The economic peril of aggrieved nationalism
Globalisation’s winners paid too little attention to the losers
by: Martin Wolf


Humanity is tribal. We are social and cultural animals. Culture lets us co-operate not just in family bands, but in imagined communities. Of all such communities nothing is closer to family than “nation”, a word signifying shared ancestry.

The capacity to create imagined communities is humanity’s strength and among its biggest weaknesses. Imagined community defines what people share. But what binds them together divides them from others. Today, as in the past, leaders foment aggrieved nationalism to justify despotism and even war.

For much of human history, war was seen as the natural relationship between societies. Victory brought plunder, power and prestige, at least for elites. Mobilising resources for war was a core role of states. Justifying such mobilisation was a core role of culture.

Another way exists to achieve prosperity: commerce. The balance between commerce and plunder is complex. Both require strong institutions supported by effective cultures. But war requires armies, underpinned by loyalty, while commerce requires security, underpinned by justice.

Perhaps the greatest contribution of economics is the idea that societies will gain more from seeking to trade with one another than trying to conquer one another. Moreover, the richer their partners, the greater the opportunities for mutually enriching commerce. The wise relationship between states, therefore, is one of co-operation, not war, and trade, not isolation.

This brilliant idea happens to be correct. But it is also counter-intuitive, even disturbing. It means that one might gain more from foreigners than fellow citizens. It erodes a sense of belonging to the imagined tribe. For many, this erosion of tribal loyalty is threatening. It becomes more threatening if foreigners are allowed to immigrate freely. Who, people ask, are these strangers, who reside in our home and share in its benefits?

The idea that the best way for societies to relate to one another is via mutually enriching trade is the validating philosophy of the World Economic Forum, which has its annual meeting in Davos this week. It emphasises commerce over conflict and what human beings have in common over what divides them.
It is a good creed. Yet Theresa May, the UK’s Conservative prime minister, condemns its believers as “citizens of the world”, who are citizens of nowhere. The resentment she evokes is, to a degree, justified. Those who did well out of globalisation and post-communist transition paid far too little attention to those who did not. They assumed that a rising tide lifts all boats.

They prospered hugely, often with little apparent justification. They created a financial crisis that devastated their reputation for probity and competence, with dire political results. They assumed that bonds of belonging which meant little to themselves meant little to those left behind. It is not surprising that those who find the world transformed by social and economic change succumb to aggrieved nationalism and protectionism.

Yet the politics of nationalist resentment are not just an upsurge from below. They are a tactic of power-seekers. The stories such leaders tell vary in detail, but the essence is always the same.

They distinguish the “real” people who support them from the “enemies of the people”. For them, life is war. In a war, they can justify anything.

Their story justifies turning liberal democracy into plebiscitary dictatorship. In a brilliant essay, the Polish analyst, Slawomir Sierakowski, lays out how this is working in his country.

The would-be despot condemns personal freedom as chaos, constraining institutions as illegitimate, independent sources of information as corrupt, foreigners as duplicitous and immigrants as threatening. The cultivation of paranoia justifies every step. The would-be despot needs enemies. They are always easily found. All the while, would-be despots stress that the majority is on their side (even if it is not).

The assault on the notion of reliable independent sources of information is a central element in the politics of a plebiscitary despot, such as Turkey’s Recep Tayyip Erdogan or Russia’s Vladimir Putin.

How is truth defined by such regimes? Truth is what they say it is. So power determines truth.

This is a characteristic of all dictatorships, notably the communist ones, as Orwell told us. It is also what US president-elect Donald Trump believes: truth is whatever he finds convenient today.

The US is much the most important example. So how far on the journey towards plebiscitary despotism might Mr Trump take his country? The consensus is “not far”, given the strength of its institutions. Yet institutions are only as strong as the people who run them. When Augustus became emperor, the institutions of the Roman republic all survived. Will the US judiciary defend freedom of speech? Will legislators defend the right to vote? Or will the president successfully intimidate those he disagrees with? And what might happen if a terrorist outrage occurred?

Mr Sierakowski points out that Poland’s Jaroslaw Kaczynski has embraced the welfare state.

Mr Trump, too, won the Republican base by stressing his support for the programmes on which ordinary Americans depend. But Republican leaders wish to gut them. His success might depend on whether he sticks to his promises or to his party.

