The Sopranos: Definitive Explanation of “The END”

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Saturday, August 14, 2010 at 12:01 AM

12:01AM

Blast from my past: Esquire's Best & Brightest: "The Strategist" (2002)

Saturday, August 14, 2010 at 12:01AM

The Strategist

Much has been made in the past year of profound changes in the way we make war. Thomas Barnett, forty, is the man who dreamed them first.

Thomas Barnett is a philosopher of modern war.

A few years ago, Barnett, a Harvard-educated professor of military strategy at the Naval War College, began to imagine a world of grave threat posed by unseen, stateless enemies capable of striking fatal blows against the modern world yet impossible to defend against. He was criticized as being perhaps unrealistic. Now the entire world knows he was right, and now the United States is in an escalating war, with a military that has significant adapting to do.

"We really haven't been a nation at war since World War II," Barnett says. "We always did it on the side, so to speak. We networked ourselves with the outside world so much that our definition of national security started moving beyond the war paradigm to something else--crises that threatened our connections with the outside world." So in the late nineties, he began thinking larger. He teamed up with the bond firm Cantor Fitzgerald and asked a question: How would the U. S. military react to a hypothetical, interconnected catastrophe like, say, a terrorist attack on Wall Street? "People heard our brief," Barnett says, "but everyone thought we were too apocalyptic, too out-there."

No more. Within weeks of September 11, 2001, Barnett was called to the Pentagon and installed as the assistant for strategic futures in the Office of Force Transformation, Office of the Secretary of Defense. Since then, he has been relentlessly briefing high-ranking members of the intelligence community and brass from all branches of the military on the next world and how to manage it. "September 11 was crystallizing," he says. "We all just went, This is what we were talking about--a peacetime, war-like event that's so profound it forces us to rethink everything."

Barnett breaks the big world down thusly: "core" countries, those that promote or align themselves with the larger global community through a relatively free flow of trade, people, direct foreign investment, and security; and "gap" countries that either refuse to or can't work with the core because of political instability, cultural rigidity, or extreme poverty. It's not as if he's making it up. He drew a map of the world and highlighted our military responses of the past three decades--from Iran, Lebanon, and Libya to the Gulf war, Haiti, Kosovo, and Somalia--until the logic emerged: The U. S. military rarely needed to respond in the core countries. The gap was another story, not only in terms of warfare but also because of exports like terrorism and illegal drugs. "The goal," Barnett says, "is not to contain the gap countries but to bring them constructively into the core. It's what we've been doing, and the only question is how long it takes us to recognize it and articulate it." And for Barnett, it's hardly hopeless: In the numbers game, there are four billion people within the core, two billion in the gap.

The future likely means that the U. S. military bases set up last year in Kyrgyzstan and Uzbekistan will develop into more-permanent bases like those in Europe. It will mean an "export of security," which involves everything from joint military exercises to long-term occupation. As we've seen in Afghanistan, it means few front lines and, when things get rough, dropping in "a small number of guys with immense power and leaving almost no footprint on the ground," Barnett says. "War is assassination on some level--all wars. The goal is to be able to do it to a point of discretion that's pretty amazing."

Barnett has the brass's ear, and the brass is listening. "When people start using your words--core and gap, system perturbations, exporting security--you know you're getting through," Barnett says. "In Washington and in the Pentagon, battles are won one room at a time."

--ANDREW CHAIKIVSKY

Then, a couple of years later, in the third annual "B&B," Esquire ran this update:

From "obscure Naval War College professor to strategic rock star," THOMAS P. M. BARNETT catapulted into the limelight after his appearance in Best and Brightest 2002. His March 2003 article for Esquire, "The Pentagon's New Map," outlined his grand strategy for the United States in the post-cold-war era, which, in expanded form, became a New York Times best-seller this spring. And Barnett's blog,thomaspmbarnett.com, is now required reading throughout the political and military establishment. Barnett says, "Up until Best and Brightest, I was slaving away in relative obscurity in the Office of the Secretary of Defense on a proposed grand strategy for the United States in the global war on terrorism." He added that his presentation, although well received in policy circles, "wasn't getting a lot of traction. Now, well .. ." Barnett's work articulates a bracing new vision and lexicon to confront security challenges in our drastically changed world. He now works as the senior concept developer at Joint Forces Command, advising the four-star general running Special Operations Command and working with other "change agents" within the intelligence community. In the June 2004 issue of Esquire, Barnett wrote a follow-up to "The Pentagon's New Map" titled "Mr. President, Here's How to Make Sense of Our Iraq Strategy."

