January 2, 2012 8:53 pm

The big questions for 2012

Comment Page

A paradox that will paralyse world politics

Efforts to rescue the world economy in 2012 will be afflicted by a perilous political paradox. The more that international co-operation is needed, the harder it will be to achieve.


The year begins with the world still overshadowed by the threat of the biggest economic crisis since 1945. But as the economic position deteriorates, the actions demanded of national leaders become ever more drastic and harder to sell at home: take part in big bail-outs of indigent nations, subsidise wildly unpopular bankers, work patiently with countries that large parts of your own population believe are bankrupt or dishonest. In 2012, the world’s most important leaders are likely to be asked to do all of the above – and will find it ever harder to deliver. The conditions of recession, instability and panic that demand international co-operation also make voters angrier and less generous.

The political pressures produced by an international economic crisis have prevented the European Union – or a larger world community – from dealing effectively with Europe’s debt problems. Over the year, the problem is likely to worsen because so many of the most important countries face elections or changes in leadership that will make it very hard for them to devote much energy to diplomacy. There are presidential elections in the US, France and Russia – and China’s top leadership will also be reshuffled towards the end of the year.

The biggest demands, however, will be made of a country that is not scheduled to undergo elections. This year, as in 2011, the world will look to Germany to provide the money and intellectual leadership to pull the eurozone back from the brink.

Germany, however, is extremely reluctant to open its cheque book once again. Instead it is pouring its energy into securing a new European treaty that will place draconian limits on deficits – a policy that is irrelevant to the debt crisis in the short term and liable to be counterproductive in the long term.

Germany’s behaviour is explicable only when understood in the context of domestic politics. The policies of chancellor Angela Merkel are dictated by a popular desire that Germany should fund no further bail-outs in Europe and instead export its ownstability culture”.

Ms Merkel is sometimes lambasted by foreign leaders for allowing domestic political constraints to dictate her approach to the crisis. But look around the world, and everybody else is doing the same.

Germany’s main partner in Europe over the next few months will be France – a country that will be preoccupied by its presidential election. Nicolas Sarkozy will be trying to push any further twist in the crisis beyond the final polling date of May 6, while guarding his flank against accusations from the left and the far right that he has gone too far in ceding sovereignty to an impatient Germany.

And what of the US? Bill Clinton once boasted that America was the “indispensable nation”. But when it comes to the eurozone’s agonies, the US would be more than happy to be dispensed with.

There is no money for a modern Marshall plan for Europe. All talk of foreign aid will be anathema during an election year. President Barack Obama’s dearest wish for 2012 is that the Europeans get their act together and avoid plunging the world into a recession before Americans vote in November.

With America gazing inward, some will look to China for money and leadership. This began visibly to happen in 2011, when European officials ended an EU summit by jetting straight off to Beijing, in a humiliatingly unsuccessful effort to drum up Chinese interest in buying more European debt.

But the leadership of China’s Communist party will also spend much of the year jostling for position. While the identities of the new president and prime minister are widely assumed to be known – with Xi Jinping and Li Keqiang slated respectively for those positions – the slots just below the top two are up for grabs. China’s urge to concentrate on domestic affairs will be accentuated by a growing nervousness about political and economic instability at home.

The leadership was clearly alarmed by the Arab spring. The recent demonstrations in Moscow against a stage-managed election will also have caused discomfort in Beijing.

There are, meanwhile, fears of inflation, a house price crash and growing social unrest in China’s manufacturing heartlands. That might mean that Beijing’s leadership transition is more lively and contested than many expect. But it will also ensure China has little energy to devote to elaborate international co-operation.

In 2012, we can look to world politics for the entertainment value that elections provide – but not for solutions to global problems.


Public v private: The state starts to run out of time on how big it should be

The big debate of 2012 will be over the role of government in the economy, writes Deanne Julius. Although this sounds like an economic issue, it is really about politics. There is no economically optimal size of government. Voters must choose whether they prefer high public sector spending and generous entitlements coupled with higher taxes to pay for them, or modest public provision and basic entitlements along with lower taxes and, therefore, more take-home pay.

The ongoing financial crisis provides stark evidence that the current model of high public sector spending financed by growing public sector debt has hit the buffers.

The US election campaign is taking shape around this issue. The Republican candidates seem determined to outdo each other in their opposition to government spending, whether for healthcare or road repairs. Their arguments vary with their political stripes.