Yuval Harari, the Israeli thinker, has recently argued that: “For all the disillusionment with liberal democracy and free markets, nobody has yet formulated an alternative vision that enjoys any kind of global appeal.” This is true, yet irrelevant. Authoritarian nationalism potentially has such appeal. It has moved into the core of the world system. That changes everything.

The Geopolitics of 2017 in 4 Maps

By George Friedman and Jacob L. Shapiro

International relations and geopolitics are not synonymous… at least, not the way we understand them at Geopolitical Futures. “International relations” is a descriptive phrase that encompasses all the ways countries behave toward one another. “Geopolitics” is the supposition that all international relationships are based on the interaction between geography and power.

Our brand of geopolitics takes this a step further and asserts that a deep understanding of geography and power enables you to do two things. First, it helps you comprehend the forces that will shape international politics and how they will do so. Second, it allows you to identify what is important and what isn’t.

This makes maps an extremely important part of our work. Writing can be an ideal medium for explaining power, but even the best writer is limited by language when it comes to describing geography. So this week, we have decided to showcase some of the best maps our graphics team (TJ Lensing and Jay Dowd) made in 2016… not just because these four maps are cool (though they are), but because we think they go a long way in explaining the foundations of what will be the most important geopolitical developments of 2017.

Map 1: Russia’s Economic Weakness

This map illustrates three key aspects of Russia that are crucial to understanding the country in 2017. First is the oft-overlooked fact that Russia is a federation. Russia has a strong national culture, but it is also an incredibly diverse political entity that requires a strong central government. Unlike most maps of Russia, this one divides the country by its constitutive regions. There are 85 of these regions… 87 if you count Crimea and Sevastopol. Not all have the same status—some are regions, while others are autonomous regions, cities, and republics.

The second aspect is that there is a great deal of economic diversity in this vast Russian Federation. The map shows this by identifying regional budget surpluses and deficits throughout the country. Two regions have such large surpluses that they break the scale: the City of Moscow and Sakhalin. Fifty-two regions (or 60% of Russia’s regional budgets) are in the red. The Central District, which includes Moscow, makes up more than 20% of Russia’s GDP, while Sakhalin and a few other regions that are blessed with surpluses produce Russia’s oil.

The third aspect follows from combining the logical conclusions of the first two observations. Russia is vast, and much of the country is in a difficult economic situation. Even if oil stays around $55 a barrel for all of 2017, that won’t be high enough to solve the problems of the many struggling parts of the country. Russian President Vladimir Putin rules as an authoritarian. This is, in part, because he governs an unwieldy country. He needs all the power he can get to redistribute wealth so that the countryside isn’t driven to revolt.

Russia is making headlines right now because of Ukraine, Syria, and alleged hacking. But the geopolitical position of Russia is better described by studying the map above.

Map 2: China’s Cage

Maps that shift perspective can be disorienting, but they are meant to be. Our minds get so used to seeing the world in one way that a different view can feel alien. But that is even more reason to push through the discomfort. The map above attempts to do that by looking at the Pacific from Beijing’s perspective.

China's moves in the South China Sea have received a great deal of attention. In a Jan. 12 confirmation hearing with Congress, nominee for US Secretary of Defense James Mattish identified Chinese aggressiveness as one of the major reasons he believes the world order is under its biggest assault since World War II. But we believe the Chinese threat is overstated. This map helps explain why.

China’s access to the Pacific is limited by two obstacles. The first is the small island chains in the South and East China Seas. When we look at this map, China’s motive in asserting control over these large rocks and molehills becomes clear. If China cannot control these islands and shoals, they can be used against China in a military conflict. (If there were small island chains off the US coast in the Pacific or the Atlantic, US strategy might look like China’s.)

The second obstacle is that China is surrounded by American allies. Some such as Japan (and to a lesser extent South Korea and Taiwan) have significant military forces to defend themselves from Chinese encroachment. Taiwan sticks out as a major spur aimed squarely at China’s southeast coast. Those that don’t have sufficient military defenses, like the Philippines, have firm US security guarantees. China is currently at a serious geographic disadvantage in the waters off its coast.