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Friday, August 13, 2010 at 12:01 AM

12:01AM

Blast from my past: "The Top 100 Rules of the New American Way of War" (2003)

Friday, August 13, 2010 at 12:01AM

The Top 100 Rules of the

New American Way of War

By Dr. Thomas P. M. Barnett and Dr. Henry H. Gaffney Jr.

British Army Review, Spring 2003, pp. 40-45;

reprinted with permission

THE PATHS TO WAR

The United States Stands Ready for Any Type of War

1. The U.S. military stays ready because it understands that while the world is full of ongoing situations in which it remains involved, it must be prepared for any acts of war against the United States that come "out of the blue."

2. U.S. forces believe in constant training, both to facilitate their command of their complex war- making system and to deal with a wide variety of circumstances.

3. Because the United States must move forces long distances to fight, it does extensive contingency planning to conquer the time and distance factors.

Whom the United States Fights in Wars

4. The United States wages war on states or nonstate actors that attack or threaten to attack the U.S. homeland.

5. The United States wages war on states or nonstate actors that attack U.S. military forces or other instruments of the government; because the United States is the de facto global cop, any such attack is perceived as an attack on global stability itself.

6. If all other measures fail, the United States reserves the right to bring war preemptively to states or nonstate actors that actively seek to acquire weapons of mass destruction for use against the United States or any of its allies.

7. The United States wages war on states that harbor or actively support terrorist groups with transnational objectives and reach, and this war encompasses all elements of U.S. national power.

8. Maintaining a commitment to global stability, the United States wages war on states or nonstate actors that threaten or launch wars against our key allies, including other North Atlantic Treaty Organization (NATO) countries, Saudi Arabia and other Gulf states, Israel, Taiwan, South Korea, Japan, Australia, and others.

Where the United States Is Ready to Fight Wars

9. The United States is prepared to intervene within the western hemisphere, and especially in the Caribbean and Central American areas, because this is its neighborhood.

10. The United States is ready to defend against aggression in Europe because this was the source of the worst wars of the past and because NATO is its strongest and oldest security alliance.

11. The United States is ready to wage war in Southwest Asia, particularly in the Persian Gulf region, where it is the only power capable of stabilizing the area—thus ensuring the continuing flow of energy out of the region.

12. In strong alliance with Japan, the United States is prepared to deter or defeat a Chinese invasion of Taiwan and a North Korean attack on South Korea.

13. Beyond these cases, the United States is ready to go anywhere to combat terrorist groups that are part of a global organization and plot.

What Triggers the United States to Go to War

14. The United States retaliates automatically to any direct attack against its homeland, although this may not be instantaneous in the case of a terrorist attack because a nonstate actor’s identity and home base may not immediately be clear.

15. Other than in response to direct attacks on the United States, there currently are five situations where the United States reflexively would engage in war:

If Iraq were to attack Kuwait, Saudi Arabia, or Israel
If China were to attack Taiwan
If North Korea were to attack South Korea
If Iran or Iraq were to attempt to close the Persian Gulf to oil traffic
If al Qaeda or any successor terrorist group attacks U.S. citizens, forces, or property anywhere in the world.

16. Outside of those circumstances, any overt U.S. war effort will follow an extensive debate within the U.S. and international political system, with the critical questions being:

How much congressional and public debate?
How much U.N. consultation/approval?
What level of allied consultation and contributions?

17. The United States pursues covert operations as part of the global war on terrorism in accordance with presidential findings.

U.S. Goals in the Conduct of War

18. Beyond preserving or restoring national security, the fundamental U.S. goal is sustaining global norms against the aggressive use of force, meaning U.S. actions are limited to those states or actors that transgress these rule sets.

19. Beyond that, U.S. interventions are meant to ensure aggression does not reoccur by supporting the institution of the rule of law and democracy.

20. In waging war, the United States seeks to protect the functioning of the global economy as necessary, since trade can flourish only under conditions of peace and freedom under law.

21. In any conflict, the United States seeks to limit its own absolute losses, so as not to damage the American public’s support both for the intervention in question and for this nation's long-term involvement in international security.

22. The United States seeks to limit collateral damage, thus to limit foreign resentment concerning the use of U.S. military force and to set the stage for restoration of economies and government once the conflict has ended.

Whose Help the United States Seeks in War

23. The United States seeks as much approval, cooperation, and mutual agreement as possible from the global community for any conflict it responds to or initiates, because it wants all such actions to further the advance of collective security.

24. When practicable, the United States seeks approval and sanctio n in the U.N. forum, but reserves the right to act unilaterally or to organize a "coalition of the willing" if such consensus cannot be found.

