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Brexit and the Other Forces Destabilising and Reshaping the World

 

Bullets new image

Leader pic _ replaced EU demonstration

 

Has the Arab Spring come to Britain and is Europe next? Or was this the return of the House of Cards to Britain[2] enacted in the greedy and vengeful spirit of Game of Thrones? And if a country as prosperous as Britain is not “safe” from such dislocating change, why would any nation be safe from change? The results of ‘Brexit’ referendum sent shockwaves through European capitals and global markets this month. The referendum results represent an inflection point in Europe’s post-war development and a potential reversal of the 60 year old trend towards political stability and integration on the continent. Although the immediate impact of Brexit will be most felt in the UK and the European Union, it was Europe that was the instigator and key arena for two world wars and so the rest of the world has a good reason to be keenly interested. In addition, there are a number of similar events or event risks with significant global disruptive potential unfolding across the world, in America, elsewhere in Europe, in China, Russia, and the Middle East. Though it is yet unclear how each of these events will play out, these changes represent a major disruptive force for geopolitics, the world economy and markets as well as people the world over. What is clear though is that there is significant popular support for change no matter how disruptive it may be and despite the fact that the resulting disruptions have the potential to negatively impact the long-term global trajectory that many have come to take for granted. At the same time, the positive disruptions are equally profound. Energy is becoming cheaper, more abundant and on balance cleaner too. Digital connectivity has spread to nearly every corner of the world and is changing the way that people, businesses and governments interact. Armed conflicts are at an all-time low, particularly given the increasingly dense web of multi-lateral alliances and partnerships that are binding countries to one another. India’s peaceful and accelerating rise is delivering prosperity not only to its own 1.3bn citizens, but also creates the potential for an economic miracle similar to China’s in 2000, creating global upside potential. Undisturbed, these long-term trends will most likely continue to unfold for the benefit of the world. Disrupted, however, their trajectories may falter or fail entirely, with potentially significant consequences.

 

Brexit, the Arab Spring and the Emerging Lessons

The Arab Spring catalysed a domino-effect across the Middle East with economic, political and military implications that toppled governments. Thus far, it has failed to lead to a new stability, peace or prosperity in the region. However, the uprisings expressed very clearly the level of dissatisfaction the people felt with the way things were. At this level, the UK’s “Brexit” matches the defining characteristics of the Arab Spring. However, while the Arab Spring arose almost spontaneously as people demanded a voice, Britons had a voice and their politicians have fought aggressively for the voice of the public to call their name. Claims and counter-claims later, the result is that 15m people voted to continue in the EU and 17m voted to leave; a close-run thing but profound for Britain, it allies and the world at large. So, what are the implications for other nations whose leaders believe they are safe from such radical change?

The first implication is the initial force of the market reaction and the toppling of the leadership. The results of Brexit referendum surprised world markets, which were expecting (or hoping) for a ‘remain’ result based on polling results. On Friday morning, as the vote came in, the British pound fell by 8% against the Dollar, later that morning, the Japanese markets fell by 8% before trading on the Nikkei was suspended entirely. Other Asian markets were less affected with the Indian and Chinese markets falling by 2% and 1% respectively, while the Euronext 100 dropped 7% and US equities declined by 3-4%. Previous experience shows that speculative flows correct relatively quickly, but risks are reflected in global currencies for a longer period. In a move to safety, aside from its gains against sterling, the US dollar rose 2% against the Euro and 1% against the rupee. David Cameron, the British Prime Minister, resigned and the opposition leader saw dozens of resignations from his shadow cabinet and calls for his resignation too for a lack of leadership.

The second implication of Brexit shock is that the medium to longer term implications are self-evident. Isolationism and nationalism have an economic price that is not too difficult to calculate. The initial reaction of the markets has been swift and dramatic and in itself could shake the foundation of weak nations. For the UK, the market reaction was partially driven by the real economic implications of the vote; of course, some of the market reaction can be attributed to the ‘pricing-in’ effect, where markets had effectively assumed a benign result and needed to readjust quickly to a new reality. However, it is very clear that Britain, if it follows through on its exit, will need to establish new trade, tax, duty, regulatory and political constructs and at each of these junctures the markets will react again. Given there is abundant information on the different deals for those in the EU, those related to the EU (like Norway) and those outside of it (giant trading nations like the US and smaller ones like Canada, which Britain is more comparable to in terms of size), it is not too difficult to calculate the implications for the UK. The simple maths will be done quickly, which is in regard to Britain’s new cost structure under which its imports can expect to be laden with in-bound duties and taxes and its export cost-competitiveness, which will also be laden with out-bound duties and taxes. Britain is no longer the great trading power it once was (since 1946, its position in world trade has fallen from 2nd to 6th, and ranks 9th in exports) and so its trading clout is far weaker alone than as part of a trading bloc the size of the EU. Given, it takes between two years (on the Norwegian timetable) or seven years (on the Swiss timetable) to complete a free trade agreement, uncertainty itself takes a toll and acts as a deterrent for investment. Britain may well have put itself on the block; cheap prices of top British assets may well at some stage lead to a buying spree by foreign buyers, which no doubt can be painted by savvy politicians as foreign investment.

