Executives often ask me what are the biggest uncertainties shaping the evolution of the global economy. My immediate answer is that political forces are by far the most uncertain. Demographic, technological and economic forces are playing out in relatively predictable patterns. But the big wild card is in the political arena, ranging from intellectual property regulation to global geo-political tensions.
We are experiencing accelerating change on a global level. New economic forces are rising and challenging entrenched institutions within enterprises and across enterprises, industries and countries. History tells us that rapid economic change usually signals political instability, often leading to violence either in the form of revolution or war (or both). Entrenched interests resort to political means to protect their positions and emerging interests often resist these efforts with increasing intensity.
I have written about the fragility of the globalization process earlier in this blog. One of the deepest fault lines emerging on the global stage is the economic rise of China and its potential challenge to more established Western powers, especially the United States. We have seen growing media attention to this fault line in recent months, attention that seems to have been catalyzed in particular by the recent failed bid by Chinas’s CNOOC to acquire Unocal Corp. In fact, while this media attention is relatively recent, policy makers have been focused on this for a lot longer.
The Wall Street Journal published a front page article on September 8, 2005 entitled “Inside Pentagon, A Scholar Shapes Views of China”, chronicling the significant influence of Michael Pillsbury on Pentagon thinking. The article reports:
Chinese writings, Mr. Pillsbury says, show a military establishment obsessed with the inevitable decline of the U.S. and China’s commensurate rise. On the economic front, he cautions that Americans shouldn’t be taken in by the profusion of fast-food restaurants in China or other signs that make China look like the West. Beneath the growing trade ties with U.S., he says, runs a nationalistic fervor that could take American investors by surprise.
The Pentagon is planning to publish a new book this fall by Pillsbury entitled “The Future of China’s Ancient Strategy” which argues that “China’s history and culture posit the existence of a ‘hegemon’ – these days, the United States – that must be defeated over time.” Pillsbury’s influence suggests that policy makers in the Pentagon have been concerned about China’s rise for quite some time.
A flavor for the discussions within policy making circles can be garnered from a debate published in the January- February 2005 issue of Foreign Policy entitled “Clash of the Titans”. Zbigniew Brzezinski and John J. Mearsheimer (a Professor of Political Science at the University of Chicago, a leading “realist” international affairs theorist and author of the extremely insightful book The Tragedy of Great Power Politics) debate the possibility of peaceful co-existence between the US and China. Mearsheimer is blunt:
China cannot rise peacefully, and if it continues its dramatic economic growth over the next few decades, the United States and China are likely to engage in an intense security competition with considerable potential for war.
On the other hand, the Financial Times published a lengthy commentary by the always insightful Martin Wolf in its September 15, 2005 issue entitled “Though Precedents Are Ominous, China’s Rise to Greatness Need Not Bring Conflict” (only available to subscribers). Wolf begins on a cautionary note:
The precedents are also ominous. In the late 19th century, the rise of four new powers – the US, Germany, Russia and Japan – shattered global stability. The results included two world wars, the communist revolutions in Russia (towards the end of the first world war) and in China (in the aftermath of the second world war) and, finally, the cold war. Only with the fall of the Soviet Union did the US emerge as victor in a struggle that lasted a century.
Wolf goes on to outline three powerful reasons that he believes make conflict less likely as China rises on the global stage. Wolf concludes by observing that:
Relations between the two powers will never be warm. But they could be workmanlike . . . . Both powers should see the benefits of co-operation rather than conflict. . . . Provided their leaders recognize the need to sustain peace and co-operation, they should be able to manage their relations. We must hope they do so. The fate of the world depends heavily on it.
Tom Friedman is even more of an optimist on this front. In his book The World Is Flat he outlines his “Dell Theory of Conflict Prevention” (complementing his earlier “Golden Arches Theory of Conflict Prevention”):
The Dell Theory stipulates: No two countries that are both part of a major global supply chain, like Dell’s will ever fight a war against each other as long as they are both part of the same global supply chain. Because people embedded in major global supply chains don’t want to fight old-time wars anymore. They want to make just-in-time deliveries of goods and services – and enjoy the rising standards of living that come with that.
I wish I could be that definitive. Market relationships without a doubt have a significant dampening effect on political conflict. But the gales of creative destruction that markets bring with them can have the opposite effect. The rapid growth of a market economy will undoubtedly disrupt and threaten traditional social and political relationships in China. Those who hold political power there are making an enormous bet that markets and authoritarian political rule can co-exist. If the bet holds and they can sustain authoritarian political rule, they will certainly be tempted to leverage greater economic power into greater military power and ultimately challenge established powers for regional hegemony. If the bet begins to falter, they may well resort to nationalism and international conflict as a way to unify the domestic population and tighten their political control.