25. As appropriate, the United States seeks the aid and agreement of the other NATO countries (especially the United Kingdom) because they are its closest allies and can provide forces most able to join U.S. efforts.

THE CONDUCT OF WAR

How the United States Commands in War

26. U.S. political control is direct and detailed at the start and conclusion of any war, and is coordinated with diplomatic actions.

27. The Unified Combatant Commander plans operations in detail.

28. The Unified Combatant Commander manages relations with involved coalition partners.

29. Combined Joint Task Forces closer to the action execute the plans, while keeping the Unified Combatant Commander fully informed.

30. As one specialized command, a Joint Forces Air Control Center or Combined Air Operations Center is set up to manage all air assets.

31. The common operational picture, compiled from extensively networked data and information flows, is available to every command element in the chain.

What the United States Mobilizes and Takes to Any War

32. Any war the United States wages involves all elements of national power, meaning the United States works to defeat its enemy in every way possible:

Destroying their ability to wage war
Isolating them from potential allies
Denying them resources
Denying them the sympathy of others.

33. The United States establishes logistical lines of communication because—aside from homeland defense—all operations are "overseas," and for the most part not likely to be where U.S. forces are stationed permanently. Thus the United States maintains and obtains airlift and sealift to get equipment, personnel, and supplies to the theater in sufficient time and quantities.

34. Relying heavily on space assets, the United States mobilizes a global information grid to achieve information dominance before a single shot is fired.

35. The United States brings as much firepower of the joint forces to bear as possible, supported by intelligence, surveillance, and reconnaissance within a comprehensive command-and-control system so it can be applied as precisely as possible.

36. To preserve personnel, the United States mobilizes the world's preeminent combat medical system.

How the United States Gets to War

37. Because the United States maintains the world’s only global blue-water navy, most U.S. forces and supplies go safely by sea.

38. If speed is required, or if the United States wishes to strike directly from the continental United States, other remote bases, or the sea, it can deliver much force by strategic airlift or long-range strike aircraft, using midair refueling.

39. The United States prepositions equipme nt and supplies both on ships and on allies’ territories for easy breakout and rapid deployment of personnel.

40. The United States uses established overseas bases, establishes new bases in adjacent countries that are supportive, or establishes lodgments in remote areas of hostile territories.

What Forces the United States Brings to War

41. The United States is ready to draw on all five services as needed for any particular war.

42. The United States brings overwhelming force to bear before joining a conflict, not committing forces piecemeal.

43. The United States seeks to overwhelm the opponent with joint firepower, and endeavors to keep the ground forces’ "footprint" as economical as possible.

44. The United States operates air assets from both adjacent bases on allied territory and carriers in adjacent seas, as well as distant, over-the-horizon bases and even the continental United States, taking full advantage of its midair refueling assets.

45. The United States uses Special Forces—including Central Intelligence Agency paramilitaries—for special up- front and follow-on tasks, and for guiding precision munitions from on-the-ground locations.

46. Whenever interagency collaboration makes sense, those additional civilian personnel are brought along, rather than the military trying to replicate their capabilities.

How the United States Fights

47. The underlying principle for employing regular forces is the United States’ desire to keep the conflict "over there" as much as possible; retaliation against terrorist attacks on the U.S. homeland is an "away game."

48. The United States aims for rapid dominance of any battlefield it may enter, so the initial blows come from the air:

First, the United States suppresses air defenses, including airfields
Next, it hits strategic targets like command and control
Then, it breaks the logistic connections to the deployed enemy forces
Finally, it directs air strikes against opposing ground forces.

49. The United States uses ground forces to roll up enemy ground forces that have been softened by air attacks and to occupy territory.

50. Leveraging its space assets, the United States possesses and keeps expanding an unparalleled capacity to wage network-centric warfare:

It drives up the enemy’s information requirements and then degrades its ability to meet them
It achieves as much transparency over the battlefield as possible for U.S. forces, then leverages that advantage to destroy enemy forces, equipment, and installations.

51. U.S. forces maneuver rapidly to avoid static "front lines," turning each engagement into an ambush across a "noncontiguous" battlefield.

52. Because no potential foe matches well, the United States expects opponents to defend themselves with dispersal and concealment, to seek destruction of high- value U.S. assets, to use chemical or biological weapons, and to seek sanctuary in both urban and remote environments; therefore the United States increasingly anticipates and prepares for those tactics and develops capabilities for combat in those venues.

How U.S. Forces Defend Themselves in War

53. If the United States has evidence that a potential foe possesses both the where-withal and the intention of employing weapons of mass destruction, it reserves the right to engage in preemptive strikes against that capability.

