and disparate tactics instead of real strategy, so you do not want to go too far with this one.

How do we deal with other states during System Perturbations? 

Rule #13: There is no statute of limitations on cultural blowback, so avoid providing future foes with chosen trauma. Middle East experts will tell you 9/11 is twenty years of blowback from Afghanistan and the mujaheddin we supported there, half a century of blowback from the creation of the state of Israel, and even eight centuries of blowback from the Crusades. Like in your marriage, no "past sins" are ever forgotten, so it is crucial that in our responses to any System Perturbation, we do not simply plant a host of new historical grievances in the hearts of those we hope ultimately win over and integrate into the Core. This is, of course, the great danger of the Big Bang strategy of toppling Saddam Hussein's regime. My Muslim colleagues from that part of the world have told me repeatedly that, immediately following 9/11, America had the chance to win over not just a small percentage of the Muslim world, but a very large one -- depending on its response. These same friends tell me now that that share of potentially winnable Muslims is far smaller, and far more difficult to win, precisely because we have provided them with a newchosen trauma. What is our solution now? As Thomas Friedman likes to argue, America's best hope now is to do whatever it takes to make Iraq a beacon of freedom and progressive change in the Middle East. In effect, we need to turn that chosen trauma into a chosen triumph -- not ours, mind you, but the Iraqi people's.

Rule #14: In response to vertical scenarios, horizontal systems naturally come together, as do vertical systems. This one we saw in spades following 9/11, as the world's free states rushed to our support and joined our substantial multinational coalition that toppled the Taliban's rule in Afghanistan. Horizontal systems naturally saw a common threat in the attacks, meaning something that could just as easily happen to them. But vertical systems, in general, saw something very different in 9/11. First, since many such states are not our friends, they saw America receiving her comeuppances for past sins. Second, since a few of these states have long been identified as state sponsors of terrorist groups, they knew they could soon be on receiving end of any general U.S. response. Of course, when President Bush identifies an "axis of evil" by name, then the U.S. simply drives this countries even closer together, furthering their collective disconnectedness from the rest of the world. I do not see anything wrong with that, because I believe in calling a spade a spade. It is just that once you generate such a list, expectations are immediately raised about what you intend to do about that list, so follow-through is crucial. In that way, you could say that the "axis of evil" is a self-declared "domino theory" for the global war on terrorism: America sets itself up for having to deal with the entire lot to demonstrate significant milestones in the war. Is this an aggressive approach to shrinking the Gap? You bet.

Rule #15: Transitional states are forced to choose during System Perturbations, and their choices reveal which direction they are truly heading. By this I mean that the world is full of states trapped somewhere between truly vertical and horizontal system status -- China, Russia, Iran, to name a few. For these states, a System Perturbation represents a real moment of truth: to which "side" do they move? This is what Thomas Friedman describes as the choice between the "Lexus world" and the "olive tree world," and it is what I call the choice between the Core and the Gap, or -- most fundamentally -- a choice between connectedness and disconnectedness. I think we learned plenty about Russia, China, India, and several other New Core members following 9/11. In the case of those three countries, despite the fact that the Pentagon had more than a few nasty things to say about each prior to 9/11, all came down firmly on the U.S. side following this huge loss in our security. They chose. How did Iran choose? Saudi Arabia? Here I fear we are talking about states moving in the wrong direction, although there are better signs from Riyadh following the fall of Saddam Hussein. With SARS, China clearly had a choice to make, and it did so clearly, again reinforcing the perception that the nation is moving deeper into the Core. With our Big Bang in Iraq, America has forced a lot of countries to choose all over again, and we will know the outcomes according to the uniforms that ultimately appear in any UN-sponsored peacekeeping force for Iraq.

