Bill Emmott - International Author & Adviser


How different is the world, really?
Voice - 2009

It is tempting, and very common, at times of great shocks and crises, to proclaim that the world has utterly changed, that it will never be the same again. That is what many people—including, I must admit, the magazine of which I was editor-in-chief, The Economist—said for example after the terrorist atrocity on September 11th 2001. It is also what many people have said ever since the global financial crisis began really to feel shocking in the second half of 2008.

To see the events that we happen to live through as being of huge, historic importance is a natural human instinct. Such a claim is not, however, often born out by events. Typically, when shocking events occur, we overstate their importance, by comparison with longer-term forces and trends. Generally, in fact, such shocking events are really just reflections of longer-term trends. Historians in later decades will show that the events that have surprised contemporary observers were in reality the consequence of forces that had long been developing. It is those long-term forces that we should be seeking to identify, not chasing the impact of immediate shocks.

            In the case of September 11th, some things did of course change immediately: the USA invaded Afghanistan and Iraq; many countries greatly improved their security controls at airports (at great inconvenience to travellers) and expanded their intelligence services; and the reputations of America and of its closest ally, Britain, for military and spying competence were badly damaged. By contrast, the image of Osama bin Laden and his Al-Qaeda terrorist network was greatly enhanced.

But was the world truly transformed by these events? Not really: 2003 was, after all, already the second time America had invaded Iraq, America´s image in the Islamic world was already bad, Al-Qaeda had already carried out several terrorist atrocities, and both Afghanistan and its neighbour Pakistan were already highly unstable places. Global terrorism, especially in the hands of Islamic militants, was already seen as a big danger. North Korea and Iran had been working on their nuclear-weapons programmes for many years before this event prompted President Bush to describe them, with Iraq, as "the axis of evil".

The atrocity was a huge shock, which we will all certainly remember. Yet we now know that the list of big trends and issues facing the world was not fundamentally altered by September 11th. China´s rise; the trend of global warming; the threat of nuclear proliferation and of the spread of other deadly technologies; the danger of attacks by terrorists all over the world; the opposition felt by Islamic fundamentalists to many aspects of the modern world: the list existed in 2000 and it still exists today.

I was in New York on that fateful day in 2001, in fact, and will certainly always remember it, the shock of seeing the twin towers on fire, and the chaos I found at New York´s La Guardia airport when (mistakenly, with hindsight) I went there to try to catch a plane. By coincidence, when I heard the news of the attack, I was having breakfast at the Carlyle Hotel in midtown Manhattan with Ambassador Richard Holbrooke, who had previously been President Bill Clinton´s ambassador to the United Nations and who is now President Barack Obama´s special envoy for Afghanistan and Pakistan. So, in a sense, Ambassador Holbrooke´s life was changed: had it not been for 9/11, he would not now be doing that job. But even if today´s American president might not have needed a special envoy, he would still have considered Afghanistan and Pakistan to be high and problematic priorities in foreign policy. Instability in Afghanistan; the presence there of terrorist training camps; instability in nuclear-armed Pakistan: these would still have been vital issues for America, and for the world.

The economic crisis has not changed the world, either

How about the global economic crisis? Has that changed the world, and the way in which it works? In answering that question, it is important, I admit, to avoid sounding too certain. Trouble in America´s sub-prime mortgage market became evident only about three years ago, and the fact that the banking system, especially in Europe and America, might also be in big trouble became evident only in August 2007. It was only in September 2008 that the great shock of the bankruptcy of Lehman Brothers and the de facto nationalisation of AIG, Citigroup and Bank of America occurred, producing a sudden slump in consumer spending and corporate investment all around the world. Not very much time has yet passed.

            There may, it is true, be new surprises just around the corner. Japan offers a helpful reminder: two or even three years after Japan´s financial bubble burst in 1990, few people would have forecast a full "lost decade", nor that even today the country would be suffering from falling wages and household incomes, quite high unemployment rates, and public debts that are equivalent to more than 180% of GDP.

