Ian Bremmer

By Ian Bremmer
The opinions expressed are his own.

Though I’ve already written about the recent Munk debate in Toronto elsewhere, it’s worth taking some space to expand on my position, and why the U.S. truly is not going to experience a Japan-style lost decade of economic stagnation.

(The debate was on this resolution: Be it resolved North America faces a Japan-style era of economic stagnation. I joined Larry Summers in arguing the Con side against Paul Krugman and David Rosenberg.)

Let’s start with the political realities: Japan experienced 50 years of single-party rule. In the last 22 years, the country has had 17 prime ministers. Recently, the Democratic party there defeated the long-time incumbents, the Liberal Democrats, only to find that they had no idea how to govern the nation. They had no idea how the ministries worked, no relationships with industrialists or financial institutions, no grasp on the levers of power in society, and no strong policy apparatus. If the U.S.’s political situation looks bleak, consider that alternative.

In fact, the political situation in the U.S. may not be pretty or easy to watch, but it’s functioning. The President and Republicans continue to hammer out centrist deals on issues like tax hikes and the debt ceiling, albeit at the last possible minute after much gnashing of teeth. Ignore naysayers who say that budget supercommittee doom is coming; a deal will likely get done. And after the presidential election, things will get even better. That’s because Republicans are almost certain to retain the House and take the Senate. Whether Obama or the likely GOP candidate Romney wins the election, their dealings with a unified legislative branch will become far easier than the current divided government.

Our stable government is why foreign investors continue to flood into the dollar. Paul Krugman may have argued at the Munk debate that a strong dollar is what’s harming the U.S. economy, by making the country less internationally competitive, but I believe the confidence that foreign and sovereign investors continue to show in US debt outweighs that negative. Ask yourself what the better scenario is: a strong dollar that puts us at a slight relative disadvantage, or a pullout of investment dollars in the U.S. altogether? Investors continue to make bets in dollars, and that’s good for us. Yes, gold has risen dramatically in recent years, but “gold” is not a country. When investors need security and stability in currency, only the U.S. can still claim to provide it.

Krugman is also frustrated that the U.S. can’t move on a dime to enact policies needed to slam the country out of its current GDP growth lethargy. Looking around the world, there are only a couple countries of size that I can point to with that ability. One is Russia. Vladimir Putin has positively gutted that Moscow’s fledgling institutions to let his will be done. Their growth rate has been phenomenal, but at what cost? No one can say what will happen to Russia when Putin exits the stage, and that’s not a situation the U.S. will ever be in. Our institutions endure.

Finally, let’s look at the U.S.’s secret weapon when it comes to avoiding a lost decade: its demographics. With healthy immigration and a fertility rate that hovers around replacement levels, our outlook for population and labor force growth beats that of Japan, the EU, and even China. We’re going to have workers that are educated and capable of entrepreneurship in a way that other regions of the world will not. They will continue to follow our lead, but the innovations will come from the U.S. and North America.

Ultimately that’s the most important point of all. Nearly twenty years ago, the rise of the Internet, which was a long-gestating government and university networking project, began to reshape the world. Today, we don’t know what the next Internet-like innovation is going to be. It could be 3-D printing, or laser fusion, or nanotechnology, or something none of us has ever heard of. But we do know that it’s almost certainly going to come from the United States. If that was not the case, 50 percent of Chinese millionaires wouldn’t want to actually live in the U.S. rather than China.

Our biggest economic competitor over the coming decades will be China. But in China, 1.3 billion people are in the process of industrializing. We’ve seen the industrial revolution in England and in the U.S. It’s necessary, but not pretty or simple. Check the air quality in Beijing for proof of that. The decision among the world’s elites as to where they want to locate themselves will always be a relative question. And relative to the rest of the world, the United States continues to stand alone.

This essay is based on a transcribed interview with Bremmer.

Photo: Japan’s Prime Minister Yoshihiko Noda (L) talks with China’s President Hu Jintao (2nd R) at the start of their meeting on the sidelines of the APEC summit in Honolulu November 12, 2011. REUTERS/Kyodo

By Ian Bremmer
The opinions expressed are his own.

What we’re seeing in Europe — in rising Italian borrowing costs and the felling of two prime ministers — is the growing impatience of the markets for a resolution to the euro zone crisis. To put a finer point on it, the hive mind of the markets has decided it is not going to give Europe enough time to get its act together. The big institutions that drive the world’s economies are sitting on huge amounts of cash — enough to solve many of these problems overnight. But they have lost confidence in the ability of the European political system to deliver solutions that will work.

