Ian Bremmer on Politics, Emerging Markets, and the Future of Capitalism
by Richard F. Stolz
Who: Ian Bremmer
What: Founder of the Eurasia Group and keynote speaker at FPA Denver 2010
What’s on his mind: We’re seeing a rise of … a new type of economic system. … The fundamental thing that has changed is the nature of the actors influencing the global economy. … Emerging markets … have an entirely different way of thinking about the world and about the role of the state in an economy, because of the nature of their political systems, the relative immaturity of their institutions, and the sort of growth they can achieve with the types of economic systems they have.
Before the modern discipline of economics began to flourish, people who attempted to understand and explain “the nature and causes of the wealth of nations” (to borrow from the title of Adam Smith’s 1776 treatise) explored what was then known as “political economy.” Ian Bremmer, keynote speaker at the upcoming FPA Denver 2010 in October, calls himself a political scientist. Indeed, he earned a Ph.D. in that field from Stanford University at the age of 24, in 1994. (He was also the youngest-ever national fellow at Stanford’s Hoover Institution on War, Revolution, and Peace.) But Bremmer’s professional focus, not unlike Adam Smith’s, has been at the intersection of politics and “pure” economics.
Last year, he and coauthor Preston Peat published The Fat Tail: The Power of Political Knowledge for Strategic Investing. The book explains why politics matters to companies and investors dealing internationally—and how inherent political risk can be mitigated.
Helping corporations, financial institutions, and governments address political risk and its economic implications is what Bremmer set out to do in 1998 when, on a shoestring budget, he launched the Eurasia Group. Today, the firm is a top global political risk research and consulting organization with offices in New York, Washington, D.C., and London, and a network of agents around the globe. The Eurasia Group also, in a partnership with Citi Global Wealth Management, produces the Global Political Risk Index, a comparative political and economic benchmark designed to measure stability in emerging markets.
When he’s not running that firm and working with clients, Bremmer finds time to teach at Columbia University and write books. His latest title, published this year, is The End of the Free Market: Who Wins the War Between States and Corporations? In it, Bremmer describes “state capitalism,” as epitomized by the set of policies and business ownership structures of the government of China. This system, Bremmer argues, poses an enormous challenge to traditional free-market developed economies like that of the United States.
What does viewing the world’s choppy economic waters through the lens of a risk management-oriented political scientist suggest about the financial future that planners are trying to help their clients navigate? Bremmer says while we are headed for some very challenging times because of such issues as terrorism, nuclear proliferation, and climate change, he remains optimistic. Instead of merely looking at the glass as half full, “I’m simply amazed that there is any water in the glass at all,” he says.
For some of his latest insights and a preview of FPA Denver’s keynote address, the Journal recently posed the following questions to Bremmer. His responses to three additional questions are available as a podcast at www.FPAjournal.org/home/podcastpage.
Is the recession that began in 2008 just part of a standard economic cycle, albeit more acute than most, or something fundamentally different?
I think something fundamental has changed. The financial crisis wasn’t a global financial crisis. It was a financial crisis primarily for the developed, free-market states. We’re seeing a rise of state-driven capitalism, a new type of economic system.
I’m a political scientist. For me, the fundamental thing that has changed is the nature of the actors influencing the global economy. The change was acknowledged in 2008 when membership in the G8—the traditional developed economies plus Russia—was expanded to include China, India, Mexico, South Africa, Brazil, and others. These new countries that have come to the table are emerging markets. They have an entirely different way of thinking about the world and about the role of the state in an economy, because of the nature of their political systems, the relative immaturity of their institutions, and the sort of growth they can achieve with the types of economic systems they have.
What does that mean for financial planners operating on the front lines with their clients in crafting investment strategies—what sort of message will you be bringing as a keynote speaker at FPA Denver 2010 in October?
They can expect much greater financial and economic volatility. That “event risk” will have much greater impact than any of your baseline investment scenarios might suggest, because we have a growing vacuum of global governance. Global challenges are going to continue to pick up, and we are going to have a harder time trying to resolve them effectively. We saw that with Copenhagen and the climate change summit. We’re seeing it with Iran and nuclear proliferation. We see it with Doha and the breakdown of an agenda for a free trade agreement. We’re going to see it in a whole bunch of areas, which is going to prove a very big challenge—particularly because the bulk of the world’s future economic growth is going to come from emerging markets that are more opaque and volatile than the developed states.
