Ian Bremmer captivated general session attendees on Tuesday at Schwab Impact 2016 despite his sobering assessment of the issues the United States, investors and the world’s population faces.
Introduced by noted advisor and Texas Tech professor Deena Katz, who said “his latest book is awesome; I highly recommend it,” Bremmer was personable and humorous as he explored “how to guide people in an increasingly unstable economic environment,” which nevertheless presents “lots of opportunity.”
First, the academic and president of Eurasia Group argued that “we’re entering a period of profound geopolitical recession,” which reverses the experiences of the “last three generations” post-World War II in which “globalization amounted to Americanization.” Then, the U.S. was “on top, and we rebuilt the world order according to our priorities, our standards,” and “with our money.”
In this new recession, not to be confused with the boom and bust economic recessions which have occurred every seven or eight years since the end of World War II, the U.S. is “not nearly as badly affected” as much of the rest of the world, and “neither are the Chinese, nor the Japanese.”
He ticked off the signs of geopolitical recession: “the Middle East is imploding; oil money is going away; OPEC is destroyed,” and yet the U.S. “doesn’t want to provide the same amount of security” as it has for the last 70 years. Despite the fact that the world now has more refugees than at any point since WWII, for the U.S. and Asia, that crisis is “not such a big deal.”
Part of the reason is geographical. “Our neighbors are Canada and Mexico and two big oceans; they’re great neighbors,” he said to laughter. “Turkey would love to have our neighbors,” but it doesn’t. Neither does Greece, nor eastern Europe, nor the countries bordering on Russia’s southern borders that once were members of the Soviet Union.
U.S. reluctance to guide world events can be seen in the opposition to expanding world trade through treaties like the Transpacific Partnership (TPP) trade agreement exhibited by both Hillary Clinton and Donald Trump. The shift from equating globalization with Americanization can be seen in the actions of Philippines President Manuel Duterte’s pivot to China: “so he can get Chinese money.” It can be seen in the actions of America’s most stalwart ally, the United Kingdom, which a year ago agreed to join the Chinese-led Asian Infrastructure Investment Bank despite the U.S. government’s strong pressure to resist, since the Chinese foray is a direct competitor “to our World Bank.”
Instead, Britain not only joined the Chinese-led bank, “but joined first,” pleading to China, “please give us more money for our nuclear infrastructure.” China is using its economic power throughout much of the world, including Africa and those former members of the Soviet Union, which eventually will bring China into more direct conflict with Russia, he argues.
“The less we do stuff in parts of the world” exhibiting volatility and unrest, “the more China will move in with big checks.” Nations in many regions around the world “will align and adhere on the basis of what the regional leaders want,” meaning Russia in Eurasia and China in Asia, “which will drive economic integration.” And he still expects a Grexit, prompted in part by Turkey releasing many Syrian refugees into Greece.
But not to worry, Bremmer said, “the U.S. is not going to fall apart,” and while he expects that “China will become the world’s largest economy within 10 years,” the U.S. will retain its outsized military dominance and will remain the world’s largest food producer and energy producer. However, he warned that “the IT sector driving so much of the U.S. and global economy will now become more fragmented” as political alignments around the world lead to a lack of technology transfers. “If you’re Lockheed Martin,” he said, you’re not going to sell advanced fighter jets to China, or maybe even Saudi Arabia, which is “becoming less our friend.”
Turning to the Old World, Bremmer said “Europe is not a horrible story,” though he expects the European Union to pull back to its original founding members, absent the U.K. “When globalization became Americanization, it made sense to expand” the EU to Russia’s borders, but “Greece’s economy is not like Germany’s,” he argued, nor is Turkey’s, nor are those of the eastern European countries.
A bright spot for investors is South America, which he said is “turning away from populism toward globalization,” as seen in the Argentine government, in Brazil and even, eventually, Venezuela. “Latin America is moving back toward” embracing the U.S. democratic and free market model, making it “a better place to invest.”
‘We Dont Think Our Leaders Are Legitimate’
Despite this big-picture geopolitical development, Bremmer is more worried about what he called “my small point: We increasingly think our leaders are not legitimate” due to the rise of populism. That’s happening not just in the U.S, but Europe as well, though not Japan. Why not? “Because Japan’s population is shrinking and they’re homogeneous, and despite 20 years of no growth” the Japanese population’s standard of living has improved, making it “the best among OECD countries.”
But populism is not built on specific political theories, Bremmer said. People who voted for Trump and Bernie Sanders, and the Britons who voted for Brexit, “didn’t do it to fix something.” Instead, he said “those voters are Palestinians with rocks. You don’t think throwing the rock will help, it won’t solve your problems, but it gives you agency.” Their intent? “This is our one chance to tell people to pay attention to me.” In the U.S., Bremmer said undereducated whites “feel they’ve been forgotten. Look at their suicide rate,” he said, along with that population’s high rate of diabetes and their diminished life expectancy.
“This matters for investors,” he said “because it won’t stop in the developed world.”
As technology displaces labor, it delivers “a lot of wealth,” but can also foster a protectionist mood. “Most of the time, we don’t care about politics: this is America, we don’t care. But in emerging markets they care. In Saudi Arabia they care. When the social contract doesn’t work anymore in emerging markets things blow up.”
These developments will only increase over the course of the next five to 10 years, Bremmer argued, where widespread adoption of 3D printing, robotics and artificial intelligence will lead to a “dramatic” jobs transformation.
To deal with this major challenge of job displacement and the resultant populism, we have several options, he said. Option 1: “we fix the social contract,” citing Denmark, Singapore and Sweden as countries where labor is treated “more like Uber or Air BNB; you’re out in the market with your skills, you use surge pricing” when demand is high for those skills, but all the “benefits go to the workforce.” The second option is to do nothing, which could lead to populations revolting and governments collapsing. “This is the Yemen model, the Syrian model, the North Korean model.”
The third option, he said, is to “build walls. Don’t change the social safety net, but build more walls separating the people” to keep them from fighting each other.
Bremmer believes that wealthier countries will either “get it right” by changing the social contract or will build walls. “Poorer, weaker countries will build walls or will fall apart.”
A solution to this bleak assessment: “The really good news is that this problem is big enough and immediate enough to solve,” unlike the more amorphous threat of climate change. “The next president will deal with this issue, as will Angela Merkel of Germany and Xi Jinping of China.
To those who scoff that there will be the political will in the U.S. to reverse the threat of populism, Bremmer recalls that during the global financial crisis, “We found out how to govern right away,” as did the developed world, with the G10 nations deciding together that to combat the crisis, “we have to stimulate.”
To sum up his remarks, Bremmer predicted that world markets would be “a little more volatile, a little more uncertain” in the years ahead. However, the silver lining is that “the risks are knowable; they’re not black swans.”