In a G-Zero world, where there is no strong global leader to direct the course of events, no one is interested in taking a flier on helping the Europeans get out of their mess. As the abortive G-20 conference showed last week, there is no backstop for any country or institution that makes an error in today’s environment, whether it’s tiny MF Global or the Chinese sovereign debt fund. In the postwar era, the Marshall Plan was the very definition of global security — it was a huge commitment by the U.S. to rebuild Europe into the economic force (and not incidentally, trading partner) that the world needed. Today, there is no Marshall plan for Europe, from within or without.

That’s the high-level view of the Europe situation. The question everyone wants answered is this: what happens next? Start with Greece: the best possible outcome for that country has happened with Papandreou’s resignation and the selection of economist Lucas Papademos as Prime Minister of an emergency government. Papademos is committed to remaining in the euro and accepting the terms of the Greek bailout package. Despite the roller coaster ride Papandreou took his country and the euro zone on, Greece has now moved closer to the Spanish and Portuguese models for avoiding the debt crisis drama. In Greece, a resolution is starting to be reached. It’s not the beginning of the end, but maybe this is the end of the beginning.

The same can’t be said for Italy as the situation changes by the day. The decisive Senate approval of a package of austerity measures (by a margin of 156 to 12) was one small step for Italy in the eyes of the markets— and a big step toward Silvio Berlusconi resigning his mandate.  It’s a wonder that Berlusconi held on to power for so long; he burned up his political capital years ago with scandals of all stripes. His stepping down is good news for Italy in the long run, but the handover of power to likely frontrunner Mario Monti is a delicate process that will have to be handled with tremendous care.  Unfortunately for Italy, political drama has insured it will face a higher and longer level of scrutiny.

Markets will continue to demand extensive and enforceable changes in spending levels throughout the peripheral states. When Italy and Greece look more like Spain and Portugal, the bond markets will treat them more like Spain and Portugal.  But that alone won’t solve the problem: investors are going to demand to know what happens next time any euro zone periphery country is on the brink of collapse. Euro zone institutions and politics have to be reshaped to prevent this type of crisis from ever happening again. Until this risk is mitigated, lending costs will stay high for a long time to come.

Case in point: I talked with about 200 international financial executives at a conference two weeks ago. 92 percent thought a “Lehman event” could easily happen once again somewhere in the world. Because we all thought the economy had been getting better over the last few years, we took our eye off the ball when it came to shoring up the global financial system and making the necessary structural fixes. In the U.S., President Obama took up health care. A weak Dodd-Frank bill passed. In the global financial system, Basel III has gone nowhere. And so every time the markets are rattled, we stare down the financial abyss, again and again.

I’m an optimist on the euro zone; I still don’t think it will fracture. The political will to stay together is too great; the mechanisms for countries to drop out are too complex and undeveloped. The institutions that compose it will get stronger — eventually. But that will be a long time from now. Until that day, we’re likely to see a lot of economist Joseph Schumpeter’s “creative destruction” — but as applied to financial systems, rather than corporations. Much of the financial edifice of the 20th century is yet to come crumbling down. To fully rebound from this era of crisis, more of it must.

This essay is based on a transcribed interview with Bremmer.

Photo: A man walks past signs that read, “For the good of Italy: Berlusconi resign” in Rome November 11, 2011. Former European Commissioner Mario Monti has emerged as favorite to replace Silvio Berlusconi as prime minister.

By Ian Bremmer
The views expressed are his own.

One of the biggest changes we’ve seen in the world since the 2008 financial crisis can be summed up in one sentence: Security is no longer the primary driver of geopolitical developments; economics is. Think about this in terms of the United States and its shifting place as the superpower of the world. Since World War II, the U.S.’s highly developed Department of Defense has ensured the security of the country and indeed, much of the free world. The private sector was, well, the private sector. In a free market economy, companies manage their own affairs, perhaps with government regulation, but not with government direction. More than sixty years on, perhaps that’s why our military is the most technologically advanced in the world while our domestic economy fails to create enough jobs and opportunities for the U.S. population.