            More could change; the long-term damage done by the economic shocks of 2007-09 could prove to be more profound than it now appears. Nonetheless, right now at the start of 2010, what feels surprising is that the economic crisis has produced so little change, not so much. Yes, there will be big changes in how financial markets are regulated, especially in America and Europe; yes, public finances in America, Britain and several other European countries have gone much further into debt, which will require taxes to rise in future or public spending to be cut, or both. But such changes are not really fundamental ones.

Globalisation is intact. There are protectionist threats, but none yet that is strong enough to reverse the process. In the emerging or developing countries, including China and India, the belief that economic development requires liberalisation of markets and of the private sector has not changed. The role of the state in those countries, especially in Asia, is a larger and more profound one than in America, but that has been the case for half a century, throughout the "Asian miracle" that was led by Japan.

 In America and Europe, some banks and even (in America´s case) car manufacturers have been taken into state ownership. But no one expects this to be permanent. Prime ministers and presidents do not want to be bankers or auto executives. The only sector where change really does look likely to be profound is in financial services itself, especially in investment banking. Shareholders will be more averse to taking risks, regulators will require banks to hold more capital, derivatives markets will become more transparent and closely regulated.

In geopolitics, the only obvious consequence of the crisis has been the creation—or, strictly since it existed before, the upgrading—of the broad, G20 ("Group of 20") summit including poor and emerging countries as well as the rich ones. But that would soon have happened anyway, given the rise in importance of China, India and Brazil. The preoccupations facing Barack Obama in foreign policy are pretty much the same ones as faced his predecessor. President Obama´s election, and change of style, have begun to rescue America´s image around the world.

No, right now in 2010, this global economic crisis does not feel as if it is going to produce a fundamental change in the direction of the world, or of capitalism. The argument of this book is that, in fact, that we must look at the longer-term trends and forces if we are to see how the world is changing, and not be distracted by short-term shocks and excitements. In some respects, the current crisis will alter the speed with which those forces have their effect, and sometimes the specific impacts. But it will not change the basic issues and the basic direction.

The basic, long-term issue that I proposed in chapter two that we should pay attention to was the Chinese currency, the Renminbi. I argued that it is a mistake to focus on the US dollar, and to assume that as a result of the global economic crisis the US dollar is going to decline in importance or that American policies towards the dollar will need to change. The real change in the world currency system is going to have to concern the Renminbi, which is going to have to join the floating exchange rate system set up in 1971. This also means that the biggest economic adjustment is going to have to be made by China, not the United States of America.

From the Chinese currency to climate change

That conclusion is in line with the long-term forces that have been at work in the world economy over the past 20 years. Since 1978 China has followed Japan´s excellent example from the 1950s and 1960s of how to achieve rapid economic development, focusing on high levels of infrastructure investment, on heavy industry, and on cheap, labour-intensive manufacturing for the export market. That development has benefited greatly from the import of foreign ideas and technology, through licensing, through foreign direct investment and through outright theft. But it has also benefited greatly from China´s currency regime, with the Renminbi fixed against the dollar and other currencies at a cheap rate, just as the Japanese yen was during the 1950s and 1960s.

            One consequence of that economic model for China in recent years has been the creation of a huge surplus on the current account of the Chinese balance of payments: it reached more than 10% of GDP at its peak in 2007-08, far larger than Japan´s surpluses have ever become. Another consequence was rapid inflation during the first half of 2008, as the effort to keep the currency cheap by buying dollars led to difficulties in controlling monetary growth, at the same time as oil and other commodity prices were experiencing a global bubble. A third consequence was a rapid deterioration in China´s environment, as the growth of heavy industry polluted rivers and urban air, and as China overtook America as the world´s leading producer of the greenhouse gases that cause global warming.

