Paying the China Price

In his recent meetings with France’s President Emmanuel Macron and EU Council President Ursula von der Leyen, Xi Jinping mocked the concept of “dual-use” equipment such as semi-conductors, saying that by European definitions rice would be dual-use because soldiers have been known to eat it before battle. (Dual-use is commonly applied to products or technologies that have military as well as non-military uses. The proximate cause for the discussion was Chinese exports to Russia, which help Russia sustain its war in Ukraine in the face of Western sanctions.) Xi also rejected the concept of Chinese industrial “over-capacity” in reaction to charges, emphasized in the meeting by von der Leyen, that state subsidies have enabled Chinese steel and car manufacturers to dominate European markets with underpriced goods.

Of particular concern to von der Leyen’s home state of Germany is China’s dominance of electric-vehicle production. Macron urged Germany’s Chancellor Olaf Scholz to attend the talks with Xi, but Macron is less keen than Scholz on protecting Europe’s EV manufacturers from Chinese competition. This difference was a principal reason why Europe’s largest economy was absent from talks that pivoted on Europe-China economic relations. From an investor perspective, Europe’s current geo-economics offer little more than chronic unpredictability. Xi Jinping’s strategy is to divide the European powers from each other and from the US, a strategy that should be harder to do than it is.

The disturbing reality is that Xi is not wrong. The concept of dual-use is infinitely expandable. If its deployment were simply an artifact of political opportunism — for example, a means to foster non-Chinese semiconductor production — the problem presented would not be so difficult. But most advanced technologies, and the innovation systems that underlie them, really are dual-use, and in the end so is rice.

What Xi is really pointing to is the impossibility of neutrality. It was impolite of him to do so and probably bad politics, which could explain why the CCP’s Internet-scrubbing mechanisms were tasked with removing references to dual-use at the time of the Paris meetings. But for Xi it must be hard to resist pointing out to Europeans how dependent they are on Chinese tech inputs, not just for their own industries but for there to be much chance for European companies to compete with American ones. European states cannot be neutral profiteers trading with both sides in the US-China conflict. At the same time, Biden’s industrial policies (particularly for electric-vehicle production), US dominance of the West’s Ukraine policy, and the prospect of a second Trump administration all combine to gravely weaken trans-Atlantic solidarity when it is most needed. This is a key CCP strategic goal.

“Over-production” is also incoherent. The European argument is that Chinese production is state-subsidized and in excess of domestic Chinese demand for electric vehicles. The second charge is the weakest. Like Germany, China produces cars in excess of domestic demand because it wants to sell EVs on the world market. That’s what exporting is. It makes no sense to insist that Germany be able to continue manufacturing Mercedes or Volkswagens in excess of German consumer demand but China should not be able to do the same.

The state-subsidy charge is stronger but still not massively convincing. German subsidies to German consumers (4500 euros, sometimes more, per purchase) incentivized the buying of 2.1 million EVs in Germany from 2016 to the end of last year. Part of the goal of this policy was, through subsidized pricing, to artificially boost German consumer demand for electric vehicles and thereby subsidize German car manufacturers’ transition to EV production. When the German government rather abruptly cancelled its EV subsidy to address a budget shortfall, German manufacturers like Mercedes and Volkswagen undertook to pay it themselves for existing orders.

That policy is not intended to last, however. At some near date, Germany and other European states with auto industries will have to choose between protecting their own car industries until they are able to compete with Chinese competitors (a very distant prospect), leaving their markets open to Chinese EV imports (already accounting for 37% of European EV imports in 2023), or somehow managing the China trade at the EU supra-national level. The last option is the one the EU is aiming at, but it will meet strong resistance from individual European states who do not want to lose their auto industries to European competitors (mainly Germany) and from European consumers, who will be stuck with higher prices. Those high prices will in turn delay Europe’s transition to greener transport. This is the fate that US protection of EV manufacturing (and much else) is intended to avoid for Americans — but at the cost of hobbling European EV exports into the US market, further impairing the geo-economics of trans-Atlantic solidarity.

Efforts to reorient manufacturing to address climate change keep running into the wall of geopolitical competition. Meanwhile, the Chinese government has economic and environmental challenges of its own and will continue to try to punch its way out of them by subsidizing domestic production and controlling domestic consumption to favor Chinese goods.  Each side in this drama will correctly accuse the others of “over-capacity” and unfair state subsidization.

China has the advantage of an unblushing commitment to state capitalism and an immense captive domestic market. It also has an ideological advantage of sorts in that it frames its own economic growth in a long narrative — “changes not seen in a century”, in Xi’s phrase — of anti-imperialism. Ultimately, the Chinese contention is that Western-led modernization was itself “unfair trade” on a very grand scale, achieved at gunpoint and cementing first-mover advantages that Chinese state policy is dedicated to undoing. Of course, Chinese growth is fueled much more by a Chinese nationalist will to power than by any notional anti-colonialism. It is a Sinicized version of the German imperial push for a “place in the sun” alongside the other imperial economies of the 1890s, including Japan. The increasing brutality of the CCP regime both domestically and in its foreign policy is an index of where its commitments lie. It came to praise globalization but in all likelihood will end by burying it.

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Latin Risks Rising

Five years ago, the head of a major think-tank in the US could credibly say that “there are no geopolitics in Latin America.” But that not-for-attribution remark has become steadily less true ever since. Latin American economic prospects are now shaped by both regional inter-state tensions and broader geopolitical currents, not least the U.S.-China rivalry (see SIGnal, “Green Protectionism,” 25 April 2024). For now at least, investors have to accept that non-market considerations will have deep effects in some major Latin American economies.

The 2015 discovery of significant offshore petroleum reserves in territorial waters claimed by Guiana and Venezuela reignited a disagreement more than a century old. The Esequibo region, which holds around 15 percent of Guiana’s population but makes up more than two-thirds of its territory, has been in dispute since before 1899: the Paris Arbitral Award then designated it part of Guiana, but Venezuela never agreed. Late last year Venezuela held a referendum that designated Esequibo its 24th state. Venezuela’s move could well lead to armed conflict.

Meanwhile, more than 8 million Venezuelans have left the country in the past decade due to dire economic and political conditions. Many have fled to neighboring Colombia, whose citizens resent expenditures on refugees by the Colombian government even though many refugees are Colombians who fled to Venezuela during Colombia’s decades of insurgency and civil conflict.

Ecuador was until quite recently a safe country for residents and visitors alike. But in the last few years, suppression of drug smuggling through Colombia resulted in the opening of a route across northern Ecuador to the Pacific, and from there to the US and Europe. This has plunged the entire country into a violent spiral, and Ecuador is now one of the most dangerous countries in the world — due entirely to exogenous, transnational factors.

As social guardrails have been eroded across the region by the decline of religion and social institutions, the movement of populations into large cities, and by the resulting splintering and estrangement of family structures, the social prohibitions against violence and crime have also eroded.

The weakening of Latin American institutions has sometimes been worsened by democratization. The PRI (Institutional Revolutionary Party) held power in Mexico for 71 years, until 2000. The PRI had an informal deal with drug cartels formed in the 1970s to satisfy increasing illegal drug demand from the US. If the cartels did not let their violence leak into Mexican society, the government would leave them alone. As cynical as it was, the arrangement kept something of a lid on social violence in Mexico.

When Mexico became fully democratic with the election of the PAN (National Action Party) in 2000, the deal collapsed. This was in part because the PRI apparatus that had managed it was gone. Mexico had no independent civil service; most everyone in government was part of the PRI. When the “PRIistas” left, the arrangements and relationships that had controlled violence left with them. Elaborate anti-gang campaigns and the militarization of Mexican policing have had little positive effect. The number of gangs has increased, as has their violence. In Brazil, by contrast, gang consolidation and “professionalization” seem to have contributed to a reduction in violence.

Many of the conflicts in the region are attracting players like China, Russia and Iran — a major arms supplier to Venezuela. These countries have an interest in the oil markets, whether as consumers (China) or fellow producers (Iran and Russia). Chinese technology firms, increasingly frozen out of Western markets and facing strong competition in Asian ones, value Latin America. Chinese consumers depend on Latin America for foodstuffs from soybeans to cherries, fish and beef, the great majority coming from Brazil, Mexico, Chile, Peru and Colombia. As the foreign policies of China, Russia, Iran and others consolidate and harden around a core narrative of anti-Americanism, the United States, obsessed by migration, has been steadily losing political power in the region.

Yet the natural resources of Latin America are becoming more and more vital to the US, in an era of the weaponization of strategic resources like critical minerals (e.g. lithium), of nearshoring, and of decoupling from China and Russia, in particular.

Latin America’s strategic importance is likely to grow, but the US has not sufficiently cultivated the relationships that would allow “win-wins” with countries in the region. The US should change course on this while there is still time.

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Trump 2024: What's in it for Modi?

In September 2019, more than 50,000 Indian Americans traveled to NRG Stadium in Houston to attend a rally in support of two of the world’s most prominent nationalist politicians: Prime Minister Narendra Modi and then-President Donald Trump. Modi modified his own 2014 campaign slogan for the occasion, proclaiming “Abki baar, Trump sarkar!” In other words, “This time, a Trump government!”

It seemed a natural political marriage between two bombastic campaigners who had overturned the political establishments of their respective countries largely through an innovative combination of aggressive social media campaigns, ethno-nationalist rhetoric, and thinly veiled antipathy to Islam. The event’s potential to benefit Trump’s cause was clear: in the offing was a possible infusion of support for his candidacy among a growing population of Indian Americans. Modi’s interest in joining the controversial and capricious Trump onstage was less obvious. He chose to associate himself very publicly with an American president whose popularity has never overwhelmed the Indian electorate, whose policies never favored India, and whose victory in the 2020 elections was by no means assured. It was far out of character for an Indian PM not only to take a public position on the domestic politics of another country, but to insert himself into a foreign election in support of a particular candidate. The move earned him tepid praise from Indian political commentators and, although one hears little else than acclaim for Modi’s India from Washington today, could not possibly have earned him any favor with the Biden administration.