The more moderate point to the inefficiency and low quality of public sector services. The more extreme think it is immoral for government to confiscate people’s income through taxation for anything other than “purepublic goods such as defence. They believe individuals should have the right to keep their income and spend as they choose, rather than having choices made by bureaucrats.

On the Democratic side, Barack Obama is fighting to maintain his healthcare reform and extensions to unemployment compensation. But he continues to claim that such entitlements can be financed by higher taxes only on “millionaires and billionaires. Few economists support that view. More importantly, the polls show that the public is very concerned about rising government debt and sceptical that higher deficits will stimulate growth.

Despite this debate, the US may be able to fudge the issue for a little longer. There are still willing buyers of US debt in Asia and, if 2012 brings more financial shocks, the dollar will benefit from safe haven flows.

But Europe is running out of time and it starts from a worse position. Taxes are already so high that they depress growth, both by making Europe an uncompetitive location for many businesses and through what economists call the “deadweight loss” they impose on the economy.

This problem is compounded for eurozone members, which cannot adjust by depreciation. Meanwhile, welfare spending and public sector employment now benefit so many voters that it is hard for politicians to win backing to cut them.

The social contract that underpins democracy requires compromise. But the political debate will grow more confrontational in 2012. It will be the year that the financial crisis turns into a number of political crises.

The writer is chairman of Chatham House and a former member of the Monetary Policy Committee of the Bank of England


Economic inequality: Peaceful acceptance of deep differentials is coming to an end

Inequality will be the central theme of 2012, writes Moisés Naím. It has always existed and is not going away, but this year it will top the global agenda of voters, protesters and politicians running for office in the many important elections scheduled.

There is nothing new in the fact that a few people have too much and too many have too little. In some places (the Soviet Union and most countries with authoritarian regimes) inequality was once largely hidden from the population, in others (Latin America) it was known but tolerated and in some (the US) it was celebrated. In 2011, the economic crisis made the world more aware of its extent and scope. In 2012, peaceful coexistence with inequality will end and demands and promises to fight it will become fiercer and more widespread than they have been since the end of the cold war.

Headlines such as this recent one in the Los Angeles Times – “Six Walmart heirs are wealthier than US’ entire bottom 30 per cent” – epitomise the new mood. Such scrutiny of the lives and deeds of the “1 per cent” will become obsessive. Alongside the new-found intolerance for inequality, we will also see the occasional attempt to explain that not all inequality is bad. Jamie Dimon, chief executive of JPMorgan Chase, said recently: “Acting like everyone who’s been successful is bad and that everyone who is rich is bad – I just don’t get it.”

Behind his perplexity is the assumption that great wealth often results from innovation, talent and hard work that are justly rewarded by society.

But as we know, great wealth and inequality can also originate in corruption, discrimination, monopolies, abusive corporate behaviour or Madoff-like malfeasance. Students of inequality like to equate it to cholesterol: there is bad and good inequality and the trick is to boost the good one while keeping the bad one at its lowest possible level.

Therein lies the problem: lowering inequality without harming other goals (investment, innovation, risk-taking, hard work) is not easy. The fight for a more equal society was the goal of countless experiments that resulted in even more inequality, widespread poverty and loss of freedoms. Yet there is compelling evidence that high inequality is also bad for a nation’s health: it leads to higher political instability and more violence and it hurts competitiveness and growth.

This year, elections will take place in the US, France, Russia, Taiwan, Mexico, Egypt and South Korea. China will also change leadership. Inequality will become part of electoral debates that will influence the conversation even in countries where it has long been taken for granted.

Inequality will be the protagonist of 2012.

The writer is a senior associate in international economics at the Carnegie Endowment


Comment Page

Social unrest: Technology to power rolling disruption to outright revolution

The big issue of 2012 will be more of the same: rolling protests across multiple countries that will morph into revolutions in many, writes Anne-Marie Slaughter. They are the result of “disruptive technology” and we are only just beginning to grasp exactly what this means. It means that disruptions in the lives of individuals – through arrests, beatings, torture, rape, detention, kidnapping and murder – have a much higher probability of disrupting entire societies.

The difference from traditional technology is speed, scale and resilience. The immediacy, apparent veracity and emotional power of words and images that are instantly transmitted to thousands and then millions of people can transform existing currents of dissent into a raging flood.

Equally important, when the state takes action to crush the first waves of protest, the resulting images create instant martyrs and a steadily growing determination that the lives lost shall not be in vain. Finally, success in one country fuels a sense both of possibility and of competition across a region. The Egyptians marching to Tahrir Square were inspired by hope and a friendly but real rivalry: “If the Tunisians can do it ...”

