Friday, 24 July 2009

The Collapse of the Baltic Tigers

In a previous post we highlighted the plight of the three Baltic States (Estonia, Latvia, and Lithuania – see post). We see the recent events in the Baltic States as the European example of the Icarus Effect – economies that have flown high and which have now hit the ground with a hard landing. As this has happened, there has been a political price to pay, and we now need to address what that price might be.

The Baltic States occupy an uncomfortable boundary between the EU and Russia. In recent years they have been suborned by membership to the EU and NATO. However, their ‘westernisation’ is relatively recent and – taking the recession into account – not that successful. Russia seems to have a ‘reconquest fantasy’ which it regularly plays out in wargames adjacent to the border.

What we also tend to forget is that each of the three Baltic Tigers has significant Russian minority as part of its population (25.6% in Estonia, 28.0% in Latvia, and 5.1% in Lithuania). This part of the population tends to look to Russia for its cultural and political lead. As time unfolds, it is not unimaginable to envisage Russian intervention in the Baltic States to support the Russian minorities. After all, this is what happened in Georgia last year.

And so, as we think about the longer future, the eastern edge of the EU might not be as stable as it appears. Global recession is placing the A8 nations under great strain, which is creating the possibility of Russian adventurism in the region.

As Icarus hits the ground, the shockwaves could reverberate far and wide!

The Collapse of the Baltic Tigers - By Edward Lucas Foreign Policy

Thursday, 23 July 2009

Are We Anywhere Near 3 Million?

The jobless total for June was published recently (see story). It was another dismal month – unemployment rising to 2.38 million – but contains cause for hope. We remain on course to see unemployment of less than 3 million at the end of this year. If we chart the rise in unemployment for the first half of this year, the figures are:


Rise In Unemployment













Monthly Average


Just suppose that unemployment continued to rise at this average rate for the remainder of the year. It would imply that the total unemployment for the year would rise to 2.77 million – higher than our original forecast of 2.50 million (see note), but lower than the projection of 3 million reported in the previous post.

Of course, this assumes that we see a double-dip recession of the severity of the one experienced last spring. We may do so with the possible onset of a debilitating swine flu pandemic. The potential GDP loss is rising as the press becomes more alarmist about the potential impact of a pandemic. Estimates vary, from between a loss of 3% of GDP (things get as bad as the first quarter of the year) and 6% of GDP (things are twice as bad as last winter). The lower estimate seems plausible whilst the upper estimate seems fanciful. However, good futuring requires us to consider what might happen if we do not experience a double-dip recession. What would happen if the ‘recovery’ continued at the present rate?

Unemployment has been growing at a slower rate in recent months. Since March (the turnaround point), the growth in unemployment has been falling by an average of 13,033 (call it 13,000) per month. If we apply this rate of slowing to our progression, then total unemployment will peak in August, and will end the year at 2.25 million. This seems to be unduly optimistic, given the mood of the country at the moment. However, given the relatively small numbers involved – 13,000 workers in a workforce of 29 million – it is not entirely unimaginable.

Where does that leave us? We currently can envisage two predominant scenarios. One in which the UK goes back into recession, in which case unemployment could rise to 2.77 million by the end of the year, and one in which the current improvement continues, in which case unemployment could stabilise at 2.25 million at the end of the year. In the coming months, we need to monitor the progress of the economy to see which possibility will actually occur.

BBC NEWS Business Record rise in UK jobless total

Friday, 10 July 2009

Is China A Threat?

Keeping with the July/ August 2009 issue of Foreign Affairs, there is an interesting article by Andrew F. Krepinevich Jr. on ‘The Pentagon’s Wasting Assets’, which is more appropriately subtitled ‘The Eroding Foundations of American Power’. In many ways, this develops the thinking touched upon in the past two posts. First, we asked the question ‘When Is China not China’ to start to think about the expansion of Chinese territorial limits (see post). We then expressed the view that, in its future dealings with the US, the US would need Chinese co-operation more than the Chinese would need US co-operation (see post). This article moves the thinking along a bit further by asking what the Chinese government would need to do in order to limit US military power in East Asia.