Biden and Modi are aware that the geopolitical and macroeconomic logic pulling India and the US into a strategic embrace is inexorable. The embrace has thus far manifested in several cooperative initiatives between the two states since Biden took office in January 2021. The most notable has been the initiative on Critical and Emerging Technology (iCET), which aims to promote bilateral cooperation in areas from defense technology innovation to semiconductor supply and higher education. As Americans prepare to vote in another presidential election in November, investors in Indian industry would do well to consider what might become of the burgeoning partnership between the two countries if Trump were reelected.

The price of Modi’s endorsement appears to have been Trump’s tacit approval for the Citizenship Amendment Act of 2019, which made eligible for Indian citizenship all Hindus, Sikhs, Buddhists, Jains, Parsis, and Christians who fled to India from persecution in Afghanistan, Bangladesh, and Pakistan before December 2014, with the notable exception of Muslims. The Act was part of a series of legislative measuresdesigned to threaten the citizenship of Muslims in India who, like much of the native-born population of India, have little or no legal documentation of their citizenship. In keeping with Trump’s transactional style of diplomacy, the quid pro quo between the two leaders does not seem to have extended any further than this simple exchange. Both men are committed to protectionist trade policies that discourage foreign competition in many sectors of their respective economies. Under Trump, a skilled-worker visa program that had long allowed foreign workers (roughly 75% of whom were Indian) to live and work in “specialty occupations” in the US was suspended in April 2020 by presidential decree. The suspension was allowed by President Biden to expire in April 2021. The Republican-sponsored CAATSA (Countering America’s Adversaries Through Sanctions Act) began in mid-2019 to impose heavy sanctions on companies and countries that continued to import oil from Iran. India, as Iran’s then-second largest buyer of oil, was no exception, despite Modi’s personal and ideological alignment with Trump. Political amity was similarly insufficient to allow their administrations to agree the terms of a promised US-India trade deal, or even the “mini-deal” that was promoted in its place when it became clear that a comprehensive deal could not be hammered out. Despite Modi’s talk of taking the US-India relationship “to new heights” with Trump, evidence suggests that Trump’s two immediate predecessors did far more to advance that relationship, and that his successor has gone to still greater lengths to embrace India. A shared contempt for Islam and liberal hegemony is not, it would seem, an adequate substitute for sustained diplomatic efforts made in earnest pursuit of mutually beneficial cooperation.

Trump has been uncharacteristically consistent in his willingness to treat US commitments abroad as political hostages, holding aid, security commitments, climate agreements, and arms control treaties over the heads of US allies and adversaries alike in an effort to appeal to his isolationist base. If reelected, he might well hold hostage the fruits of Biden’s efforts to build a lasting structure for American cooperation with India. He might decide to treat India’s increasing access to American capital, technology, and manufacturing contracts under Biden as a privilege to be revoked at his pleasure, with few domestic consequences for his administration and many for Modi’s. The iCET is not part of Trump’s personal legacy and might well be considered disposable. India’s position as a regional counterweight to China makes it indispensable to American strategy in the Indo-Pacific, but even as President, Trump never confined his role to the pursuit of US interests abroad. Indeed, he often acted against them. In the announcement of his plan to impose a universal 10% tariff on all imports to the US, and in Modi’s ever-louder emphasis on Indian self-reliance, we can see that the indiscriminate protectionism that left a US-India trade deal dead in the water is alive and well.

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The Dystopia Fund

The pessimistic worldview reached a new stage this week as the Economist declared that “the liberal international order is falling apart.” SIGnal readers will already be familiar with this idea, but for the Economist to adopt it might reasonably be taken as a sign of the Apocalypse. Meanwhile, the distinguished demographer Nicholas Eberstadt showed at length in Foreign Affairs what a profound demographic crisis East Asia is facing — another SIGnal theme, underlined this week at a desperate press conference given by South Korea’s President Yoon Suk Yeol in which he announced the formation of a Ministry of Low Birth Rate Counter-planning. It was a bad week for optimists, but perhaps the right time to think about a Dystopia Fund.

Macro short-selling is usually done on a national basis, by betting on (or against) currencies. A Dystopia Fund would look to sectors and sub-sectors that would be likely to benefit from long-term negative trends. Humans, even investors, tend to be optimistic, but reality is not. This creates a sort of information disparity that can be exploited.

Last week’s post looked at artificial intelligence in this context. AI, potentially, provides a way for problems of demographic decline to be compensated for by increased productivity within a given national market. The national is important: states large and small have registered that while technology-enabled globalization did indeed bring many tens of millions of people up from poverty, it was driven not by charity but by the extraordinary profits and monopolies that accrued to the companies, overwhelmingly Western, that produced the technology. Now that incomes have grown and capital has accumulated in countries from Saudi Arabia to Singapore, states want to harness technology to grow their own economies and keep wealth in domestic markets. AI promises to do that in that it can increase productivity despite declining populations and, perhaps, poor local education systems.

Other Dystopia Fund targets could be in travel and entertainment for the very old, a growing demographic. Various forms of nostalgia would be investable. Great sums of money in recent decades have gone into market research on people in prime consumer age ranges. Not so much money has gone into understanding elderly consumers. The market-research firm that embraces demographic decline would be worth backing.

An aging population puts transport innovations like self-driving cars into a different light. Most transport systems are only friendly to people who can walk and drive. Companies designing systems for the elderly will find their consumer market steadily increasing. By the same token, tele-medicine, home drug delivery, home medical-testing, and other services for the home-bound will also find growing markets. Working from home, despite its many disadvantages, will provide a way to keep older people active in the job market as the (traditional) working-age population shrinks.

Parag Khanna has led the way in identifying regions that will do relatively well out of climate change — a perfect Dystopia Fund sector. Khanna sees climate-driven emigration as something to be optimized for rather than bemoaned, for the simple reason that it is inevitable. Technologies that can extend the habitability of currently populated areas would be another way to approach the challenges of real estate in a changing climate.

One frequently cited reason to regret the demise of the liberal international order is that challenges like demographic shrinkage and climate change are on such a scale that they would benefit from international coordination. While that is certainly true, liberal internationalism’s vitality has been rooted in optimism, whereas what might be needed now is investment strategies based on a pessimism that accepts the profundity of climate and demographic change and their effects on the status quo. 

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AI Family Values

Theories of economic growth do not deal well with demographic decline. How can an economy with ever fewer consumers and producers still grow? Artificial intelligence, looked at a certain way, is an attempt to answer that question. Worries about AI taking jobs are somewhat misplaced. The opposite would probably be worse: shrinking, ageing societies unable to replace lost labor.

AI anxiety usually flourishes in wealthier, industrialized societies. So, for a change, consider Saudi Arabia. It intends to invest $40 billion in AI, which would make it a world leader. Amazon has announced $5.3 billion in AI and data center investments in the Kingdom. Nearby, Microsoft is putting $1.5 billion into a joint venture with Abu Dhabi firm G42, which would also involve the use of Microsoft’s Azure data-center platform. Why such levels of investment?

Yes, there is a geopolitical aspect. Chinese companies dominated the mobile-infrastructure wave of investment in the region in the early part of this century. China’s security-related firms, often banned by the U.S., thrived in the Middle East. Chinese firms used these ties to move into data-center construction. When, sometime late in the Obama administration, the U.S. realized that a great deal of digital real estate was being settled by a hostile power — and that a great deal of American tech capacity was being exiled along globalization’s supply chains — a reaction set in. But even that, by itself, was not enough to get U.S. tech giants investing in the pokey market of data centers in less-developed countries. AI is what made the difference, because AI, in its current configurations, depends on massive, non-latent computing power. The Internet temporarily freed data from physical constraints. AI is helping bring it back to Earth. This happens to coincide with governments’ unquenchable desire to control citizens’ information, in every sense.

But more important is what may be called the gender aspect. To an often underappreciated degree, women are driving technological change. While female workforce-participation rates vary greatly among countries, they have generally been going up for decades, while fertility has gone down. Birth-control technology has been absolutely critical to this change, but its availability and use are social phenomena, driven by choices. The Gulf Arab countries have seen steadily declining fertility rates for years now, along with an easing of prohibitions on the education of women and their participation in the workplace.

In many countries, female workforce participation — greatly enabled by birth control as well as home labor-saving technologies — made productivity and consumer-demand gains possible when male workforce numbers stagnated. In Western countries in particular, there was a sort of internal labor migration from the home to the wage-based workplace. The economic benefits can top out, however — and waged productivity’s gain is fertility’s loss.

Internet-enabled globalization made a second renewal of growth possible. Much like the movement of women into the workforce, globalization put developed-world capital in a position to increase productivity by bringing new labor into the workforce, especially Chinese labor. But this was done at a distance, with laborers outside the home markets of the highly developed economies. Globalization had enormous benefits for even the poorest rich-world consumers, but it did not necessarily make the poor more productive.

AI has the potential to restore bounded, domestic productivity. That makes it intensely attractive to a wide variety of societies, all of which are facing demographic slowdowns or  reverses but have the domestic capital to invest in technological solutions to what is, in the end, a question of power and social cohesion. This is emphatically not about human capital. The Gulf Arab states, despite their wealth, do not have high levels of citizen education such as you find in East Asia or Europe. Saudi Arabia imports human capital, whether laborers or surgeons. About 40% of its population is foreign. Saudi Arabia is a de facto nation of immigrants, but it is not understood as such because it does not expect that 40% of its population to become Saudis. The Saudi state is certainly not worried about AI taking jobs from Saudis. What the Saudi state aims at is achieving the domestic productivity mix that will make it possible for Saudi Arabia to be Saudi, in whatever way the Saudis themselves might define it. Globalization was not especially good for that. Female workforce participation is, as long as it doesn’t undermine “being Saudi.” AI might be even better: in effect, a set of tools for enhancing the productivity of domestic human capital and thereby providing growth without undermining the Saudiness of Saudi, the Japaneseness of Japan, or the Chineseness of China.

AI, then, can be seen as compatible with de-globalization, or more precisely with a decentralization of capital productivity, very much including human capital. It could, in short, enable an increase in domestic production despite a decrease in reproduction.