54. In any conflict, the U.S. military seeks to defeat its enemy in the field while simultaneously waging a three- front defensive strategy:

Preserving its forces in-theater through mobility, range and stealth
Defending U.S. military and diplomatic installations around the world through vigilance
Protecting the homeland from retaliatory strikes by preventing their launching at the source.

55. The United States seeks to avoid using its nuclear weapons, but remains ready to retaliate against any state that first uses weapons of mass destruction against its forces.

How the United States Protects Its Homeland during War

56. Protecting the homeland remains the most important defense function of the Defense Department, therefore it makes forces available for those purposes as necessary.

57. Protecting the homeland is first and foremost a matter of deterring attacks that employ weapons of mass destruction by the threat of nuclear retaliation, so the United States maintains and modernizes its nuclear forces.

58. The United States develops and deploys missile defense to strengthen deterrence and to defend in the event deterrence fails.

59. The United States is prepared to strike preemptively against any regime or nonstate actor it knows to be planning for, or mounting, an attack against the homeland as part of a strategy to degrade U.S. power projection capabilities.

How the United States Stabilizes Situations as Wars Subside

60. The United States conducts "psychological operations" to try to win the hearts and minds of the local population toward the goals of its intervention.

61. The United States makes every necessary effort to track down and incapacitate known belligerents who refuse to comply with conflict-termination agreements; it also facilitates the capture, processing, and confinement of individuals suspected of war crimes for later adjudication by internationally recognized courts.

62. The United States works with local social and political leaders to resurrect basic elements of the government and infrastructure to return life to some semblance of normality.

63. When necessary, the United States conducts emergency humanitarian missions on its own, until civilian or international relief groups can pick up the task.

THE AFTERMATH OF WAR

When the United States Leaves a War

64. The United States does not leave until the capital city is under firm control by friendly forces and government.

65. The United States does not leave until the countryside is no longer roiling with conflict, and appears to be quiet enough for the local constabulary to once again extend its political reach—sometimes with the help of other states’ peacekeepers.

66. The United States does not leave until all the major local players in the conflict basically sign up to the conflict termination agreements and demonstrate their adherence.

67. The United States does not leave until the magnitude of any ongoing humanitarian crises have been reduced to the point where the international community can meet the population’s basic needs.

What the United States Leaves Behind Following a War

68. The United States may leave behind Special Forces or other Army trainers to help the country rebuild its military and to train them to combat remaining rebels.

69. If the United States expects to return for further combat in the country or region, it may leave behind a supply of prepositioned materiel, signaling a strong relationship with the surviving/reconstituted government.

70. The United States may leave with signed agreements for long-term military cooperation or government- financed arms sales to help the country get its military back on its feet.

THE EMPLOYMENT OF VARIOUS FORCES IN WAR

How the United States Uses Air Forces in War

71. The United States strikes enemies first from the air to suppress air and ground defenses and to hit strategic targets, using its Air Force and/or naval aviation as defined by circumstances.

72. Once the United States effectively rules the skies, it is free to choose the time and location of strikes for strategic effect.

73. Over time, because of increasing accuracy and better intelligence, the United States realizes greater economy of force with its air strike assets, limiting collateral damage.

74. The United States is able to strike with aircraft stationed far away and keep those aircraft loitering on station at length since it has an enormous capability for midair refueling.

75. U.S. air strike assets are managed centrally through an air tasking order, but as network-centric operations mature and enemy forces resort more to dispersing themselves, an increasingly larger portion of these assets is freed to respond flexibly to targets of opportunity.

76. Airlift is a major tool for delivering, dispersing, and removing ground personnel and materiel throughout combat areas.

77. By gradually increasing the use of unmanned air platforms, the United States loiters longer and closer in dangerous environments while risking fewer personnel.

How the United States Uses Naval Forces in War

78. Because the United States "owns" the world's oceans, it focuses its naval forces' combat activities onto the land—including strategic targets deep inland—as part of joint combat operations.

79. U.S. naval forces are responsible for defending the sea approaches to land against threats from mines, submarines, attack boats, cruise missiles, and air attacks.

80. Naval forces are part of U.S. joint air strike forces, with Tomahawk land-attack missiles playing a leading role.

81. U.S. naval forces provide off-shore staging platforms for Marines, Special Forces, and Army forces; the Marines, in particular, are customized to approach combat zones from the sea.

82. The Military Sealift Command, as part of the joint Transportation Command, transports the vast majority of Army troops and logistic supplies to a theater.

How the United States Uses Ground Forces in War

83. Marines, having been designed as a self-supporting force, are a useful interim force until the U.S. assembles larger ground forces.