Where do you see financial regulatory reform in the U.S. headed? Will it have any effect on investment markets in the near term?
Later this year, Congress is going to pass the largest financial regulatory overhaul since the Great Depression, and it’s not a question of whether it will have a significant impact on the financial services industry but of just how big that impact will be. The new rules will matter for everything from large financial institutions to derivatives to the creation of new and stronger consumer and investment protection plans. The markets’ response to all this will be big, but it will likely be gradual. As the new rules become clearer and then go into full effect, markets will begin to “price in” the changes. The financial services industry will have to learn to live with higher transaction and disclosure costs, and with some restrictions on how they currently operate. As the effects of the new regulations become clearer, many institutions may begin to think about changing the fundamentals of how they do business. We also have to remember that this year’s reforms won’t be the last word and that some of the uncertainty will continue. Congress and the White House will be tweaking the new framework for the next two or three years.
Could you identify a few countries that you believe have a promising future economically over the next decade?
China has one of the brightest futures economically, but that does not mean that Westerners will benefit from it. I do think there will be greater tensions between China and the West, especially trade frictions. But I feel comfortable that the combination of social stability, politically directed growth, and the ability to bring more economic capacity out of internal development in China will be very compelling over the next 5 to 10 years. India, which is starting to invest in its infrastructure—as the Chinese did in the 1970s and 1980s—is going to become stronger and stronger because it’s politically stable. Indonesia and Australia are both, geographically, able to take advantage of the Chinese growth. They are both commodity plays. They both have political stability. Then I think Brazil, which has a combination of great political stability and fantastic resources, will be strong.
I also like Canada and the U.S. The United States is the most resilient of the big developed states. People do asset allocations on the basis of developed markets. Europe and Japan are in parlous condition. The United States has the world’s biggest economy. It’s resource-rich. It has favorable demographics. Its governance is dramatically better than what you see in Europe and Japan. Maybe those aren’t the best baseline comparisons, but those are the comparisons people make. So, as a consequence, the U.S. will continue to do well, as will Canada.
What about countries that may appear to be doing well, but are more vulnerable than is generally understood?
There are countries that had been doing well as emerging markets, but where the political stability is not that great. They’ve already been pummeled economically, yet there is still a lot of downside. Those include Thailand and Turkey. Russia is a great commodities play, but there’s a lot of opacity around it. It’s not a country ruled by a broad political consensus. It’s a few very powerful guys, so there’s a lot of potential volatility there. And though most people aren’t excited about Japan, it’s actually worse than people think. Its governance right now is just disastrous.
Where does Europe fit into this picture?
The eurozone is not going to fall apart. The stronger EU members are not going to leave the euro. It’s too dangerous for them. Even if the German people want to get the heck out, there are too many vested interests in Germany that would oppose that. But assuming the euro stays together, that doesn’t mean we won’t see sovereign defaults. We may well. It’s not at all clear that Greece will be able to deal with the 10 percent contraction that will be required to get through its own bailout. And while the situation in Spain isn’t as bad as in Greece, tough choices are coming. And the ability of the Europeans to respond to that in a coordinated way, I believe, is going to be very limited. As a consequence, I think Europe is absolutely not out of its troubles, and it is absolutely possible that we could see a restructuring of some European sovereign debt going forward. The size of the Greek bailout has made markets realize that anything is possible now. So while I don’t see a collapse of the euro, what could happen is very, very damaging and could have effects in other markets.
How much “political risk” is there in the U.S. itself, from an investment perspective?
With 9.9 percent official unemployment [May 2010] and real unemployment around 17 percent, there will be a strong populist reaction against free trade and immigration and support for protectionism. You already see that in the legislation in Arizona. And nobody believes that employment will pick up strongly any time soon. That will clearly impede our ability to set a sound course for rebuilding the economy. Add to that, there is also event risk. Thank God somebody spotted that smoking car in Times Square last April. If it had blown up, there would be a very different political debate and agenda in the run-up to mid-term congressional elections in November. Clearly, that would have had an impact on America’s ability to focus on the domestic economy.