The third implication is related to the division of peoples themselves. Hate and division breed more hate and division.   Britons are now divided by their aspirations and values very clearly between mass urban centres and rural ones (70% of Londoners voted to stay and between 58% and 70% of other major cities such as Oxford, Manchester and Liverpool did too), between the North versus England and Wales (62% of Scots voted to stay in), and between the affluent and the non-affluent (50% to 58% of the voters from the three richest counties of England, Berkshire, Buckinghamshire and Oxfordshire voted to stay in versus 36% to 44% from the three poorest counties, Cornwall, Tees Valley and Durham). The extremist parties’ view is that 52% of the British people have rejected not just the EU but also the eight million people of foreign origin, another division that takes it back to its troubled race relations past.

More fundamental though, perhaps, is the clear demo- and sociographic split between the leavers and the remainers, with the latter being overwhelmingly young, educated, urban and affluent. These voters have grown up in the EU and live and work in cosmopolitan environments that they believe provide them with attractive economic opportunities. The leavers, rural, older and less affluent and educated, have already gained or paid the price for the UK’s economic policies over the past 35 years; based on their experiences, these voters do not believe that further economic integration or ongoing EU membership will actually benefit them. This gap in values and perceptions within the UK’s electorate, regardless of where it has come from, is very real and appears to be growing.

The regional implications of the vote are also important: Scotland narrowly lost its independence vote in 2014; 55% of Scots in Scotland voted to stay as part of the UK. Scotland outside of the UK was not tenable from an economic perspective given its dependence on the oil price, which has crashed since the independence movement lost the vote. However, with the UK out of the EU, Scotland – which is already a financial services hub in the UK – can adopt a Dublin style model, attracting the financial services industry and other English and EU corporations keen to be part of an English speaking EU nation. The case for Scotland’s independence has just been made by the English and Welsh. The splintering of Britain from the EU may well splinter the UK itself so it is no longer a united kingdom in terms of geography or values.

The fourth implication is that disruption spreads across boundaries. The Brexit vote was hailed by European far right parties who welcomed the results as validating their own anti-immigration and anti-EU platforms. The potential impact of another major European nation (e.g. Italy) voting to leave the EU could have a domino effect on the rest of the continent. It could galvanise populist movements across many European countries that may well demand similar referenda, including both regions with ongoing separatist ambitions such as a Catalonia as well as regions such as a Scotland and Basque country. While a number of these regions are in fact pro-EU while at the same time being pro-independence, the potential Balkanisation of Europe can only weaken the region and its institutions. A Europe consisting of self-defined nation-states, potentially even more fragmented than the map of the continent in the inter-war years, will make the region a less safe, a less prosperous and likely a less free place. Indeed, the US had to fight the Soviet Union in a 45 year Cold War to see the splintering of the USSR; Britain may have done that to the EU on its own without any rival outside of the EU lifting a finger.

Finally, it seems that one would be mistaken to jump to the conclusion that Brexit is an example of “power to the people, the people have spoken”. At face value, the British people were given ample information and time to decide and they choose to “Leave”, around i should have thought quote1.3m more wanted to leave than stay. As early as the day after the vote was counted, an alternative reality began to emerge. In this one, while there was “marketing”, “lies, damn lies and statistics”[3], on both sides of the “Remain” and “Leave” camps, as the world around Britons fell in a crash a peculiar thing happened, a stunned silence grew, there seemed nobody who wanted to press the button to leave Europe, Article 50 of the Lisbon Treaty seemed to have no one to sign it, and politicians on the Leave side seemed to look over their shoulder for somebody else to standby the promise that had been held out to the public, namely that they would have hundreds of millions to invest in jobs and the national health service arising from saved EU membership fees and saved social security payments from dispelled foreign workers and they would have their sovereignty back, no more deals. As the days unfolded, what emerged instead was the story of unbridled personal ambition and a deeply felt need for revenge as real drivers behind the two most prominent figures leading the Leave campaign and revealed the story of a battle between “elites” (there is clearly nothing elite about their motives or behaviour) where the public were merely used to realize personal ambitions. In this story, the press were galvanised (some of the press also emerged as those doing the galvanising), issues of sovereignty and immigration were used to stoke fear and pride, experts were discredited and “the truth” made too difficult to decipher. House of Cards has returned to Britain. In the next season of this series, under this emerging reality,th epowerful quote the new leadership team in the UK, likely but not necessarily drawn from the Leave campaign, have the difficult task of deciding whether they now follow through on something that they do not sincerely believe benefits the country or engineer a different outcome. The risk of not following through is so great – rioting in the generally peaceful streets of Britain – that there will likely be some follow through. The likely real question for the power players will be what is the follow through that does not bring on the economic and political isolation, nationalism and division but still leaves the victorious in power? This does not sound at all like the people’s Arab Spring, more like Game of Thrones, where the losers are many but certainly always the people.