According to Mr Krepinevich:

The intended message to the United States and its East Asian allies and partners is clear: China has the means to put at risk the forward bases from which most U.S. strike aircraft must operate. Area-denial capabilities are aimed at restricting the U.S. Navy's freedom of action from China's coast out to "the second island chain" -- a line of islands that extends roughly from the southeastern edge of Japan to Guam…

The implications of these efforts are clear. East Asian waters are slowly but surely becoming another potential no-go zone for U.S. ships, particularly for aircraft carriers, which carry short-range strike aircraft that require them to operate well within the reach of the PLA's A2/AD systems if they want remain operationally relevant. The large air bases in the region that host the U.S. Air Force's short-range strike aircraft and support aircraft are similarly under increased threat.

Just suppose that this is true. Does it matter? It is by no means clear that an expansion of Chinese influence out to the First Island Chain would be the cause of conflict. We know that there are issues surrounding Taiwan that need a long term resolution. However, the current policy of not bringing matters to a head whilst encouraging a convergence of interests between China and Taiwan seems to be working well. Conflict will only result if one sides reads the actions of the other side in this way.

This is where I part company with Mr Krepinevich. Can we assume that U.S. taxpayers are willing and able to provide a security umbrella to East Asia for an unspecified period into the future? many think not. If that umbrella is taken away, who will guarantee peace and stability in the region? China seems to be an obvious candidate. In which case, it seems to me that a logical process of engagement would be to recruit China into the international community as a partner, recognise that China has strategic issues of its own, and use the willingness of the Chinese Government to act as a peace-keeper in the region.

If we were to do this, then China would be seen less as a peer-to-peer threat and more as a willing ally who is prepared to pull their weight when it comes to the defence burden in the region.

The Pentagon's Wasting Assets Foreign Affairs

Thursday, 9 July 2009

Does China Need The US?

The current edition of Foreign Affairs contains an excellent little essay by Robert C. Altman on “Globalization in Retreat”. There is much to commend in the analysis of the argument – it gives a good overview of the recent progress of globalisation. Where I start to differ with Mr Altman is in the conclusions that he draws from this analysis.

In many respects, the conclusions drawn are highly influenced by his values. One of the values that Mr Altman appears to hold is that:

“It is increasingly clear that the U.S.-Chinese relationship will emerge as the most important bilateral one in the world. The two nations have similar geopolitical interests.”

I’m afraid that it isn’t that clear to me at all. I can see that the US will increasingly see the relationship with China as of critical importance, but it is by no means clear that China will think likewise. China is an important trading partner for the US, an important supplier of credit to the US financial system, and a key influencer over North Korea.

On the other hand, China trades about the same with the EU as it does with the US, is looking to diversify its foreign currency holdings away from the US dollar, and increasingly finds US criticism of its human rights record both inconsistent and hypocritical. If we view the world from Beijing, then there is much to argue that the important relationship for China will be that with India and Russia, particularly once the First Island Chain is secured.

Taking a long term perspective, there is much to ponder on how important the US will be to China.

Globalization in Retreat Foreign Affairs

Tuesday, 7 July 2009

When Is China Not China?

One of the pitfalls that many futurists and corporate planners fall into is the trap of thinking in linear terms. In the realms of geopolitical futures, this can be a mistake because it naturally excludes the possibility of change and of big surprises. When we look at works on the future of China, a surprisingly large number of works assume that the current territorial boundaries of China will remain the same into the long term future. A study of the history of China suggests that this may be a false assumption.

When I see a work on the future of China, I always ask how the analysis would differ if the territorial extent of China were to be appreciably larger, and how it would change if it were to be appreciably smaller.

In my own musings, the pressure to expand the territorial extent of China is most likely to come through the re-occupation of the First Island Chain.

China 5This is an area that encapsulates previous Chinese territorial expansion, and, in the mind of the Chinese government, it represents what is seen as “China”. That the area includes vital sea lanes to China, oil and gas resources, and abundant fish stocks merely brings the area into a sharper focus.

We have also given some thought to what a smaller China might look like. In 2007, as part of the reporting process for our ‘America 2025’ Project, we gave a paper on future geopolitics at the WFS Conference in Minneapolis, USA, where we considered the possibility of a smaller China by 2050. This map encapsulates our thinking at the time:

China 2 (2050)

In our thinking, we speculated that the dissolution of China would start in the west and head eastwards. The two western provinces – Tibet and Xinjiang – don’t really see themselves as part of China. Tibet sees itself as an autonomous nation, which, when I was a boy, it was. Xinjiang has a much closer affinity to Tajikistan, with whom it has a large number of ethnic and cultural links.