            At some point during this decade, these trends were bound to produce a substantial change in China´s economy. The current-account surplus could not keep on growing forever. Labour-intensive manufacturing could not remain forever one of the mainstays of the Chinese economy. The Renminbi cannot remain forever fixed in price and not convertible freely into other currencies. The global economic crisis of 2007-09 may have altered the timing, but it has not altered the underlying facts.

            For China, this period is, as I wrote in my 2008 book Asia Sangokushi, rather similar to the 1970s for Japan. That was when Japan´s time of high growth, led by infrastructure investment, heavy industry and low-cost manufacturing, and helped by the cheap fixed rate for the yen, came to an end. It was also the time when Japan moved vigorously to halt the deterioration of its environment, transforming itself from one of the dirtiest developed countries in the world into one of the cleanest.

            China now needs to follow Japan´s example. It needs to liberate (and thus revalue) the Renminbi, move its industry into cleaner, higher-technology sectors, boost its domestic demand, and produce radical improvements in its environment. In December we had the beginning of negotiations in Copenhagen to produce a successor to the 1997 Kyoto Protocol on climate change. In that United Nations Climate Change Conference, an outline deal was agreed between America, China, India, Brazil and South Africa over the sort of measures that will be needed to deal with climate change, and over payments from the rich world to help the poorest cope with global warming and with adjustment to a low-carbon future.

            Under the Kyoto Protocol, developing countries were not required to make any binding commitments about their future emissions. It was dissatisfaction with this provision, and especially its exclusion of China, which persuaded the US Senate to reject the Kyoto deal in a unanimous vote in 1997, and then provided the Bush administration with the pretext for dropping all efforts to ratify the treaty when it entered office in 2001.

The Kyoto Protocol, which was thus ratified only by European countries, Canada and Japan, among the big emitting nations, expires in 2012. Since 1997, the scientific evidence that global warming is occurring has become stronger, and so has the consensus around the world that the process needs to be slowed down and, eventually, put into reverse. So a new deal needs to be in place before 2012. But if America is to be persuaded to sign up to it, then China, India and other developing countries will need to be brought in to the pact in some way. That is what the Copenhagen framework deal envisages.

            Will it be enough? The agreement that closed the Copenhagen climate conference will disappoint anyone who dreamed that this summit of more than 190 countries would come up with a legally binding treaty guaranteed to save the planet (or, rather, to save it by the common definition of catastrophe-prevention, namely restricting the rise in average global temperatures this century to 2 degrees celsius). But such dreams were always fantasies. Actually, the far-inferior deal that emerged was pretty good in the circumstances, and should be counted as a success. Yet quite how successful it is depends not on this deal but on what happens next, especially during 2010, but also afterwards.

            This is a deal that consists mainly of a promise to make another deal during 2010, at a conference due to be hosted by Mexico, but then also to introduce, in the course of the next 5-10 years, much stricter controls on greenhouse-gas emissions than most countries have so far promised. For although the agreement contained a pledge to meet the target of a 2 degree celsius temperature rise, most scientists believe the emissions cuts so far promised are too meagre to achieve that. For scientists and environmentalists who have been lobbying about this issue for at least 20 years, it is dispiriting to get so little after so long a campaign. But for governments, most of whom have only begun to take climate change seriously during the past five years—if that—this deal is, as President Barack Obama described it, an important first step.

            The question now is whether there will really be a second and a third step, and when. How can we tell? There are, most probably, some clues in the way in which the Copenhagen deal was reached. Not the fact that it happened far into the night—that is normal with summits, as any European Union negotiator knows. The clue lies in the small group of countries that thrashed out the deal, and then presented it to the others as a fait accompli.

            The first and most important clue about that group of countries is that it was headed by the United States. Whatever anyone might say about declining American power, the US remains central to any issue of global governance. It is especially central to climate change because until recently it was the world´s biggest producer of greenhouse gases (China overtook it in 2007) and because it refused to ratify the previous treaty on climate change, the 1997 Kyoto Protocol.