 

The Major Forces Destabilising the World Order

Leaving aside the analysis of how Britain got to its Brexit conclusion, there is no doubt that there are fundamental unaddressed issues dormant and seething in major countries in the world. These issues are so important that the aggrieved are prepared to endure even greater suffering rather than leave these issues unexpressed. In the Middle East’s Arab Springs this has meant that the aggrieved have been killed in large numbers and been prepared to throw their nations into civil wars and when it has become unbearable they have risked their lives to make their way to other nations to find peace, prosperity and freedom. In the developing nations, the public took to the streets to protest against election rigging in the Ukraine, corruption in China, and terrorist attack in Mumbai, India. In the richer nations, it has meant that the rich have protested relatively peacefully; people gathered, waved and sometimes shouted against Wall Street in the US and nuclear power in Japan. The UK is the first rich nation to vote to actually make a radical move and break from its allies of over 70 years and risk the world order that it helped create.

The anxieties underlying the leavers in Britains’ vote to exit include immigration, sovereignty, opportunity, participation and a mistrust of the establishment[4]. Anxiety and insecurity make for a catalyst for change the world over and so the risk of similar disruptive events is real for the world at large. In America, the rise of Donald Trump under an ostensibly, anti-immigrant, isolationist-nationalist and anti-free trade platform reflects the growing backlash against globalisation, even in America, which arguably has been one of the greatest beneficiaries of free trade through its overwhelming influence over the WTO, its multinational corporations and its security and intelligence networks. In Europe, there are similar nativist political movements gaining strength, the Front National in France, PEGIDA in Germany and PVV in the Netherlands. In China, the government faces growing public anxiety over pollution, falling opportunities to move to the cities, corruption and the entitlements of the privileged class. In the Middle East, unsuccessful people’s revolutions have opened the door to terrorist movements such as ISIS to gain local patronage, territory, spread their message across borders and secure financial backing. Russia, following its collapse in 1989, has faced growing disaffection and turned that into mass public support despite a struggling economy through a resurged nationalism on the back of its military interventions in Georgia, Ukraine and Syria. Although the root causes vary between nations, the willingness of people to act on their issues is a clear force for change, whether manipulated by the privileged class or a spontaneous act of hope, the stage is set for disruptive change.

 

Some of the key disruptive changes include:

I. Brexit and the Collapse of the EU

a. What Could Happen? With the UK voting to leave the EU and the resignation of Prime Minister David Cameron, the stage is now set for the UK to invoke Article 50 of the Lisbon Treaty and for a painful process of exit negotiations with Brussels which will touch on critical topics like trade and investment agreements, visas and work permits, regulation and law and defence and security. At the same time, factions in other large European countries including France and Spain (some of which have polls indicating a majority support for leaving the EU) have been emboldened by the results and are likely to increase calls for similar referenda in some of those countries, which if they offer a similar result, could lead to a collapse of the EU or the formation of a smaller EU.

b. Key Evident Risks. Brexit will likely have adverse economic consequences for both the UK and EU economies, in particular for industries such as pharmaceuticals and financial services, which benefit tremendously from the EU common economic area. In the longer-term, the bigger economic issue will be Europe’s ageing population and any restrictions on the free mobility of labour will inhibit various countries’ abilities to mitigate the impact. The IMF predicts that the UK economy could shrink by upto 9%. Following the results, global financial markets have started to price in the downside (reflected in the sharp correction in European banking stocks) and also a period of uncertainty due to the potential knock-on effect of the vote on other European countries and a potential accelerated collapse of the EU and Euro.

c. Alternative Scenario. The alternative end game, which would require masterful maneuvering and communication, is one where the new UK prime minister returns with a “new deal” that allows the UK prime minister to declare it has left the old EU and joined a new EU. This implies a compromise by the EU affecting all its members in a bid to stop its disintegration. The threat is certainly now at a level for such a compromise to be met. However, as one famous quote from Hollywood reminded us, “Some people just want to see the world burn.”[5].