In 2012, we should see many more protests in sub-Saharan Africa. Zimbabwe is one obvious candidate; Sudan is another. Nigeria could rise up en masse against enormously pervasive corruption; uprisings are also possible in Ethiopia, Uganda and a number of smaller countries. In Russia, shame among educated classes that Vladimir Putin is just the latest tsar, combined with growing economic desperation and corruption in rural areas, makes another Russian Revolution plausible if not probable. And I would not be surprised to see mass protests in several central Asian countries, in Pakistan, again in Iran, in Algeria, Mexico, Venezuela or Cuba.

In the US, the Occupy movement will operate through rolling flashmob-type disruptions, but we should also see much more concrete actions such as defending against foreclosures – a tactic pioneered in Spain. In European countries that are choking on eurozone-imposed austerity, protests are also likely to turn into co-ordinated civil disobedience, centred on a refusal to pay new or higher taxes. And the Middle East will continue to burn.

Revolution is the ultimate disruption; it is an overturning rather than a reshaping through reform. Rolling disruption is somewhere in between. Wise governments will pre-empt revolution and respond to protests with rapid and meaningful reform. But wise governments are few and far between; and wise governments able to act quickly are far fewer. Expect a very turbulent year.

The writer is a professor at Princeton and a former director of policy planning at the US state department


Energy: Fuel’s decisive shift in supply will boost security – at a price

Technology is profoundly changing the world’s energy equation and all its geopolitical implications, writes Roger Altman. Energy efficiency in the advanced countries has risen sharply, implying that their demand has peaked, and vast, commercially exploitable discoveries of oil and gas – especially gas – have been made in politically stable areas, including in the US. This suggests that in future gas will account for a much larger proportion of world energy supply. While these developments are positive for geopolitical stability, they may pose difficulties for the climate.

Since the embargo of 1973, there has been a global preoccupation with the centrality of oil, its supply, its cost and the international politics of it. As economies grew and global demand for energy increased, oil and gas exploration and production increasingly moved to distant and politically unstable countries, such as Russia, Iraq, Libya, Iran and Venezuela. At the same time Opec rose to power; the US military assumed protection of the Gulf; and concerns grew that the world might run out of oil.

This difficult era is now approaching an end and technology is the main reason. New techniques of exploring and drilling in very deep water and tar sands have been developed. New approaches to hydraulic fracturing and horizontal drilling have made it possible to extract deposits of oil and especially gas profitably from shale. The implications are huge. Vast reserves of natural gas are now accessible and the role of gas in world energy supply is growing fast. Within 25 years, gas should outstrip coal to become the second biggest source of global supply, behind oil. This is positive because gas is much cleaner than coal.

America is experiencing higher efficiency and an energy boom, in both offshore and onshore production. This means it will reclaim its role as the world’s biggest energy producer and, incredibly, become a net energy exporter. Brazil, Canada and Australia, all stable countries, are experiencing similar energy booms.

Huge changes like these always have a downside. The environmental implications of these technologies are not clear. The movement towards renewable energy sources, nuclear power and climate stability may be slowed by the new abundance of oil and natural gas and the relatively low price of gas. Even in 2040, respected forecasts now envision that fossil fuels will still supply 80 per cent of the world’s energy needs.

However, energy security and national security for much of the world will be improved, as the influence of rogue oil states diminishes. That is quite a plus.

The writer is the founder and chairman of Evercore Partners and was US deputy Treasury secretary in 1993-94

Copyright The Financial Times Limited 2012

Rethinking the Growth Imperative

Kenneth Rogoff


CAMBRIDGE – Modern macroeconomics often seems to treat rapid and stable economic growth as the be-all and end-all of policy. That message is echoed in political debates, central-bank boardrooms, and front-page headlines. But does it really make sense to take growth as the main social objective in perpetuity, as economics textbooks implicitly assume?

Certainly, many critiques of standard economic statistics have argued for broader measures of national welfare, such as life expectancy at birth, literacy, etc. Such appraisals include the United Nations Human Development Report, and, more recently, the French-sponsored Commission on the Measurement of Economic Performance and Social Progress, led by the economists Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi.

But there might be a problem even deeper than statistical narrowness: the failure of modern growth theory to emphasize adequately that people are fundamentally social creatures. They evaluate their welfare based on what they see around them, not just on some absolute standard.

