Two decades of geopolitical analysis

[UPDATED JULY 2018] I’ve been employed to analyze geopolitics and the world economy for about twenty years now, which means, alarmingly, I’ve got a track record. (Most of my publicly-available articles are now posted on this blog.) What did I get wrong, and what did I get right? The worst calls 1. Turkey My worst call has been Turkey. In a 2004 editorial, I contended that Turkey was on the path traveled by so many Eastern European states: convergence with Western Europe. I even invested in Turkey, I was so sure of this call. To be fair to myself, the problem arguably wasn’t with Turkey: to my surprise, the EU got cold feet. But even after that I doubled down on Turkey with another article predicting a turnaround. This is an example of what Daniel Kahneman would call irrational decision-making based on “loss aversion.” C’mon Turkey! This is your year! 2. China Starting with my 2003 book The Kimchi Matters, co-authored with Marvin Zonis and Dan Lefkovitz, I’ve continually been predicting trouble in China. But, China just keeps on booming. I did get some things right: in a 2004 editorial, I predicted that China would get into trouble by stimulating its economy too much if it faced a downturn. That is indeed what happened during the 2007-8 global slowdown, and China now faces a severe debt problem as a result. So I doubled down on this prediction as well. But there’s no denying that, blithely disregarding my sniping from the sidelines, China is still booming today. Good for you, China. The best calls 1. Venezuela In 2004, I wrote an...

Is China at risk of instability?

In a chapter contributed to my recent edited volume on country and political risk, Michel-Henry Bouchet of the Skema Business School makes the case for a new indicator of political risk: capital flight. He writes: “when attempting to understand the complexities of country and political risk, it is perhaps the most useful to turn to those who are embedded in the country’s matrix of social, political and economic forces, and hence understand these forces best – that is, a country’s residents.” To be sure, there are also more direct indicators of political behavior that one might wish to use to track political risk. Protests, for instance. Or even – as has lately become popular in the era of big data – natural language analysis of postings to blogs and social media. But, as Bouchet points out, capital flight has much to recommend it as an indicator, because capital flight involves putting one’s money on the line: “there are costs and risks associated with transferring one’s money abroad. When citizens do so consistently over time and en masse, it is meaningful.” (To this, I would add, somewhat cynically: in contrast to protests or social media posts, capital flight has the advantage of being, in the main, an indicator of the behavior of a nation’s wealthy elite, who are perhaps more likely to be in the know in regard to the true state of their country’s politics and economy.) Of course, where money is involved, one must also consider financial motivations. Bouchet and a co-author have constructed a model explaining capital flight in 43 countries. An overvalued currency and negative real interest...

The Greek crisis explained, in pictures

Between 2007 and 2012 several Eurozone countries — Portugal, Ireland, Greece, Spain — needed bailouts. In each case, the recipient countries threatened that they would leave the Eurozone if the bailout terms were too harsh. Germany and the other AAA-rated European countries countered with threats to withhold the bailouts if the recipients did not agree to austerity and economic reforms as part of the bailout terms. The threats were treated by financial markets as credible (the price of gold, for instance, soared, as each bailout deadline approached). Hence both sides gained leverage and the bailout packages, though harsh, conformed to the desires of the recipients. This was a classic game of chicken, illustrated here with tractors in honor of the American movie Footloose. In 2013, Cyprus attempted the same strategy. Eurozone financial markets did not react. Probably, Cyprus was seen as small enough that if it exited the Euro there would be little impact on other Eurozone economies. As a result, Cyprus had no leverage. The brinkmanship strategy was a failure. The terms of the bailout Cyprus received were exceptionally harsh – much harsher than those currently offered to the Greeks. Money was taken from Cypriot bank accounts to pay for the bailout, for instance. Cyprus accepted the bailout nonetheless. This was the last time a Eurozone member employed a brinkmanship strategy… …until 2015. Greece, under a Syriza-led government, made another attempt. Rather than threatening to leave the Euro, though, they threatened to default on debts from prior bailouts. The financial markets once again did not react, even as negotiations went to the brink and Greece defaulted on IMF debt. Greek negotiators tried everything, including good-cop-bad-cop and...