 

II. The Rise of Donald Trump

a. What Could Happen? Donald Trump has upended all expectations of the US presidential election and captured the Republican nomination on the back of a platform which at various times has advocated US isolationism and nationalism, trade wars, anti-immigration policies and military policies which stoke the fear in a significant portion of Americans who feel economically excluded from the national prosperity and America’s huge benefits from trade and globalisation. His promise of a new America built on isolationism-nationalism and a more predatory approach to negotiations with other nations (which by definition are in a weaker position) creates a new America, one which the world has not seen before and is unlikely to want to work with. His presumptive opponent, Hillary Clinton, though apparently ahead in the polls, continues to be deeply unpopular in some quarters due to her association with the ‘Washington establishment’ and the baggage of several ‘scandals’, giving rise to the continued possibility of a Trump presidency

b. Key Risks. It is difficult to predict what a Trump presidency would actually mean from a policy perspective given the frequency of his shifts on any given position (see our Sign leader from May 2016, titled The Trump Doctrine and the Future of American Power). However, over time and through the rhetoric, what emerges are a clear preference towards isolationist nationalism and anti-immigration policies which would decrease global stability and prosperity too, in America and elsewhere.

c. Alternative Scenario. The core alternative scenario, Donald Trump losing the election and sinking into ignominy, is relatively clear. What is less clear is what America under Hilary Clinton would look like, while the US would then not tear up the world order that its leaders have spent a century constructing it is less clear whether President Hilary Clinton will be able to reunify America let alone address the underlying issues that gave rise to the Trump candidacy in the first place. Similarly, the Republican Party will face the steep challenge of reinventing itself in the face of an American population whose demographics and needs have shifted considerably over the past decades.

 

III. The Rise of Independent Agents of Terror

a. What Could Happen? Al Qaeda redefined the role of terror through a single act of terror on US soil by drawing the US into an attack on two sovereign nations and inspired a generation of terrorists with the idea that one does not have to be a nation state to wage a war or draw a nation into a war. The Islamic State (ISIS, ISIL or Da’esh), has inherited the mantle, and taken this to another level in its bid to takeover a sovereign state. It has made gradual advances in the wake of the Iraq and Syria conflicts to claim a swathe of territory in the volatile Middle East and also claim the minds of disaffected Muslims in cities across the world. Although the international coalition to battle ISIS appears to be making advances, the group’s bigger impact is being felt through a series of terror attacks on “soft” targets in the west (most recently seen in Paris). ISIS’s continued expansion continues to be a highly disruptive force in an already unstable geopolitical region and a force for instability in cities around the world, for now, predominantly in the west.

b. Key Risks. Sporadic acts of terror have strengthened the political voices in favour of division and against immigration in the targeted countries. In addition, because they foment instability in the resource-rich Middle East, they provide a counterweight to falling energy prices. Terror havens such as the ISIS territory today also have the potential to become a theatre for a proxy war between the world powers who intervene and can lead to an escalating conflict; when a Russian fighter jet was shot down by Turkish forces on the Turkey-Syria border the ramifications were potentially catastrophic. The prospect of increased low-level terror attacks perpetrated by ‘lone wolfs’ also increases risk.

c. Alternative Reality. In a best care scenario, in the context of continuing military defeat and the presence of viable alternative to Islamist extremism for the region’s disaffected, ISIS would increasingly lose its influence among the sub-set of Muslims where it has gained traction. The group’s territorial loss in the past one year has substantially undermined ISIS as a ruling regime, and has weakened is capabilities as a fighting force in the region too. However, for the region to fully reclaim ground from terrorists and create lasting stability, it will need to transform both ISIS members and the numerous militia factions fighting them into participants of a modern and inclusive political system, an endeavour that to date has largely failed in the Middle East.

 

IV. China’s Bubble

a. What Could Happen? China’s modern day stability has been built on the unwritten deal of delivering prosperity in return for the continuation of the power of the communist party. China’s leadership has delivered on the promise by taking nearly 700 million people out of poverty. However, with the recent collapse of the stock market, the GDP and the currency and a two year drive to root out corruption from every level of government, the deal has been more and more difficult to deliver on. Also, with total debt standing at US$24 trillion or 260% of GDP, China is facing a debt bubble of unprecedented scale. This has triggered a real asset price bubble, overcapacity across capital-intensive industries and capital flight. With Beijing struggling to address the issue, China faces the risk of its debt bubble bursting, driving sustained deleveraging which could grind the country’s economic growth to a halt entirely for some time as the economy restructures, and in turn unsettling the China story itself.

