The elephants in the Davos ski lodge

By Nader Mousavizadeh
January 24, 2012

The epic global shifts of 2011 transformed the political, economic, and social landscape from Shanghai to Sao Paolo, Washington to Cairo. No leader (not even Vladimir Putin) is safe from the vagaries of social unrest; no economy (not even China’s) is unaffected by contagion from an over-leveraged, under-managed euro zone. No country (not even the United States) is immune from the threat of asymmetric attacks—anything from a terrorist bomb to cyber-warfare.

Volatility will be the rule, not the exception in 2012. What I call the emerging Archipelago World of fragmenting power, capital, and ideas is inherently unstable— as vulnerable to old conflicts and new threats as it is open to the dynamic entrepreneurship of rising powers and corporations remaking the map of the world.

A 20-year period of one-world, one-way globalization is being replaced by an era of competitive sovereignty. The walls are going back up. Developed and developing states alike are vertically integrating political and economic interests across public and private sectors in a global race for growth, employment and security.

Having previously embraced interdependence as the motivation for horizontal integration across markets and regions, states as diverse as Canada, Finland, Saudi Arabia, Japan, Brazil, Turkey and the United Kingdom are now pursuing more national strategies for economic and political security. For investors, corporations, and governments doing diligence on their global exposures, acknowledging this new reality is an essential starting point. Forget stability and predictability. Abandon the notion of global solutions to global problems. Instead, develop deep, granular understanding of the distinct political and economic context of new markets. Seek cooperation and alliances of interest, beginning with the discreet interests of these states and their economies. Embrace complexity, and understand that the successful management of political and economic discontinuities will be the essence of stability in the 21st century.

Four themes are likely to dominate the environment in which global investors, companies and institutions will seek to limit the downside to risk and capture the upside to volatility in 2012.

A global reset

A new strategic landscape will take form amid a global reset marked by leadership change in China and national elections in the United States, Russia, and a halfdozen other pivotal powers. The systemic banking crisis in the euro zone will force Berlin and the European Central Bank to pick their poison—and either become a sovereign lender of last resort or see the 27-member ECB’s dreams of fiscal union evaporate. For the Middle East, the second year of the Arab Awakening will begin under a cloud of increasing peril and paranoia. The movement for more legitimate and accountable governments in the Arab world will be tested by the still-powerful forces of tyranny, corruption, and fundamentalism—a scenario that will further draw in Israel, Iran and Turkey as strategic arbiters of the region. For the global economy, 2012 will likely see continued disarray, with the gap between the debtor and creditor nations of the world likely widening.

War over a nuclear Iran

The Middle East, more than any other region, gives validity to the old joke that even paranoid schizophrenics have enemies. Add to the very real perils arising from deeply divergent interests of Arabs, Turks, Persians, and Israelis heightened paranoia about Iran’s nuclear program. Gulf countries are as concerned about Iran’s meddling in their internal affairs as they are about its nuclear ambitions. Combine this with Israel’s growing fear of Iran reaching a point of no return in its nuclear weapons program and the stage is set for a confrontation— whether planned or accidental— in 2012. Non-military options for halting Iran’s nuclear weapons program have not yet succeeded, nor have they failed. However exasperating the diplomatic track may seem, growing talk of a military option risks creating a logic all its own.

Nationalism, populism, and protectionism

A fragmenting map of the world provides, in even the best of times, an opening for the forces of populism and nationalism, and those movements are coalescing now —from China to the United States to South Africa. Factor in the cyclical deleveraging and austerity in the West, and it is only a matter of time before isolationist politics gain traction.

The best antidote to this lies not in another vacuous appeal to “global awareness,” but rather in setting out the case for why the national interest is best served through a mosaic of regional and global alliances. The countries and leaders now gaining stature on the national stages— from Turkey to Brazil—are those that understand that a sustainable economic strategy begins with delivering growth for the citizens of their own nation first. They see open markets and free trade not as ends in themselves, but as means to broadbased prosperity; they are making reforms to secure greater competitiveness and investment. Down this road lies a messier, more populist, more contingent phase of globalization with beggar-thy-neighbor policies—a spiral of currency wars, capital controls, and tariffs that could accelerate the current contraction through a wave of worldwide protectionism.

