Key variables: introduction

Key variables: introduction

Developing scenarios for 2025

We have raised a complex network of issues. Discussing them all at the same time is rather like entering a busy roundabout – there is always another idea coming along that has to be taken into account. In place of a gradual, iterative overview, therefore, let's simply jump in by means of a major question. That is:

What would happen if the European sovereign debt crisis suddenly evaporated, and with it concerns for the Euro? If the situation was somehow transformed to become convincingly rosy? What would we need to know in order to discuss the world as it might then be?

There seem to be three basic questions that we would need to ask in this very hypothetical situation:

First, a rather abstract but very real question, in regard to the fitness for purpose of the global financial system and its various nodes and national players.

Second, what political path the US is likely to follow over the next ten years, and what effect that style will have on matters other than the domestic economy.

Third, whether China has peaked or will be able to undertake the necessary broadening and deepening of power, doing so through impersonal institutions rather than networks of personal influence embedded in the Party. China has a number of other major predetermined or uncertain elements that interact strongly with this question.

Positive answers to these issues lead us to think about commodity prices, energy supplies and the environment. (As do negative ones, but with less political priority, and considerable lags.) In a positive world, small changes may create supply shocks, and it may be in the political interests of informal groups to generate such shocks. All scenarios are susceptible to both natural and political discontinuities around critical world systems, from the weather-food nexus to the consequences of the geographical concentration of minerals and energy supplies.

The way of darkness.

A negative world does not have to start from Europe, but the lack of resolution of the European sovereign debt issue – and of the innate instability of the Euro within this – is clearly a major factor in holding back confidence. The issue is less one of European financial health – although this is plainly important – but more the fear of financial contagion. Europe will not quickly resolve its problems, but it may nonetheless find its way to convincing solutions around three issues:

First, generating legally-enforced national and bank liability accounting that will make explicit the contagion risk. Taking convincing steps to manage the most egregious of these.

Second, an agreed and unambiguous model amongst the core nations as to whether Europe is to be primarily a free trade area or else a federation of states. To adopt institutions that reflect one or the other of these. To adopt policies and management schemes towards the Euro that deliver on these ambitions. To dump costly initiatives that fit the model not so chosen.

Third, subject to the outcome of the second of these, for European nations to develop real-world, convincing policies that combine debt reduction with economic growth. If such policies exist, they are likely to be found much closer to models other than the European post-war social consensus. One might look no further than Singapore for a convincing extension of the European model.

Europe will have to undertake this activity against a backdrop of swift demographic change, grossly under-funded state pensions and other age-related problems. The desire to "put it back the way it was" will find political expression, generally at the expense of cold-minded economic reform.

So, Europe has problem and Europe is a problem. The reasons why it is a problem to the broader world are clear. First and foremost, the issue of contagion limits commercial enterprise elsewhere. Companies are sitting on large amounts of cash; they have stockpiled five years of technology and ideas; and labour markets are well-supplied with able people. Sub-optimal amounts of this potential are being deployed because investors perceive unresolved risk. Most outside of Europe have stabilised, if not wholly resolved, their specific financial issues – unstable banks, consumer or mortgage debt – and are in effect ready to roll. But, then there is Europe...

This, the darker path, suggests world growth at something like 40% below capacity for the entire scenario period for the industrial economies, and 25-30% for the remainder of the world. (I am using numbers as adjectives: we need to sharpen these figures.) Commodity prices are low, penalising primary exporters and lessening investment in their industries. A weak jobs market comes with political instability in many poor countries, further weakening investment.

Perhaps of more significance is, however, the sharply increased convergence between the emerging and the industrial economies which these figures imply. It is clear that at some stage the current emerging economies will become the direct competitors of the industrial world, rather than its suppliers. In a world in which relative growth followed historical patterns, this would occur in the 2040s. when the emerging economies are undergoing their own demographic transitions and the industrial nations would once again be young. In the present case, this occurs earlier, in the 2025-30 period, during the most acute of the industrial world's demographic change.

That situation has two possible responses, other than to permit the passive collapse of local industry. One is protectionism, the other is aggressive retooling of these old economies in order to compete. In essence, that is Europe's dilemma right now – how to sharpen its comfortable, debt-ridden ways to meet the harsh reality in which it finds itself? The political battle lines are very clear.

The rosy(-ier) path.

Earlier, we posed three questions that we would need to answer if all was rosy in Europe. These were:

Fitness for purpose of the global financial system. We have already noted that this cannot be the case when an important player in it is in chronic difficulties. However, the world will learn to work around this as the scenario period progresses. The question may move to other forms of instability, notably in respect of under-invested primary production, such as food.

