Global Externalities: Preparing for Geopolitical Unpredictability
By Cameron Munter, Skytop Contributor / August 31st, 2022
Cameron Munter served as ambassador to Pakistan at the time of the Bin Laden raid. He was ambassador to Serbia during the Kosovo independence crisis. He served twice in Iraq, in Mosul as Provincial Reconstruction Leader and in Baghdad as Deputy Chief of Mission. In the course of three decades as a career diplomat, he was also NSC Director in the Clinton and Bush White Houses, and served overseas in Warsaw, Prague, and Bonn.
Munter studied at Cornell and earned a PhD in history from Johns Hopkins, and has taught at Pomona College, Columbia University School of Law, and UCLA.
Currently a global consultant living in Prague, Munter was President and CEO of the East West Institute, a nonprofit engaged in global conflict prevention. He is a member of the Council on Foreign Relations and the American Academy of Diplomacy and serves on numerous corporate and nonprofit boards.
Economists and Externalities
I’ve always envied economists. Rather than taking as many things into account as possible, they do the opposite, reducing economic trends and behaviors into various forms of equations, and then referring to “externalities.” In many cases this kind of approach proves helpful, providing focus on key factors.
But what happens when the externalities become so numerous that they overwhelm us?
I think we’re going to see a situation like this globally in the coming months. Now, as the first post-COVID summer has passed, and the elites have headed off to the Hamptons or Jackson Hole, and the common folk to Croatia and Orlando, we’ve had somewhat of a reprieve. Consumers are spending their pandemic-era savings. No one wants to call it a recession yet. There are jobs being created even as inflation persists. There are a lot of factors that don’t seem to cohere, and at least in the United States, that means that both sides of the polarized debate are making strong claims: the Democrats that Joe Biden has achieved more than any president in recent history, the Republicans that only Donald Trump can save the country from oblivion.
Too many externalities. Let’s talk about a few:
Energy
Energy: at least in the short run, it’s not evenly distributed. As Europe weans itself from Russian oil and gas, the rest of the world is not able to make up the shortfall, at least in the short run. Eventually American LNG will become available to more Europeans, and distribution in Europe will adjust. Europe will make decisions about the future of nuclear power, but that will take a while. China’s extraordinarily strict response to COVID will contribute to its economic slowdown, and demand for hydrocarbons will diminish. The major oil companies of the west are not yet throwing their huge windfall profits into new rigs and oilfields. Everyone is not quite certain how all this will play out.
Inflation
Inflation: caused by what? By many things of course, not all of which work in the same way. Commodity prices are usually dependent on some sort of coherent notion of how demand and supplies will develop over coming months and years, but how can we guess whether the war in Ukraine will last (for months? For years?) or whether the financial crises that beat the much-bruited Chinese Belt-and-Road Initiative (BRI) will continue? Inflation, after all, doesn’t affect everyone equally – emerging markets are especially hard hit when their expectations of the cost of repaying cheap debt are dashed (and make no mistake, BRI is no Marshall Plan: these are no grants that Pakistan and Sri Lanka and Cambodia are pocketing, but loans whose terms are not available to the public eye). Housing in the developed world? We’ve had many years of easy money, but mortgages are unlikely to dip back close to 2 percent any time soon, which doesn’t augur well in places where there aren’t enough homes built in the first place.
Supply Chains
Supply chains: there’s evidence of major shifts, of re-shoring and other movement of production sites away from China, not only to other locations in Southeast Asia, but even back to the developed economies themselves. This is a profound and major shift, not only in the sense of where things are physically made, but also in the attitudes of industrial leaders. It’s a simple thing to say that just-in-time is giving way to just-in-case. But it is a much messier and larger process on the ground, or on the sea, as shipping adjusts to these and other changes. Experts are now telling us to watch the behavior of maritime insurance companies to predict whether goods such as wheat can make it out of the Black Sea, or semiconductors can continue to make their way from Taiwan.
Political Tensions
Political tensions: most experts expect the war in Ukraine to last a long time. But it might not. Ukraine is resilient. We don’t yet know if Russia is. But how this all plays out will have an enormous effect on such various subjects (externalities?) as hunger in Egypt, heat in Central Europe, government defense budgets in the Atlantic Alliance as well as the ripple effect on defense spending in places like Korea, Japan, and Australia. Diplomacy is unpredictable as well, as the American-led resistance to Russian aggression in Ukraine has found strong support among the OECD economies but a rather tepid reception among emerging and poor countries, even those, like India, that the Americans are courting like crazy. And how will the unpredictability of the coming times play out in domestic politics? Will we see another wave of Bolsonaros and Orbans, Modis and Trumps, or is there another paradigm shift in store for us as confused and fearful publics turn to other types of leaders (democratic and otherwise) to reassure them that the current conceptual muddle can be sorted out?
So Little That’s Certain
In other words, it’s not the kind of situation where the kinds of signals economists seek are out there, obvious, for all to see. One can say: watch China! From financial weakness to tightening political oppression to demographic crisis, there are plenty of warning signs. Or: watch the American political scene! Can a divided country provide leadership in times when that leadership is in doubt, not only by others but even by many in the U.S. itself? Or watch the emerging markets, as Pakistan hovers on the edge of default, Argentina continues its financial difficulties, and inflation goes through the roof in Turkey?
So many elements to watch. So little that’s certain. Not an easy time for those (yes, I pick on economists) who want to reduce the world to those key quantifiable data sets that lend themselves to equations, blithely ignoring those key externalities. No, sorry my friends: the externalities are all over the place, and they are what we all must watch.