Contrast the U.S. and its free market economy with China’s system.  For years now, that country has experienced double digit growth. Many observers would say that China’s embrace of capitalism since 1978, and especially since joining the World Trade Organization in 2001, has been responsible for its boom. They would be mostly wrong. In fact, a new study prepared for the U.S. government says it’s not capitalism that’s powering China, but state capitalism — China’s massive, centrally directed industrial policy, where the government positions huge amounts of capital and labor in economic sectors it intends to nurture. The study, prepared by consultants Capital Trade for the U.S.-China Economic and Security Review Commission, reads in part:

In a world in which central planning has been so utterly discredited, it would be natural to conclude that the Chinese government and, by extension, the Chinese Communist Party have been abandoning the institutions associated with the communist economic system, such as reliance on state‐owned enterprises (SOEs), as fast as possible. Such conclusion would be wrong.

In a G-zero world where no country can claim the mantle of international leadership, China has pulled an accomplished head fake. While the media focuses on China’s special economic zones, like Hong Kong and Macau, and the rise of the banker class and Chinese tech industry, state directed spending is the real engine of growth.  Capital invested in infrastructure like factories, heavy industry, roadways, and high speed trains continues to power annual double digit growth in GDP. Reliable data from 2004 shows that 76% of Chinese non-financial firms are classified as State Owned Enterprises (firms with government ownership of greater than 10%).

In short, while the U.S. has spent decades and vast treasure building up its defense system (and yes, by extension, the sectors of the economy that service it), China has spent its time and money building up control over the broad direction of its entire economy. In today’s world, where the first sentence of this essay rings true, which country currently looks better positioned to, pardon the pun, capitalize, in the years ahead?

During last week’s euro zone bailout talks, French President Nicolas Sarkozy went hat in hand to China, painting a stark picture of China’s still-growing economic importance internationally. Never mind that the phone call didn’t result in any particular action; the mere act raised Chinese President Hu’s profile going into the G-20 talks in France this week. Not only that, the entreaty by Sarkozy made plain that China has nothing to hide about the economic path it’s chosen for itself. After decades of hectoring from the West, the tables are perhaps about to turn. After all, what economic model should China emulate? Europe’s? The United States’? “With all due respect,” you can almost hear President Hu saying, “we like the way our system is working, thanks.”

There is, though, a fatal flaw with state capitalism. It works, and it will continue to work, until the day that it doesn’t. China’s economic growth is built on the back of cheap labor. As China’s wealth and per capita GDP (currently $4,400 compared to the U.S.’s $47,000) continues to rise, that labor will one day cease to be cheap — perhaps not compared to the U.S.’s, but certainly compared to the labor forces in India, Turkey and across Southeast Asia.  This trend is already beginning, as we have seen multinational companies turn to countries like Indonesia, Vietnam, and Thailand for cheaper labor in the region.

State capitalism requires that the state have access to a cheap good or service that has high value in trade. Saudi Arabia has oil, Argentina has mines. Reaching back further, as New Yorker writer John Cassidy has recently noted, the British had access to cheap Indian opium that 19th century China snapped right up. When China’s emperor protested the drugging of his people, the British sent warships to force its ports open. State capitalism, in other words, has a long history as midwife to economic powerhouses. China’s cheap resource continues to be its labor. The leadership there is going to protect that resource as long as it can, through any lever its government can control.   When state capitalism breaks down, the results will be ugly if the government has not adequately braced the economy for fundamental change.

At the heart of every military conflict, after all, is some sort of trade war. It’s not a bad thing that the U.S. has invested so much in its own security. But in a world where economics drives geopolitics, the U.S. will be in a decades-long race with China to maintain its perch as the world’s largest economy, and it will have to do so with a much smaller population and relatively anemic growth, compared to China’s rapidly urbanizing population and its double-digit annual GDP bonanzas.  That assumes, of course, that China weathers the shocks that state capitalism will bring, and manages to overcome a looming demographic problem as the population ages without an adequate social safety net in place.

Make no mistake — China’s leaders are well aware of the economic power they currently hold, but they also recognize the potential for more prosperity and influence if they can carefully manage their economy for future generations — and the consequences should they fail. It’s good — and long overdue — that the U.S. learns more about their system, and Capital Trade’s important new study is a step in the right direction.

This essay is based on a transcribed interview with Bremmer.

Photo: China’s President Hu Jintao (L) and France’s President Nicolas Sarkozy (R) discuss  before the start of the G20 Summit of major world economies in Cannes November 3, 2011. REUTERS/Charles Platiau