b. Key Risks: A low to no growth China represents much more than just an economic risk. The Chinese communist party’s own legitimacy lies in its ability to deliver prosperity to the country and a sustained slowdown would significantly increase civil unrest, in turn triggering increasingly severe government crackdowns in a spiral of repression. Further, China’s government may well be tempted to distract from domestic issues by promoting increased nationalism and regional expansion, flexing its political and military muscles in a manner that significantly destabilises the Asia-Pacific region.

c. Alternative Reality. In an upside case scenario, China would be able to maintain over 6% reported GDP growth without resorting to further credit expansion. This would imply that China undertakes bold economic and industrial reforms deleveraging SOEs, empowering private enterprises and eliminating corruption on a massive scale; the trends are in exact opposition to these factors at the moment. Further, over the medium term the transition to a services/knowledge economy will require increased openness, more transparent politics and better access to information for consumers, entrepreneurs and citizens generally; the trend is also in the opposite direction for now.

 

V. Russia’s Adventurism

a. What Could Happen? The collapse of the Soviet Union is seen by President Putin and his team as the “greatest tragedy to befall the world” (or at least to befall Russia). The damage done by the victors of the Cold War to the Russian people’s self-image, self-respect and national psyche has been underestimated and the restoration of that psyche is an expensive affair for the rest of the world. Under President Putin, Russia has become increasingly aggressive overseas and has clamped down on dissidence at home. Rather than a direct military conflict with the western powers, which Russia can ill afford, this has manifested in Russian interventions in overseas conflicts such as in Ukraine where it is directly opposed to western interests, and Syria where it is fighting towards a different purpose altogether (supporting Bashar al-Assad rather than combating ISIS).

b. Key Risks. While the West under the Obama Administration has not escalated the Russian military interventions into a military conflict, they have also not yet determined how to stop Russia. As the world’s third largest energy producer and largest net exporter, Russia also has the ability to disrupt global energy flows both directly by using its own production as strategic leverage, and indirectly by contributing to instability in the Middle East. Given that its economic growth and wealth is closely tied to energy prices, Russia has a big incentive to do what it can do to drive up energy prices. Russia’s role in various global conflicts, particularly where it fighting at cross purposes to the US and European powers also creates a heightened risk of an escalation into a more global conflict.

c. Alternative Reality. Economic sanctions and encirclement in the past have only served to embolden Mr. Putin. In a best case scenario Russia would also be able to avoid a violent regime change, the country will have its next presidential election in 2018 and Mr. Putin has at least hinted that his running for a fourth term is not a certainty. It is hopeful that his successor, for the purpose of a smooth transition (and successful presidency), will choose to pull back on Russia’s regional adventurism. The sanctions on Russia following the Ukraine crisis have clearly spelled out the importance of strong economic and political relations with the West but these have not been well heeded to date. However, Mr. Putin’s successor has the potential to reap an immediate economic and political benefit by mending ties with the West and lifting sanctions, rather than continuing down the path established by Mr Putin.

 

The sum total of these disruptions is a disunited Europe, an America focused on its own interest and so increasingly resented, a Russia still not accepted in the world as a positive force, a distressed China struggling to rise to the next level and a number of violent groups exploiting the disenfranchised. These conditions are not too dissimilar to those the world found itself in prior to embarking on the Second World War.

If we dig deeper, although each of these risks are distinct and unique, there are a number of recurring themes driving or influencing them. The most obvious one is that a number of them are driven directly by populism and therefore enjoy increasing public support, sometimes in the face of evidentially “rational’ facts. While globalisation has driven surging global prosperity overall, it has divided its spoils unevenly and this has created discontent. This is a big driving force behind both the right-wing nativist movements which politicians like Donald Trump and Marine le Pen as well as left-wing movements driven by an opposition to free trade and lower regulatory barriers driven by most evidently Bernie Sanders’. While these movements may be diametrically opposed in terms of their ideological inspiration, their diagnosis can often be similar, namely the belief that the ‘system’ is not working, accruing benefits to a small minority at the expense of the majority. This point of view is also unfolding on a larger scale in the rest of the world, where entire countries feel that globalisation is not working in their favour and the system is rigged to exploit them and keep them poor despite the global trend to increasing prosperity. This deeply held suspicion underlies the historic resistance of India to open to foreign direct investment, the rise in President Putin’s popularity as a strongman protecting the country from international enemies and ISIS’s popularity in projecting the west and its allies in the Middle East as a threat to the “true” spirit of Islam. Interestingly, at the centre of three of the disruptions is an authoritarian figure, Donald Trump, President Putin and President Xi, not all sharing the same values but all wielding (or seeking to wield) great power. These figures offer strength in times of uncertainty, and the promise of protection against exploitation by others. What is clear is that unchecked, the the voices of hate quotediscontented or disenfranchised have the potential to alter the global trajectory of growth and prosperity and not necessarily see any benefit come back to them, as  Brexit voters are quickly discovering. People turn to radical solutions at times where they feel so exploited. Communism was one solution that arose in times like these and as the 20th century shows, it was one of the biggest excuses in human history to kill one’s fellow man, even exceeding colonialism; estimates place deaths from communism as high as 130 million people[6]. The voices of hate, division, isolationism-nationalism and predatory behaviour seem very able in these times to override the softer, more peaceful voice of reason, compassion and co-existence. It tells us that the latter need to improve their proposition or face irrelevance. It would be too simplistic and intellectually lazy to assert that globalisation is to blame for the lack of opportunity and prosperity of large swathes of the public. In the UK, the Margaret Thatcher government dismantled the industrial base across much of the midlands and created large structural unemployment. In the US, the much-lauded national mobility of American labour also left behind large sections of the population with structural unemployment and the US approach to social security and healthcare has left behind even more. The reasons for popular disaffection are often deeply rooted in national political and cultural history and characteristics. However, what is clear is that there is an absence of leadership and vision as to how to solve these issues either at a nation state or a global level.