* * *

One of the main reasons why I think we are far enough along in our understanding of System Perturbations to start identifying some of the rule sets is because 9/11 was not just an existence proof for the concept, it started a whole new discussion on -- even a whole new lexicon for describing -- the nature of system-level security crises. Look at how the phrase "9/11" has become a touchstone for shocks that remake rule sets. The Chinese have repeatedly referred to SARS as "our 9/11." Australia suffers a great loss of life due to terrorist strike against its citizens touring in Bali, the biggest number of Australians killed in one hostile act since World War II, and they refer to it as "our 9/11." India's Parliament is bombed by terrorists, and many Indiana refer to it as "our 9/11." Russia is confronted by terrorists holding a theater full of hostages in Moscow, and its tragic outcome is described by many Russians as "our 9/11." In each instance, people are talking about security suddenly revealed as inadequate, rule sets suddenly sent into flux, and political systems deeply perturbed.

Understanding how System Perturbations unfold is crucial, in my mind, for understanding war within the context of everything else. This understanding is not only good for helping us stabilize the Core progressively over time, but also in shrinking the Gap, a process that is likely to be regularly punctuated by significant System Perturbations perpetrated by the United States itself, the most revolutionary country the world has ever known. To that end, the Pentagon needs to rethink its ordering principle, as does the entirety of the U.S. national security establishment. The wars we wage and the peace we win across the 21st century will be shaped decisively by how America comes to define crisis in the age of globalization.

[TEXT ENDS]

Blast From My Past: First time on national TV

Aired February 26, 2003 - 12:50 ET

BARNETT: Thank you.

WOLF BLITZER, CNN ANCHOR: The U.S. military is constantly transforming military capabilities to meet future global threats. A senior strategic researcher at the U.S. Naval War College, Thomas Barnett, is a big help in that regard. His latest article appears in the March issue of "Esquire" magazine, titled “The Pentagon’s New Map.” Mr. Barnett is currently working at the Office of the Secretary of Defense. He's joining us now live from San Diego, California.

Mr. Barnett, a very interesting article. Thanks very much for joining us.

You see this current struggle with Iraq within the broader issues of the gaps resulting from globalization. Give us the gist of your thesis.

THOMAS BARNETT, PENTAGON ADVISER: Well, this new way of looking at the world begins with a simple series of observations. First, you look at where this country has sent its military forces around the world over the past 12 years, or basically since the end of the Cold War, a total of 132 cases. You draw a line around the majority of these cases, the regions where these situations have been concentrated, and you're really talking about the Caribbean rim, you're talking about most of Africa, you're talking about the Balkans, the Caucuses, central Asia, the Middle East, southeast Asia.

You draw a line around those regions of the world and you ask yourself, what's the common characteristic here that defines why we seem to be sending military troops into these regions time and time again in this era of globalization? And the basic argument I make is, these are the countries or regions that are having a hard time with globalization. In effect they can't integrate their national economies with a global economy because of repressive political regimes, endemic conflict, abject poverty, perhaps they just don't have the robust legal systems to attract foreign direct investment.

BLITZER: And so I was going to say, that's why you think a war with Iraq right now is not only inevitable and desirable, but clearly imperative for the United States and indeed for Iraq. That's also your argument?

BARNETT: Yes, because when you talk about the parts of the world that aren't integrating in this larger process we describe as globalization, it's very instructive to note that these are the places we're sending our troops again and again.

So you've come up with this new security paradigm that says, it's disconnectedness that tends to define danger in this era of globalization. And when you're talking about the Middle East, you're talking about a region of the world that has very little connectivity with the rest of the planet. Basically, they offer oil, and what we're trying to do is prevent terrorism from coming out of there.

BLITZER: But do you really believe, Mr. Barnett, that the U.S., with this military engagement, can transform that region, beginning with Iraq, into vital democratic robust nations?

BARNETT: Well, my argument is basically, we've got to shrink these parts of the world that are not integrating with the global economy, and the way you integrate a Middle East in a broadband fashion with the rest of the global economy is to remove the security impediments that create such a security deficit in that part of the world. And the biggest security impediment right now, I would argue, is the regime of Saddam Hussein. You move that out of the area, you eliminate that source of conflict, and hopefully, you can talk about integrating part of the world that over the past several decades has woefully underperformed economically. Basically the Muslim population represents something like 20 percent of the global population—only engages in about 4 percent of the trade.

So we've got to expand this dialogue, this interaction between the West and the Middle East beyond just oil. My argument is it's not the oil trade that we have with the Middle East that accounts for the enmity those regions feel for us; it's the fact that we don't have anything BUT the oil trade.

