On a Knife's Edge

The global economy is balanced precariously between total collapse and salvation. Here are four tipping points toward disaster and four things that could get it back on track.

The year 2012 is Europe's moment of truth. If their dithering continues, European politicians will soon lose control of the continent's economic and financial future. After all the excitement of 2011, it is also a make-or-break year for some Middle Eastern countries in the midst of tricky political transitions. Even the United States is being shaken out of its social slumber as concerns mount about income inequality and, more generally, the fairness of the "system."

All this speaks to an increasingly bimodal outlook for the world economy in the years ahead. At one end, timely and proactive policy measures can help with the healing and put the globe back on the path toward higher growth, job creation, and better social justice. At the other, political dysfunction and financial deleveraging could lead to economic fragmentation, higher unemployment, trade wars, and social unrest.

In an attempt to shed light on the key issues in play, what follows is an attempt to identify four factors that could wreck the global economy in the next few years, and four factors that could propel it to greater stability and prosperity. Let's hope our leaders choose wisely.


European economic and financial fragmentation: As of today, the biggest risk for the global economy this year is the disorderly collapse of the eurozone. It would bring economic and financial activity to a standstill across the continent, cause widespread corporate bankruptcies and bank runs, and destroy millions of jobs. Other countries, be they advanced or emerging, would be contaminated by the collapse in global trade, the curtailment of credit, and the spike risk aversion that would lead investors to rush into cash. A complete eurozone collapse would be both chaotic and an unmitigated disaster.

Disruptions in the Middle East: As the New York Times' Thomas Friedman brilliantly pointed out in a recent column, there are two types of destabilized countries: those that implode when highly stressed, and those that explode, affecting entire regions. Iran and Syria are of the latter type, and both are near boiling point due to internal and external developments. The greater the instability in these two countries, the higher the risk of regional contamination and, accordingly, worrisome global repercussions. This could include surging oil prices, leading to an ugly global stagflation.

Central bank exhaustion: Unconventional measures by central banks have, up to now, played a critical role in avoiding debt deflation and economic recessions in advanced economies. In the process, the banks have ballooned their balance sheets to previously unthinkable levels (from 20 percent of GDP for Britain and the United States to 30 percent for the European Central Bank). No one knows with any degree of confidence how far these balance sheets can expand safely, nor is there sufficient clarity on the collateral damage and unintended consequences. What is clear is that we are in unchartered waters and, given that they are the only agencies that have stepped up to the policy plate, the world can ill afford a loss of central bank credibility and effectiveness.

Social unrest: Enabled by social media technologies that facilitate broad-based coordination, the world has witnessed an astonishing outburst of grassroots social movements that are pressing for greater social justice -- from the Arab Spring to the Indignados in Spain, the Occupy movements in the United States, Israel's protesters, and anti-austerity riots in Greece and Italy. Having come together on the basis of legitimate grievances, these movements now face the challenge of pivoting from complaints about the past to helping to build a better future. The longer it takes the pivot, the higher the probability of frustration and of the protests turning violent -- and governments reacting inappropriately.


"Refounding" Europe: France and Germany have embarked on an effort to strengthen the underpinnings of a restructured and reformed eurozone -- what French President Nicolas Sarkozy has labeled a "refounding." So far, this effort has been half-hearted, trying to meet too many objectives with too few instruments. Both Europe and the world would benefit from a more focused effort to enhance the core of Europe through greater fiscal and political integration and countering the fragility of banks. The likely outcome -- namely, a smaller but more robust eurozone focused more on the Germanys and Netherlands of the region as opposed to a Greece or Portugal -- would remove a major uncertainty that holds back investments and job creation.

America's Sputnik moment: The United States remains the global economy's best locomotive for growth. But its vibrancy is threatened by unprecedented political squabbling that undermines any attempt to lift the impediments to growth. What America needs is reminiscent of what followed the Soviet Union's successful launch of Sputnik in 1957 -- the convergence of American society around a common vision and purpose. A 2012 economic Sputnik moment would lift structural obstacles to growth (including in housing, public finance, and credit), unleash the considerable dry financial powder currently on the sideline, and empower the entrepreneurship that is unquestionably in place; and the post-Sputnik efforts would revolve around improving education, infrastructure, innovation, and other enablers of long-term growth.

Political healing and leadership: It is not due to complicated technical difficulties that many of the world's economic problems persist and deepen. In most cases, today's malaise is a reflection of political dysfunction and ineffective leadership, both of which pre-empt any meaningful effort to take the difficult yet necessary decisions. Witness how the U.S. Congress has torpedoed President Barack Obama's job initiative. As a result, the credibility of the system itself suffers. Fortunately, several key countries, including the United States, are holding elections this year, giving citizens an opportunity to send a message to their elected representatives. The greater the clarity and urgency of that message, the higher the probability that bickering politicians can overcome real and perceived legacies to unite in doing the right thing for current and future generations of citizens.

Unleashing the emerging consumer: Emerging economies, China in particular, are in a very different place today than Europe and the United States. With a savings rate that has consistently been among the highest in the world, their consumers have the wallet but not the will to spend. Their behavior is a complex reflection both of self-insurance against the uncertain public provision of social services and of government policies that favor production at the cost of consumption. By moving on the latter, for instance accelerating the liberalization of the exchange rate system and tweaking the balance of taxes and subsidies, emerging economies can have a material impact on global growth and trade.