This map, though, does not reveal a critical third piece of this puzzle—the US Navy outclasses the Chinese navy in almost every regard, despite impressive and continuing Chinese efforts to increase capabilities. But looking at this map, you can see why China wants to make noise in its coastal waters and how China is limited by an arc of American allies. You can also see why one of China’s major goals will be to attempt to entice any American allies to switch sides. Consequently, China’s moves regarding the Philippines require close observation in 2017.

Map 3: Redrawing the Middle East

It has become cliché to point out that the Middle East’s current political borders were drawn after World War I by colonial powers like the United Kingdom and France, and that the region’s wars and insurrections in recent years are making these artificial boundaries obsolete. What isn’t cliché is doubling down on that analysis. We’ve drawn a new map of the Middle East based on who controls what territory, as opposed to the official boundaries recognized by international organizations like the United Nations.

The map above reveals what the Middle East really looks like right now. Many will object to some of the boundaries for political purposes, but this map is explicitly not trying to make a political statement. Rather, it is an attempt to show who holds power over what geography in the Middle East.

From this point of view, Syria, Iraq, Yemen, and Libya don’t exist anymore. In their places are smaller warring statelets based on ethnic, national, and sectarian identities. Other borders (like those of Lebanon and Israel) are also redrawn to reflect actual power dynamics. Here, a politically incorrect but accurate map is more useful than an inaccurate but politically correct one.

Just as important as redrawing the borders of countries that no longer function as unified entities is noting which countries’ borders do not require redrawing. These countries include three of the region’s four major powers: Turkey, Iran, and Saudi Arabia. The borders of the other major power, Israel, are only slightly modified. (Egypt is an economic basket case and does not qualify as a major power, even though it has arguably the most cohesive national culture in the Arab world.)

The Middle East is defined by two key dynamics: the wars raging in the heart of the Arab world and the balance of power between the countries that surround this conflicto.
Map 4: Imagining 2017’s Brexit

Analyzing this map must begin with a disclaimer: This is, first and foremost, an analytical tool and a means of thinking about Europe’s future. It is explicitly not a prediction of what Europe’s borders will look like in the future.

The map identifies areas in Europe with strong nationalist tendencies. Those regions with active separatist movements are not italicized. The italicized regions are those demanding increased autonomy but not independence. In many of these regions, secessionist movements may be favored by a minority of the population. The point here is not their size, but rather that in all these regions, there is some degree of national consciousness that is dissonant with the current boundaries of Europe’s nation-states.

The European Union is a flawed institution because its members could never decide what they wanted it to be. The EU is not quite a sovereign entity, but it claims more authority than a free trade agreement. European nation-states gave up some of their sovereignty to Brussels… but not all of it. So when serious issues arose (such as the 2008 financial crisis or the influx of Syrian and other refugees), EU member states went back to solving problems the way they did before the EU. Instead of “one for all and all for one,” it was “to each their own, but you still have to buy German products.”

Brexit shook the foundations of the EU in 2016. Elections in France and Germany and domestic instability in Italy will shake those foundations in 2017. But Brexit also opened the doors to a deeper question: How will national self-determination be defined in the 21st century? Not all of Europe’s nation-states are on stable ground. The most important consequences of Brexit may end up being its impact on the political future of the United Kingdom. And in Spain, Catalonia already claims it will hold an independence referendum this year.

Brussels, meanwhile, keeps trying to speak with one voice. This map communicates just how hard that is… not just for the EU, but also for some of Europe’s nation-states.

The saying goes that a picture is worth a thousand words. Maps are worth many more. Our perspective on the world is rooted in an objective and unbiased approach to examining geography and power. Maps like these are foundational components for building that perspective. These four maps are especially helpful in thinking about the geopolitical forces that will shape the world in the year ahead.

Russia’s Imperial Instinct

Carl Bildt
 Russian military exercise in Primorye territory


WASHINGTON, DC – Russia is once again at the center of policy debates in many Western capitals. And for the third time in a row, a new US president will start his administration with ambitions to improve bilateral relations. To understand why achieving this goal has been so difficult, it helps to take a longer historical view of the Russian state.
It is now a quarter-century since the Soviet Union disintegrated; and 2017 will mark the centennial of the Russian Revolution, which toppled the teetering, centuries-old czarist empire.
As it happens, there are telling similarities between the periods that followed each of these imperial denouements.
Russia’s history has been characterized by continuous expansion over the Eurasian continent.

