The global outlook: beware falling objects

The world economy has in the past few years undergone a dramatic shift. Chinese industrial growth – for decades 10 percent or higher – has declined nearly to nil. Global commodity prices have shifted from high to low. At the same time, the U.S. dollar has surged from low to high against most other currencies. Partly this latter surge has occurred in response to the expectation of rising U.S. interest rates; and partly in response to turmoil elsewhere (most recently, the Brexit vote). When the world shifts in a way that is unfavorable, the first reaction of those adversely affected is to hang on for dear life. That tends to work for a while. Budgets can be cut; credit lines called upon. But eventually, those hanging on by their fingertips tend to fall. Some jump, recognizing that the shift is irrevocable and hoping they might land somewhere soft. Others hang on until they lose their grip. And thus, a few years into this dramatic shift, the world outlook is: beware falling objects. What might fall as a result of this economic shift? To answer that question, go back in time. We don’t have to go too far back: more or less this same shift occurred in the early 1980s (see chart). Commodity prices were high in the 1970s; in the 1980s they were low. U.S. real interest rates were low in the 70s; in the 1980s they were high. The US dollar (not shown) was weak in the 70s, and strong in 80s. The first objects to fall were the emerging markets (see chart; I first wrote about this...

A Turkish turnaround?

Most reasonable people would agree that the administration of Turkish President Recep Tayyip Erdoğan has been heading, alarmingly, towards authoritarianism. Erdoğan has been accused of imprisoning journalists, censoring the media, attempting to exert political influence over the courts, and using the security services for his own purposes. He has pushed through revisions to the country’s constitution, arguably in his favor. He served as Turkey’s prime minister for more than a decade before becoming president. But there is one fact that is difficult to reconcile with this chain of events. Included as part of Turkey’s recent agreement with the EU on Syrian refugees was a little-noticed, and even less-discussed, provision: resumption of Turkey’s EU accession negotiations. On the face of it, it is a paradox. If Turkey is becoming increasingly authoritarian, why on earth is Erdoğan attempting to re-open accession negotiations? After all, part and parcel of EU accession negotiations is an intrusive and meticulously verified set of requirements for democratic reforms. Is Erdoğan schizophrenic? Was the measure adopted by the Turkish government despite Erdoğan’s opposition? Or, just possibly, is Erdoğan misunderstood? I would argue the latter – and that there is a distinct possibility of a Turkish turnaround. It is undeniable that Erdoğan has shown authoritarian tendencies. But he has also been misunderstood, for two reasons. First, his rhetoric is worse than the reality; and second, he has been pushed by circumstances into his authoritarian role. On the topic of Erdoğan’s rhetoric, he suffers the problem of any politician who relies on pious supporters: he’s scary when playing to his base. Of course, it is not only Erdoğan who...

Is Cuba coming in from the cold?

One of the most extraordinary geopolitical trends of recent years has been what might be called, with apologies to John le Carré, “coming in from the cold.” Many countries that had excluded themselves from the globalization system and maintained an adversarial relationship with the West have recently performed an about-face, opening themselves to foreign investment and normalization of relations. Myanmar (formerly Burma) was the first of the recent converts, making rapid progress since 2011. Iran has followed with on-again off-again negotiations on a nuclear deal. Is Cuba the latest example? To answer this question, one must first understand the trend itself. Generally speaking, there are two factors that appear to be driving these countries’ decisions to put aside decades of isolation. The first of these is the emerging markets boom. A heat map of global economic growth in 1992 (see below) was hardly a compelling advertisement for the globalization system. “Open your markets to the West,” it said, “and the West will get really rich while you struggle.” As the map shows, most emerging economies outside of Asia were floundering, while the U.S. powered head. This was the tail end of the so-called “great divergence,” in which the poorest countries of the world became relatively poorer, in complete contradiction of economic theory. By 2005, the global economic growth heat map looked very different. Nearly every economy in the world was booming. Led by China and India, the ‘BRICs’ were catching up with the West, and looked set to surpass the United States in economic size. The only emerging economies whose performance was wobbly were the refuseniks: Iran, Cuba, North...

The Emerging Markets Have Emerged

The acquisition of IBM’s PC business by China’s Lenovo was no red herring. The emerging markets have, at long last, emerged. It looks, at first, like just another bubble in emerging equities. Following the acquisition of IBM’s PC business by China’s Lenovo, Chinese businesses are in the headlines. The usual suspects are up – Brazil, Russia, Turkey. Americans who once feared a rising Japan now talk of a rising India. All of which usually means, sooner or later, another emerging market meltdown. But there is an important difference. That difference is Nigeria. Or, more specifically, the fact that Nigeria became, in 2004, the third largest global market for Guinness breweries – trailing only Ireland and Britain in Guinness’s global sales and edging out the United States. So odd a fact cannot be dismissed as a fluke. There are no speculative bubbles in beer consumption. Nigeria’s unlikely rise is, in fact, the harbinger of a trend that is changing the global business landscape. That trend is not a simple expansion of wealth. Since the early 1990s emerging markets enthusiasts have made much of the fact that the combined output of the developing economies is, by some measures, roughly on par with that of the rich world. But this sizeable economic output does not make the emerging markets relevant to global business – any more than the Warsaw Pact economies were relevant to global business during the days of the USSR. To be relevant, economies must be integrated. Until recently the emerging markets were cordoned off by barriers of politics, policy, culture, and sheer economic difference. These barriers were as real...

Microsoft’s kimchi problem

Microsoft’s success in the U.S. market is uncanny and ongoing. But in countries on opposite sides of the world, things sometimes go wrong for the wizards of Redmond. Brazilian authorities have announced plans to convert five federal government ministries from Windows to mandatory use of open-source software. In Beijing, representatives of the Chinese, Japanese and Korean governments have been meeting to hash out a joint plan to promote the usage of Linux. And in Europe, the competition authorities handed down a monopoly ruling and fine that cut deeply into Microsoft’s global earnings. This may seem out of character for Microsoft, a company known for its unerring command of strategy. Or perhaps coincidental. But it may be typical. Consider the telling blunder Microsoft made in the Korean software market in the summer of 1998. That summer, in the face of determined local competition, Microsoft was struggling with a minority market share. Then the company’s strategists hit on a bold plan. The Korean software firm that dominated the local word processing market was bleeding cash. Because of rampant software piracy, many Koreans were using the company’s software, but few were paying for it. Cash-rich Microsoft negotiated a deal in which the Korean company would discontinue producing its software in return for a bailout from Microsoft — leaving the word-processing market open for domination by Microsoft Word. An aggressive strategy. But what Microsoft failed to understand is that there is something unique about the Korean written language. Most alphabets have evolved organically over the centuries and aren’t related to national boundaries. (The letters A through Z are used, with some modification, to...