The J Curve | Ian Bremmer | Talks at Google

Review of the New York Times, the LA Times and a slew of other publications. He appears frequently on many news programs as a commentator. And his new book, the J Curve, takes a look at how nations develop, what factors affect that development, and is really relevant to a lot of what we're doing with Google in terms of our globalization and moving into some of the emerging and established markets around the world without anything else. I'd like to introduce Ian and let you know that we're all out of books Ian will be signing after the talk. And as some of you may know, Ian's group does work for Google and like to keep confidential questions until after the author's portion of this talk. So we're recording this, it's going to be up on YouTube if you have to leave or something in the talk. You can catch it there later, but just keep the confidential questions out of the recorded Q and A part. So with that said, I'd like to introduce Ian Bremmer, everyone. Thank you. Thank you very much. It's a pleasure to be here. I didn't know it was going to be on YouTube, but I'm glad it is. I hope I get a share of advertising revenues. The concept went. I'm delighted to be here at the Googleplex. I was sort of saddened to see that this is building 42. I thought it would be sort of building 42 quadrillion or something like that. It's not thought to be lots of zeros everywhere. It's my first time here, though. Google is a client. Vince Cerf's the guy that, you know, has. He's on the back of the book and been working with him for a long time. Got to know him at WorldCom, but he's moved and we're delighted that he's here, obviously. Let me first say what I'd like to do. I'm a political scientist. I'm not an economist, I'm not a strategist. Right. So if you want to know what Bernanke is going to do with rates going forward, US Inflation, want to know whether the US dollar is going to be against the euro, all that, I have no idea. I can't answer that question. I won't answer that question. On the other hand, if you go to Wall street and you ask an economist or strategist what's going to happen in Iran and the effect that's going to have on oil prices, they don't know, but they will answer that question. And the reason they'll answer that question is because they do not have political scientists on Wall Street. That's what we do. I mean, ever since 1998, I was a Stanford guy, got my PhD over there. I was at Hoover for a couple years and then left and started the firm. And the idea was that politics was going to matter more to markets over time. And trying to understand how that is made both interesting, relevant and actionable for multinational corporations and investors around the world is what Eurasia Group actually does. So what I'd like to do over the course of 30, 40 minutes today and then take your questions, is first to explain why I think political risk is relevant, what it is and how it matters, and how it's becoming more important. And then I want to talk to you about why the J Curve is relevant to that. Talk about the book a little bit. And then finally I want to talk to you a little bit about what that means in a few countries where political risks matter. I want to talk about Iran, I want to talk about the Middle east. Since I'm here at Google, I want to talk about the 600 pound elephant in the Googleplex, which is China, and maybe what Google does in China and what that means going forward. Its role on the J Curve is very interesting. And then I'll take whatever questions you guys want. Okay? That's kind of the way I'm going to lay this out. So first, in terms of political risk, politics. For me, political risk is how politics affects the markets. We've known for a long time that economics affects the markets, but my argument would be that that politics not only matters to corporations internationally, but it's mattering more over time. In fact, it's mattering more structurally for a number of reasons. It has since 1998. So if you look back at when I started this firm, you'd say he made a pretty good bet. But I would make the argument now in 2007 that looking forward for the next 10 years, politics will continue to matter more to the markets over time. And I think that there were four basic reasons for that. And they're reasons, frankly, I'm not really prepared to debate. They're structural. We can argue about speed, we can argue about magnitude, but we can't really argue about whether these trends are happening. Let me list what they are. Number one, energy is coming from more unstable parts of the world, right? It's not the Gulf of Mexico, it's not the North Sea, it's the Persian Gulf, it's the Caspian Basin, it's West Africa. And that is increasingly true over time until there is not Only alternate energy sources that are technologically feasible, but as important alternate energy infrastructure. Now, the fact that that development is in the context of a cyclical market where energy prices go up and down because of supply and demand, means that the markets are going to look like this in terms of energy, oil and gas. And in a sense that cyclicality, given the structural increase is worse for the United States, especially because it means that we were in a $78, but now we're 50 to 55 for a barrel of oil. And that means that it's not considered as pressing an issue. The likelihood that the US government will make alternate energy a presidential priority in 2008, given cyclicality of this upwards push is really much less long term, that's really bad for the US we could talk