Second, the political path to be taken by the US. A failure of the European model will greatly influence the way people think about their options as a nation. The Left may well urge protection, but the majority will accept the need for a radical redirection of money and effort. For example, US schools under-perform globally given the sums spent on them. What radical changes (of motivation, of ethos, of delivery) would be imposed? With the acute increase in competition, questions of this sort really are the "moral equivalent of war".

Third, developments in China. Once again, this is not the place for a full discussion. Political transitions in China are unlikely to be much influenced by outside events unless, of course, those precipitate very low internal growth or impose themselves aggressively on the region. Equally, if China fails to find better political institutions, then this is unlikely to show itself as concrete outcomes much within the scenario period, with one possible exception.

This exception is the widespread and systematic rise of workers' power – that is, unionisation and political organisation, against the current powers. This would, of course, be radically opposed by the state, and would be unlikely to take the traditional forms of labour mobilisation. Wages rose 20% in the Chinese coast in 2011, however, and skill shortages are everywhere. Electronic means of communication are controlled, but are also essential to modern China and not open to complete management at the cutting edge of the technology. As more informal channels emerge, so too can a point-by-point form of activism grow that picks off this company or that, this source of corruption or the other. Set against this, loyalties are to family and – less – to nation, with no tradition of solidarity with abstract social groups. The practice of Communism under Mao saw to that.

Were Chinese wages to rise and labour flexibility to fall, this would map onto a national model that is now much under internal debate. This has China lessening its dependence of export markets in order to focus on building a welfare society, supporting its ageing population and redressing the pain of twenty years of social dislocation. Its economy would be restructured to grow around internal demand. The consequences in the industrial nations would be considerable, as outsourced work was relocated to less perfect environments or repatriated, to the benefit of low skill workers.

A resumption of modest growth before 2020 would, of course, once again place stresses on global commodity supplies. Environmental issues could be expected to regain some of the priority that they have lost. Taken together, these imply a chronic cost pressure on the world economy that was not there before, and which can be expected to shave up to a percentage point off potential growth. This is a chronic and relentless pressure that can be foreseen as intensifying into the indefinite future. A high growth world is therefore an environment that places much emphasis on efficiency. States will have been through fifteen years of austerity, companies will be facing unprecedented competition. Technology will be changing very fast as compared to any time in history, and be on a palpably accelerating framework that owes much to the interaction of domains of understanding – of IT and psychology, for example – that were hitherto separate.

The psychology that emerges from this is interesting. By analogy with military hardware, the solutions of a former age were complex and dedicated to a specific task. The new solutions rely on work-horse infrastructure and platforms, but with elements bolted onto them to fit the task in hand. Subtle databases recall which platform has what, and why; which software upgrade, which operator skill requirement, what maintenance schedule. Applied to the civil world, we move to a norm of temporary and probably very specific and local solutions, configurations that are constructed from a Meccano of capabilities and modules, all focused around doing what is needed for just as long as it is needed, and then dispersing these to other uses.

That mind-set leads to something that looks very like the dream of sustainability. It requires very different people, though, and very different attitudes to work, learning, status, careers, the role of the state, "society" and the immediate group with which a person happens to be bound up. It is a culture shift that may be too much for the old industrial world.

Comments section

Note from Ed.

The comments have been so valuable - and the comments on these comments so complex - that it seems best to split them out as separate papers. You will therefore find four "core" papers on, respectively, the fitness for purpose of the financial system, another major text on systems instabilities and finance, the dynamics governing China, political attitudes in the US and a paper that contrasts these with Europe. There are then three additional papers that reply to these: one on finance, one on China and one on values. politics and the area of how attitudes form and acquire political expression.

Excepting general comments, or those which address none of the above issues, all of the comments that fits into these categories are summarised, below, in the order in which they arrived. If you click a link - the gray button on the left - it will take you to the full comment, located in one of the papers indicated above. At the head of each paper are general links, and if you click on "go back" after each comment you will be brought back to where you left in this paper.

Please note that the "go back" button relevant to each comment is itself located below the comment text.

Comment 1

Excellent review. How do we handle the scenarios if everything depends on Europe, and there are at least four generic outcome for that? Perhaps that is why you picked two paths? Put all the Euro cock ups in one of them, and all the solution paths in the other?

Thinking about this, I wonder if the survival of the Euro sui generis is the key. The real thing is whether Europe is predictable and, somewhat in second place, successful. If it is, then everyone else is enabled; if it isn't then they aren't. That seems to simplify considerably.