84. Marines have specialized capabilities for special operations, chemical-biological responses, and urban warfare, thus expanding the joint commander’s tool kit.

85. The Army offers broadly capable large-scale ground units featuring heavy firepower, armored mobility, and air and missile defenses.

86. Large Army units are moved mainly by sea to prepared staging areas, except for the lightly equipped 18th Airborne Corps.

87. To minimize ground force casualties, the United States avoids attrition warfare by stressing reconnaissance, overwhelming force, armor and other protections, and rapid maneuver.

88. Ground forces complete the liberation of territory and the eradication of opposing forces.

89. The Army is the premier long-term occupation force, which means if any nation building is pursued postconflict, the Army maintains the peace while the transition is made to international or local civilian rule.

How the United States Uses Unconventional Forces in War

90. Special Forces are the clandestine/covert infiltration force, so they are used in small numbers for specialized tasks.

91. Where minimal personnel are needed in the most dangerous situations (e.g., pre-invasion reconnaissance, spotting for air strikes), Special Forces are preferred because they require the least support.

92. Special Forces set the military standard for cooperation with law enforcement agencies, apprehending combatants in both war and peace.

93. Special Forces set the standard for cooperation with intelligence agencies because of their sensor- like role in command and control and their unique abilities for unconventional tactics against asymmetrical opponents.

94. When covert preemptive strikes are attempted, the United States employs Special Forces with a level of impunity far beyond previous use of U.S. military power in a peacetime environment.

How the United States Uses Reserve Forces in War

95. Reserves are the backbone of an American hedge force and homeland security.

96. Reserves are the cornerstone of logistics for combat operations, manning a large part of the airlift and air refueling force.

97. Because of high demand, civil affairs personnel are de facto active-duty assets.

How the Services Fight Jointly in War

98. Operations are joint from beginning to end, because Combatant Commanders plan operations according to the law.

99. Space-based communications assets are the sine qua non of jointness because they move the services past mere deconfliction to genuine operational integration.

100. Facing no peer competitor and enjoying the lion's share of the earth's surface and space as its operating domain, the United States exploits the exterior position to employ all five services in a network-centric approach that yields their maximum combined combat power.

Dr. Barnett, a Naval War College professor, currently serves as the assistant for strategic futures, Office of Force Transformation, Office of the Secretary of Defense. Dr. Gaffney is a research manager at The CNA Corporation, serving as team leader in the Center for Strategic Studies. The authors thank Vice Admiral Arthur K. Cebrowski, U.S. Navy (Ret.), Professor Bradd Hayes, and Professor Hank Kamradt for their advice on the list.

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Thursday, August 12, 2010 at 12:01 AM

12:01AM

Blast from my past: "The American Way of War" (2003)

Thursday, August 12, 2010 at 12:01AM

The American Way of War

by Arthur K. Cebrowski & Thomas P.M. Barnett

British Army Review, Spring 2003, pp.39-40;
reprinted with permission

U.S. Naval Institute Proceedings, January 2003, pp. 42-43;
reprinted with permission

The effort to identify and characterize the American Way of War is—in many ways—an attempt to understand how U.S. warfare evolves once freed from the bilateral and all-consuming competition with the Soviet Union. In other words, left to our own devices to manage a complex and constantly changing global security environment, how does this country choose to wage war?

By our reckoning, the United States—and the world—stands at a historical creation point similar to the immediate post-World War II years. Across the 1990s global rule sets became seriously misaligned, with economics racing ahead of politics (as evidenced by current corporate scandals) and technology racing ahead of security (e.g., the rise of transnational terrorists exploiting globalization’s growing network connectivity). Now it is time to play catch up, as we did in the early Cold War years, with the U.S. military once again serving as an instrument of rule-set exportation through the global war on terrorism.

Can we as a nation go overboard in this endeavor and destabilize globalization in the process? Only if we forget who we are and what we represent to the world: democracy, free markets, and the rule of law. That is why it is so crucial for us to understand this nation’s particular approach to waging war, taking into account all its operational complexity and moral imperatives. To that end, here are our summary observations concerning the emerging American Way of War.

The Networking of American Warfare

Network-centric warfare combines the four military branches into a seamless, joint warfighting force. It is a new form of warfare that capitalizes on the trust we place in our junior and noncommissioned officers: as information moves down echelon, so does combat power, meaning smaller joint force packages wield greater combat power. Network-centric warfare generates new and extraordinary levels of operational efficiency. It enables and leverages new military capabilities while allowing the United States to use traditional capabilities more discretely and in new venues (e.g., strikes, not battles). This is allowing the U.S. military to downshift effectively over time from system-level wars (the Cold War and its World War III scenarios) to state-on-state wars (Iraq and Korea major theater wars/scenarios) to the emerging wars fought largely against groups of individuals (Taliban take-down, rolling up the al Qaeda network).