The czars’ eastward push into Siberia mirrored America’s westward push during the nineteenth century, and Russia’s expansion into Central Asia coincided with the European powers’ colonization of Africa.
But as Imperial Russia expanded westward and southward, it always encountered opposition, and had to use force to keep newly acquired territories within its domain. After the 1917 revolution, many of these areas – from Tashkent to Tbilisi, and Kyiv to Helsinki – sought independence from Muscovy’s yoke.
At first, Vladimir Lenin seemed amenable to these demands; but he soon deployed the new Red Army to impose Soviet power across the former Russian Empire. It succeeded in Ukraine, the southern Caucasus, and Central Asia. But it failed in Finland and the Baltic states, and it suffered a crucial defeat outside Warsaw in 1920. This allowed a string of independent states to emerge from the former Russian Empire’s western flank.
But then Stalin came to power. Using terror and forced industrialization to try to make Russia great again, he sought to reassert imperial control over its former territories. Stalin found an opportunity in secret talks with Adolf Hitler, where he demanded the return of what had been lost after 1917, including the Baltic states, Finland, and part of Poland.
He eventually got it. After Hitler’s Reich collapsed, not least owing to the sacrifices of the Red Army, Stalin had carte blanche to extend Soviet power deep into the heart of Europe. Only Finland preserved its independence – miraculously, and by force of arms. The Baltic countries were brutally brought back into the Soviet fold, and Poland and others were reduced to satellite states.
In 1976, a top US State Department adviser to Henry Kissinger controversially argued that Russia had failed to establish “organic” relationships with these countries. True enough, as the Soviet Union collapsed, the satellite states hastened its demise by reasserting their sovereignty; in short order, almost every non-Russian republic in the former USSR demanded, and secured, independence. With Ukraine and countries in the South Caucasus achieving statehood, Russia controlled even less territory than it did after the 1917 revolution.
Vladimir Putin, like Lenin a century ago, is intent on changing that. Since coming to power following Russia’s tumultuous attempts at liberal and democratic reform in the 1990s, it has become increasingly clear that Putin aspires to make Russia great again, both economically and geopolitically. Despite some obvious differences between the founding of the Soviet Union and now, the historical parallel is too obvious to ignore.
Under Putin, Russia has invaded and occupied parts of Georgia, annexed Crimea from Ukraine, and militarily propped up two sham “republics” in Eastern Ukraine. Russia has also tried – so far unsuccessfully – to establish a Novorossiya across Southern Ukraine.
Step by step, whenever opportunities present themselves, the Kremlin is ready to use all means at its disposal to regain what it considers its own. Putin may not have a firm or comprehensive plan for imperial restoration, but he undoubtedly has an abiding inclination to make imperial advances whenever the risk is bearable, as in Georgia in 2008 and Ukraine in 2014.
So, what lessons can we take from the past? For starters, Russian imperialism has thrived when Europe and the West have been divided. This was the case when Hitler and Stalin entered into their non-aggression pact in 1939, and when Napoleon and Tsar Alexander entered into theirs in 1807. And we certainly should not forget the Yalta Conference in 1945.
Expanding both NATO and the European Union to include the Central European and Baltic countries has been essential to European security. In any other scenario, we would probably already be locked in a profoundly dangerous power struggle with a revanchist Russia reclaiming what it had lost.
The collapse of the Soviet Union in 1991 and the Russian Revolution in 1917 reshaped regional and global politics. In the immediate aftermath of each event, Russia demonstrated its historic inability to build harmonious relations with the countries along its periphery; and in the intermediate periods, it acted on its imperial ambitions at these countries’ expense.
But Russia will come to terms with itself only if the West firmly supports these countries’ independence over a prolonged period of time. Eventually, Russia will realize that it is in its own long-term interest to break its historical pattern, concentrate on its domestic development, and build peaceful and respectful relations with its neighbors.
We are certainly not there yet, but that’s no reason to throw in the towel – or throw out the lessons of history. We need a stable, prosperous, and peaceful Russia. And that can be achieved only with determined support for the independence and sovereignty of all of its neighbors.

Fed Officials See Less Need for Tax and Spending to Boost Short-Term Growth

Shift in thinking comes as economy improves, jobless rate declines

By Shayndi Raice

The Federal Reserve building in Washington, D.C. Photo: Stephen Voss for The Wall Street Journal

Federal Reserve officials increasingly say they don’t see a need for stimulative government tax and spending programs to boost short-term economic growth, reversing their stance during and after the Great Recession.

