As the global elite gather for
the World Economic Forum this week the topic of discussion is less about
creating wealth for the less fortunate or helping the developing world -- it's
about saving the core. Perhaps not surprisingly, economist Nouriel Roubini says
don't hold your breath, calling 2012 a year of "no progress." But Eurasia
Group's Ian Bremmer is also worried about the retreat of democracy and inequality
becoming a global class war. The two experts also reveal their surprising
predictions for the big geopolitical and economic winners of 2012 -- and which
former European finance minister shouted at Roubini to "Go back to Africa!"
Excerpts below (and, for a inside look at the goings on in Davos, keep an eye
Foreign Policy: So, you're both off to
Davos. And the World Economic Forum's foremost global
risk this year is "dystopia." Is it all that dark?
Ian Bremmer: The folks at Davos intelligently recognize this
problem, and they're calling it the great transformation -- it's a search for
new models. I think it's appropriate because we're not at the new normal yet. The new models have not shown
up. Nouriel and I both believe that we're presently at a G-zero, where there
isn't global leadership, and that is articulating itself economically [with]
the eurozone. If the Europeans don't get themselves out of this, the U.S.
obviously isn't going to, the Chinese obviously aren't going to, no one else
is. It's also proving itself in terms of political transition in places like
Syria, across the Middle East, Pakistan, and Afghanistan. If the United States
isn't going to be able to ensure democratic transition, well, who else is?
They're going to have to do it themselves.
Last year's Davos
fell in the middle of the financial crisis, and then Egypt hit right in the
middle -- and no one knew what to
do with that. Looking at it a year on, it's not like we've moved back to Frank
Fukuyama and the "End of History." This has not been a year where democracy is
bursting out all over; it's vastly more complex than that. Part of the reason
is the existence of major economic disjunctures, but part of it is because the
global backdrop is not one where Western, democratic values or the free market
is actually leading the charge. In the old days, you had the International Monetary
Fund and the World Bank providing money, but they also influenced economic
shock therapy and political reform. Well, the Chinese have no interest in doing
that. The Chinese Development Bank is putting more money on the table than the World
Bank and the IMF combined.
Nouriel Roubini: Last year was one in which there was a whole
series of tail risks that led to uncertainty, to volatility. They optimists
said that these were just temporary shocks: rising commodity prices, the Arab
Spring, the Japanese earthquake, the eurozone problems, the worries about the
U.S. fiscal environment. But if you look at all these things, they're not temporary,
they're not reversible, and these shocks are going to persist -- and the
sources of uncertainty as well. You know, for commodities, demand is rising
because of growth, industrialization, and urbanization in emerging markets. But
supply is not growing as much -- for many reasons. And therefore energy and
food insecurity is here to stay with us.
The problems of
the Middle East have spread: Tunisia, Egypt, Libya, Syria, Yemen, now tension
in Iraq, possible conflicts within U.S., Israel and Iran, conflicts between
Turkey and Israel, Turkey and Cyprus, between Israel and Palestinians -- that's
going to keep all prices higher. Even these natural events that are unpredictable,
like earthquakes, tsunami in Japan, many of these damaging events are man-made.
There is now scientific evidence that these extreme weather events, whether
it's a drought in Russia, Argentina, or Texas -- or floods in Pakistan, China,
or Thailand -- have to do actually with global climate change and these things
can disrupt economic activity, as we've seen in the case of the Thai floods.
problem has spread from Greece to Ireland to Portugal, to Italy and Spain, to
their banks, to their sovereign. Now it is spreading to the core of the
eurozone, with French banks and Belgium's banks under pressure, with the
downgrade of France and Austria. It is not going away. And the U.S. saga about
fiscal deficit and the gridlock between Democrats and Republicans is there to
stay. This year is going to be a year of no progress. But next year, whether
Obama is elected or Republicans go for Romney, neither party is going to have
60 votes in the Senate -- so one party can veto tax increases, the other can
veto entitlement reform. We live in a world in of risk: market risk, financial
risk, fiscal risk, sovereign risk, regulatory risk, taxation risk, and -- as
Ian says -- geopolitical and geostrategic risk. And it's here to stay.
IB: When you see all of the social movements that
have so grasped the attention of the press over the last year -- whether you're
talking about the Arab Spring, the protests in Russia, the 180,000
demonstrations in China, or Occupy Wall Street, that's the narrative that
people are talking about. It's the one that the Western press is really
articulating, and the implication is that it's all about economic dislocations.
It's all about rich vs. poor, the gap and divide. It's all about class. And, you
know, people have made that mistake historically, and I think we're starting to
make that mistake again today.