            President Obama´s offer to the conference of a 17% cut in American emissions by 2020, from 2005 levels, was modest by European standards but even that is far from certain to be accepted by Congress when legislation to implement it is debated next spring. That uncertainty gave America some leverage in Copenhagen—for President Obama could say, with total credibility, that unless a new treaty goes beyond Kyoto by including binding commitments by the big developing countries—ie, China and India—to cut emissions, Congress will reject it, along with the 17% emissions cut.

            Like it or not, that evident truth destroyed as impractical any argument—by Venezuela´s Hugo Chavez and others—that the rich world is obliged to bear all the burdens of dealing with climate change, since the industrialised countries have caused most of it. That is a nice argument for philosophy salons, but has no political relevance in the real world.

            The second clue, however, lies in the names of the other countries involved in the deal. They were China, India, Brazil and South Africa. Note first that these are not the famous "BRICs": Russia is out of this group because as a highly polluting oil and gas producer it had little interest in striking any deal. They are, however, the biggest emerging economies. We may now be in a world of multilateralism rather than the George W. Bush world of unilateralism, but it is a world in which big powers count for a lot more than small ones. This group was not the infamous "G2", of America and China, either, for other developing countries will not accept China as their sole spokesman. Nor was it considered necessary to include either Japan or the European Union in this deal: their ultimate acceptance of it was simply taken for granted.

            Without the participation of China, India, Brazil and South Africa, America could not have accepted a deal. But what was in it for them? Why did they sign up to it? Partly, prestige: they have now displayed their importance. Partly, money, in the cases of India and South Africa, but mainly on behalf of other poorer countries, who will get financial help to adjust to climate change, which is promised to total as much as $100 billion per year (though there is plenty of reason to doubt whether the promise will be kept, or whether other aid flows might be cut to pay for it). Mainly, though, the reason they signed up is probably that the fairly minimal and heavily deferred binding commitments that this deal implies are better than these big developing countries thought they might face if they were to kill the deal and wait another few years for the next climate change summit.

            Everything, however, depends on the next steps. America´s desire to get its legislation through Congress, plus the interest of China, India, Brazil and South Africa to bank this limited deal now for fear of worse later, surely make it likely that a proper legal treaty can and will be negotiated next year. Smaller, poorer countries no doubt will protest and hope for more. But in today´s world, the big and powerful call the shots. It is just that the list of big and powerful has changed, to now include China, India, Brazil and South Africa.

Of those, China is the most crucial. After all, it is the biggest producer of carbon dioxide and other greenhouse gases. But also it is the biggest perceived competitor for western industries. If Chinese companies are thought to have an unfair advantage over their western competitors, by virtue of not having to exercise costly restraint on carbon emissions, then protectionism will become a bigger political force in the West. Already, there has been talk of adding provisions to the rather weak climate change act that will be  debated by Congress this spring, to create powers to impose border taxes against imports from countries that have not imposed comparable emissions controls to those in America.

America´s controls will arise from the introduction of a "cap and trade" scheme for carbon emissions, under which the government puts a limit of total permitted emissions, issues permits for the production of those emissions, and allows trading of those permits in order to set a price for them and a disincentive to pollute. Initially, this "cap and trade" scheme promises to be rather weak, as Congress has lobbied to ensure that too many permits are issued on too favourable terms. But that weakness can be dealt with later, once the scheme has been established, by reducing the number of permits and forcing up the price. That is what has happened in Europe. When the American scheme is strengthened, complaints from American business that they are disadvantaged compared with competitors will grow. Most likely, their loudest complaints will be directed at China.

The real long-term change in capitalism

China is central to the changes that are likely in the world economy, and it is central also to the question of whether there can be a global agreement on how to restrain the process of global warming and climate change. So is China again, as it thought of itself for centuries, the "middle kingdom", the centre of the world? Not exactly, but it is nevertheless not at all surprising that China should now be so important.