BLITZER: A provocative article in the new issue of "Esquire" magazine.

Thomas Barnett, thank you very much. We gave our viewers just a little bit—an appetizer, if you will—of what's in the thrust of your article.

Thanks for joining us.

What I remember:  I was in San Diego doing an intra-governmental consulting gig (as War College profs, Bradd Hayes and I were there leading a visioneering exercise with a naval systems command, using the same process we had developed within Barnett Consulting LLC in our previous commercial work with the United Way of Southeastern New England—now known as the United Way of Rhode Island, thanks to our advice).  The appearance on Blitzer’s show was arranged by Esquire’s PR firm, Dan Klores Communications.  So I engineered a suitable break in the proceedings, stepped outside the naval facility and into a limo that took me to a ratty little local remote facility (dingy storefront in strip mall), where the tech threw up a pretty San Diego backdrop on a screen that even featured, if I remembered, the occasional commercial jetliner on final approach over the city skyline—on a loop).  It was my first remote and it was hard.  The tech said I wouldn’t want to watch the feed because the time delay meant both Blitzer’s and my own lips wouldn’t match up to what I was hearing—faster—over my ear bud.  He warned that I would start trying to slow down my words to match my lips, making me sound drunk.  So I went without any visual aid and simply stared into camera.

In the car ride on the way home, I called my parents to see if they caught my first-ever appearance on national TV, and the first thing my mom said upon answering was, “Your father and I both agree:  TV adds 15 lbs.”

Without missing a beat, I turned to the invisible camera in my mind and quipped, “Folks—my mother!”

I saw the tape finally days later when I got home.

When I read the text today, my logic remains unchanged:  You go after bad actors when you can muster the international will, but what you focus on in the aftermath ain't democracy but economic connectivity.

Blast from my past: Barnes & Noble interview re: "Pentagon's New Map" release

An Interview with Thomas P. M. Barnett

Barnes & Noble.com: What is the main theme among the many addressed in your book?

Thomas P. M. Barnett: I specialize in thinking about war -- the seam, so to speak, between war and peace. The shorthand I use for everything else is globalization. Globalization is an all-encompassing compass, if you will. It is why the factory shuts down, why you go back for another degree at 45, why you switch jobs. America must wage a war on terrorism, but if there is a great criticism of this administration and America in general right now, it is that we are waging this war on terrorism without understanding the larger context of everything else. I wanted to write the book because unless we explain it so that it is understood, people on one side are going to shout "Empire" and on the other side are going to shout, "You're not defending America." Neither of those positions gets near to discussing the task at hand or what we need to achieve. The idea of empire is a caricature. If we want to get terrorism to go away, we need to connect the disconnected -- to make them a part of globalization.

B&N.com: What is the meaning of "Map" in the context of your title?

TB: I mean it both figuratively and literally, in a sense. The military uses the term because it likes to view information in a visual fashion. It's just like the original warriors of ancient times who drew plans with sticks in the dirt. Maps are vital for the military. "The Pentagon's New Map" is the new map of globalism. And on this map, where globalization has not spread, there has been violence.

B&N.com: Globalization is a key theme in your book. Please elaborate on it.

TB: What we need to do with the globalization map, so to speak, is to identify the big sources of violence, position ourselves around them, and shrink them over time. We are the only ones who can go somewhere and do things and help. Through our power, military and economic, we can establish stability. We are not interested in empire. When we export security to places that lack it, we do not seek to extend our rule.

Globalization does not come with a ruler -- it comes with rule. We extend rules, not our rule. The map I am talking about is a new map for the globalization for the new century. It is a new understanding of how nations come together. It is not the old balance of power that existed in the 19th century. It's different.

B&N.com: You spend a lot of time distinguishing between those countries and their people that are part of globalization and those that are outside of it. You relate that to the idea of the map, too, don't you?

TB: Yes, the map also has that feeling of a road map. The key question that doesn't get asked enough concerns the makeup of that global map. Where is it leading? The new map says that two-thirds of humanity is in what I like to call "the club." One-third is not. In the end, what shrinks this vital gap is money and investment. That's how we got China on board.