Obama has been very fortunate. He has had the political space to focus on the domestic agenda so far. He has not had foreign policy crises to deal with. But it’s not likely that will continue for years. Having said that, we need to recognize that the United States has better governance than any of the other developed economies, and that does play to the general strength of, and a positive outlook for, the U.S. economy. As for 2012, like him or not, people should bet on Obama. He was strong enough to get healthcare reform legislation through. There will likely still be a Democratic majority in Congress after the mid-term elections this year, even if the Democrats take a hit. The Republicans are in disarray. Incumbency matters, and Obama’s election team is fiercely competitive.
Will the dollar remain the world’s reserve currency for the foreseeable future?
Yes, because there are no viable alternatives. You can only go so far with gold. In theory, the best alternatives are the euro and the Japanese yen—but give me a break. They look much worse. As a consequence, the dollar looks good. Plus the United States is also the one major economy that, come next year, is in a position to have a meaningful discussion about its budget deficit in a way that will dominate its political agenda. That’s what Obama is doing with the bipartisan fiscal deficit commission, which is going to come out with recommendations right after the elections. Some of them will be politically unfeasible, like probably a value-added tax. But clearly, the only reason the Obama administration is doing this is because they want the deficit and the national debt to be on the agenda. I don’t see this discussion happening in Europe, because of a lack of coordination and the huge problems they are having internally now. And I don’t see that happening now in Japan because the DPJ party is very vulnerable and can’t set such a politically difficult agenda. All of that is likely to make the dollar stronger. There will be lots of folks looking to diversify away from the dollar, but they won’t have the option. So the dollar still looks good.
How do you watch for developments that are off the radar screen—and do you see any countries at risk of blowing up?
One of the reasons our firm has been successful is that you have a lot of smart economists and strategists working on Wall Street, but you don’t have political scientists who focus on the political risks that really matter to markets. I’d like to believe that having our kind of research expertise does make a difference. It’s not a question of CIA-style political intelligence, because in a globalized world, all the data you need is available. The problem is with information overload—knowing which pieces of information matter and knowing how to read them.
One situation I’m worried about now is North Korea. They’ve had some difficult internal situations with currency reform. Earlier this year, they executed their finance minister. They apologized to their people for the state of their economy. That’s unheard of in North Korea. And then, all of a sudden, a South Korean ship is sunk. The South Korean financial markets haven’t been affected by those events yet, but I’m worried about that. These kinds of situations don’t make headlines until something sudden and dramatic happens, but this is one that we should be concerned about now.
And what are your clients most worried about?
In the near term, they’re most worried about Europe, the possibility of European contagion, and the sustainability of the euro. In the longer term, they are worried about China and U.S.-China relations, and they worry about whether they’ll be able to do business effectively in China, and the relative incompatibility of the U.S. and Chinese business models, given the friction between free-market and state-driven capitalism. They’re concerned about the ultimate economic strength of China and whether it will be possible for them to do business there. They’re concerned about cyber-security, in terms of their exposure to China. And they’re worried about the changing regulatory and tax environment in the U.S.
Richard F. Stolz is a financial writer and publishing consultant based in Rockville, Maryland.
Talking Point
A New World Order
Ian Bremmer believes the emergence of emerging market countries as economic powerhouses—particularly China—poses a significant challenge to the market economies of traditional developed countries. He also worries that populist political pressure in the U.S. today will impede economic policies that will help to rebuild the economy. Yet he remains generally optimistic about America’s future because its governance system ultimately will allow it to come to grips with fundamental problems such as the mushrooming national debt.
- Can American companies (domestic and global) that make standard products remain strong—or even survive—in the long run in the face of competition from emerging market economies?
- Can competition from emerging markets make American companies stronger?
- Does a strong democratic tradition ensure America’s prosperity?
Discuss these and related questions with your colleagues on the FPA Linkedin site (member login required).