The economist Richard Easterlin famously observed that surveys of “happiness” show surprisingly little evolution in the decades after World War II, despite significant trend income growth. Needless to say, Easterlin’s result seems less plausible for very poor countries, where rapidly rising incomes often allow societies to enjoy large life improvements, which presumably strongly correlate with any reasonable measure of overall well-being.

In advanced economies, however, benchmarking behavior is almost surely an important factor in how people assess their own well-being. If so, generalized income growth might well raise such assessments at a much slower pace than one might expect from looking at how a rise in an individual’s income relative to others affects her welfare. And, on a related note, benchmarking behavior may well imply a different calculus of the tradeoffs between growth and other economic challenges, such as environmental degradation, than conventional growth models suggest.

To be fair, a small but significant literature recognizes that individuals draw heavily on historical or social benchmarks in their economic choices and thinking. Unfortunately, these models tend to be difficult to manipulate, estimate, or interpret. As a result, they tend to be employed mainly in very specialized contexts, such as efforts to explain the so-calledequity premium puzzle” (the empirical observation that over long periods, equities yield a higher return than bonds).

There is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity, to the neglect of other risks and considerations. Consider a simple thought experiment. Imagine that per capita national income (or some broader measure of welfare) is set to rise by 1% per year over the next couple of centuries. This is roughly the trend per capita growth rate in the advanced world in recent years. With annual income growth of 1%, a generation born 70 years from now will enjoy roughly double today’s average income. Over two centuries, income will grow eight-fold.

Now suppose that we lived in a much faster-growing economy, with per capita income rising at 2% annually. In that case, per capita income would double after only 35 years, and an eight-fold increase would take only a century.

Finally, ask yourself how much you really care if it takes 100, 200, or even 1,000 years for welfare to increase eight-fold. Wouldn’t it make more sense to worry about the long-term sustainability and durability of global growth?

Wouldn’t it make more sense to worry whether conflict or global warming might produce a catastrophe that derails society for centuries or more?

Even if one thinks narrowly about one’s own descendants, presumably one hopes that they will be thriving in, and making a positive contribution to, their future society. Assuming that they are significantly better off than one’s own generation, how important is their absolute level of income?

Perhaps a deeper rationale underlying the growth imperative in many countries stems from concerns about national prestige and national security. In his influential 1989 book The Rise and Fall of the Great Powers, the historian Paul Kennedy concluded that, over the long run, a country’s wealth and productive power, relative to that of its contemporaries, is the essential determinant of its global status.

Kennedy focused particularly on military power, but, in today’s world, successful economies enjoy status along many dimensions, and policymakers everywhere are legitimately concerned about national economic ranking. An economic race for global power is certainly an understandable rationale for focusing on long-term growth, but if such competition is really a central justification for this focus, then we need to re-examine standard macroeconomic models, which ignore this issue entirely.

Of course, in the real world, countries rightly consider long-term growth to be integral to their national security and global status. Highly indebted countries, a group that nowadays includes most of the advanced economies, need growth to help them to dig themselves out. But, as a long-term proposition, the case for focusing on trend growth is not as encompassing as many policymakers and economic theorists would have one believe.

In a period of great economic uncertainty, it may seem inappropriate to question the growth imperative. But, then again, perhaps a crisis is exactly the occasion to rethink the longer-term goals of global economic policy.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.

01/02/2012 02:25 PM

The World from Berlin

'Iran Is Playing with Fire'.


With international pressure mounting against Iran to end its nuclear ambitions, the country has begun ominously rattling its sabers in the Persian Gulf. German commentators on Monday urge caution on both sides.

Tensions between Iran and the West escalated again on Monday as Tehran announced it had test-fired two long-range missiles in international waters near the strategic Strait of Hormuz.

"We have successfully test-fired long-range shore-to-sea and surface-to-surface missiles, called Qader (capable) and Nour (Light) today," Deputy navy Commander Mahmoud Mousavi told state television.

Amid ongoing international criticism of Iran's nuclear program, the missile launches were Tehran's latest show of force in military exercises started in response to the pressure. Monday's maneuvers came after the country announced the launch of a medium range missile the day before.

The so-called war games could bring Iranian ships near US naval forces operating in the Persian Gulf. Both the US and Israel have not ruled out a military response in the conflict over Iran's nuclear ambitions, and US forces based in Bahrain have said they will not allow a closure of the important Strait of Hormuz -- through which 40 percent of the world's crude oil is transported.