about different countries where that hits, but this is a structural driver. Okay, number two, the diffusion of dangerous technologies, the fact that it's increasingly easy for rogue states and organizations and individuals to get their hands on stuff that can seriously disrupt global markets. That's true, of course, for North Korea. It's true for Iran. As Iran develops nuclear weapons, it will be true for a host of other states in the Middle east and beyond. But it's also true for organizations and other types of things. You look at Hezbollah and their attacks into Israel and the war that occurred over the summer, you see that they weren't just launching missiles across the border. They were able to hit Haifa, which is a major Israeli urban center. I was just in Israel last week. A lot of people talking about that. What happens when Hezbollah has missile range to be able to hit Tel Aviv? What happens when there's an air warning and Israeli bankers have to be in safe houses? Does that trend long term affect Israel's economic viability? I suggest it does. We're seeing these trends happening and whether it's the horn of Africa or Afghanistan, Pakistan or Iraq or the rest of the. You know, this issue is real. It's a structural driver. It's the nasty underside of globalization. Right. The third point is that increasingly the exciting opportunities for the world economically are coming not from the developed markets, but they're coming from the emerging markets. They're coming from the brics, they're coming from China and Russia and India and Southeast Asia and East Europe and all of the rest. But emerging markets are fundamentally different from developed states. I would define an emerging market something, I guess has gotten a little bit of notoriety as a country where politics matters at least as much as economics to the market. Find a country where that's true. It's an emerging market. Find an emerging market where that's increasingly not true, like say South Korea or Mexico. It's increasingly a developed state. That's investment grade. We shouldn't consider it an emerging market anymore. It has effectively de facto emerged. Going to talk about that quite a bit in a little bit. Nonetheless, to the extent that that's where the exciting possibilities are for economic growth, that means that political risk is going to matter more to all the companies that are taking these investment decisions. Obvious to everybody in this room. Fourth point. We are living in a world where the United States increasingly lacks both the political will and, and the political capacity to get things done internationally. Right? We are moving away from a US led unipolar world towards a more multipolar world. And we're doing that in the absence of effective international architecture. The international architecture that exists was created for the Cold War environment. That's true whether you're talking about the proliferation regime or NATO or the Security Council. And that means more volatility. I am not suggesting that a multipolar world is better or worse than a US led unipolar world. The markets don't talk about better or worse. They're indifferent. What I'm talking about is the fact that as that shift occurs, there will be an absence of countries or institutions that will be existing, that can actually create and implement and support and uphold common goods, public goods that are necessary for smooth international economic transactions, and that will create more volatility whether you're talking about proliferation or climate change or security environments and regional arrangements and all the rest. EU exists in Europe, works pretty well. There's no EU in Asia. There's no NATO in Asia. Yet Japan is becoming far more assertive. Want to change the constitution? Just made the Defense Committee into a ministry. The Chinese are building up their military capacity broadly. They're increasing economically beyond anything that anyone has seen in the last 10, 20 years. But there's no international architecture to deal with that. That's an issue. So for those four reasons, structural drivers, I believe that politics will matter more over the next 10 years to the market than it has even with all the headlines that we've seen. Okay, so that's my premise. That's my axe. It's my bias. So that's the part I'm not prepared to debate. Everything beyond this, I'm debating. Okay, now I'll get into. Hopefully I've proven to you that I'm at least interesting, right? Maybe even relevant. I have not yet proved in any way that I'm Actionable, that you can do anything with this stuff, right? Aside from read it. Let me talk a little bit about how I think you measure political risk. Because if you want to make it useful for Google, you want to make it useful for multinational corporations, institutional investors, hedge funds, all the rest. You need to have decision points. You need to be able to measure political risk. Now, political risk historically is something that's hard to measure. I mean, a lot of economists will say we've got data. You don't have data. Well, first of all, I'd say economic data often isn't as hard as the data you'd like it to be. What's unemployment in Saudi Arabia? Well, the government may say it's 25%. Is it? What's GDP growth in China? Government says 11.3%. Is it? You know, a lot of this requires judgment afterwards. So economic data is not as hard as you think it is. Political science data may be hard to get your hands around, but we know rule of law matters for political risk. We know a country that has rule of law has more stability