 

The Major Forces Creating New Platforms of Prosperity

Despite the shortcomings of many national governments, globalisation and integration to date, the long term global outlook remains highly favourable.   Although there are clearly major risks and uncertainties to the existing world economic and political order from the disruptive factors explored briefly above, there are also many catalysts for positive disruptive change. These have the potential to bring a new generation of hundreds of millions out of poverty and revolutionise the quality of lives for human beings across the planet. These breakthroughs span new models of developing whole nations, new energy sources, new technologies to lift human education and performance and a general striving to avoid deadly conflict.

Most importantly, contrary to the day-to-day headlines, which seem to indicate an increasingly unpredictable and violent world order, we are now living in one of the most peaceful eras in human history measured in terms of actual war-related deaths and casualties. Simply put, the likelihood of dying or being injured in an armed conflict is lower than it has been at any other point in history. This is, in part driven by the post-Cold War order, which saw countries establish strong multilateral frameworks such as the United Nations, the IMF and World Bank to govern their interactions. While some of these institutions have compromised their effectiveness and legitimacy by failing to adapt quickly enough, they have not stopped countries from striking bilateral and regional multi-lateral deals on trade, investment and military cooperation in order to grow their economies and protect their sovereignty.

 

The key forces with the potential to put the world on course for a more peaceful, prosperous and freer future include:

I. The Energy Revolution

a. What is Happening? Oil prices have declined by approximately 70% since June 2014 driven by a combination of increased supply – with the United States having nearly doubled its domestic production on the back of the shale gas revolution – and weaker demand due to a slowdown in China and Europe, and more energy efficient vehicles and delivery systems. At the same time, production of renewable energy has grown rapidly increasing to 12% share of total energy production, driven by declining costs of wind and solar installations, which have grown at 26% and 17% in 2015 alone[7].

b. Long-Term Potential. The decline in oil prices and the investment and growth in renewables and energy efficiency systems has the potential to not only supply the energy necessary to power rapid growth in output, but also to materially alter world geopolitics by making energy importers less dependent on volatile producing regions like the Middle East, while doing so in a manner where the impact on the environment is mitigated to the greatest extent possible. Rather than scrambling for scarce energy resources, the world economy is moving to a structure where conventional energy reserves are plentiful, and nations have the ability to chart their own course by developing production of both conventional and renewable energy. The big shift comes, of course, when the ingenuity of man creates a near free, abundant and clean energy source.

 

II. Evolution and Revolution of the Internet

a. What is Happening? There are currently 3.4 billion internet users in the world today, up from 2.0 billion five years ago, with the majority of incremental users from emerging markets in Asia, Africa and elsewhere. This has been enabled by the proliferation of low-cost smartphones and the spread of high-speed data networks (both wireless and fiber) and has helped drive a wave of consumer empowerment and disruption across a number of sectors from traditional retail, transport, health and education.   When combined with the rapid growth in other connected devices into the ‘Internet of Things’, the transition to an information powered global economy appears to be well underway.

b. Long-Term Potential. The world is at the early stages of a technology revolution which has already seen old industrial companies overtake by tech businesses, first wave digital businesses become irrelevant replaced by new internet giants that have grown overnight and information spread the world over to inspire the Arab Spring and extend disruption to the world. We still a long way away from these technologies achieving their full potential with the ‘Internet of Things’ market expected to reach US$1.7 trillion by 2020[8], vs. a total IT industry of US$3.5 trillion today[9]. The increased connectivity will change business models, increase efficiency and lower transaction costs and the analysis of the massive volume of data which is generated as a result will spawn whole new industries. This promises fundamental changes to individual behaviour, the nature of work, structural employment, winning and losing industries, the relative strength of nations and how the global economic system functions. These changes portend substantial dislocation and in short duration waves before the world settles to a “new normal”. Leadership rather than blame will be required to help old practices die and new ones to be born if peoples are to maximise the benefits for the minimum transition cost.