There's no question
economic dislocation is a very, very big issue. But the state is very
important. In fact, the state is going to be a more important actor coming out
the financial crisis than it was before. I think as a consequence of that we're
seeing that it's not just about intra-governmental strife, it's also about
inter-governmental strife. There's a lot of nationalism that's emerging. And
there's also a lot of sectarianism that's emerging. And much of those trends
are distinctly anti-democratic, so even in the places where you do get
transitions that come as a consequence of this economic volatility, combined
with social networking, global communications, and all the rest, it's not at
all clear that the direction you move is the one that the West has been
hopefully predicting over the past decade.
FP: But the issue of economic inequality is certainly
a factor. Is there a plan to deal with that?
IB: And I think the answer depends enormously on
where you look. In the United States, not to in any way downplay the Occupy
Wall Street [OWS] movement, but it's not going to lead to significant change in
policy. And, frankly, the American system is immensely resilient; it's the most
resilient governmental system in the world, and it's not under a lot of
pressure to change. And I think despite the fact that it's going to get a lot
of attention, and in some ways, it's getting more attention because the
Republicans are fighting over the issue internally. Ultimately, I suspect that OWS
is going to be subsumed by the Democratic Party, in the same way that,
historically, the Green movement has -- and, in some similar ways, to the way
the Tea Party has been subsumed by the Republicans.
But I believe
that major wealth disparities that are growing in China are probably not as
important as Chinese nationalism as a factor in determining where cleavages and
where conflict are likely to really pop up over the coming years. And that may
very well be true in Russia as well. In other countries -- in countries that
Nouriel knows exceptionally well -- in places across Europe, I think the
economic cleavages are huge and are becoming bigger.
NR: I don't want to overstress class factors -- nationalism,
race, religion, even inter-generational cleavages. Yes, they are going to be
important, but there's a broad nexus of economic and financial concerns. It's
about income and wealth inequality, but it's also about jobs -- whether your
children are going to be better off than you. It's about economic insecurity,
about whether the benefits of social security, health care are going to be
there. It's about underemployment, or unemployment. So it takes different
manifestation in different places, of course. There's the Arab Spring, Occupy
Wall Street, the riots in London, the middle class in Israel demonstrating because
they cannot afford their homes, the Chilean students that cannot afford good
education, anti-corruption in India, people saying enough of what's going on in
Russia, and in China where people cannot go out on the streets to protest so
they turn to the microblogs to voice anger about corruption and inequality.
So it's a whole
nexus of things that have to do with economic insecurity, whether it's poverty,
education, skills, the ability to compete in a global economy, keeping your old-age
benefits, and then inequality. The manifestation of them can be class warfare
as opposed to nationalism, or religious warfare as opposed to
inter-generational cleavages between young and old. But I think there's a
complex nexus of economic concerns that are at the basis for many of the things
that are happening in different ways in different countries.
FP: Ian, you've both mentioned a lot of risks and fears
that people have going into this year. But what are the big stories and
personalities in Davos in 2012?
IB: You know, it's funny, because last year [IMF
Managing Director] Christine Lagarde did incredibly well at Davos, and so did [German
Chancellor] Angela Merkel. But the IMF is in a more marginal role today than it
has been historically. It's weaker. And the Germans are too -- so there are
more questions to what extent the Germans are going to be able to get things done,
although they're clearly taking on a lot of leadership. So, I think Europe is
going to be the focus of a lot of scrutiny, but they're not going to look like
The United States
would be a winner
because the U.S. economy is doing better. But the U.S. does not typically take
Davos very seriously -- especially during a presidential election, where we're
talking about Occupy Wall Street and the 1 percent and Mitt Romney's 15 percent
tax. So I think a lot of people will be seeing that the United States is doing
better, but it won't get a lot of attention. American corporate CEOs will be
feeling a lot better, if even still skittish and gun-shy, given the volatility
in the world, they'll look like comparative winners.
Beyond that, I
mean, you've got to look at China. They're in the middle of a leadership transition,
and they're handling it incredibly competently and confidently. They're still
showing very, very strong growth, though, obviously it's coming off the burn. And,
yes, there are 180,000 demonstrations a year, but those numbers are going up in
large part because urbanization is going up in China. Of course, there are more
people demonstrating in the cities -- there are more people in the cities. But actually, given the
massive transformation that's been going on in that country, they've been
handling it very, very well. And I think there's a reason the Economist runs with state
capitalism as their cover for the week that Davos is going to be in town. Frankly,
it's because this has moved to becoming conventional wisdom.