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Green Protectionism

Geopolitical competition seems to be leading away from the greening of global production. Major players like China, the European Union, and the United States are all trying to spur green industries like electric-vehicle production in their own territories and with their own companies. Taken as a whole, this has the effect of stimulating production and innovation, which should be beneficial for the planet. But it also raises prices by directing capital to redundant production, and it establishes a kind of green protectionism that seems certain to have unforeseen consequences. Successful investing in an industry whose major players include several antagonistic and powerful state entities is difficult at best.

The most interesting recent development has been the US decision to pressure Mexico not to welcome Chinese investment in electric-vehicle production. Mexico has, of course, benefitted from US-China competition in that companies like Tesla, Samsung, and Nissan have shifted production away from China to Mexico as part of global de-risking. Note that Samsung and Nissan are not US companies. The great appeal of Mexico apart from its workforce is proximity to US consumer demand. By pressuring Mexico to keep Chinese EV companies like BYD, Chery, and SAIC at arm’s length, the US is using the size of its consumer market as a political weapon in foreign policy. The policy goal is to deprive Chinese companies, private or not, of markets. (BYD is private, Chery and SAIC state-owned.)

The European Union has been doing something similar, having become alarmed last year at the growth of European demand for Chinese EVs and the barriers erected by the Biden administration to European companies prospering in the US market. Europe’s car manufacturers don’t want to lose their future domestic market to Chinese competitors. Biden moves to protect US domestic EV production deprived the Europeans of a crucial export market at the same time that Chinese manufacturers were selling high-quality EVs to European drivers at a 30% discount to European prices. These political-economic factors have combined on the Continent with a growing distrust of Chinese tech companies and China — rather, the Chinese Communist Party — more generally. The EU raid this week on Nuctech, a Poland-based Chinese scanner manufacturer long held in suspicion by Western China analysts, was made on economic grounds but has a strong security aspect as well.

Many Chinese argue that the root of these EV conflicts is that Chinese companies are simply better. Europeans and Americans counter that Chinese EV companies are state-backed, which is certainly true, such that the competition is unfair. None of this is wrong exactly but it misses the macro point: the major Western economies embraced extended global manufacturing supply chains and China did not, with the result that China now has innovative vertically integrated large-scale manufacturing companies that can compete globally. Because so many of those supply chains ran through China, the US and the EU are playing catch-up, and they are weaponizing their own consumer populations as well as alliances (as with Mexico) to do so.

One result is likely to be chronic high prices for North American and European electric vehicles, which means (in the absence of Chinese imports) a slowdown in EV adoption — which is already occurring. That in turn means a slowdown in carbon reduction. China’s aggressive, state-led pursuit of green industries was driven, to a great extent, by a desire to innovate out of a global climate crisis that has hit China quite hard. China’s pre-eminence in solar panels was initiallya responseto German rules on energy efficiency that could not be addressed with European products. But US-China competition has now transformed an environmental policy into something that has anti-environmental results. One can hope that all this duplicative effort will result, over the long term, in electric-vehicle and other green industries that will be able to expand around the globe and save the planet. But picking winners in such a roiling political environment is very hard, as Tesla’s investors will have been reflecting this week.

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Networks of Confrontation

When political scientists and policy wonks wrestled with the prospect of a world war that was not, in any conventional sense, winnable — that is, a nuclear war of comprehensive destructiveness — they turned hopefully to “escalation dynamics.” They tried to find a set of reversible steps between chronic conflict and mutual obliteration. It was a way to imagine how to manage the unmanageable. Today, with widespread access to drones and ubiquitous access to the Internet, it is difficult even to define “escalation.” The means for crossing borders, whether in the air or online, have proliferated to such a degree that actors engaged in conflict seem to lose sight of the de-escalation part of the old “escalation ladder.” Having escalated online, they can next escalate with drones, or by activating proxies of one kind or another, or by directing industrial policies toward harming the enemy at one remove. The jumpy, somewhat hysterical, mode of constant irritation of the status quo — constant escalation — was once the signature style of North Korea alone. Now it is worryingly common. 

 There is an argument that the United States was the first mover in this trend toward border-jumping provocation. The U.S., having done far more than any other state to advance the Internet, did tend to treat it as a network for espionage overseas, if not often for conflict. Having pioneered drone technology, which was greatly telecommunications technology, the U.S. made frequent use of it in others’ sovereign territories. With an economy uniquely globalized because of the nearly universal use of the dollar as an exchange currency, the U.S. had another planetary network it could use against its enemies, for example through financial sanctions. And having driven a globalized trading and manufacturing economy, to its own great benefit, the U.S. is now exploiting the resulting global network dependencies by weaponizing industrial and trade policies.

In each of these networks of confrontation, all of which have developed immensely since the end of the Cold War, the U.S. has moved first.

Now so many others are in the game of what the Oxford scholar Lucas Kello, optimistically limiting himself to cyberspace, once labeled “unpeace.” There is so much signaling of malign intent, expressed over cross-border networks, that the foreign-affairs signaling becomes more like noise. Russia’s appetite for information operations directed at undermining U.S. power around the world seems possibly insatiable. One reliable analyst sees Russia’s government as behind a recent infrastructure attack — all executed remotely — on Texas water systems. China increasingly looks to its diaspora as a population physically outside its own borders that is nonetheless expected to show loyalty to the mainland government. Overseas Chinese are monitored and influenced both physically (through embassy and consular staffs) and online. Iran launches an enormous drone attack against Israel and now awaits retaliation, confident that it will not be in the old, pre-1990 form of actual war but in some new “escalatory” move. But escalation without some logic to it is just random warfare. It is unpeace. A lot of aggressive noise without much clear signaling.

For investors, and for everyone else, the challenge is to identify sources and patterns of stability as well as to identify threats. It is not easy. China and Russia are trying to stabilize themselves through a striking combination of patriotism and ethnicity, rallying the tribe of consumers and producers to defend against the external enemy — a method of stabilization that runs quickly into each country’s dependence on external markets for survival. Autarky only feels stable.

The U.S. has the advantage of corporate and entrepreneurial cultures, as well as multinationals, that accept government direction only when they must. Of course the U.S. has many other advantages, and its lack of supervisory power over business has not always been a good thing. But in the present circumstances, when globalized and globalizing networks are both necessary for growth and increasingly dangerous and unpredictable as platforms for political confrontation, the U.S.’s, or perhaps more accurately North America’s, ability as an economy to resist government direction seems to be a distinctive strength. It creates a resilience in unpeace that, one hopes, can survive changes in government. An economy that can thrive under Obama, Trump, and Biden alike is a resilient economy.

Headlines for the IMF annual meeting this week emphasized American economic strength, with growth far outstripping that in the other Group of 7 members. At the same time, the U.S. was at bottom in a poll looking at G7 public confidence in institutions like the military and courts. Politics must dwell on the latter and strive for improvement. But stability comes mainly from the economic side.

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Dealing with Corruption: Part Four of Four

By Dee Smith

In the first 3 parts of this post, I discussed the nature and history of corruption in non-Western cultures and in the modern West.

Whatever we in the West tell ourselves about the “objectivity” of our institutions, a great deal of life still operates in terms of familial and friendship connections, affinity with like persons, membership in groups (from criminal gangs to professional and religious organizations), and reciprocal obligations. This is the result of human evolution. As we evolved in small societies of like individuals based on trust, outsiders were seen as untrustworthy at best and often presumed to be enemies unless proven otherwise. In many cultures, they still are. Group belonging and identity in all its forms is one of the constants across cultures and time.

There have been many concerted efforts to change these embedded practices. For example, “legacy” admissions of students at universities in the US have recently come under attack as being unfair (which they are). Sweeping efforts are being made to eliminate them, but it is likely they will change only in form, not in substance.

Corruption in Africa, the Middle East, South and East Asia, and Latin America has been profoundly influenced by European conquest and colonization. As an example (and to vastly oversimplify): Latin America was mostly colonized by the imperial powers of Spain and Portugal, and their fundamental goal was to extract wealth and send it back to the regent. The British colonization of India, in contrast, was for centuries managed by a private enterprise, the East India Company, and the goal was to enrich shareholders back in the homeland.

Enriching shareholders in the homeland was also sometimes the goal in North America, for example with the Hudson Bay Company. In many cases, however, North America was settled by individuals and small groups (who were not state-sanctioned), often from the lower rungs of society, fleeing religious and other persecution, and seeking to create a new life in a “new world”—essentially by seizing it from its inhabitants. The goal of these colonists was to produce material prosperity for themselves, in their new homes, not to send it back to the motherland. The legacy of those very different goals informs social realities in Latin America and North America, respectively, to the present day.

Corruption, as we have seen, is a complex issue, and trying to understand it is a monumental task. Generally, it is over-simplified to the point that the descriptions correspond little with the actuality. And all too often, it is simply a blame game where “I’m right and you are wrong.”

From a practical standpoint, what is a Western businessperson to do when confronted with corruption in Africa, Latin America, or anywhere? Lecturing people from other cultures about “their” corruption is very bad form and therefore often bad for business. Furthermore, as we have seen, corruption is equally present in the West—it just works in a different direction—and much of the pronounced culture of corruption that exists in such countries is a legacy of the colonial and commercial goals of the Western powers that colonized these countries and extracted their wealth.

On a practical basis, for many reasons—legal, ethical, moral, or financial—a businessperson from the U.S., the U.K., or many other Western countries simply cannot engage in activities that their own jurisdiction defines as illegal corruption, however endemic it may be in a country in which they are working.

My advice is threefold: first, do your homework and make sure before you initiate talks with a potential partner that they do not represent an individual, family, company, or other party known for egregious corruption. Stay away from those.

Second, be very well informed in advance of what specifically is defined as corruption in the laws of your country, of the country where you are operating, and of the countries in which your investors or other partners are based. All are crucially important.

Third, if and when you are confronted by corruption, the best procedure is legalistic. Something like the following is a good approach: “I simply cannot do that or anything associated with it. It is against the law in my country. If I did it, it would threaten my ability to continue to do business, and quite possibly threaten my personal freedom.”

In that way, you are not “calling out” anyone, you are not making a value judgement of right or wrong, and you are not on a high horse criticizing anybody’s culture. You are simply drawing a bright-line around what you can and cannot do—a bright-line required by the legal regime of your country.

And then, if you have to, you need to be willing simply to walk away.