The shift is drawing attention as President-elect Donald Trump prepares to takes office on the promise of tax cuts and spending increases. He has promised annual U.S. economic growth of as much as 4%, double the 2% seen since the recession.

To several Fed officials, the need for such fiscal stimulus to raise overall demand is a thing of the past—the postcrisis period when unemployment peaked at 10%. Today, with joblessness down to 4.7%, they instead advocate targeted policies to spur long-term economic growth by raising productivity—or output per labor hour. These would include improving education and infrastructure, fostering research and encouraging new business formation.

“I would say at this point fiscal policy is not obviously needed to provide stimulus to help us get back to full employment,” Fed Chairwoman Janet Yellen said in December.

To some observers, the turnabout appears political: Fed officials supported fiscal stimulus during the Obama administration but don’t as Mr. Trump takes the helm. However, central bankers see this as a return to normal now that the economy has healed.

Underlying the Fed’s shifting view is a long-running economic debate about the appropriate interplay between monetary and fiscal policy in managing the economy.

Before the 2008 crisis, many economists agreed that monetary policy was a better tool than fiscal policy for managing the short-term ups and downs of the business cycle. Central banks could quickly cut interest rates to boost economic activity in a recession or raise them to cool the economy if it overheated. Changes in government tax and spending programs generally take longer to enact because of congressional wrangling and are better targeted at the economy’s long-term needs, the thinking goes.

In the 1990s the Fed, under then-Chairman Alan Greenspan, cut rates in response to a recession, raised them mid-decade to prevent the economy from overheating, and lifted them again later during the tech boom. Meantime he frequently urged Congress and the White House to reduce projected federal budget deficits. In early 2001, after budget surpluses appeared, he supported tax cuts.

The thinking changed after the crisis, when the Fed and central banks in other advanced economies cut rates to near zero, only to see a deep global recession in 2009. The collapse in demand was so great, and their policy options so limited, that many monetary policy makers called for help—urging governments to ramp up short-term spending and make structural changes to their economies to foster economic growth.

European Central Bank President Mario Draghi has for years urged European governments to do more to fuel growth, saying monetary policy “can’t do everything.” Bank of Japan Governor Haruhiko Kuroda has been urged by some economists to adopt a policy called “helicopter money,” in which the central bank prints money in direct support of tax cuts and government spending increases.

In the U.S., however, the economic tide has turned. Fed officials raised interest rates in December, their second increase in a year, and foresee more increases this year if it stays healthy. In this context, they’ve returned to the old view.

“I don’t see a need of the kind of fiscal policy just to stimulate aggregate demand,” Cleveland Fed President Loretta Mester said in a recent Journal interview. “If we could come up with policies that are productive in terms of raising productivity growth, that can help our long-run economy, then those are good things,” she said, citing as examples educational programs to help workers move into new jobs and efforts to improve internet access across the country.

Chicago Fed President Charles Evans made a similar argument last month when he said that with a strong labor market “you don’t need explicit stimulus.”

Fed Vice Chairman Stanley Fischer said in October, “Some combination of more encouragement for private investment, improved public infrastructure, better education, and more effective regulation is likely to promote faster growth of productivity and living standards.”

Some Fed watchers see political implications in the shift. “Call me a skeptic, if you will, but had [Hillary] Clinton won, I don’t think Fed officials would be walking back their comments on more fiscal spending,” said Brian Horrigan, chief economist at Loomis Sayles & Co.

But PNC Financial Services Deputy Chief Economist Gus Faucher is among those who view it as a reflection of the Fed’s confidence in the economy. “I think that the reason why simply is that the economy now is in better shape than it has been in any time since before the recession started,” he said.

Under New Management

by Jeff Thomas

In 2008, the majority of Americans voted for “change,” and in some ways, they got it. They received a heavier dose of collectivism in the form of Obamacare, but in addition, they received an even heavier dose of “more of the same.”

Mister Obama did not put an end to Guantanamo as he promised. And, although he did remove troops from Iraq (only to send them back a few years later), he expanded America’s military adventures overall, invading numerous sovereign nations.