FP: Nouriel, you've been a lot more pessimistic on
China. In our previous conversations, you've said you've seen this bubble
bursting soon rather than later.
NR: Well, the data in China already suggests an economic
slowdown. Residential investment now is falling at an annualized rate of almost
20 percent. Net exports are weakening because export growth of China to the
world has slowed down and to the eurozone periphery is actually falling and so
you see the economic data for Q4 is lower and for Q1 is also going to be lower.
Given that it's a transition year this year, they're going to do any necessary
to maintain at least 8 percent growth to additional stimulus.
The point that we're making is that no country
in the world can be so productive that you take half of your GDP every year and
you reinvest it into new capital stock, whether it's real estate or
infrastructure or industrial capacity. You're going to have down the line 3
problems and we see the risk this happening in 2013/2014: the first problem is that
massive non-performing loans in your banking system lead to a credit crunch. Secondly,
the public debt of China is in our estimates is already 80 percent of GDP and
when you add all these different loans of provincial governments,
policy-development banks…you name it. And third, every investment boom has ended up eventually in a hard landing --
there is no historical example of a soft landing from a 50 percent of GDP, even
a 40 percent of GDP, investment boom. So we are right to worry that China's
reforms that are going to lead people to save less and consume more are
occurring too slowly. After all, consumption is only still 33 percent of GDP
while investment is 50 percent and once the investment bust occurs and exports
cannot grow because the U.S. and other countries cannot be anymore the consumers
of first and last resort, then the weakness of consumption growth is going to
manifest itself in a hard landing.
FP: We haven't really spoken much about the resource
economies -- about OPEC, Russia -- countries that haven't been touched as much
by reform and democratic movements. But if you look at the Davos agenda, "enabling
green growth" -- which is perhaps code for disengagement from these strong
resource economies -- is far down the list. Why?
IB: I think "down the list" is code for we've got
bigger problems right now; we can't deal with this. I mean, in the United
States, how much are we talking about climate right now? In Japan, they've got
to get energy, right? Fukushima means no more nukes. Germany is having that
problem; even France is having that debate. China -- the world's largest carbon
emitter -- is also the one country that doesn't have to worry about regulatory
problems or the safety of nuclear reactors. So the consequence is that they can
continue to build with reckless abandon, but they're still going to be
overwhelmingly dependent on dirty coal.
There is a lot more geopolitical risk
around energy this year. The reason for that is that the Middle East is more
problematic. Iraq is still the most exciting story in terms of new oil coming
on to the markets this year. But Iraq is becoming much more unstable, and
there's a potential for more fragmentation through sectarian fighting as the
United States has left, and [Prime Minister] Nouri al-Maliki's center will have
a hard time holding. That's a real risk. Add to that the likelihood of
provocation from Iran, and between Iran and Israel is absolutely going up.
All of that is implying there's not a lot
of spare capacity in the world, even with the comparative slowdown, now that
the U.S. numbers are coming back up a bit. Clearly, now you are going to see
demand increase, and there's going to be a squeeze on global energy. That, of
course, is continuing to provide an awful lot of cash for the Russians, for the
Saudis, and for the other Gulf economies, and they aren't being hit very hard,
and they're not going to be. You know, unemployment in Saudi Arabia is
structurally different than unemployment in Egypt, there are just lots and lots
of jobs that Saudi men are not prepared to do, and that go to immigrants
into Saudi Arabia -- Bengalis, Pakistanis, Filipinos, and the rest. The Saudis
have tried "Saudization," it's worked in neighboring Oman, but it's not working
very well in Saudi Arabia.
FP: Nouriel, what about the bottom billion?
Previous Davos's have seen Bono parading up there, getting developed nations to
commit money to focus on poverty. Is this just not the time? Does the
insecurity in global markets mean that this goal has to be put aside?
NR: Well, people don't talk about it as much when
the new human development goals have not been achieved. But what has happened
in the last year is that people have understood that you need growth but you
also need inclusive growth. And economic and financial insecurity combined with
rising inequality across countries and within countries can be a major source
of social and political instability.
So, we cannot ignore this issue of
inequality. We must make sure that growth is inclusive -- in China, in India,
in Latin America -- and that we do create opportunities for young people in
Europe and United States to have jobs and succeed in life. We have a huge amount
of social and political instability. The issue you raised is usually couched as
the bottom of the bottom, meaning the starving people in sub-Sahara Africa. But
there is a bigger issue because now we have several billion people in the world
working in advanced economies, in emerging markets, who feel very insecure
about their own future.