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Dealing With Corruption: Part Three of Four

By Dee Smith, CEO

 

The 18th century European Enlightenment made the West quite distinct in terms of intellectual, social, economic forms, even WEIRD:  Western, Educated, Industrialized, Rich, and Democratic, as the phrase goes.  In parts one and two of this series, I looked at how corruption in many non-Western societies has been structured by “social pyramids” that link the high and low of a specific social group in mutual obligations, including cooperation in securing political power in order to succeed economically. This structure I contrasted to that of the post-Enlightenment West, where corruption uses money to get political power. I then argued that Western rules-based social orders, which made it possible to separate corruption from the social pyramids, are breaking down. One way to look at the rise of identity politics in the West is as the re-emergence of kinship- and identity-based structures similar to those of societies structured by social pyramids. The implications of this for society and for the evolution of corruption will be substantial.

Nineteenth-century European and North American societies, as they industrialized and previously rural people were forced to compete for survival in fast-growing cities, came to depend on science, technology, and eventually modern education. These societies developed distinctive hierarchies to manage their growing complexity, increase productivity, and compete with rival societies. Complex hierarchical structures were very different from the old social-pyramid hierarchies, although the two long existed side-by-side and in some ways still do. One difference was that they required social mobility and the possibility of advancement by merit. Dynamic merit-based hierarchies gradually replaced the social-pyramid hierarchies and developed merit-based elites.

“Merit” was and is a social relation, changing over time according to social demand. Imperial China’s merit-based examination system for civil servants rewarded expertise in classics of Chinese literature, rather as Britain’s elite educations emphasized classical Greek and Latin. When social demand for very different kinds of merit strengthened, these systems had to adapt or die, particularly as societies like Japan and the newly unified Germany quickened their pace of industrialization, militarization and social engineering.

Merit-based modern societies create a particular kind of private anxiety in that the creation of open opportunities for personal advancement puts the burden of failure, as well as success, on the individual. The protectiveness  of social pyramids, as well as of mass participation in collective religious rituals and a shared spiritual life, could not survive the rise of merit-based hierarchical societies. The old social pyramids had cared for the people within their structures through a sense and practice of reciprocal responsibility. Modern societies deracinated this—each person is on his or her own. Official, bureaucratic systems now “care” for those who, because of nature, nurture, or accident, cannot care for themselves. Everyone else is homo economicus.

“Economic man” and societies based on competition and maximal efficiency dominated the 20th century to such a degree that almost everything was seen to operate in terms of economic “laws.” Yet markets are human constructs, and we forget that at our peril. The disruptions and anger we see in societies today may be connected to this in more ways than one.

Market-based maximal efficiency undermines social structures in part because it directs capital to technologies that themselves lead, unpredictably, to social transformation. More than 80 percent of unemployment in manufacturing in the US in the last 2 decades is due to automation, not to offshoring (whatever politicians may say). With the rise of generative AI, we face a tsunami of unemployment, coming now for white-collar employees. As Yuval Noah Hariri has noted, we are living for the first time in history without any real idea at all of what jobs will look like in 10 years! What’s a young person—or anyone—to do? People feel profound uncertainty about change that does not seem to have an identifiable logic or purpose but is nonetheless pushed forward relentlessly by developments in technology, from dependence on cyber systems and their vulnerabilities, to bio-error and bio-terror, to generative AI and the possibilities of Artificial General Intelligence.

In such an environment, people long for connection to something meaningful and concrete. They long for stability.  “I don’t even recognize my own country any more” is a phrase I have heard all over the world, in societies very distinct from one another. People thus seek kinship, identity, and affinity with others who share their culture, concerns, maladies, and even bloodlines. And if they do not have a community offline they will find one online, with results that, over the past decade, seem to have been more negative than positive.

It is possible that these changes represent not partial revolutions, as in 1848, nor even the kinds of anti-capitalist revolutions seen in the first half of the 20th century, which were also built around homo economicus. The changes to come may represent a more profound transmutation, into a system (or systems—the outcomes may be very different from place to place) whose nature we cannot, at present, see. If large numbers of people decide their future looks worse than their present—which many perceive as already worse than their past—they may decide that the systems and rule sets and leaders they have been living under are no longer serving their needs. That they are no longer fit for purpose.

And then what? Will we see the rise of a revised form of social pyramids with internal obligations, because people do not feel they can rely on government promises and systems, and do not like the isolation and radical uncertainty that modern life forces upon them? Will the nature of corruption in the West begin (again) to resemble that of the non-Western world? Or will we see something entirely new?

The New Anti-Imperialism

Through Western eyes, anti-imperialism might appear to be an anachronism. Didn’t the empires pack up and go home half a century ago? If so, then what is anti-imperialism against? There is an increasingly stark divide between those who think the post-imperial era is well along and those who think it is just beginning. Whichever side of this divide one is on, the political salience of anti-imperialism in West Africa and the Sahel, from Senegal’s Atlantic coast to Niger’s eastern border with Chad, cannot be denied. Niger decided days ago to eject the United States, having done the same with France late last year. Senegal meanwhile elected on Monday a young former tax inspector whose populist party has built its politics around distancing the country from France, the former colonial power. Imperialism may be dead, but anti-imperialism is thriving.

This is a political reality, and in politics there is always ample room for cynicism. The military governments in Mali, Burkina Faso and Niger are not led by angels. (Chad and Sudan are under military government as well, as is Guinea.) Expectations for sound governance, fiscal prudence, gains in health care and education, or democratic accountability should be kept very low. Nonetheless, these governments are not unpopular. They are seen as an appropriately tough response to an extremely difficult security situation as killings and kidnappings, usually by Islamist groups, have continued. French and American counter-insurgency aid was initially welcomed by many but was not the solution hoped for. The price paid in sovereignty (and military autonomy and accountability) was too high. Western military assistance came to be seen as neo-imperial.

Sovereignty, and something quite intangible having to do with respect, are the keys. All three countries, after all, have at the same time ejected France and the U.S. while seeking to pool their sovereignty, as they choose, in a tripartite security alliance against insurgent groups and while welcoming military aid from Russia, in particular. It is very hard to think of Russia as respectful of sovereignty, at least when it comes to neighbors. So all three nations are demonstrably willing to compromise their sovereign room for maneuver if it is necessary to get them closer to their security goals. They just won’t compromise it for powers perceived as imperial or neo-imperial.

Russia, along with China and even Iran — Niger’s willingness to sell uranium to Iran was a major source of friction with the U.S. — is successfully building its soft-power brand as anti-imperialist. This would seem like madness to a Ukrainian, a Pole or a Taiwanese, or indeed to those in larger states who have been the object of Russian, Chinese and Iranian extra-territorial cyber-attacks and information operations. Yet it is a political reality. Russia backs up its talk with hard power, China with investment — and some hard power as well. They are increasingly the anti-West, and that clearly has appeal.

Happily, this week’s presidential election in Senegal was a victory for democracy against authoritarian moves by the now departing incumbent. Yet much of the new government’s appeal comes from its anti-imperial politics, including agitation against “economic enslavement” by resource-extractive multinationals. The new president’s party made a point of advocating the adoption of a national currency and exit from the CFA currency area, seen as a relic of French colonialism. The CFA franc is pegged to the euro and backed by the French treasury. Replacing it has long been an anti-imperialist touchstone in the region.

And yet: incoming president Bassirou Diomaye Faye has already downplayed the CFA pledge and is most likely to continue backing replacement of the CFA by a regional currency (the Eco) shared by the 15-member Economic Community of West African States (ECOWAS) and scheduled to be launched in 2027. Something similar will probably get in the way of a plan mooted by Niger’s ruling general last month to create a post-CFA currency for Niger, Mali and Burkina Faso as “a first step toward breaking free from the legacy of colonization.”

In short, anti-imperialist sovereignty may be absolute but real sovereignty is relative. As in the 1960s and ‘70s, pan-Africanism, in doses small or large, is seen as the means for successfully blending sovereignty, dignity and survival – even prosperity.

The Networks Trap II: Disrupting a U.S.-led System

What could destabilize the emerging geoeconomic framework based on tech networks and alliances? An earlier post (“The Networks Trap,” 6 March 2024) examined how, as one result of the U.S.-China contest, the international system is dividing into two separate and distinct spheres for tech innovation, telecommunications, and military technology. In both the Chinese and American spheres these three sectors are being protected so that American technology will not be in Chinese networks and vice versa. Security alliances in particular, but also political alliances, are increasingly shaped by an emerging type of technological exclusivity. Most of the world would rather not have to choose between one tech ecosystem and another, but the viability of tech non-alignment seems to be weakening. “The Networks Trap” considered this in terms of Southeast and South Asia, where there are flourishing economies, strong domestic tech ecosystems, long-standing wariness of Chinese and American power, and a tradition of non-alignment. The post concluded that tech non-alignment will not be easy to maintain in the region and that the U.S.-led tech ecosystem was likely to prevail in competition with China’s own, even in China’s backyard.

What could disrupt this solidifying geoeconomic pattern?

One potential disruptor is India, which has pursued a technology-development path that avoids dependence on China or the U.S. India learned many lessons from China’s experience building an indigenous tech sector, including that if you welcome foreign venture capital it will come, but once foreign money and expertise have helped you build domestic capacity it might be best to unwelcome foreign capital except under conditions determined by the domestic private sector and the state. (It is perhaps an irony that much of the capital India welcomed and then unwelcomed was from China itself.) India learned from Europe that simply burdening foreign (American) technology with regulations gave no guarantee that domestic entrepreneurs would seize their opportunities. Like most countries, India has neither China’s technocratic relentlessness nor Europe’s high-end purchasing power. After decades of poor results, non-alignment is finally paying off for India. In principle, it could serve as a third-way model to others, such as Nigeria, Indonesia, and Brazil, and this could undermine the U.S.-China-driven tech-telecoms-security alignment currently under way.

However, India’s security worry is not the United States. It is China and its ally Pakistan. India’s security relationship with the U.S. keeps getting tighter, despite very considerable wariness on both sides. What India covets, as the U.S. well knows, is defense technology sharing and joint R&D — as distinct from arms sales. This gives the U.S. leverage to bring India into its networks and even its tech-innovation ecosystem. China’s comparative ability to do this is very weak. India will continue to seek non-alignment but the trend will nonetheless be toward stronger ties to the U.S.