B&N.com: How did 9/11 change the basic defense posture of the United States?

TB: Since we created the Department of Defense in 1947, we have prepared for a war with a great power. But 9/11 transformed all that. We had to go to high-tech and completely alter the way we looked at things. We learned that traditional definitions of war do not exist anymore. We are a military made to fight other militaries, but the fact is there is no one left to fight on a scale like ours. Now the grand historical struggle is between those are willing to integrate into the new global economy and those who are not. What we had driven home to us on 9/11 is that groups like al-Qaeda want to hijack societies like Saudi Arabia and Afghanistan and disconnect them from the future. There is pain in what I call the integration process of these societies outside the globalized world.

B&N.com: You point out that, surprisingly, only a very small portion of the oil that America consumes comes from the Persian Gulf. Where does the Persian Gulf oil go?

TB: Only 40 percent of our energy is oil and only half of our oil comes from abroad. Only one-fifth of what we import is from the Persian Gulf. So, the oil we import from the Persian Gulf is only in the single digits. What people need to know is that the Persian Gulf provides oil for the global economy. We get most of our imported oil from Mexico, Canada, Venezuela, West Africa, Nigeria, Angola, Chad, and the North Sea. The important thing is that global energy markets have regionalized. Remember, OPEC includes Mexico and Venezuela. It is important to realize that Persian Gulf oil -- 60 percent of it -- goes to developing Asia. Those countries are overwhelming consumers of oil and Persian Gulf oil.

B&N.com: You write about the flow of oil as being central to your theory of the new kind of war and globalization. Could you elaborate on that?

TB: Remember, the key thing is that oil has to flow, investment has to flow, people have to flow, and security has to flow. Again, to emphasize that theme, war falls within that context of everything else. There are the four great flows, so to speak, that define globalization's ability to expand: They are the flow of energy, the flow of people, the flow of investment, and the flow of security. Without security, energy won't move, people won't move, money won't move. So the notion that if America pulls back its military from the world, this will somehow lead to less conflict and more stability is wrong.

Security that American military strength provides is as important as any of those other flows. If you remove that security, you will feed the disruption of the flow of people, investment, and energy. Walls will go up and globalization can be killed. That is one thing that the American public does not understand. Our export of security is one thing -- it does not mean exporting arms. It means paying attention to mass violence around the world. The Department of Defense is the world's largest consulting force. It goes to where the "client," so to speak, lives. The American public only wants to hear about the exit strategy. But "the boys" are not coming home until we make globalization truly global. People don't want to hear about that long-term effort.

B&N.com: The last few years have been so harrowing. Are you optimistic or pessimistic?

TB: I am optimistic about the future. But I don't see how you can expect other people to sacrifice or put trust in government unless you are telling them a happy ending. The failure of the Bush administration is not the action or the deeds but the words that are failing. And we need more out of a Democratic contender than to blame a Bush administration. Bush needs to define a happy ending, and he needs to define a finish line in the war on terrorism. Yes, we are all against empire, but what we need to know what he is for.

People might say a "happy ending" is naive, but there is enough in the book for me to show that I am not "a wooly-headed peacenik." I come from the world of national security -- I work at the Naval War College -- I can say that there is a happy ending if you have the courage to recognize the path that lies before us and the tremendous opportunity that lies beyond. The society is on the verge of eliminating war as we know it. That is what the book seeks to describe.

Blast from my past: the UK version of shrinking the Gap

Sent to me by a reader (suspect it was Michal Migurski, because that's where I find the graphic today.

Blast from my past: my avatar appears in Second Life

I would take that hairline today.

Where I spoke.  It was specially constructed for my appearance.

Me walking to the event with my handler.  I didn't fly so well.

Shot from audience.

A famous-in-the-community member in the audience.  He wasn't the reason why I accidentally fell off the stage early in my talk.

Nice action shot.

A comparison of the virtual and real.

Fun event.  "Spoke" by keyboard for a long stretch, then Q&A, and then my kids rushed in from school and jumped all over me and the talk was over--truly the most shocking end to a talk I've ever given.

Post-mortem by hosts found here.