In short, the rise of asymmetrical warfare is largely our own creation. We are creating the mismatch in means as we increasingly extend the reach of our warfighting machine down the range of conflict—past the peer competitor, past the rogue nation-state, right down to individual enemy combatants. This constitutes in itself an amazing transformation of the American Way of War over the past generation.

The Inevitability of American Warfare

There is an enormous literature about how everything connected with warfare is accelerating—technological advances, technology proliferation, the pace of events on the battlefield. But it is not only the speed of the U.S. response to aggression that matters; the inevitability, even unstoppability, of our power projection once we choose to employ it is critical as well. Again, the rise of antiaccess strategies by our opponents is largely our own creation, as we try to maintain a capacity to reverse significant acts of aggression within a security system we seek to administer like an empire, but one based on shared values rather than imposed order.

Over time, it is a “fast” 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.

The Speed of American Warfare

The decision to go to war must never be quick, but a defining characteristic of the American Way of War is the growing ability of U.S. forces to execute operations with unprecedented speed. This is not so much speed of response as speed within the response. In other words, we may choose our punches with great care (strategy), only to unleash them with blinding speed (operations, tactics). Most of this speed comes from increased battlespace transparency, although the speed of platforms remains crucial to protecting our personnel.

U.S. operations increasingly resemble hockey superstar Wayne Gretsky’s “speed” on the ice. Never the fastest skater, Gretsky concentrated less on skating to where the puck was and more on skating to where the puck would be. The goal of the common operational picture within network-centric warfare speaks to this sort of speed: not trying to be everywhere all the time, but to be exactly where you need to be exactly when you need to be there.

The Precision of American Warfare

It is from this information-driven speed that another key attribute of the American Way of War emerges: the increasing precision of our operational effects. Trapped within the distant, abstract near-peer attrition scenarios still favored by some within the Pentagon, this sort of operational precision always risked seeming pointless. The objective of precision is not the weapons effect, but the enabling of our political objectives—effects-based operations. In the increasingly transparent battle space, the speed and access of our networked forces open the way to profoundly altering initial conditions of conflict, developing high rates of change that cannot be outpaced, and sharply narrowing an enemy’s strategic choices.

When downshifted by the global war on terrorism, such effects-based operational capabilities appear both more credible and more useful, primarily because in a war fought largely against individuals, the capacity for discrete applications of military power is prized most of all—likewise for focused, preemptive strikes against rogue states enabled by weapons of mass destruction.

The Transformation of American Warfare

Pulling together the major conceptual threads of the emerging international security environment, one is led to the conclusion that even when homeland security is the principle objective, the preferred U.S. military method is forward deterrence and strike operations. As a matter of effectiveness, cost, and moral preference, operations will have to shift from being reactive (i.e., retaliatory and punitive) to being largely preventative. Forward presence therefore will be valued more than strategic deployment from home, necessitating a major force posture shift from the current condition where 80%-plus of the force is U.S. based. Accordingly, the emerging American Way of War speaks to a future military force that features more:

Special operations-like forces whose easier insertion and extensive local knowledge will give them greater power and utility than large formations deploying from remote locations
Forces capable of applying information-age techniques and technologies to urban warfare, else we will not deny the enemy his sanctuary
Surveillance-oriented forces to counter weapons of mass destruction, else unambiguous warning will come too late
Concepts of “jointness” that extend down through the tactical level of war
Interagency capabilities for nation building and constabulary operations, lest our elite forces get stuck in one place when needed in another
Adjustments in force structure and posture in consideration of the growing homeland security roles of the Coast Guard, the National Guard, the Air National Guard, and the Reserves.

The ultimate attribute of the emerging American Way of War is the superempowerment of the war fighter—whether on the ground, in the air, or at sea. As network-centric warfare empowers individual servicemen and women, and as we increasingly face an international security environment where rogue individuals, be they leaders of “evil states” or “evil networks,” pose the toughest challenges, eventually the application of our military power will mirror the dominant threat to a significant degree. In other words, we morph into a military of superempowered individuals fighting wars against superempowered individuals. In this manner, the American Way of War moves the military toward an embrace of a more sharply focused global cop role: we increasingly specialize in neutralizing bad people who do bad things.