A second potential disruptor of U.S.-China tech bipolarity is South Korean and Japanese dependence on tech exports. South Korea, Japan, and the United States are growing closer in terms of the tech innovation, telecommunications, and security triad. (The Center for a New American Security will release a report on this next week.) The difficulty is that South Korea and Japan, as aging and immigration-resistant societies with thin resource bases, rely on technology exports for growth at just the time when the U.S. is attempting to locate or relocate as much high-tech production to home as it can. This dynamic occurs with European tech powers and Taiwan as well. One partial solution is for these tech economies to relocate production into the U.S., satisfying the U.S. security requirement for production within American sovereign territory while retaining the earnings — in effect, an internationalization of U.S. production that also makes it possible for Japan, South Korea, and the rest to sell into the U.S. market without difficulty. But U.S. preference will still go to U.S. companies, as the extraordinary subsidization of Intel ($8.5 billion in grants and potentially even more in loans) shows. Powers like South Korea, Taiwan, Japan, and Germany cannot hope to be non-aligned in the way India aspires to be, but all these relationships will need to be sensitively managed on all sides, especially the American side. The economic fruits of a U.S.-led tech alliance cannot go disproportionately to the U.S. or its companies.

There are other potential disruptors. China and Chinese tech companies could extend their established practice of selling into markets too unremunerative (much of Africa and Latin America and parts of Asia) or ethically too dodgy (MENA) or both (Central Asia) to appeal to American, Korean, and Japanese tech companies. That would give China a significant advantage. Another possibility is that cybersecurity will become too difficult to maintain across a large number of semi-allied American partners, resulting in resentment of the core — say, the Five Eyes plus Japan, Taiwan, South Korea and some Europeans — by the periphery and political weakness throughout the network.

But the greatest threat is probably an American inability to share either power or wealth. The U.S. is currently engaged in developing defense-production partnerships around the world. The immediate spur has been the Ukraine war: even the Europeans and the Americans together have struggled to keep production at the necessary levels to meet official commitments to Ukraine. Their defense industrial capacity has barely been up to it. The reason is not a lack of military manufacturing capacity per se. Rather it has to do with the downsides involved in the allocation of that capacity to military purposes, which economists generally understand as among the least productive of economic activities: If you manufacture an automobile, it will be used by its purchaser for a variety of purposes that will themselves be economically significant; if you make a tank, its one purpose will be to destroy value, if it is ever used at all. Defense contractors are therefore peculiar animals, protected by states, and enjoying preferential relationships and long-term contracts, in exchange for the preservation and refinement of industrial capacity to provide the arms a state might need to ensure its survival. But in most cases they are a drag on overall productivity, which is why states are often quite happy to buy arms rather than divert resources to producing them.

So for economic as well as political reasons the U.S. does not want to be sole supplier to Ukraine or others. Instead, the U.S. hopes to broaden defense supply chains, seizing what Assistant Secretary of State for Political-Military Affairs Jessica Lewis called “a once-in-a-generation opportunity to transition countries off Russian-origin equipment, improve NATO interoperability, promote transparency and accountability in security sectors, and strengthen our defense industrial capacity.” (Lewis’s Bureau of Political-Military Affairs handles approval of foreign weapons sales.) By “our” Lewis meant European allies, although she went on, in this December 2023 speech, to identify a similar dynamic in Asia. But is it politically or economically possible to internationalize U.S.-allied defense production? Can such an expansion be secure, in cyber and other terms? Will U.S. defense companies be willing to share the risks and profits of production with overseas partners? Will Congress, which determines the contours of defense spending, be willing to let them?

As the international system divides into two separate and distinct spheres for tech innovation, telecommunications, and military technology, one dominated by the U.S. and the other by China, the process has many potential disruptors. The greatest is that the U.S. will be unable to manage this new and untried variety of internationalism.

Dealing With Corruption: Part Two of Four

By Dee Smith, CEO

 

Understanding corruption is difficult because often there are detectable trends and tendencies that go in more than one direction and can even seem contradictory or paradoxical. However, it is essential to understand it to know how to deal with it. As I noted in Part 1, in many regions, society can be conceived of as organized into “social pyramids” that stretch from a very wealthy family at the top to street sweepers at the bottom, with reciprocal obligations up and down the social pyramid. As I also noted—via an excursion through the arguments of Bernard Lewis—corruption is widespread in the West, it just generally flows in the opposite direction: using money to get political power, rather than using political power to get money.

It is impossible to understand why these structures are—or seem to be—different in the West than in the rest of the world without understanding the backstory, which starts with the birth of the modern era. Drawing on Enlightenment ideas of the 18th century, and building on even earlier, primarily British ideas about governance, the past 300 years have constituted a great social experiment to see whether society could be organized rationally, formally and institutionally, instead of along more hereditary, informal and relational lines. This was related to the advance of science and decline of religion: Given the revelations of science and empirical observation, an increasing number of people could no longer believe in an active god and a life after death. For example, science had started to reveal what the heavens really were: other suns and planets, not a supernatural realm.

If there was no paradisiacal afterlife credibly on offer, quite a few European thinkers and political figures became enamored of trying to construct paradise on earth. This social experiment produced the United States, the French Revolution (and an early example of the dystopias that result from such idealism, the French Terror), modern European states, communism, socialism, commercial capitalism, state capitalism, the industrial revolution and all that followed it (up to the computer revolution and the current AI revolution), consumer culture, and a number of other rationalist and “scientific” approaches to better organizing human society.

For this Enlightenment project, the primary motivator of human beings was conceived to be rational (here, read economic) self-interest—an idea that has held until very recently, and may just be beginning to come apart under the growing realization that idealistic attempts to produce perfected societies often result in hell on earth.

In order to secure a society based on Enlightenment values like equality, liberty, fairness and freedom, many new kinds of “rationalist” rules governing behavior would paradoxically have to be developed by the state, and human needs provided for or guaranteed by the state,  rather than by the informal, kinship-based social structures that had existed since time immemorial.

Expanding population was also a factor. The argument was that you had to have more rational, directed, scientific management or you risked the kind of scenarios outlined by Thomas Malthus (1766-1834), in which population growth leads to poverty, famine, disease and war.

An alternative interpretation is now arising. Its adherents feel that they cannot trust governments to decide on their behalf, that they want to emphasize culture and family over traditional political organizations, and that they want to focus on smaller structures. They want radical action to stop climate change and environmental degradation, which governments—seen to be in thrall to moneyed interests—are believed to be unable to do. They are often strongly attracted to exclusive social groupings, often newly created but presented as ancient, defined by ideology, ethnicity or race. Equally confusingly, the extremes of what used to be left and right often meet in a kind of atavistic libertarianism.

To the extent that some of this is called “conservative,” it is not your father’s conservatism, and it is only really conservatism in that it harkens back to an earlier form of human social organization. It is to a certain extent related to the trends towards splintering so readily observable today in affairs from global to local, which can be understood as representing a rejection of the logic and rationality of economic structures and rationales (such as globalization) in favor of what economists sometimes call “animal spirits” alongside a desire for closely defined belonging and identity.

There are currently a number of variants of the reaction against the doctrine of progress and the presumed supremacy of rationality among human motivations. For example, in the UK, some proponents of Brexit said they would be happy to be measurably less wealthy if they could be measurably more British. A willingness to become less wealthy has not been seen in recent times as a politically conservative attitude. If these trends rejecting recent distinctions between legacy liberal and conservative orders continue to spread, what could this mean for existing political and business structures? That will be the subject of part three.

The Networks Trap

Now that globalization has entered its military or security-led period, what will be the implications for the world’s fastest-growing regions: India and Southeast Asia? These economies have been seeking to refurbish the non-alignment of the Cold War in the hope of benefitting from US-China rivalry. In their different ways, India, Australia, Indonesia, New Zealand, Vietnam, and others have succeeded at turning that rivalry from a zero-sum game into a win-win for them, if not for the US or China. Investment capital has rushed into their economies as a result, with India on track to become the world’s third largest economy. It is early days, however. Neither major players such as India and Australia nor minor ones such as Fiji or Brunei really know what to expect. And none of the state actors involved, even China, truly have the capacity to coordinate defense, commerce, and innovation policies in a harmonious whole. The same is all the more true for a body such as the 14-member Indo-Pacific Economic Framework in the news this week. The potential for policy and economic chaos is very high.

The military connection of the region into an undeclared bloc is not a new development. The Pentagon’s embrace of a strategy built around the China threat has blossomed, under President Biden and Defense Secretary Lloyd Austin, into an extraordinary network of linkages and cooperation agreements throughout Asia. Given bipartisan support for US-China policy in Congress, and the relative policy autonomy of the defense-industrial sector, the marriage of Asian defense strategy and alliance politics seems likely to survive even into a second Trump administration. As America’s domino-theory aggressions in Vietnam and elsewhere in Southeast Asia have not yet been forgotten, it is striking how eager regional powers have been to accept US military leadership in an unwritten SEATO agreement that stretches from Seoul to New Delhi. The world has the Chinese Communist Party to thank for this still rather incongruous development.

As successful militaries have become so dependent on electronics and electronic-network-based technologies, military cooperation and technological capacities have become inseparable. This is one of the two main roots of the global turn toward industrial policy and the repudiation both of globalization—even by national economies that have benefitted most from it—and of the neo-liberal orthodoxies that seemed so immutable not long ago. Political structures such as AUKUS and the Quad are as much tech alliances as security ones. The US is long accustomed to using American technological sophistication and power as a way to cement security alliances. It is equally adept at using security alliances to advance the US defense-tech sector.

At some point, as all the players must realize, there is defense-tech lock-in. And this is where the other main root of the turn toward industrial policy can be found. The strictly economic prosperity of modern nations is dependent both on access to technology and on indigenous capacity to innovate technologically, at least for domestic markets. As so much of new and future technology is dual-use, the overlap of military tech and every other kind of tech has become enormous and seems constantly to grow. Indeed, the term “dual-use” itself, so important a few years ago, already seems anachronistic. When everything seems actually or potentially dual-use, the term doesn’t have any useful work left to do . Semiconductors are simply the most obvious instance. Japan’s decision to revive its own semiconductor industry, at great expense, makes no sense from the old neoliberal globalizing perspective. In the new dispensation, however, it seems a clever policy, at least to the investors who have bid Japanese equities to the highest point in 35 years on the strength of tech companies. The amazing rise in recent years of electronics manufacturing in India — India’s tech weak point since the 1960s — is a similar example of inherently dual-use industrial capacity-building.