As the Chinese economy continues to grow and Chinese companies begin to pose a greater competitive challenge to Western companies, the latter may be tempted to lobby at a minimum for protectionist measures and perhaps even begin to push for more aggressive actions by Western governments to counter the Chinese “threat”.
We are already hearing growing concern about rising Chinese demand for raw materials in the global market. For example, see the article by David Zweig and Bi Jianhai on “China’s Global Hunt for Energy” (only abstract available without purchase) in the September/October 2005 issue of Foreign Affairs (this issue contains a number of other important articles on China’s increasingly important role in international affairs).
There is enormous uncertainty in how this will play out. In such circumstances, business executives need to be careful to design robust strategies that have the potential to succeed in multiple scenarios. The Financial Times featured an article on September 23, 2005 entitled “Fortune Favours the Forward-Thinking” (for the life of me, I can't find it online at the FT site - it appeared in a special section labeled "Mastering Risk") by Eric K. Clemons, Steve Barnett and Jaron Lanier presenting four scenarios regarding China’s evolution. The scenarios are interesting, but I think they reveal a lot more about Western biases towards China than they do about the likely evolution of China.
For example, two highly plausible scenarios are not even captured in the article. One scenario is that China evolves as a global center of management innovation, creating enormous economic value for its own enterprises and for consumers around the world, undermining its authoritarian government, posing significant competitive challenges for Western companies and catalyzing wrenching economic and political changes in Western countries, leading ultimately to a fundamental realignment of global political power. Another scenario is that China’s vigorous economic growth strengthens the country’s nationalist traditions and that an authoritarian government becomes increasingly confrontational with the US on the global stage, mobilizing support from other prominent countries who are seeking to contain US power internationally while at the same time strengthening domestic support.
One thing is certain. If lobbying by business and/or labor interests succeeds in restricting trade, the chances for highly disruptive political and military confrontations will rise dramatically. In this regard, the insight of Frederic Bastiat, the brilliant 19th century French economist, is critical: “When goods cannot cross borders, armies will.” Unfortunately, the converse is not always true. Tom Friedman notwithstanding, trade can threaten entrenched economic interests and these interests may in turn resort to political means, including military action, to protect their income and assets.
The best way to reduce potential political disruptions is for Western companies to focus on increasing their competitiveness in global markets, not just on a stand-alone basis but also in collaboration with many of the entrepreneurial companies emerging in China and other parts of Asia. As JSB and I suggest in The Only Sustainable Edge, public policy needs to be re-conceived in terms of accelerating talent development. There will continue to be significant potential for political disruptions domestically in China but, by focusing on China’s economic growth in a constructive way, in terms of strengthening our own competitiveness, we will reduce the risk that these domestic political disruptions will spill over onto the international stage.
I think that the potential for real war is quite minimal. Actually, the US won against the old URSS by not engaging in a real war with blood and distruction, but by simply raising the bar of competition to a point that the URSS could not sustain.
My interpretation of what is happening todays is that China will rule the world as the US did after the Second World War. Ruling in terms of driving the directions on politics, on consensus, on economy and, finally, on culture. A big, undervalued power of the US after WW2 is certainly the cultural power that gets inside our houses through goods, music, movies, TVs etc. The homogeneization process that happened at cultural level is something that is actually binding people to the US, starting from the private heart and ending with political and economical decisions. As I say, this is an important ingredient in fostering the power of the economy of a country.
This happened in a homogeneous situation, where the driving forces in the US have been organic to the Western European culture (or to the European Culture that survived until 1939). For us, in Europe, the "messages" that came from the US were not that different from what we were used to. This "homogeneous culture" made it smoother the homgeneization of the economy, of the politics, of the "fundamental values", imho.
The effectiveness of cultural messages and models of "success" can be very high; it may take longer with a dis-homogeneous culture... but that is not the issue.
By the time democracy (as we "know and interpret it") will be established in China, I guess that this whole process will be well on its way.
And that the "Western world" will not be ruling as it did so far. Which means that we may "loose" the benefits of the driving seat.
In my humble opinion, the only real threat is this one, which may not be a threat at all at a global scale.
Posted by: Stefano | December 08, 2005 at 10:03 AM