Adding these new responsibilities to the U.S. military is not only a natural development but a positive one, for it is the United States’ continued success in deterring global war and obsolescing state-on-state war that now allows us to begin tackling the far thornier issues of transnational threats and subnational conflicts—the battlegrounds on which this global war on terrorism will be won.

Admiral Cebrowski serves as Director, Office of Force Transformation, Office of the Secretary of Defense. Dr. Barnett, a Naval War College professor, serves as the Office of Force Transformation’s assistant for strategic futures. The authors are indebted to Henry Gaffney, Colonel Pat Garrett, U.S. Marine Corps, and Bradd Hayes for their input.

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Wednesday, August 11, 2010 at 12:01 AM

12:01AM

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

Wednesday, August 11, 2010 at 12:01AM

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

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:

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.
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.
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.
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.

9 References |

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Naval War College pubs |

Tuesday, August 10, 2010 at 12:01 AM

12:01AM

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

Tuesday, August 10, 2010 at 12:01AM

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

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.

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

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Monday, August 9, 2010 at 11:12 AM

11:12AM

More pix of the girls at WACAP house in Addis Ababa

Monday, August 9, 2010 at 11:12AM

Vonne and her mom (Nona Vonne) are a scant 10 days from leaving for Ethiopia, and we are but 18 days from welcoming the girls (much work to be done on the new "girls room" for Vonne Mei, Metsewat and Abebu). Our eldest, Emily, is in the process of packing up for college and yielding her "biggest bedroom" for the cause.

Just got some more photos of the girls by parents currently in Addis. Clipped them down to remove any other kids from the frame.

First is Abbie [our nickname going forward for Abebu]:

Her hair seems to be coming in nicely.

Next is Metsue [our nickname going forward for Metsewat]:

Then the pair of them:

The main reason why I'm chilling on the blog this month is all the stuff we need to get ready for the girls' arrival on the 28th. We are a home in tremendous transition.

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10:00AM

WPR's The New Rules: Putting the Brakes on China until Beijing Can

Monday, August 9, 2010 at 10:00AM

In late-July, Secretary of State Hillary Clinton gently put China on notice regarding its increasingly aggressive claims over the near-entirety of the South China Sea by proposing a formal international legal process to resolve territorial disputes there. Naturally, the Chinese were not pleased, but the proposal was a great move by the Obama administration. Every step that China takes to build up its military power naturally triggers a strong balancing desire throughout the rest of Asia. But with none of those far-smaller economies looking to anger “rising China,” somebody needs to give voice to those fears and create vehicles for organizing the sought-after balancing.

That somebody can only be the United States.

Read the rest of the column at World Politics Review.

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Sunday, August 8, 2010 at 12:03 AM

12:03AM

Blast from my past: U.S. Naval Institute Author of the Year (2002)

Sunday, August 8, 2010 at 12:03AM

Dr. Thomas Barnett named Proceedings 'Author of the Year'

By Lt. David Ausiello

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.

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12:02AM

Blast from my past: "Asia: The Military-Market Link" (2002)

Sunday, August 8, 2010 at 12:02AM

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.

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12:01AM

Blast from my past: "Globalization Gets a Bodyguard" (2001)

Sunday, August 8, 2010 at 12:01AM

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.

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Saturday, August 7, 2010 at 2:15 AM

2:15AM

Blast from my past: "Globalization is Tested" (2001)

Saturday, August 7, 2010 at 2:15AM

"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.

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Friday, August 6, 2010 at 12:01 AM

12:01AM

Blast from my past: "India's 12 Steps to a World-Class Navy" (2001)

Friday, August 6, 2010 at 12:01AM

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.

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Thursday, August 5, 2010 at 12:01 AM

12:01AM

Blast from my past: "Top Ten Post-Cold War Myths" (2001)

Thursday, August 5, 2010 at 12:01AM

Blast from my past: "Force Structure Will Change" (2000)

Wednesday, August 4, 2010 at 12:01AM

Force Structure Will Change

by

Thomas P.M. Barnett and Henry H. Gaffney, Jr.

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).

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Tuesday, August 3, 2010 at 10:21 PM

10:21PM

Mac help request

Tuesday, August 3, 2010 at 10:21PM

Have service call scheduled tomorrow afternoon, but the problem is stunningly simple, if only I knew how to fix.

Family's iMac downstairs: old wireless keyboard dies, and in the shuffle, the Mac gets rebooted and stuck at log-in screen. Replacement keyboard in hand, but can't get it to link, bluetooth-wise to Mac and without it, cannot get past log-in screen.

Everywhere I look in help and online, I get instructions on how to fix the keyboard connection--but only if you're past the log in.