The world economy faces an unsettling outlook for the next few years. It can either break out of its current malaise and deliver economic prosperity, jobs, and greater social fairness; or, instead, it can slip deeper into unemployment, inequality, financial instability, and trade wars. Neither is preordained at this stage as leaders still have an important ability to influence outcomes to the better. But, as Europe demonstrates, the longer they dither and bicker, the higher the risk that policies will lose both effectiveness and credibility.

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Why Twitter will regret its misguided flirtation with censorship.

Outrage has predictably followed Twitter's announcement yesterday that it has developed a system to block (or, as the company euphemistically puts it, "withhold") specific tweets in specific countries if they violate local law, while keeping the content available for the rest of the world. The hashtag #TwitterBlackout is bursting with calls for a boycott of the microblogging service on Saturday, and headlines like "Twitter caves to global censorship" abound.

But the indignation may be overwrought. The Next Web's Anna Heim points out that Twitter users who want to see a blocked tweet can simply change their country setting. In fact, Twitter's decision to link to instructions on how to change that setting as part of its announcement has some speculating that the company is actually feigning respect for local laws while winking at its users.

"Chances are that Twitter perfectly knows about this workaround," Heim writes. "Users won't need to hide their IP address with a proxy: Twitter lets them change it manually, despite the potential loss in hyperlocal ad dollars for the platform." Indeed, in an email exchange with Foreign Policy, Twitter spokeswoman Rachel Bremer emphasized user control. "Because geo-location by IP address is an imperfect science," she explained, "we allow users to manually set their country."

What's more, Twitter has promised to disclose any information it withholds through a system that looks a lot like Google's Transparency Report, which tracks requests by government agencies and courts around the world for Google to hand over user data or remove content from its services. Twitter pledges to alert users when their tweets or accounts have been removed, clearly mark withheld content, and post notices on the website Chilling Effects. The company will only remove content in reaction to "valid legal process -- we don't do anything proactively," Bremer explained. She insisted that Twitter's commitment to free speech, which "has been demonstrated in our actions since the company was founded," is "not changing."

But that's just the problem. Twitter has long built its brand around free expression. While the company has never joined tech giants such as Google and Microsoft in supporting the Global Network Initiative, which seeks to protect online privacy and free speech, Twitter has championed those values in other ways. CEO Dick Costolo likes to say that Twitter is the "free speech wing of the free speech party," while former CEO Evan Williams once described the company's goal as reaching the "weakest signals all over the world," citing protests in Iran and Moldova as examples. Not only did Twitter famously postpone a planned outage at the height of the Iranian protests in 2009, but when the Egyptian government shut down social networks last year at the start of the revolution, Twitter teamed up with Google to develop a "speak-to-tweet" service. While "Google only promises not to be evil," Jeff Bercovici writes at Forbes, "Twitter's devotees have built it up into something much more exalted: a force for global progress and human enlightenment."

And, so far, Twitter has not done a particularly good job of explaining how this week's changes will alter its process for removing content and why the company is willing to imperil its brand by implementing the new rules. In announcing the policy, Twitter explained that it will need to "enter countries that have different ideas about the contours of freedom of expression" as it grows. But what does "enter countries" mean for a website theoretically available from anywhere? Spokespeople have since added that there are still countries where Twitter will not operate as a business (read: China, where Twitter is blocked) and that the changes have nothing to do with Saudi Prince AlWaleed bin Talal investing $300 million in the company. But when asked by Foreign Policy for an explanation of how notices under the new system might differ from the copyright complaints currently clogging Twitter's section on Chilling Effects, Bremer declined to comment on "hypothetical situations about when or how we might have to remove content in the future."

The Electronic Frontier Foundation's Jillian York thinks the new system may have something to do with Twitter's recent announcement that it will be opening an office in Germany, after previously expanding to Britain. By "implementing [these changes] in advance," York explains, "they may be saying, 'OK, we'll play by your rules. But only in your jurisdiction.'" (Indeed, in explaining the changes, Twitter noted that countries such as France and Germany ban pro-Nazi content.)

York says that while Twitter may respond to requests outside Europe under the new regime, it's less likely because the company won't have a business presence in other countries. "If they have a service presence everywhere except China, the only risk they have by not complying with requests [for content removal] is Twitter getting blocked," she notes. But if Twitter has people on the ground, the company is "risking people's livelihoods at the very least and lives at the very worst" if they don't comply with complaints about content.

York may be right, but Twitter's remaining tight-lipped about its intentions. It's no wonder, then, that people are cynically interpreting the announcement as yet another instance of a free speech-championing tech company putting pragmatism ahead of principle -- a less brash version of Facebook lobbyist Adam Conner's declaration last year that "we are occasionally held in uncomfortable positions because now we're allowing too much, maybe, free speech in countries that haven't experienced it before."

As GigaOM's Mathew Ingram notes:

Twitter has just opened itself up to all kinds of conspiracy theories about what tweets it is or isn't withholding -- and on whose behalf it is removing them. What happens if and when a revolution erupts in Saudi Arabia? Critics will no doubt latch onto the fact that Saudi prince AlWaleed bin Talal lbin Abdulaziz owns a significant chunk of Twitter, thanks to a recent investment in its shares. And what if Britain orders Twitter to remove specific tweets during a riot like the one that caused so much controversy last year, when the government consider banning some users from the service?... What happens when someone posts a tweet that makes fun of the founder of Turkey, something that is a crime under Turkish law?

Or, as Suw Charman-Anderson explains at FirstPost, without context, we can't tell if Twitter's move "will decrease the number of tweets made unavailable to Twitter users, or whether it will enable more censorship." And if Twitter doesn't enlighten us about its motives, its users will assume the worst.

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