Today´s Chinese centrality is surprising only when compared with the period when China was isolated under Chairman Mao in the 1950s and 1960s, or with the many decades of civil war and imperial collapse in China during the first half of the twentieth century. China is already the world´s third largest economy, behind America and Japan, and is pretty likely to overtake both of them in terms of absolute size of annual GDP some time in the next 10-30 years. The probable, and desirable, appreciation of the Renminbi against the dollar and the yen will simply accelerate this process.

            The environment, too, is central to the question of how capitalism will need to change in the coming years. The global economic crisis will, for sure, change the role of banks and capital markets in the financing of capitalism. But my bet is that historians, looking back at this change with the benefit of a decade or two of hindsight, will not consider it to have been truly fundamental in terms of capitalism´s long-term evolution. The really fundamental change will occur for environmental reasons.

            Man´s principal source of energy has been the so-called fossil fuels of coal, oil and natural gas for the past two centuries, supplemented by the unfossilised source of the same carbon-based storage of energy, namely wood. That long fossil-fuel era is, however, coming to an end. It is coming to an end because of the steadily accumulating evidence that the burning of fossil fuels is the principal man-made cause of global warming, but also because of a painful rise in the price of those fuels. Having been driven, illuminated or carried by the steam engine and the internal combustion engine for two centuries, economic life and indeed all human life is in future going to have to find a new source of energy. As it does so, that change will surely represent as important a new course for capitalist life as has the emergence of information technology and satellite communications, for example, or indeed the spread of economic development to populous emerging economies such as China and India. It is that change of energy technology, for both environmental and economic reasons, that promises to be the most notable feature of this coming ten years from the point of view of future historians.

The strange story of the oil price

How quickly will this change our economic lives? Five years ago, I would have said that the change was going to be very slow. Now, however, I am tending to think that it might happen quite rapidly: probably we will feel a big change within the next 10-15 years, with continued changes during the 20 years after that. The reason for my new view lies in the current global economic crisis. But it lies there in an indirect way.

            The reason why, five years or so ago, I thought that this change would occur very slowly is that I am confident that the world is not running out of fossil fuels, or of other natural resources. Many environmentalists claim that we are running out of resources, but this simply is not true—except for the very important resource of the planet´s atmosphere, which is being filled up with greenhouse gas emissions (of which we therefore have too much, not too little). Global reserves of all except the rarest and most sophisticated metals remain abundant.

According to the annual and well respected BP Statistical Review of World Energy, published by the London-based oil giant, the currently known, recoverable reserves of coal amount to nearly 150 years of consumption at current rates. On the same basis, natural gas will last more than 60 years and oil more than 40. The US Geological Survey is the most comprehensive study of the world´s reserves of other commodities, and its 2009 data shows that the world´s reserves of copper, a metal whose price soared in 2003-08 as Chinese imports boomed, are sufficient to last for more than 35 years at the current rate of mining. That may not sound very long, just as 40 years of oil reserves may sound short to some people.

But the vital point to note is that when I last looked at the US Geological Survey data, for Asia Sangokushi, the data showed reserves of copper of 490 million metric tonnes (in 2006) rather than today´s 550 million tonnes, and projected that they would last 30 years, rather than today´s 35 years. Similarly, BP´s statistics on oil, coal and gas reserves all show increases compared with five or ten years ago. Of course, the planet is not creating more of these resources. What is happening, as it always does, is that man is finding more of the existing reserves and getting cleverer at mining or drilling for them in an efficient way.

If this is the case, then we have a mystery to explain. The mystery is that even while reserves of all these resources have been expanding, the prices paid for most of the resources have been rising, rapidly. Between 2002 and mid-2008 the price of copper quadrupled and the price of oil more than quintupled. It was as if we really were running out of these resources, even though in truth we were not.