So the question is: how to log-in absent keyboard so I can get to screens I know well and get the keyboard discovered and linked up?

Any help appreciated--but fast!

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9:54PM

Taking a break from blogging

Tuesday, August 3, 2010 at 9:54PM

Got too many things going on right now, work-wise and family-wise, and feel frustrated about my inability to find time to get old pages recreated.

As such, I am going to resist blogging stories for a while, and instead use my non-working hours to chill a bit, get ready to send off my daughter to college, try to attend every possible cross country practice with my sons (one student coaching, one competing), get the house ready for the girls, and try to get the old site's pages rebuilt by the end of August.

I just feel the need to spend as much time as possible outside the workday with my family.

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1:11AM

The definitive analysis of Tony Soprano's death at the end of the infamous smash-cut finale

Tuesday, August 3, 2010 at 1:11AM

I have long clinged to the hope that David Chase's "smash-cut" (technical term for the harsh cut-to-black with no sound) ending was meant to be an ambiguous conclusion that let every viewer walk away with their own interpretation. Mine, being a Tony fan, was that Chase was telling us it could always happen at any minute and MAYBE it happened then . . . but, mebbe not!

Well, after the finale, I let it rest, and then I spent last year and the beginning of this year watching the entire boxed set, and as I perused the final season, I was struck by the Bobby Bacala's response to Tony on the subject of getting whacked (when they were fishing on the boat):

“Our line of work, it’s always out there. You probably don’t even hear it when it happens right?”

Then there's that Private Ryan-like loss-of-sound bit when Sil is talking to a prostitute at a table in an Italian restaurant and suddenly he's sprayed with blood, and he's confused, and then the audience point-of-view is re-established and we suddenly realize that a shooter is dispatching the other guy.

The loss of sound . . . you never see it coming . . . the smash-cut.

And so my 15-year-old son Kevin watches a few episodes of the first season (he's already confirmed, so he's in charge of his own soul now), and, being an Internet/videogame kid, he starts searching the web for cheat sheets and backgrounds and good sites to explain the story-behind-the-story.

And then he starts assaulting me, day after day, week after week, with a slew of interpretive theories about the history of the series (which he's just about finished) and how Chase lays it all out for the viewer and the ending is crystal clear--not vague, not open to interpretation, but oh-so-very Chase.

And then he makes me watch the last scene one more time with him online, giving me the detailed explanation, and then he makes me read chunks of this site:

The Sopranos: Definitive Explanation of “The END”

Do not go there unless you want to know the end--definitively. If you harbor any hopes or interpretations or personal philosophies . . . don't go there.

Because it is brutally thorough in its research and logic.

And I am cruuuuuushed!

Kevin plans to go into law enforcement. He is RELENTLESS!

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12:10AM

Joining the WEF's Network of Global Agenda Councils

Tuesday, August 3, 2010 at 12:10AM

Got an invitation to become “a Member of the Network of Global Agenda Councils” run by the World Economic Forum.

Each of our Councils, comprised of 15 to 20 Members, serves as an informal advisory board to the World Economic Forum and, through the Forum, to the international community. The Councils represent the world’s foremost integrated “intelligence” network of innovative thinking and idea exchange on global issues. Established two years ago, the Network of Global Agenda Councils has already demonstrated its importance as a much needed catalyst for improved global cooperation on key issues.

There is a total of 72 Global Agenda Councils with about 1600 total people involved globally: 14 industry ones, 10 regional ones, 13 policy and institutional, 17 risks and opportunities, and 18 drivers and trends.

I am guessing I’m in the Geopolitical Risk one (risks and opportunities), because I’m pretty sure that Ian Bremmer of Eurasia Group is co-chairing that one.

Anyway, I’m supposed to tout the Council’s work in blog posts, op-eds, speeches, etc., and since I engage in a wide variety of such things, let this be the First Official Brag!

One step closer to the Illuminati . . . (hope I spelled it right)

12:09AM

The Af-Pak trade pact--45 years in the negotiating!

Tuesday, August 3, 2010 at 12:09AM

Score two for Hillary in July: the proposed internationalization of a legal process to resolve South China Sea claims and then this Pakistan-Afghanistan trade deal.

The United States had prodded the two countries to sign the accord, calculating that it would bolster the Afghan economy by expanding its trade routes and curbing rampant smuggling. The pact could cover a multitude of trade and transit issues, ranging from import duties to port access. Example of progress: killing the requirement to reload all Afghan exports at Pakistan’s border instead of at some downstream port.

The two countries have been working on the deal since . . . oh, when did it start? Oh right, 1965!

I’m happy to say I lived long enough (born 1962) to see this day come.

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