That gives you three cases:

Europe re-organises itself into a predictable and eventually successful framework, with or without the Euro, either as a superstate or as a free trade area. (I really like that distinction, although one is of course a subset of the other.) The details really do not matter a this scale - in essence, it ceases to be a problem and vaguely contributes to economic activity. It could get sharply better post 2020.
Europe undergoes a chaotic fragmentation, but does so without major contagion. (I exclude that as it is a decidedly black-swan-card, like a major political derailment the Gulf. If it happens, the scenario is dark and deadly: a crash unprecedented in modern times, given overall systems fragility.)
Europe continues to flounder, but is also able to muddle through. Its growth is negligible and the uncertainty that it generates inhibits growth elsewhere. I cannot see this as a stable case that will last to 2025, however: it has to fall into one of the other two.

I agree you need better numbers, but of course those have to wait on clear scenarios. What I see as clear is that we will not see historical growth rates over the period. We will see capacity under utilised and potential under used. We are certainly going to see sociopolitical trouble of the sort that you mention. The response sooner or later will be containment, citizens or no. Real wages will fall for many in the west. And that's the best case. Will technology dig us out of this? The world, yes; the old rich world only if it plays its cards right (and gives science and allied disciplines) a much better deal.

Comment 2

Thank you very much for sharing with me your thoughts in your last e-mail - we really share some of the perspectives!

I liked especially this paragraph

The psychology that emerges from this is interesting. By analogy with military hardware, the solutions of a former age were complex and dedicated to a specific task. The new solutions rely on work-horse infrastructure and platforms, but with elements bolted onto them to fit the task in hand. Subtle databases recall which platform has what, and why; which software upgrade, which operator skill requirement, what maintenance schedule. Applied to the civil world, we move to a norm of temporary and probably very specific and local solutions that are constructed from a Meccano of capabilities and modules, all focused around doing what is needed for just as long as it is needed, and then dispersing to other uses.

In close relation to that, you and the other coworkers in your project may find the "Wildcard" (Global Europe 2050, p.111 : break, make...) and the different scenarios interesting which have now been published by the European Commission as part of the "Global Europe 2050" report You can find it free of charge here.

Concerning the failing schools in many countries- education and knowledge are definitely these "assets" and these social activities which need to be taken into account much more!
Concerning the discussions on China, I would broaden the perspective a little bit concerning the Southern Chinese sea and all its stakeholders to this terrain - it will be one of the hot spots in the years beginning from now culminating at the latest around 2 years time with large repercussions on international politics and the world economy.

Comment 3

A text from Spain, concerning useful and distracting social attitudes. Is it possible shape social attitudes towards a more appropriate stance, given the challenges ahead?

Comment 4

The authors of this comment have produced a complex text, which has been separated out as a paper in its own right. This is called Developing Patterns in US politics.

Comment 5

A comment on Comment 4, disliking the approach.

Comment 6

A further and positive commentary on Comment 4. The authors provides data on 'tight' and 'loose' cultures for a specified list of countries. Tight countries are more vulnerable to disturbance, as per the texts posted under the Politics of Anger, to which a number of new and relevant papers have been added.

Comment 7

An appreciation of China over the next fifteen years, which has of course been appended as a separate paper.

Comment 8

A free standing paper that was stimulated by Comment 4 but which extends this to Europe. It digs into the European ideal and finds it a fragile construct.

Comment 9

A lengthy paper on the financial system and its general fitness for purpose. It concludes that bubble proofing is virtually impossible, but that we need to be able to visualise the complexity of what is going on better.

Comment 10

Intrinsic instabilities in the financial system: is there a regulatory cure?

Comment 11

Likely absence of bubbles in the next decade

Comment 12

A paper which comments on the text regarding financial instabilities. It discusses power laws and their impact on instability in markets.

Comment 13

Detailed comment on China, focusing on the cost of labour consequent on the attempt to turn China into a consumerist society.

Comment 14

Derived from Comment 13, this offers a view on the principle components defining China's future.

Comment 15

This text suggests that the analysis of US politics and its generalising conclusion misses an important dimension, the Libertarian mind. It extends this to cover politics generally.

Comment 16

Quote "I was just blown away by the analysis of Libertarianism (Comment 15)". This is a remarkable extension of the analysis on US attitudes, generalised to global politics.

Comment 17

Analysis of central bank regulatory systems, relevant to the fitness for purpose of the financial system and regulation.

Comment 18

Is capital the limiting factor in today's economy? What is?

Comment 19

Graphics showing growth in US public debt, and the consequences to potential policy. Usefully contrasts the Left and Right responses to the current situation.

Comment 20

Response in part to Comment 19, but dwelling on the sources of competitiveness and innovation. Data shown from world and US about what supports eg patent applications.

Comment 21

Response to Comment 20, about clusters. Offers map of Europe by wealth generation, showing clusters, Questions whether we propery understand our purpose when cross subsidising remainder of society, other countries.