As for his promise to come down hard on the sworn enemies of democrats—the evil usurpers on Wall Street—he instead dug in deeper. His Treasury secretaries were banking insiders, not the “reformers” that had been anticipated.

Many who had voted for Mister Obama were deeply disappointed. Under him, government had grown, warfare had expanded, the economy worsened and Wall Street became even fatter than before.

In 2016, Americans, in large part, sought the selfsame changes—less central government control, less overseas aggression and a reigning-in of Wall Street and banks. But to achieve these ends, voters switched sides once again and voted for a Republican, one who boldly committed to “drain the swamp.”

So, what are the odds that they’ll receive those changes? Let’s have a look.

When a new leader is elected, the best first assumption to make is that his campaign promises probably had little or no relationship to his actual intentions. More likely, his intentions will be to continue to pander to the Deep State and those that helped him to get elected.

Therefore, it’s always a good idea, in any country, to pay attention to the new leader’s choice as his posse. The US president-elect has been active in choosing the gunslingers who will ride with him into Washington and the choices may provide an early warning as to who the new president really intends to be.

So, first off would be his closest advisors—his chief of staff and his chief strategist. Mister Trump’s choices, respectively, are Reince Priebus and Stephen Bannon. Mister Bannon is a Goldman alumnus.

In addition, Gary Cohn, Goldman’s president, has been chosen as director of the National Economic Council. By any measure, the cabinet will be somewhat of an extension of Goldman.

Mister Trump railed against Wall Street during his campaign and vilified his opponent on Twitter, stating, “Hillary will never reform Wall Street. She is owned by Wall Street!” His supporters had every reason to expect that he would prove to be the reformer they hoped for, yet his choices above suggest that that’s not the plan.

This likelihood is further enforced by his choice of Steven Mnuchin, who spent 17 years at Goldman, as Treasury secretary. His choice for commerce secretary is Wilbur Ross, a billionaire investor who is also unlikely to emerge as an advocate for reform.

As to whether warfare will be diminished in the coming administration, Mister Trump has stated clearly, in reference to ISIS, that he intends to “bomb the shit out of ’em.” (No uncertainty there.) His choice for national security advisor is Lt. Gen. Michael Flynn, whose primary focus is in ramping up tensions with Iran. His choice for secretary of defense is Gen. James Mattis, who has declared his desire to invade Iran. In addition, Mike Pompeo, who also favours an invasion of Iran, has been selected as head of the CIA.

These choices are not likely to sit comfortably with Mister Putin, with whom the president-elect suggests he will enjoy a good relationship. Nor will they sit well with the many throughout the world who already feel the US has gone far beyond its limit in seeking to police the world.

Rather than back off from the dreaded Wolfowitz Doctrine, the choices of cabinet members, taken collectively, suggest a continuation of the foreign boondoggles that began in 2001.

The one departure may be in the important position of secretary of state, Rex Tillerson, a lifetime employee of Exxon who has developed good relations with Russia and opposes government regulation of business. He may be the one pick that reflects Mister Trump’s campaign claims. Still, Mister Tillerson falls right in line with the ever-expanding corporatist relationship extant in the US government.

Finally, those who hope that Trump will reverse the trend of the Deep State’s near-total control over the US will be disappointed not only by the choice of Mike Pompeo for the CIA, but of Trump campaigner and establishment insider Jeff Sessions as attorney general.

None of the above guarantees that the voters who chose Mister Trump will soon be experiencing buyer’s remorse, but the indicators that Americans may find themselves out of the pan and into the fire are significant.

There’s an old saying that “the more things change, the more they stay the same,” and the lineup of new players above suggests that that may well be the case in the next administration.

Meanwhile, not only the US, but the entire world will be holding its collective breath over the coming months. The new president is less likely to spend as much time on the golf course as his predecessor. He’s far more likely to hit the road running. The question will be in what direction he chooses to run. His choices for cabinet suggest that that direction might have less relationship to his campaign rhetoric and more relationship to the ongoing Deep State programme. To be sure, his clear choice of Washington insiders for so many of his primary cabinet positions informs us that the swamp will not, in fact, be drained. Big Business, the military-industrial complex and Big Banks will dominate the Trump cabinet.

Whatever the world will be treated to under the new American presidency, the words of Neil Innes ring true: “No matter who you vote for, the government always gets in.”