 

III. The Rise of Successive Developing Nations, India Next

a. What is Happening? Developing nations are increasingly closing what was long perceived as an unbridgeable gap to the developed world. China’s economy has gone from outside of the top 10 in 1990 to the world’s second largest in 20 years. With China’s growth now slowing, India has emerged as the fastest growing major economy in the world and the most favoured foreign investment destination, attracting a record US$55billion of FDI in 2015. Despite a general deceleration in global GDP growth, India has successfully accelerated its economy to from c.5% GDP growth in 2012 to 7.5% driven by an energised government which has systematically implemented key reforms, a revival in foreign investment and a benign energy and commodity price environment. China’s development has set an example that India and others will follow to increase their own prosperity, hoping to capitalise on a globally connected world for trade and investment in particular.

b. Long-Term Potential. With strong underlying fundamentals including a favourable demographic profile, large reserves of natural resources such as coal and arable land, and strong and stable institutions, India has the potential to sustain a growth rate of 8% (or higher) for the next one or two decades[10]. At this rate, the Indian economy will double in size every five years, become the third largest economy by 2020-2025, and effectively replace China as the engine of incremental global supply and demand. This process will involve significant structural investment and including the buildout of world-class infrastructure and manufacturing base, the education and training or large numbers of young Indians, and a growing integration with other major economies from a trade and investment perspective. India is set to be the next growth engine and its success makes China’s growth not a miracle but an example for many developing nations to follow.

 

IV. The End of Poverty and Illiteracy

a. What is Happening? Poverty and illiteracy are two of the greatest debilitating burdens holding back large segments of the developing world. However, both have been retreating at an increasingly accelerating pace: The percentage of the global population in poverty (defined as living on US$1.90/day or less in 2011 PPP dollars) has decreased from 29.1% in 1999 to under 10% in 2015.[11] Further, the full eradication of poverty by 2030, one of the United Nations’ key Millennium Development Goals, appears to be on track. In a similar fashion, illiteracy is also on the decline. Global literacy has grown from 56% in 1980 to 83% in 2010, with youth literacy (15-24 year olds) at almost 90%.[12] The depth of literacy has yet to be improved and the same is true of the prosperity of the poorest. Both of these trends have been driven by globalisation, the accompanying international investment allocation beyond the West, national economic growth – among leading growth nations, China has played an important role – and the spread of medicines, education and information.

b. Long-Term Potential. The full eradication of poverty appears to be in view while the growth in literacy in developing countries points to the longer-term potential for global literacy over time. For both of these burdens however, the ‘last mile’ may well be the hardest, requiring significant investment in the world’s most remote and backward regions, failed and failing states and conflict zones. Further, the eradication of poverty assumes a worst case scenario of flat global growth. Countries will need to ensure that they have institutions that can weather recessions and provide the social safety nets required to keep people out of poverty even in economic downturns. Over the long term, the definition of poverty is both relative and absolute. Having eradicated an (arbitrarily defined) absolute level of poverty in the world, leaders will still be faced with the problem of relative poverty, potentially exacerbated by the ongoing growth in income inequality, as the next challenge to address.

 

V. Rise of Peaceful Conflict

a. What is Happening? While the day-to-day newsflow continues to highlight the instances of violent conflict globally, data on armed conflict[13] clearly indicates that we are living in an era of unprecedented peace. The number of conflicts[14], the intensity of conflicts (measured by number of deaths and casualties in a period[15]) are near or at all-time lows[16]. With regards to armed conflicts between state actors, the current US administration and its EU allies have helped set the tone of using means other than arms to penalise transgressions by third countries. Further, a number of structural changes including the growth of open information, increased connectivity between peoples, economic integration and the spread of democracy[17], or at least improved governance, throughout the world have also supported the general reduction in violent death. Importantly, it is not just war which is rarer today; genocide and violent crime generally – including homicide, rape[18], child trafficking – are also at an all-time low.

b. Long-Term Potential. The reduction in armed conflict and violence generally has in large part been driven by the spread of democracy and capitalism across the world since the collapse of the Soviet Union in 1991, which have made the costs of conflict prohibitively high for most nations. Even countries such as Russia and China which have not yet created a democratic political structure are nowhere near as repressive as their earlier regimes (Stalin and Mao). The spread of political and economic freedom of course may not continue unabated (particularly if some of the risks noted earlier are actualised) but there are no major risks yet that this is a development, which can be easily reversed. However, a relatively peaceful world order is likely to persist over the long-term, even as hyper-communication connectivity will seemingly indicate a rising prevalence of violence. The biggest threat to this peace seems the rise of separatist movements within blocs like the EU, the “our nation first” parties in various nations from the US to China and the rise of authoritarian figures in major political blocs, as highlighted earlier in this paper.