Cyber-attack on a global institution

Despite a dramatic increase in the capital and technology devoted to cyber-defense in the West, the threats from new sources of cyber-war are multiplying. The West reveled in the success of its Stuxnet and other forms of cyber-sabotage against the Iranian nuclear program, but it will soon have to face the consequences of the proliferation of these technologies. Governments, terrorists, and even solitary hackers are increasingly amassing the ability to launch a cyber-attack against a Western government or multinational. The real test of an effective cyber-defense will not be “Can you prevent an attack?” It will be, “Can you survive one?”

2012: The world of the state

The burgeoning role of the state in an age of sovereign crises and solutions will be a defining feature of the strategic landscape. The locus of political legitimacy has returned to the nation-state, and as economic and political power shifts to emerging markets, no solution that isn’t both global and national will be successful or sustainable. A new kind of Great Game will be played in 2012—winners will be those states and corporations seeking success irrespective of the traditional boundaries of geography, ideology, interest, or alliances.

PHOTO: A woman cleans chairs in front of logos of the World Economic Forum (WEF) on a podium at the congress center in the Swiss mountain resort of Davos January 24, 2012. REUTERS/Arnd Wiegmann

 

2 comments

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“Down this road lies a messier, more populist, more contingent phase of globalization with beggar-thy-neighbor policies—a spiral of currency wars, capital controls, and tariffs that could accelerate the current contraction through a wave of worldwide protectionism.”

The free trade, globalization paradigm is a sinking ship, run aground on a reef of huge trade imbalances that very nearly collapsed all economies of the world. Your denial of this is reminiscent of Captain Schettino and the Costa Concordia disaster.

The blanket application of free trade never had a chance of succeeding. The inverse relationship between population density and per capita consumption makes it impossible to avoid crushing trade imbalances when two nations grossly disparate in population density attempt to trade freely with each other, as in the case of trade between America and Japan, Germany, China and a host of other badly overpopulation nations.

The time has come for the comparative advantage fairy tale to be swept aside in favor of trade strategies that are rooted in economic reality.

Pete Murphy
Author, “Five Short Blasts”

Posted by Pete_Murphy | Report as abusive

> “The best antidote to this lies not in another vacuous appeal to “global awareness,” but rather in setting out the case for why the national interest is best served through a mosaic of regional and global alliances. The countries and leaders now gaining stature on the national stages— from Turkey to Brazil—are those that understand that a sustainable economic strategy begins with delivering growth for the citizens of their own nation first.”

@Pete_Murphy: It appears to me that Mr. Mousavizadeh is a more sophisticated character than you give him credit for. His article does not simply mourn the reversal of globalisation, but pragmatically explains the real risks of reversing these overall global gains in economic efficiency (which he implicitly acknowledges have been unequally distributed). Mr. Mousavizadeh has taken an even-handed approach to explaining both the real benefits and real disadvantages of increased “protectionism”.

@Pete_Murphy: news out today: Japan has a trade deficit for the first time in 30 years. Old news: Gaza (some of the post populated territory on the planet) has a trade deficit with Israel (with a much lower overall population density). Have you produced any graphs/ scatter plots and more detailed analyses to support your claims? Could I find those if I read your book? Even if the correlations support your theory, I’m sceptical about the causal relationships: it could simply be that where territories have historically enjoyed economic success (and inherited a “strong hand” in industrial/land productivity), those territories have typically enjoyed greater overall population growth (e.g. through net immigration). How strongly do you make your case?

I personally have no quarrel with globalisation, as long as competition is on an equal basis. Working-class people in the West should not be made interchangeable with expendable slaves in India or sub-Saharan Africa who have no access to education, welfare, advanced healthcare, sanitation or legal services. Our kinsmen within the top 1% of income should not be allowed to do that to their brothers, cousins, grandchildren and countrymen.

Tariffs are necessary to equalise these imbalances. Want to play in our market, which is benefited by these government services and cultural benefits? Pay to play (compensate us for the unfairness of unequal competition), or otherwise equalise your system… We can all agree on this, can’t we?

Posted by matthewslyman | Report as abusive