The explanation has three parts. First, booming global economic growth did increase the demand for these resources, especially in China and India where urbanisation and the development of heavy industry was particularly resource-intensive. Second, during the previous 20-25 years prices for oil and the other natural resources had mostly been falling, which discouraged companies from investing in increased production or in searching for lots of new reserves. So production from mines and oilfields was slow to react to the rise in prices, and when companies finally came to believe that the price rise might be sustained they found that investment became very costly, as there was a shortage of oil rigs, experienced engineers and mining equipment. Thus, supply did not rise rapidly enough to hold prices down. Third, in 2007-08 the credit boom began to burst in America and Europe, hitting the prices of shares and of derivatives, but many investors still had a lot of capital, which they invested in commodities instead.

We had a shortage of oil and other resources in the short or medium term, but not in the very long term. As a result, oil and other commodities peaked in price in June or July 2008, well after the global financial crisis had begun. Oil reached the extraordinary level of $147 per barrel, more than 14 times higher than the price ten years earlier, in 1998. But then, when China and India began to crack down on their rising inflation rates, and when the collapse of Lehman Brothers made demand for all products and services slump in Europe, America and Japan, the prices of commodities slumped too. The oil price fell by 75%, to a low of $35 a barrel in March 2009. The price of copper halved, in the same period.

Economically helpful, environmentally damaging

This collapse in oil and other commodity prices was very good news for all the rich, commodity consuming economies of Europe, Japan and America, and for China too. A big cut in energy and other materials costs is rather like being given a big cut in your taxes. Your costs fall and you feel better off. Since the world was slumping at the time, it didn´t feel so good, but in fact it was. If oil, copper and other resources had stayed at their mid-2008 prices, the global economic slump would have been even worse.

It was, however, bad news for the environment. Many people seem to think that companies and households will decide to adopt cleaner, greener production methods and lifestyles for moral or political reasons, because they would like to save the world from global warming or just to make it a better place. But this is naïve. For most of us, a moral or political instinct to be greener lasts in our minds for a few hours, or perhaps a few days at best. Then we get on with our lives, making the best use of our limited incomes and wealth or trying to be competitive as best we can, depending on the prices and technologies that are available to us. In the longer term, only two things really persuade us to change what we do, how we behave. These are cost and compulsion: the impact of higher prices or of new laws that force us to behave differently.

The rise in the oil price from less than $30 a barrel before the invasion of Iraq in 2003 to nearly $150 a barrel in June 2008 was extremely painful for consumers and for industry. But rather quickly it forced consumers to drive less, to insulate their homes more effectively, to use their heating less, and it forced companies to search for ways to use less energy. In America, it led to a collapse in the market for gas-guzzling pick-up trucks and sports utility vehicles; in all the developed countries, it created a surprise sales success for the Toyota Prius and other "hybrid" cars that use less petrol and run on electric power. And, just as significantly, it persuaded car makers and other companies to invest much more money into research on new technologies, both for electric engines, better batteries and other "renewable" or at least non-fossil-fuel sources of  energy such as wind, solar and tidal power and biofuels of all kinds.

China, India and other developing countries did not respond in quite this way: the companies and households there did not rush to substitute other energy sources for the now costly fossil fuels, nor to buy much more fuel-efficient vehicles. The reason is that for political reasons, in most of those countries the retail price of fuel was held down, by regulations or by subsidy. So the full impact of higher prices was not passed on to consumers or to companies. It was mainly absorbed by government budgets. That experience was so costly for the governments, however, that they are unlikely to want to repeat it—and increased fiscal deficits during the global economic recession means that they are less able to afford to do so, in any case.

The collapse in the oil price since June 2008, and the associated drops in price of natural gas and coal, brought a sudden end to this process of looking for substitutes for fossil-fuels, of seeking greater efficiency, and of research into new technologies. As oil fell to $35 a barrel in March 2009, it felt as if the price might even drop further. After all, the world economy was heading downhill very fast. The World Trade Organisation forecast a drop in world trade of 9% in 2009. Big oil-consuming economies, including Japan, America and Germany looked to be heading for contractions in GDP of between 5% and 10%. The unusual characteristic of this economic crisis was that it was global, with virtually all countries affected in some quite serious way. Hence, the demand for oil looked as if it could keep on dropping. If so, surely the price would keep falling too.


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