Spending state money to build this kind of capacity, which in the old globalization would have seemed absurdly counter-productive in its inefficiency, has begun to seem sensible because it amounts to states investing in their own relative political and economic autonomy. The alternative is to become passengers on networks designed and controlled by others. The question is: Where does this process end? Where are the network boundaries of sovereignty and where are the network boundaries of alliances? The Biden administration’s turn last week toward the potential threats posed by Chinese electronic vehicles is a case in point. Logically, the threat posed by a Chinese  telecommunications network (Huawei, ZTE, China Mobile) is not very different from the threat posed by what the administration identifies as “connected” EVs — or as Commerce Secretary Gina Raimondo has called them, “smartphones on wheels.” The principle extends, perhaps indefinitely, to ships, planes, trains, and any other data-delivery or supply network. The semi-success of an agreement on supply-chain security by the nascent Indo-Pacific Economic Framework should be understood in this context. Even when the supplies as such are not high technology, their transport and distribution networks are. States will continue pushing to secure as much room for maneuver as they can. The brightness of their economic and security futures depends on it. In such a networked environment, however, the scope for non-alignment is shrinking. A later post will consider the factors that could make the emerging geo-economic structure unstable.

Dealing with Corruption: Part One of Four

By Dee Smith, CEO

In Latin America, Eastern Europe, the Middle East, Asia, and Africa, corruption is one of the most difficult and feared realities that businesspeople confront. There is certainly corruption also in North America, Europe, Japan and Australasia, but it is not as familial, for lack of a better word, and legal prosecution is far more thorough and predictable. Corruption in a place like Africa or Latin America isfundamentally based on the structure of society and inseparable from it. Dealing with it as an investor is fraught with risk.

In Latin America, for example, society can be conceived of as generally organized into social pyramids. These can stretch from a very wealthy family, or set of families, at the top, all the way down to street sweepers at the bottom. It is an extended family, whose members have obligations to one another, up and down the social pyramid. If someone becomes ill, it is the responsibility of persons around and above her to take care of her. If a member of this extended family gets into trouble, it is the obligation of the others to do whatever they can to help him. Or, in some cases, to discipline him.

At the top of this kind of pyramid sits one person, usually male: the patrón. The job — more than the job, the social responsibility — of that person is to provide for everyone below him in the pyramid. That is his primary social responsibility, even if it involves taking money illegally from the state, which is not necessarily seen as socially wrong. This is because the extended family surpasses all other considerations. The social system is geared to the patrón and his activities on behalf of the people beneath him. Isn’t the patrón enriching himself and his immediate family? Of course he is. But he isn’t just doing that. He is providing for the well-being, even the continued existence, of the entire social pyramid beneath him and of the lives of the people within it, even if he is also often ruling it with an authoritarian hand.

Within this kind of society there are many patróns with their social pyramids beneath them. Some of these pyramids are larger and richer, some smaller and less rich; some much taller or much shorter. The major families keep smaller families from growing beyond a certain point — unless there is a merger, for example, via marriage. This is why it is so important to have the right business partners in such countries If you haven’t done your homework, you can find that you are in business with a local partner who simply cannot grow your joint venture past a certain level. His business is allowed to continue to exist, because it would be morally wrong, and socially disruptive and dangerous, to remove the support for a whole social pyramid. But its growth may be strictly limited.

This overall structure of neighboring social pyramids is a fundamental part of the organization of this kind of society. Here is where history and anthropology become extremely relevant. There is evidence that this is a foundational structure of most human societies that become complex beyond a certain point. It was the social structure brought to the Americas by the conquering Spanish and Portuguese, which is why a certain amount of generalization is relevant for areas colonized by them. But it was also the social structure already present in ancient America. Ancient civilizations in what is now Latin America, like the Aztec civilization, had very similar social structures. So did ancient Rome. Similar structures are widespread in the Middle East and in many other parts of the world, from the rise of early chiefdoms more than 10,000 years ago to the present.

Bernard Lewis, the British-American historian of the Middle East, observed that there is just as much corruption in the Western world as there is in the Middle East. But, he said, in the Middle East, corruption means using political power to get money. He was correct in that, and this is true in much of the world. However, he also stated that, in the kind of corruption prevalent in the West, money is used to get political power. So the two work in opposite directions, so to speak. Lewis said they were technically equivalent, but he believed that this change in the “direction” of corruption made a huge difference and that the Western version is less damaging.

But is it? It is easy to argue that they are equivalent in effect. Certainly, there are in the West many examples of people using money to get political power and, partly as a result, the wishes of the electorate often have little to do with what legislation is passed by the US Congress. What does influence what gets passed by Congress is money, as a Princeton study showed in 2014. We all see how the wielding of money puts certain people in a position of primacy and gets certain people elected, whatever their merits.

(Continued in Part 2.)

Europe’s House Divided

The recent focus in Europe has understandably been on security. The European Union committed to massive support ($54 billion) for Ukraine, Donald Trump again put America’s commitment to European security in question with his remarks on NATO, and Alexei Navalny died at 47 in a Siberian penal colony. These were the leading topics at last weekend’s Munich Security Conference. But poor economic performance is the deeper problem in Europe and will remain so after memories of the conference fade. There are solutions available. Whether Europeans will choose to pursue them is the question.

The single market has been the great success of European integration. However, the EU’s 27 member states retain considerable authority over defense, telecommunications, finance, and energy. The economic integration of the continent seems to be reaching its limit under the current governance structure. This harms competitiveness, because national entrepreneurial energies are directed to national companies that serve national markets, some of which are very small. While the overall EU market is enormous (448 million people), the great majority of European companies, especially small and medium enterprises (SMEs), develop and market their products for national markets.

One clear solution would be to reduce the inherent barriers that keep European competitiveness trapped in 27 individual boxes. This is likely to be the main focus of two reports for the European Commission, one on the internal market and another on EU competitiveness. The first will probably arrive in April and the second in July.

But will dramatic steps toward greater integration be taken? The chances don’t seem good. The EU’s recent embrace of industrial policy has hugely privileged the largest economies, Germany in particular. Faced with Covid and then the Russian invasion of Ukraine — followed by an American turn to industrial policy under Joe Biden, notably for green industries and products — the EU, under Commission President Ursula von der Leyen, turned on the aid spigots. The funding went to deal with Covid, reboot European weapons production, stimulate the greening of the European economy, and triangulate economic aid in relation to US priorities as revealed in the Inflation Reduction Act, among other goals. The biggest beneficiaries of this sudden largesse were the economies with the greatest capacity to answer policy needs. Not surprisingly, these were also the largest economies. About half the aid between March 2022 and August 2023 went to Germany — half, that is, of €733 billion.

In such a situation, the willingness of smaller European countries to give up what control they retain over defense, telecommunications, finance, and energy is going to be limited. The brain drain from smaller to larger economies has further fueled resentment of the major European powers and left large parts of the region populated mainly by the elderly or by younger people who are either determined to stay in place or feel that they have little choice. Given these dynamics, the growth of nationalism in smaller or medium-sized electorates, and in the less developed parts of larger ones, seems inevitable. It would directly militate against the political viability of further economic integration. So would the ongoing flow of European capital to the US in that it acts to reduce investment in Europe.

Still, the European model of governance innovation has always been a kind of crisis response and Europe is now rich in crises. Russia’s actions in Ukraine inspired a surge in European defense spending, reviving a sector that had been in decline. The first Trump administration delivered a severe shock to Europe; a second would do the same. Some European reformers joke that a Trump presidency might be just what it takes to reinvigorate the European project. Kamala Harris, at the Munich Security Conference, carried a message of reassurance about American commitments to Europe, but she might not be in any position to fulfill that promise.

Investing in Europe necessitates close attention to these dynamics. Large-scale EU industrial policy is likely to continue for some time. The EU is participating in an “onshoring” cycle that is just as vigorous in China, the US, and India. Each of these reacts to the others, deepening the replication of production in the world’s largest economies. Selling further integration to European electorates will probably require more emphasis on industrial policy rather than less, along with a serious commitment to making Europe more competitive and less dependent upon the US and China. This seems certain to create new trans-Atlantic tensions as the US reacts to European “protectionism.” In many ways, an integrated trans-Atlantic market seems to be the only long-term solution for a Europe in demographic decline, but the chances of it are getting lower.

India’s “New Era”

Growing tension and economic decoupling between the US and China have prompted many investors to move their capital from China to India or other growing Asian economies. India is projected to maintain growth between 6% and 7.5% into the second fiscal quarter of 2024, and Morgan Stanley and Goldman Sachs alike expect it to be the focus of international investment in developing economies for the next decade, much as China was earlier. India offers a business environment that is comparatively free from the demands of an authoritarian state in the China mode. For different reasons, the United States is also investing a lot of political capital in India. But while India is an attractive alternative to China there are important reasons for investors to be cautious as well.

Freedom of the press in India and access to accurate information have become serious problems as major publications and platforms are now dominated by wealthy individuals or conglomerates loyal to the ruling BJP party. Party activists have been mobilized to monitor and harass journalists or sources who might be inclined to criticize government policy.

Political success requires large amounts of money and the BJP has been nourished by crony capitalism. The system was described by the Chairman of the Reserve Bank of India, Raghuram Rajan, as a “cycle of dependency”:

The crooked politician needs the businessman to provide the funds that allow him to supply patronage to the poor and fight elections. The corrupt businessman needs the crooked politician to get public resources and contracts cheaply. And the politician needs the votes of the poor and the under-privileged.

In the process, however, the economy is reduced to a kleptocracy from which open markets, competition, rational price mechanisms, transparency, and the rule of law disappear. The most outrageous example in recent decades has been the career of Gautam Adani, who rose to power along with Narendra Modi after religious riots in Gujarat in 2002. Adani was briefly the third richest man in the world until Hindenburg Research published a report that implicated the Adani Group in fraud on a massive scale.

