Regaining Balance

Major events in the first quarter of 2011 – the Libyan revolt, as well as broader Middle East unrest and the Japanese disaster – promise to alter the global economic and political framework for years.

CME Group Magazine asks four experts for their observations on what these events mean for the global economy.

Nader Mousavizadeh (Oxford Analytica), Ian Bremmer (Eurasia Group), Andrew Lipow (Lipow Oil Associates LLC) and Robert Pozen (Harvard Business School and The Brookings Institution) took time with CME Group Magazine to discuss the impact of recent global events.

Nader Mousavizadeh, chief executive, Oxford Analytica, a global analysis and advisory firm

Q Speaking broadly, what do the events in Japan and Libya tell us?

A The combined effect of Libya and Japan happening more or less simultaneously has been to underline the general vulnerability of the global economy to the sources of energy in an increasingly commodity-driven world. As BRIC (Brazil, Russia, India, China) demand continues to rise, that is becoming more and more acute.

Q How does this affect market participants planning for the future?

A What we are dealing with in Japan is a unique set of highly correlated natural disasters. This is an unusual circumstance that is very hard to plan for.
Clearly, there will be post-disaster pressure in Japan, as well as in Western Europe, to determine how nuclear power factors into the future energy mix. I think that is much less the case in the developing world. As people diversify away from hydrocarbons they will want to have access to nuclear going forward.

On the issue of the Middle East and Libya, what you are seeing is an epochal event. What is happening in the Middle East now is certainly one of the most significant transformations that has taken place in the last 100 years. Where the process ends is much more a question of debate. There is much more diversity in the Arab world than otherwise seems to be considered: Syria is not Jordan; Saudi Arabia is not Egypt; Tunisia is not Libya. Understand there is a very broad, important and lasting movement toward accountability and legitimacy. Traditional allies of the West, particularly Saudi Arabia, will not be able to ride this out without more substantial changes than they currently have committed to make.

Q Is there a way for this Middle East change to occur without roiling the markets?

A Like trying to price in the risk near-term and mid-term, there is no doubt we are facing a split image. There really is no country now that has not been affected meaningfully by this. The short term for the market will hold more risk around continued volatility.

The medium-term and long-term risk for investors is very much that if these societies do not embrace reform of some kind, they are simply kicking the can down the road. If in Saudi Arabia and the Gulf the move is made to simply tighten control and limit further liberalization, there is a much greater risk you will see 1979 Iran all over again.

Ian Bremmer, founder and president, Eurasia Group, a political risk research and consulting firm

Q What do the events of the first quarter tell us about the global political climate?

A We have moved from a G-7 to a G-20, but G-20 is really aspirational. We would like to have 20 countries collaborating, but they aren’t – not on standards, not on trade, not on climate. We see this in the Middle East. Despite the fact Muammar Gaddafi is hated by both the Iranians and the Saudis and despite the fact the Arab League asked for intervention and despite the fact the French got involved, only with great concern and teeth gnashing did the United States say it was prepared to have a limited role. It is the exception that proves the rule: the bar for getting collective action on anything in this environment has gotten far higher and that has massive economic implications going forward.

Q So the balance of power is shifting away from the United States?

A The big issue globally is that the economy is completely rebalancing away from the developed world to the developing world and, in particular, from the United States toward China. Those are economies that do not play nicely with each other, and that is going to come back and bite us.

The emerging markets house the main growth we are going to see in the world economy going forward. And, in a world where emerging markets do most of the lifting, you are going to see much more volatility. You are going to see much more zero sum-ness in economic confrontation at the global level because the West is not prepared to have the difficult conversations about belt-tightening. There is still globalization going on, but it is not gravitating toward the West and that undermines the ability of the U.S. dollar to maintain itself as the global reserve currency.

Q How do you see the Middle Eastern political situation unfolding?

A Do not paint all Middle Eastern populations with the same brush. The Saudis have an enormous amount of youth, but they have much higher per capita income. In Egypt and Tunisia, it was a combination of their political systems along with the lack of ability to provide opportunities to young Egyptians and Tunisians. That latter point is not the case in the major Persian Gulf oil producers.

The relevant experience we should be looking at is not the Prague Spring, but the revolutions that followed the Soviet Union’s collapse. There were revolutions in Ukraine and Georgia, after which the authoritarian governments in the region learned how to control, how to oppress and coopt more effectively. And they learned how to engage in incremental political and economic reform.

Q How does Japan fit in with all of this?

A The Japanese nuclear problems certainly will affect how countries view the energy mix. I suspect it will change dramatically in many places, particularly in Germany. It is not going to change China. It is not going to change India. Emerging markets will do what they need to. What we are seeing is that, in a challenging global economic environment, the ability to not have to deal with electoral cycles and regulatory policy proves to be a significant short-term advantage. However, it is not a significant long-term advantage.