Iranian officials have made conflicting statements about possibly blocking the passage if sanctions were imposed on its oil exports, which are vital to the country's economy. Despite threats to the contrary from Iranian officials last week, on Monday military officials insisted there were no plans to close the waterway. "No order has been given for the closure of the Strait of Hormuz. But we are prepared for various scenarios," navy chief Habibollah Sayyari told state television. Deputy navy Commander Mahmoud Mousavi called the military excercises a "tactical" expression of the country's ability to control the strait if necessary.

Fuel Rod Breakthrough

Tehran continues to deny that it is attempting to build nuclear weapons, insisting their program is for generating electricity alone. On Sunday, Iranian state television announced a breakthrough in their nuclear progress, reporting the country had produced uranium fuel rods for power plant use for the first time.

The conflict with the West over the program has intensified since US President Barack Obama approved new sanctions on Saturday against financial institutions that do business with Iran's central bank. Obama will have the option of applying the sanctions flexibly, and depending on how strictly they are enforced, the sanctions could block oil refiners from buying crude oil from Iran, the world's fourth largest producer of the crucial product.

The United Nations Security Council has already implemented four rounds of international sanctions against Iran in hopes of discouraging the country's nuclear ambitions. The European Union is now also considering a ban on Iranian crude oil imports. But on Saturday Iranian media reported that a nuclear negotiator would likely signal a new willingness to resume EU talks on the matter.

With international talks stalled for almost a year now, EU officials welcomed news of the offer. But Iran would not be allowed to impose any pre-conditions on such negotiations, a spokesperson for EU foreign affairs representative Catherine Ashton said on Sunday.

German Foreign Minister Guido Westerwelle's had a similar reaction, encouraging Iran to abandon vague proclamations and urging the country to undertake "concrete, verifiable action" in the matter.

German commentators on Monday warned both sides to exercise caution in the potentially explosive conflict.

Center-left daily Süddeutsche Zeitung writes:

"The United States and Iran are playing a dangerous game of cat and mouse It remains unclear just how strict the US government will be in applying the new sanctions. The White House can approve exceptions. But if punishments are pushed through to their full extent, they will amount to an economic blockade against Iran."

"The US sanctions are the toughest yet to be levied against Tehran in the battle over Iran's nuclear program. And they are risky. In the past, when such blockades were enforced by military ships along foreign coasts, they were considered an act of war. If Iran's oil doesn't reach the world market, oil prices will reach painful levels for the West. Still, even if there is little to suggest that Iran will back down, it's worth a try. The alternatives would be far more uncomfortable: Iran with nuclear weapons or an Israeli military strike."

The Financial Times Deutschland writes:

"It's nothing new for Iran to emit a deafening war cry, only to offer barely believable new talks over its nuclear program shortly thereafter. That the estranged leadership in Tehran rarely speaks with one voice is also well-known."

"But new and sobering are the similar signals coming out of the US. When Washington votes in favor of tougher sanctions against Iran, even as President Barack Obama adds that he is not in agreement, their allies should take notice."

"There are good arguments for and against these sanctions. However it's important that such invasive measures be approved on an international level. They should not be the result of domestic policy maneuvering."

"The West must be as consistent and resolved as possible in reacting to Iran's charades. A devious and half-hearted implementation of tougher sanctions only offers the regime an unnecessary open flank."

Conservative daily Die Welt writes:

"Ten years ago former US President George W. Bush coined the phrase "axis of evil" when he gave his State of the Union speech on Jan. 29, 2002, describing Iraq, Iran and North Korea as regimes who aimed to threaten the West with terror and weapons of mass destruction. In Europe, no one wanted to accept this culturally antiquated moral-religious speech, also finding the term 'axis' confusing, as it implied these nations were forming an alliance.  Today, Iran, Syria and North Korea do advise and support each other about rockets and even nuclear questions."

"Bush was right in his diagnosis. Dictators remain dictators, evil and hostile. One shouldn't tolerate them, and must instead fight them with all possible means. Especially Iran and North Korea."

The conservative Frankfurter Allgemeine Zeitung writes:

"Iran is playing with fire. With even the tiniest wrong move, the Middle East could be left in flames. According to an Iranian General, closing the Strait (of Hormuz) would be as simple as drinking a glass of water. But Iran would only be harming itself that way."

"The country's Arabic neighbors are alarmed. Even the threat of closing the strait is tantamount to blackmail. They turn cold with the thought that Iran could soon be armed with atomic weapons, becoming even more aggressive. The only way to prevent this is once again more weapons from America."

-- Kristen Allen