The government has also begun to weaponize the Indian Revenue Service against its opponents. When the BBC released a documentary last year that was critical of policies towards Muslims, the government responded by banning the film and ordering the IRS to raid BBC offices in India on suspicion of tax evasion. This is only one of the more prominent examples of the BJP’s use of government agencies to bully political opponents and discourage open criticism.

The judiciary has attempted, with some success, to retain its independence, but the BJP has persevered in its efforts to dismantle the Supreme Court’s defense of precedent and constitutional law. This has allowed a powerful executive branch to delay or disrupt the judicial process and, with a compliant Chief Justice, to assign politically significant cases to judges sympathetic to the ruling party. Investors should bear in mind that political expression is no longer entirely free in India. The V-Dem Institute in Sweden now describes the country not as “democratic,” but as an “electoral autocracy” similar to Hungary, Turkey, or El Salvador.

The accusation is no more troubling for Narendra Modi, leader of the BJP and Prime Minister of India since 2014, than it would be for Recep Tayyip Erdoğan in Turkey. It may still not appear to be a serious concern to foreign investors in India. But even if foreign journalists are inclined to treat the economic success of India as if it could be distinguished or detached from aspects of BJP or Modi himself that they regard as unethical or even criminal, it is far from certain that this can be done.

The Biden administration seems to have calculated that the US-India strategic relationship must be maintained regardless of the BJP’s rhetoric or policies. In 2005, Modi had been banned from entering the US due to his “severe violations of religious freedom” while Chief Minister of Gujarat. He was only allowed to enter the US after he became Prime Minister in 2014. Now, however, he is welcomed with lavish receptions at the White House, a confirmation of the place that India has come to occupy within the global network of American partnerships. Barring any extraordinary shifts in the strategic balance between the US and China in the Indo-Pacific region, it can be assumed India will not be subject to economic sanctions or other punitive measures by the US or its allies, even if there were otherwise reason to apply them.

The BJP and its rhetoric recall the politics of the far right in Europe: a profound sense of grievance, an appeal to a mythic past, and repeated calls for public mobilization. Modi has described a Hindu majority under Muslim rule as having suffered “a thousand years of slavery” that India will no longer tolerate. He has increasingly shown what that might mean, for example with his commemoration a famous attack on a mosque.  On 6 December 1992, some 200,000 Hindu nationalists attacked the Babri Masjid, a mosque built by the Mughal emperor Babur. The violence would not only provoke rioting across India, it would also transform political and social life in the decades that followed. In January 2024, Modi presided over the lavish inauguration of a new Hindu temple where the Babri Masjid once stood. “We must not bow down anymore,” the Prime Minister insisted as he announced the beginning of “a new era.”

Other mosques are now being targeted for demolition and other excavations at other monuments continue as the BJP attempts to create a new history from tales in ancient epics, but its quest for a purified Hindu India is based on the assumption that one community will win as another loses. It is all too easy, however, to imagine a future in which both will be diminished.

Hedging the Middle Powers

As Central Intelligence Agency director William Burns has been understandably circumspect in making public statements, on or off the record, his article last week in Foreign Affairs made news. The FA promotional material stressed Burns’s reflections on how the CIA is adjusting, and must adjust, to the times. News coverage of his article focused on Ukraine, Russia, and Iran. In SIG’s view, however, the most interesting passages were on “middle powers” vis-à-vis US-China relations.

“In this volatile, divided world,” Burns wrote, “the weight of the ‘hedging middle’ is growing. Democracies and autocracies, developed economies and developing ones, and countries across the global South are increasingly intent on diversifying their relationships to maximize their options. They see little benefit and plenty of risk in sticking to monogamous geopolitical relationships with either the United States or China.” Unlike many in the US intelligence community, Burns does not go on to say that states will need to choose which side they are on. He simply accepts the situation as a reality that the US must accept and address rather than hope to reverse.

To be fair to the reporters linked above, Burns’s passage on the “hedging middle” was not new and therefore not really news. Somewhat surprisingly, the passage and indeed much of the FA article had already been published in July of last year in the Washington Post, an opinion piece that was itself adapted from remarks that Burns had made earlier that month at the Ditchley Foundation. Even the somewhat off-kilter metaphor of open geopolitical marriage survived from the earlier speech.

Still, Burns’s acceptance of the legitimacy of middle powers keeping their options open is important to register. It is one thing to say, as Burns has been saying for a number of years, that the days of US hegemony are over. It is quite another to draw from this the conclusion that the US just has to make do with autocracies or democracies, as the case may be. Indeed, that implication runs counter, at least in spirit, to President Biden’s “summits for democracy” policy.

Burns’s vision is probably close to what Biden actually thinks about alliances and democratic values, as distinct from what he sometimes says. After all, Biden would have had opportunities, in eight years as vice president, to push the Obama administration toward an explicitly values-based or activist foreign policy. But Biden, who was the youngest member of the Senate Foreign Relations Committee in the mid-1970s and left it as chairman in 2009 when he entered the White House, tended to come down on the pragmatist side as vice president and has kept to that path as president.

This was a departure from the Clinton-era Democratic Party. It emerged in the Obama administration. Obama’s antagonism toward the foreign-policy “blob” normalized a pattern of public idealism atop policies of taking “the world as it is,” a phrase that gave top Obama foreign-policy advisor Ben Rhodes the title of his memoir. The pattern has continued under Biden and solidified into a doctrine, or at least an idea, of how to deal with “middle powers.”

It's hard to know where the idea originated, but one can easily imagine Burns playing a major role. The son of a general who was very active in policy-making, Burns was the most celebrated professional diplomat of his generation. Of the Biden national-security triumvirate of Blinken-Burns-Sullivan, Burns was the only one with many years of experience dealing directly with foreign friends and adversaries. This made him unique among CIA directors, and his unusual para-diplomatic assignments under Biden, along with his being given cabinet status, have reinforced his unique position. So do his singular personal qualities. As anyone who has met him will attest, he is an almost extravagantly modest person, starkly different in that respect from many of his predecessors. (A collection of oral histories about Burns’s State career captures this and similar qualities in the words of his contemporaries.) He has a mesmeric ability to inspire trust among enemies as well as friends. His personality and professional practice alike suit him to accepting and dealing with a “hedging middle.”

This could soon have domestic political consequences. It has often been noted that Biden’s China policy continued Trump’s China policy, and as a result has enjoyed a bipartisan support otherwise almost absent from US politics. Biden has even taken the approach to new lengths with his adoption of a China-focused industrial policy and a much more extensive program of techno-containment than Trump had attempted. The trade deficit with China has shrunk to the level of 2003, and US tech companies are benefitting from government encouragement while China’s tech sector is still struggling to adjust to Xi Jinping’s much more heavily interventionist policies. But the Biden administration has not stressed either the Trumpian “business” approach, which emphasized that China was an unfair competitor, or the values approach, which was more an appeal by Trump’s advisors for a moral confrontation with Chinese Communism. Both of these can be expected to form the core of the Trump campaign’s attempt to differentiate its China policy from Biden’s. It is hard to imagine a second Trump administration displaying any tolerance for a hedging middle constantly weighing its options. As before, nations will probably be pressured to make a choice between the US and China.

Between now and November, the Biden administration will likely stick with its policy of trying not to force other countries to choose between the US and China or between democracy and autocracy. The policy has the public endorsement of Burns and Sullivan, and a bit less enthusiastically of Secretary of State Blinken. It is definitely an investor-friendly policy and, in its way, globalization-friendly during a period of anti-globalization still under the shadow of Trump’s successful appeal to economic nationalism. But it might not be permanent, and investors will want to do some hedging of their own in preparation.

Green Poverty?

The first wave of backlash against environmental, social, and governance (ESG) standards focused on the sacrifices in efficiency involved in compelling corporations and investors to comply with unclear standards that raised costs and redirected capital. A second and more subtle wave has been gaining momentum over the past year. Environmental standards are joining with social and governance standards to create a new global investment landscape. Some areas that were preferred destinations before ESG factors were considered have become less desirable, while other areas that once seemed too expensive for investment now seem more attractive. The emerging pattern is one in which supply chains are assessed in avowedly ethical terms, to the economic detriment of poorer parts of the planet. Whether this will lead to a world divided into wealthy and self-consciously virtuous countries and others that are regarded as chronically poor and chaotic remains to be seen. In SIG’s view, however, certain ESG trends are combining with technological and security-driven issues in ways that will ultimately shape the global distribution of wealth.

Europe has been the leader. Germany has played a leading role in developing standards that bring human-rights and environmental concerns together in ways intended to mold major business decisions. In particular, its concerns are expected to shape anticipated European Union regulations. Although such rules are not intended to make anyone poorer, the countries with the strongest records on environmental, social, and governance concerns tend to be wealthier, democratic, educated, and industrialized. When ESG standards are applied to domestic companies’ overseas investment decisions — or, what amount to almost the same thing, sourcing rules are applied for supply-chain inputs — one effect is to realign supply chains such that investment is biased toward countries that are already relatively high up the ESG ladder. As transport costs are a major factor in carbon use, ESG priorities also enhance the importance of geographical proximity, which itself often reflects the existing distribution of wealth. As the Financial Times put it in reporting on Macquarie’s record 8 billion euro infrastructure fund, “there has been a revival of interest in infrastructure as businesses seek to profit from transitions to cleaner energy and supply chains that are closer to consumers.” If a plant in Poland and a plant in Pakistan could deliver the same product to the European market at the same price, then the Polish product would prevail because its transport to market would be less. And as European infrastructure improved, the Polish advantage would grow.

Moreover, because there is a rough but clear human-rights and democratic-governance geography that privileges Europe, the island nations of east and southeast Asia, and the Americas, the application of human rights and governance standards unintentionally reinforces the physical geography of carbon reduction in transport. In effect, investment and growth become increasingly centered on geographies where they are already greatest.