As we move through time, the forces of expansion and contraction are both in play simultaneously, and it is through this lens that we can interpret the news. The apparent uprising in Xinjiang suggests that the forces of contraction are evident in western China. However, the recent closer ties with Taiwan also suggest that the forces of expansion are also in play. The balance between the two is likely to dominate our news in the coming years.

156 dead as Muslim uprising hits China - Asia, World - The Independent

Saturday, 4 July 2009

What Follows The Dollar?

The pattern of international settlements is not the sort of topic that will have you sitting on the edge of your seat. It is, however, quite important – as we have recently found out. We have recently seen the recycling of excess East Asian savings into an excess of borrowing on the part of the G8. This was not sustainable. It lowered interest rates to undue levels, which fuelled speculative bubbles in key asset markets (the Stock Market and the global property market), until we reached a point where the loans being made took on a reckless air as lenders gave credit to those who had little hope of repaying their debts. And then the bubble burst.

We first had the Credit Crunch, which spread contagion into the financial system causing it to come grinding to a halt. This provided the mechanism whereby the turmoil in the Financial Economy spread into the Real Economy leading to our present recession. As we work our way out of recession, the root causes - those financial imbalances - have not gone away. Taking a futures perspective, one wonders how this might play out.

There are long term adjustments that are currently playing out. We often hear about how the balance of geopolitics is shifting eastwards from the US, but we rarely are told how this might occur. One mechanism by which it occurs is through the shifting pattern of international settlements. As the US – both in the private sector and in the public sector – becomes dependent upon East Asian finance, so the East Asian nations will have more say in geopolitical affairs.

It is through the exercise of financial power that the balance of geopolitics will be shifted. In the near future (the next decade), we can reasonably expect China to move away from a reliance upon US Dollar assets and towards a more broad currency base. When it does, it will be laying a claim to be a dominant global power. At that point, we need to look to the Inner Island Chain for potential flashpoints between the US and China.

Buttonwood: Birth pains | The Economist

Friday, 3 July 2009

Latest figures show recession is deeper and longer than feared - Times Online

This is an interesting article because of what it doesn’t tell us rather than what it does tell us. It would appear that the GDP figures for the first quarter of 2009 have been revised downwards from –1.9% to –2.4%. We can accept that the official figures may be subject to periodic revision, and that the revisions can be quite substantial at times (the GDP figure was revised by about a quarter). However, it doesn’t really convey a great deal of information about where we are now, and, more importantly, where we are headed in the future.

In a previous post (see post) we commented upon February experiencing the peak in the growth of unemployment. Since then, unemployment has been growing at a slower rate each month, which suggests that the real economy may now have turned the corner. All the GDP figures have done is to confirm that story – that things were pretty dire in the first quarter of 2009.

Are they dire now? The evidence – mainly anecdotal at the moment – suggests that things are getting easier. Industrial production is up in the East Asian economies, the commodity markets have tightened, and banks are lending again – both to themselves and real world companies. Whilst we have not recovered the ground lost, things don’t seem to be getting worse either.

For the future, the question  is whether or not we are likely to see a ‘double-dip’ recession. If things do worsen over the autumn (possibly due to swine flu) then the recession could be longer and deeper than originally feared. However, that is a pretty dystopian scenario. All of the evidence suggests that unemployment will not reach 3 million by the end of 2009, which is what the doomsters were forecasting back in December.

For now, we will just have to sit and wait to see what does actually happen. So far, it has been nowhere as bad as had been suggested by some commentators.

Latest figures show recession is deeper and longer than feared - Times Online

Thursday, 2 July 2009

Britain faces 100,000 swine flu cases a day - Times Online

If this were to happen, and it may not, then it would certainly knock the recovery off course. Oxford economics calculates the cost of a potential swine flu pandemic to be 3% of GDP. That’s quite a significant number when compared to the fall of 2.4% in GDP during the first quarter of this year.

Britain faces 100,000 swine flu cases a day - Times Online