 

These breakthroughs havethere are a number of quote the chance to enhance the human condition and address many of the issues facing those people disenfranchised by the world’s progress. The ability to galvanise these potent forces for positive change are also an important part of delivering solutions to the world. Such advances do not prosper under hate and division and nor do they prosper well under authoritarian regimes. Indeed, these positive forces for change are born from innovation, diversity and risk taking. The chances of creating a world where these things are firstly created but then go on to change the lives of ordinary people for the better require open, inclusive and compassionate regimes and are fundamentally at odds with the approach of some of the disruptive privileged class.

 

Conclusions

The Brexit vote has without a doubt increased the likelihood of continued economic pain in Europe, and more broadly, is the biggest blow since the global financial crisis to the project of European integration and expansion and perhaps of the notion of an integrated world where participants work together to solve important human issues and correct the mistakes of history.   Even for many of the EU’s supporters, Brexit provides cause for pause to consider the preferred limits of integration; at some point integration and expansion leads to dis-benefits and diseconomies of scale. With the right leadership, this can reach a balance of integration and individuality.

However, the forces for division need not necessarily triumph everywhere. Millions of people have been liberated through the spread of the internet and the decline in energy prices. China’s drive for prosperity set a new and high bar but also showed that it was possible and so set the scene for Indians to demand the same of their politicians. Many poorer nations will follow. With the spread of ideas and the calls for freedom and opportunity has come huge disruption but this has also moved the world inexorably towards less, not more, armed conflict. In many ways, it has never been a better time to be alive. However, with social media and a 24-7 news cycle, what is most visible to us of course are the conflicts and the challenges. The shock for 48% of the British population that voted to stay with their World War II allies and find solutions to their grievances serves to remind us that even the positive trends can be undone if the risks are not managed.

Fundamentally, the Brexit referendum results represent a breakdown in leadership, and the devolution of such an important vote itself was evidence of this breakdown.  However, the deeper flaw is the failure to understand let alone address the most important issues of the British people.  The people’s discomfort with the level of immigration, the paucity of jobs in large parts of the country, the fall in quality of public services, the perceived lack of sovereignty and a host of other issues was not something that the establishment empathised with.  It is clear that other establishment figures were able to cast themselves as non-establishment figures and capitalise on this sentiment.  Where the socialist might see “social justice”, this story looks more like a game played by so-called elites against each other for the prize of power and sometimes just of vengeance.  What has also become clear in the aftermath of the Brexit vote is that the members of the privileged class that hitched their wagons to popular discontent do not in fact have viable alternatives to offer.  Leaders from the leave camp have already started backtracking on their campaign promises and Boris Johnson has, for now, ruled himself out of the race to lead the Conservative Party following the prime minister’s resignation after the vote.  What is clear is that the establishment clearly failed the people and this is a worldwide phenomenon.  This is the void in which hate, populism and authoritarianism can flourish, rarely with positive long-term results.  With it comes the risk that the people reject the world order that got the world this far in favour of something that is far inferior.  However, if the establishment refuse to listen, then what choice will they have?

 

 Brexit | United Kingdom | EU | India | China | United States | Donald Trump | Russia | Elections | Referendum

2. The highly acclaimed US political series is based on an older British one
3. Phrase attributed to Mark Twain, “Chapters from My Autobiography”
4. Source: Pew research study
5. Source: The Dark Knight, Warner Brothers Pictures
6. Democide: The murder of any person or people by a government, including genocide, politicide and mass murder Professor RJ Rummell
7. Source: International Renewable Energy Agency (IRENA), Renewable Capacity Statistics 2016
8. Source: IDC, Worldwide Internet of Things Forecast 2015-2020
9. Source: Gartner Research, April 2016
10. The IMF’s latest economic forecasts indicates that the Indian economy will grow at 7.5-8.0% until 2020
11. Source: World Bank
12. Source: UNICEF
13. Source: Max Roser, Human Security Report Project
14. Sources: Uppsala Data Conflict Project; Peace Research Institute of Oslo
15. Sources: Uppsala Conflict Data Project Program; Peace Research Institute of Oslo; US Census Bureau
16. Source: Dept of Peace and Conflict Research, US Census Bureau
17. Source: Center for Systemic Peace Democracy and Autocracy
18. Source: Bureau of Justice Statistics