Less-developed countries have long seen environmental standards as a way for rich nations that were once imperialist and colonialist powers to pocket the productivity benefits of two centuries of industrialization while spreading the environmental costs over the rest of the world. The reality is more subtle. After all, the expansion and diversification of production during the most recent episode of globalization, along with the provision of higher education and the dissemination of intellectual property, have all been driven by rich-world economies. In other words, the fruits of earlier, and very dirty, industrialization are beginning to be shared, albeit in ways that are also self-serving. The great rich-world universities, for example, have been fattened on inequalities of many kinds, but the excellence that resulted is now shared — at a price — with Chinese and South Asian students, most of whom will take this knowledge home. It is a heavily mediated and uneven form of redistribution, but it is still redistributive. The same is true of the diffusion, from wealthy centers, of intellectual property and productive methods and processes, as well as finance capital. In their universities, as elsewhere in their economies, wealthy countries seem to have more productive intellectual capital than they can absorb. Globalization has helped to redistribute that capacity, to the benefit of less developed countries.

The growth of ESG standards is likely to inhibit that redistribution, not just on its own but as it reinforces rich-world policies for reshoring production due to security reasons. Although the desire to have supply chains that are as green and human-rights-friendly as possible may not seem to have much in common with the wish to have a secure supply of semiconductors, all three point in roughly the same direction: the re-concentration of production in higher-wage areas that are physically nearer the centers of global wealth and power. Intellectual, industrial, and perhaps financial capital are likely to become less rather than more evenly distributed, as areas close to the centers of power gain further advantage.

In Latin America, for example, the US is determined through the framework of the Americas Partnership for Economic Prosperity (APEP) to support the growth in Latin America of production capacity in clean energy, semiconductors, and medical supplies. This is the classic post-Covid trifecta of environmental, technological, and public-health as shaped by ESG and security concerns. APEP’s spring 2025 meeting in Costa Rica will focus on semiconductors. Investment in that sector in Central America would not be as likely in the absence of the near-shoring effects of ESG and security priorities.

So is the change in patterns of green investment simply another vector for the division of the globe into production blocs? Not quite, or not yet, mainly because China is investing in many of the same sectors in many of the same locations. Its Latin American priorities have shifted from traditional infrastructure to data centers and 5G networks. In line with its own strategic priorities, China is now stressing clean-energy and agricultural biotech investments in Latin America as well. China may not care about social or governance issues, but it cares very much about clean energy and the global food supply. Both are critical to its long-term survival and it cannot secure either on its own. This in turn has led China to invest heavily in green shipbuilding, part of a large and ongoing Chinese effort to increase its share of the industry. As China already produced 48% of global shipyard output in 2022, countries such as the United Kingdom have begun to invest more in their own capacity to avoid dependence on China. In short, neither strategic competition nor green initiatives inevitably cause an in-gathering of production. In some cases and at some times, they can have the opposite effect. Factors of production can become more diffused despite the wishes of the major players.

Proxy Votes in Baluchistan

When Iran fired missiles across its border into Pakistan’s Baluchistan province on 16 January, it announced that its targets were bases belonging to the anti-Iran insurgent group known as Jaish al-Adl (Army of Justice). The Associated Press reported  that “a military response from cash-strapped Pakistan” was unlikely, but within 48 hours Pakistan retaliated with missiles and sent fighter jets into Iranian airspace. Pakistan claimed that it was targeting anti-Pakistani insurgents operating from Iranian territory.

As anxiety about Iran asserting power beyond its borders has increased after Hamas attacked Israel on 7 October 2023, and after Iranian proxies in Yemen responded to Israeli counter-attacks in Gaza, any cross-border Iranian actions are going to cause alarm—especially if they are conducted against Pakistan, a nuclear power with a Sunni-dominant political culture.

It is true that an argument can be made to dial down worries about the Iran-Pakistan missile exchange. Iran, Pakistan, and Afghanistan all contain large areas of territory dominated by the Baluch people. Indeed, Baluchistan is Pakistan’s largest province in land area—but also its least populated and arguably least developed. Although military-heavy, authoritarian, and ruthless governments might be assumed to have the means to protect their own borders, Iran, Pakistan, and Afghanistan have never been able to assert their sovereign power convincingly in Baluchistan. Relations between the three states being fraught, Baluchistan has for years been a reliable source of irritation for its putative overlords and a place for them to contest with each other. Trouble in Baluchistan is hardly new.

But for just that reason the current level of Pakistan-Iran conflict seems disproportionate. Jaish al Adl had killed a dozen men at a police station in Iran, a depressingly common form of Baluchi skirmishing. Lobbing missiles over a border, in retaliation for such a familiar provocation, was new, as was Pakistan’s emphatic response.

The Iranian action may be easier to understand. Most analysts believe that it was a show of strength at a time when the Iranian regime feels threatened. The killing of 84 people gathered In Kerman at the grave of the Iranian major general Qassem Soleimani—who was assassinated on 3 January 2020 in an American drone strike—was yet another outrage by Islamic State and may have been encouraged by Pakistan. There is no doubt that Islamic State had a particular interest in Soleimani, who had been the mastermind behind Iranian force projection in Iraq and Syria against Sunni extremists. He had therefore become both a source and a symbol of Iran’s use of force beyond its own borders, which was why the US decided to assassinate him. The two Islamic State suicide bombers who attacked his grave on the anniversary of his death came from Khorasan, which is, like Baluchistan to its south, a large border region that no state has been able to control.

More broadly, Iran's theocratic Shia regime has often found itself at odds with Sunni Pakistan. Shia minorities in Pakistan have faced attacks from Sunni militants for decades, with thousands killed in the past 30 years. Iran has long tried to export its Shia ideology to border countries and elsewhere in the vicinity, which is hardly appreciated by most Pakistanis. The close relationships that Pakistan maintains with Persian Gulf monarchies, especially with Saudi Arabia, also fuel Iranian hostility. The nuclear competition in the region has been driven in part by Saudi investment in Pakistani nuclear-weapons projects and by Saudi hopes of obtaining a nuclear arsenal of its own.

On the Pakistani side, these existing patterns of conflict are worsened by Iranian ties with India. The Foreign Ministry of India issued a statement that supported the Iranian attacks. Meanwhile one of the few potential bright spots in the Pakistani economy, the Chinese-built megaport at Gwadar, is within Pakistani Baluchistan and acutely vulnerable.

Proxy warfare is a sometimes underestimated factor in economic stagnation. Inward investment to Pakistan has plummeted since its 2007 high. Iran’s inward FDI peaked earlier, in 2002. Both are now at 1970 levels. But Iran is significantly wealthier in per capita terms, due mainly to oil rents—about 20% of GDP in 2020, compared to only nominal amounts in Pakistan. This seems to have the effect of making Iranian strategists more willing to spend on foreign adventures. Investors need to take current and likely patterns of proxy warfare into account. This unfortunate reality became clear to the Chinese in Gwadar and has become clear to the world as Iran’s Houthi proxies harry shipping in the Red Sea.

The Davos Myth

The peculiarities of the World Economic Forum meeting at Davos look more peculiar each year. The WEF’s 2024 risks report again used a proprietary poll of global leaders to foresee global trends, but the Davos definition of “global” may finally have transitioned from eccentric (or nostalgic) to misleading: 38% of respondents were from Europe, 18% from “Northern America”, and just 5% from “Eastern Asia”. In the breakdown of national responses, China was notably missing. In what sense is this global?

Similarly, the Davos analytical frame continues to look at world trends independently of particular actors. The 2024 report, in line with WEF tradition, leaves out names: no Trump, no Xi Jinping. Nations also get little attention as independent political-economic actors.

The idea of the WEF was always to both reflect and nurture a view of globalization in which economic forces could be relied on to overwhelm politics, preferably for the better. In that odd way that neoliberalism and Marxism have of blending into each other, the Davos view is of what Marxists call “the forces of production” structuring the surface phenomena of states and political leaders. As long as the theory is sound, then it might not matter that only 5% of respondents are from China/Japan/Korea/Taiwan, which is presumably the group forming the “Eastern Asia” category.

But the theory is not sound, which is why the 2024 report looks so odd. Xi Jinping’s mode of responding to globalization — remaining open to foreign capital and technology while protecting domestic firms from competition in the home market and subsidizing their growth abroad — made WEF globalization anachronistic, as did the self-protecting responses of the US, India, and to a degree Europe. The relief with which Xi was greeted at the 2017 WEF did not last very long. Neither did its embrace of India, which weakened under the pressure of Narendra Modi’s India-first policies. Vladimir Putin crushed WEF’s Ostpolitik while Donald Trump made “economic nationalism” great again in the US. Individuals, states and politics really do matter.

This week South Korea, for example, announced it would direct nearly half a trillion dollars to improving semiconductor production on its own territory. Korea, whose Samsung currently runs a distant second in semiconductor production to Taiwan’s TSMC, is partly reacting to increased domestic semiconductor subsidies in Taiwan and Japan.

Meanwhile, in the US the grip of national-security priorities on the tech sector has steadily increased. Concerns about the sturdiness of the American DIB (Defense Industrial Base) were once a fringe obsession, but now every four-star is an authority on the economics of manufacturing.

Interestingly, some WEF survey respondents identified this bending of national economies to a kind of security-driven tech hoarding as a major risk in 2024. SIG’s view is that they are right to do so.

Investors, therefore, are wise to continue evolving away from a faith in globalizing forces and toward close analysis of particular people, states, policies, and political pressures. The most difficult, and most important, area to watch is the intersection of nationalist priorities and globalized markets. It is the Xi Jinping intersection, but it has grown far beyond his signature twinning of Made in China 2025 and the Belt and Road Initiative. Now all the major economies are playing the same game. When economies as diverse as those of the US, Korea, Japan and India are reaching for many of the same policy levers in trying to achieve the China goal of insulation from global forces combined with export promotion, globalization has changed its nature. It is not about less-developed countries “catching up” with more-developed ones. The process, if that is the right word, is much more discontinuous than that, more subtle and less predictable. Against most post-Cold War predictions, the power of states and individual leaders is increasing, as are popular expectations about what states can and ought to do for them.  All of this fuels interstate competition in ways that the Davos worldview is ill equipped to handle.

Strategic Insight Group is a licensed Private Security company with the Texas Department of Public Safety pursuant to the Texas Occupations Code 1702, license number A10774.