And unless we're going to address that,
everything that happened in the last year -- from the Arab Spring to Occupy
Wall Street to riots throughout Europe -- is going to get worse. Even in sub-Saharan
Africa, you could start to see a lot of social and political instability. We've
seen, for example, what happened in Nigeria, when they started to phase out
subsidies on oil, and prices went up by 200 percent. Which is why there are now
riots in the streets.
So we have to think about these issues; we
have to discuss them and figure out how to address them. Not only are a lot of
people starving, but actual social and political instability comes from potentially
middle class people who see their hopes being dashed.
FP: Ian, what's the biggest winner of the coming year?
IB: United States.
IB: Oh, absolutely. First of all, it's all a
relative game. If you're concerned about the euro, the dollar looks really
good, and that gives us a lot more flexibility in this country. I'm a believer
in American entrepreneurship. I'm also a believer in quality of life, and when
things start falling apart, people look to the U.S. more. The reason [President
Barack] Obama's Asia trip went so well is because when you pull out, everyone
is like, ‘Oh my God, we need these guys.' If there was anyone else filling the
breech, it could be a different story; in many parts of the world, there isn't.
FP: So that makes the United States a leader of a
IB: Well, hey, "leader of last resort" in Libya
worked really well for the United States. I mean, you managed to get rid of
Qaddafi, you didn't lose a single troop. So increasingly, the United States is
not the global policeman; it's not going to be doing everything. You know,
without any question, "leader of last resort" is less problematic for the U.S.
than it is for anybody else.
Beyond that Brazil is looking good. They've
got the World Cup and Olympics coming up, and the Brazilians are hosting the Davos
banquet this year, which they've never done before. It's their time. [President
Dilma] Rousseff got rid of a host of ministers for corruption and she's shown
herself to be competent and capable, not
just an emerging market leader. She's much more able to balance between the
United States and China, balance between being a BRIC and being a country that's
been a safe destination
for capital for a long time now. Plus, they've got massive commodity wealth and
more coming from the pre-salt offshore. This might be Brazil's year in Davos.
FP: Biggest loser? Or biggest retrenchment? Biggest
country taking a step back?
IB: Europe's is still going to look like big losers
this year because they're not coming out of crisis. At best, they're muddling
through. And I think "muddle through" is going to continue to happen. So it's
not looking pretty, and that's particularly true for the countries in the
periphery. This is also not a good year for Russia. You know, I don't agree
with the Fitch downgrade, personally. I think that if anything, after Russian
elections, [Prime Minister Vladimir] Putin might actually say, "Oh, I need to
take governance a little more seriously, bring some more serious people in."
But clearly, of all the BRICS, Russia doesn't deserve to be there -- they
really don't. They're so consolidated around a single individual; their
governance is so poor, so opaque, so corrupt. You've had years in the past
where [President Dmitry] Medvedev and Putin have gotten up and they've given
really great speeches. This time around, everyone knows that they're running
into elections that are going to be a bit of a farce; that those demonstrations
are not going to matter very much. Russia has been left behind, despite all its
commodity wealth. It really hasn't done anything else right compared to the
other BRICS. They're a big loser.
FP: Nouriel, do you concur?
NR: I agree that Russia might not be left among the
BRICS. Actually, I wrote an article about a year ago saying that maybe they
should drop Russia and add Indonesia. I felt quite positive about Indonesia
when I visited there recently, and I am going to go soon again. Another rising
power outside of the BRICS is Turkey. It is rising economically and flexing its
diplomatic muscle throughout the Middle East. It could become a model, over
time, for a successful, moderate Islamic state. Plus, it has taken an assertive
role towards Syria, towards Iran -- it may be able to help the United States in
many ways in the Middle East in spite of the current tension that exists
between Turkey and Israel. So I would say Turkey is a relative winner.
But, certainly the periphery of the
eurozone is the big loser. You know, at Davos 2006, I was in a session together
with [Guilio] Tremonti, who was then the finance minister of Italy, and [European
Central Bank president] Jean-Claude Trichet, on the future of the eurozone. And
I dared to say then, in 2006, that if the divergences in the eurozone were to
continue, in five years Italy and Spain and the periphery might end up like
Argentina -- in default and currency crisis. Tremonti got very angry and shouted
at me while I was giving my talk, "Go back to Turkey!" I happened to be born in
Turkey, but it meant, "Go back to Africa" or to some other underdeveloped country.
Now, five years later, what I predicted
is happening: It's a disaster in the eurozone, Greece is collapsing, and Turkey
is doing well. And I think the Europeans made a big mistake in slowing down the
negotiations about having Turkey -- a young, dynamic country -- join the
European Union. And that's the world we are in right now.
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