A New Big Power Era
2014-05-14
South Africans first and foremost create their own destiny. The "political disaster" bit in Prof De Kiewiet's ancient dictum. But it doesn't only have to be such disasters that do our shaping. If we are prepared to break old moulds, even when of recent vintage, and create better foundations (policy choices), we could do a lot better, even break out of old constrained growth patterns.
But in such deep self-preoccupation we should not lose track of the "economic windfalls" bit also featuring prominently in the De Kiewiet's old dictum.
Such as tailwinds fueling our prosperity and development, first and foremost stuff that is part of our make-up (such as finding rich new commodity endowments wanted by global buyers).
Yet that is not all. If global developments shape the demand for our natural riches, they also determine price. And here events have a way of episodically becoming extreme, either by richly pricing commodity prices higher and/or channeling large amounts of capital our way, thereby reinforcing our national income or firming the Rand, lowering inflation and boosting our purchasing power, giving us greater confidence, potentially boosting business enterprise.
What therefore happens globally also shapes us. And when global events start to shift fundamentally, there are also welfare implications for us, usually only well understood after the event.
The global scenery has for long been very busy, and there is more ahead. Untangling these events is challenging, regarding costs and benefits. And sometimes these can develop spectacularly, for good or ill.
The main point about the present appears to be that the world could be blundering into yet another New Era, as it exits what has prevailed for a mere two decades, potentially with major implications. These Era shifts are hardly ever clean-cut and instantaneous. This one is no exception. But the dawning in our perceptions, even when late, can develop suddenly.
And the principal question is the usual one: what's in it for us? Fight or flee? Or getting deluged by favours?
The longest major global Era of modern times was Pax Britannica ruling for nearly 200 years (or was it longer?) after starting to pull ahead and leaving the rest of Europe behind sometime in the 17th century, also seeing off repeated French challenges. And this was followed by a Pax Americana, which started economically (by overtaking England in the late 19th century) and then militarily and politically (after WW1).
At its peak, the Pax Americana was challenged by the Soviet Empire, the inheritor of the Russian Imperial space, when a Cold War Era emerged in which there were basically only two superpowers (1948-1989).
When Russia was competed into the ground and imploded following Gorbachev attempts at reform, the most recent stage of the Pax Americana began with only one superpower left standing. This, though, was seen as a short interregnum, an in-between-stage in which America could catch its breath before having to face a new crop of upcoming superpowers, with China in the lead, but potentially with many more flowering into full bloom in the course of the 20th century.
In a way it is perhaps ironic that in the year China is overtaking America economically in size (2014, according to the International Comparison Programme at the World Bank, equalling the moment in 1872 when the US overtook the UK economically), and is making its presence felt in East Asia, an old Big Power contender has suddenly reasserted itself in western Eurasia, economically and regionally perhaps in its way now a super-lightweight, yet a nuclear class competitor with attitude demanding attention as an equal.
Ever since rising to the Presidency in 2000, Vladimir Putin has had strong visions of restoring Great Russia, apparently within the confines of the old Soviet Empire. Over time this missionary preoccupation has come more sharply into focus, episodically inviting confrontations with the West as the latter questions the Putin modes operandi (Chechnya 2000, Georgia 2008, Ukraine 2014).
This Russia Restoration Project, like the Soviet expansionism of the Cold War era, is potentially an effort of decades. So far 15 years have gone by (20 years when reckoned from Boris Yeltsin's first Chechen war), with Putin considered good for at least another ten years (until 2024 when he will be only 71).
The strains and stresses so generated in the Eastern European borderlands could be on a par with what a near-future Iranian nuclear capability may unleash in the Persian Gulf (vs Saudi) and eastern Mediterranean (Israel, Egypt, Turkey).
Yet the Russian territorial ambitions, preferably acquired by stealth, pale besides the Chinese projections in the China Sea confronting Japan, Taiwan, Vietnam, Indonesia and the Philippines.
The so-called nine-dash-line incorporates a carefully drawn area in the South China Sea bigger than Ukraine and Belarus combined whose sea floor is probably very commodity rich (oil, gas).
In all three these instances, America is the distant guarantor of territorial integrity and the real geopolitical interlocutor, in an as yet undeclared War of Realignment (WOR) that reminds closely of the Cold War, only bigger and nationalistic, and not at all ideological (unless it is democracy vs autocracy, still a value game).
The main global implication is that such conflict is costly, and can fuel regional uncertainty inhibiting investment and growth.
In each instance there are energy angles (oil, gas) that could lead to destabilizing price shocks, as seen in the 1970s, though regional vulnerabilities are different today.
On a ten year view, all these features could carry implications for SA, negative (slower world growth and stunted SA exports) and possibly positive ones too (precious metal and also energy price booms if we were to become a much bigger net energy exporter, not now a given).
Of immediate short-term interest is the potential for Putin's Chess to badly backfire through miscalculation (as Hitler did over Poland), triggering a deeper economic confrontation that neither Putin or Europe may be seeking but that America might find worthwhile to instigate in order to win, if it can, a bigger argument.
The possible disruption so unleashed could have as consequence Europe tipping from +1.5% growth and +0.5 % inflation to minus signs in each instance. Perhaps no Big Deal in the greater global context, but likely a regional pretext for the ECB to be forcefully pressed into service like Bernanke was in 2008.
An aggressive ECB launch of QE asset buying of say Euro 100bn monthly, possibly accompanied by a slight Fed delay in finishing tapering and starting rate hiking, would likely change global market expectations and actions fundamentally, favouring safe havens and high-yield quality EM plays.
On balance, this could replay 2009-2011, when the Rand temporarily firmed by 40% from undervalued levels, inflation eased, capital inflows were strong and SARB cut interest rates significantly.
No event plays identically, and the instigator here would be geopolitical, but the confluence of factors and actors just happens to be interesting as to its potential for moving markets in unexpected ways.
We may not have to wait 20-30 years for our next Big Global Shock. One may be just around the corner right now, even if it were to be dependent on Putin and European miscalculation (along with misjudgment and mistrust the true nature of this tail risk, but then it often is in Big Power relations).
As to Chinese and Iranian ambitions, and possible neighbourly regional counter plays, these may need more time to focus and turn fruity. But these things could be rich in consequences, also for us who have historically thrived on globally induced windfalls.
Cees Bruggemans
Consulting Economist
Bruggemans & Associates
Website www.bruggemans.co.za
Email economics@bruggemans.co.za
Twitter @ceesbruggemans
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