The Rise of the State: Profitable Investing and Geopolitics in the 21st Century --Tectonic Shifts
- Aug 19, 2010
- Governments have always interfered in the investment process. Our contention is that the state's role in finance and the economy will only increase in scope and scale in the decade ahead, for two reasons.
- Developed-world economies are in a precarious condition in the aftermath of the great economic collapse of 2008–09. This instability and the extreme measures required to counteract it have exacerbated stresses long-term commitments to citizens have placed on government balance sheets. A paradigm of entitlement has gripped these societies and will prove a difficult burden to shed. At the same time, rising powers feature governments that have traditionally been much more involved in financial and economic matters—practitioners of what many observers have defined as state capitalism.
- Here we describe, in broad strokes, the world as it was under US dominance and how it will evolve going forward. Understanding this evolution is most important for the long-term investor. One must look no further than Central Asia to see how economic and political games today's great powers are playing in the region affect the rest of the world. Polycentricism is fast becoming the new norm among states.
- Our assessment of how the world will be divided going forward is an effort to prepare the reader for the deep transformation that's already underway. We make no claim that the new financial and geopolitical order we envisage will be a better one. For Westerners, however, the new normal may not be as agreeable as the state of affairs. The example of political and economic order represented by China is a direct challenge to two centuries of accepted wisdom.
- Economic and geopolitical scales are tilting eastward. Investors—and citizens—who understand and adapt will find this new world a profitable and exciting one.
In the 1980s, UK Prime Minister Margaret Thatcher was instrumental in blocking the Kuwait Investment Authority (KIA) from controlling more than 25 percent of British Petroleum. The Iron Lady objected on the grounds that she didn't want to see a national treasure owned by a foreign government. The KIA, which was owned by the Kuwaiti government, had to reduce its share of the company to less than 15 percent.
Apart from leading a revival of England's collapsed economy and injecting a dynamism that it until recently possessed, Lady Thatcher was a big proponent of capitalism. She acknowledged, however, that governments had occasionally to interfere, for a variety of potential reasons, in otherwise free markets.
History is full of examples of states intervening in the financial arena for political and economic reasons. The most characteristic examples involve the use of investments or other financial engagements as a geopolitical negotiating technique,1 as was the case with the English East India Company and the Dutch East India Company. Both companies were founded in the early 1600s to exploit business opportunities in Asia, with initial focus on India and the Indian Ocean, respectively. Both were also involved in politics and acted as agents of the imperialistic aspirations of their countries.
Even the US, which has long projected the image of a free-enterprise haven, maintained high-tariff policies until World War II. "Freedom to trade" rather than "free trade" remains the maxim of its leaders. As recently as 2008, Germany adopted a bill that blocks non-European investors from owning more than 25 percent of a German company.
Peace and Prosperity
As World War II came to an end, the US had clearly evolved into a power financially and militarily able to lead a new era. Its isolationist pretentions were quickly put aside as the new global power was getting ready to take central stage.
President Truman, in an April 1946 speech to a joint session of Congress, observed, "The free people of the world look to us for support in maintaining their freedoms. If we falter in our leadership, we may endanger the peace of the world—and we shall surely endanger the welfare of our own nation." America's "sphere of interest" was now global.2
Although the US has been quick to use force in furtherance of its strategic goals, it's also responsible for important institutions with global reach. The most significant in the geopolitical arena are the North Atlantic Treaty Organization (NATO) and the United Nations (UN).
NATO may initially have been designed as its first secretary-general, Lord Ismay, allegedly said, "to keep the Russians out, the Americans in and the Germans down." In practice, it did shelter Western Europe from communism, and the threat of US power guaranteed stability—a prerequisite for economic growth.
The UN's role has been the subject of much criticism. But the UN, overall, has been a positive force in the world—even for the small countries that constantly note their underrepresentation in key decision-making circles. At the end of the day, as Paul Kennedy has observed, "We have a central, self-selected world security body that can be summoned day and night in the event of a new emergency and threat to international order. It is as strong or weak as its permanent members wish it to be. At least, the Great Powers remain inside the tent. At best, they can do great things."3
Mainly because of the leadership and restraint it exercised in its post-World War role as one side of a bipolar global power structure, the US has been able to exercise its military and economic power on a global scale essentially unopposed for more than 60 years. The phenomenon of economic globalization, as Baldev Raj Nayar has noted
- ...is not something that has occurred as simply the outcome of some autonomous economic process, but is fundamentally rooted in the geopolitical fact of the global reach of American military power. It is precisely the globe girdling American military presence that has provided the political framework—because of the accompanying security and stability that it assures—within which the Western regime of "embedded liberalism" has functioned and the massive flows of post-war foreign direct investment have taken place.4
America's dominance was also helped by the failure of its two most important adversaries to keep up with a changing world. The Soviet Union eventually collapsed under the weight of its own misguided policies and disastrous economic planning. China suffered more than 30 years of "warlord-ism," genocide at the hands of the Japanese, financially disastrous policies, and oppression under Chiang Kai Shek. It didn't fare better under Mao Zedong, whose "Great Leap Forward" led to the starvation deaths of about 40 million Chinese. The Middle Kingdom's economy, by 1962, was decimated.