politically than countries that don't. More transparency and the rest, better operating environment, corporations makes sense, but there are no numbers for rule of law. True, but there are variables that you can assess that will get you in a useful proxy manner to understand rule of law. You want to understand if judges have paid a living wage, you can get data for that. You want to understand if judges are trained with funded programs in different regions throughout a country on new legislation as in exists. That's a good proxy variable. You want to understand if there are assassination attempts against judges, how many per thousand judges? That's a good proxy variable. I would argue if you collect that data and you look at countries over time and compare them to one another, you'll have a pretty good sense, not perfect, but a pretty good sense of how comparatively open and transparent the legal systems in these countries are. And you can do that on political variable. Bivariable. It's hard. It requires a lot of people. It's taken us a long time to build it up, but it's doable. Okay, that's the first point. Now, there are two components of political risk. I promise you, I'm getting to the J curve. Okay? There are two components of political risk. The first is stability. The second is shock. Right? You have a country that is unstable or a sector in a country that is unstable, or a transaction in a sector in a country that is unstable and a shock hits it, you have political risk. If you have a shock and It's a stable situation. It's not as risky. Let me give you an example. Imagine that there's a country where there is an election for a head of state, any country, and the ultimate determination of who becomes head of state in that country is made by a vote that is considered illegitimate by a majority of the people. Could happen, right? Further, imagine that the ultimate determination of who becomes head of state is made by a partisan determination of the top judicial organ of that land. Okay. I know you can imagine that this might happen. And of course, it has happened in Mexico last year, right? It happened in Ukraine with the Orange Revolution, and it happened right here in the United States. Now, when it happened in the United States, same shock. A lot of my friends from Indonesia, Russia, Turkey called me up and they said, you hypocrite. I mean, how can you talk about the export of democracy and legitimacy and values and look at what you do in your own country? And I'm like, you missed the point. Same thing happens in your country. There could be flames in the street. Happens in the United States. No impacts on America's credit rating. No impact on foreign direct investment, no impact on social stability. Look, I did my undergrad in New Orleans, Tulane University, before I came out to the farm here, right? And I went back a few months after the hurricane hit. A complete disaster. Completely mishandled by the United States, completely not mentioned by President Bush in the State of the Union speech a couple weeks ago. Shocking in my perspective, but nonetheless. Right, but there was no rioting going on a couple months afterwards in New Orleans. New Orleans natives saw that the police force, the American police department were theirs. The American judicial system, the legal system were theirs. You know, the level of instability wasn't there. The same thing occurred in Ukraine with the elections. And the country basically fell apart. And it's continued to reel since then. And the Orange Revolution has been turned backwards. It's because the stability wasn't there. Mexico, right? The elections occurred. And most people believe that Amlo had that election stolen away from him. Mr. Obrador, by Mr. Calderon. And you know what? The average Mexican was not prepared to allow the country to fall apart. They supported the fundamental institutions. And so when Amlo said, I'm creating a parallel government, I'm your president, I'm going to collect taxes, we might shut down the airport. The Mexicans said, no. And look at what happened. You had elections in Tabasco state, and AMLO's people didn't do very well. And six months, nine months, 12 months later, we will increasingly see that Mexico looks more like the United States in terms of stability than it looks like Ukraine. Meaning Mexico is increasingly not an emerging market. Macro politics no longer matters as much. It's micropolitics. We're moving from stability as the operative variable to regulatory policy. The boring stuff. Taxation, labor, you know, all of trade policy, sector by sector. Not saying politics isn't as important, but it's not the fundamental driver that you need to look at anymore. All right, okay. So if you understand stability, and I think stability is something that you can measure, then you have a pretty good sense because shocks will occur and you can't predict them very well. And you're always going to be surprised by a shock. That's why it's called a shock. You know, that you will have a pretty decent sense of the political risk that hit you. Okay, that's enough for all of the why I do what I do and what the heck political risk is. Let me talk about the J curve. The idea about the J curve is if you accept the fact that if you want to understand political risk, that stuff, stability is your operative variable. What the J curve tries to do is understand why countries are and aren't stable, what leads countries to fall apart. And if you. The J curve itself. There is a curve in the book. It does look like a J. Kind of a conceit of the book. This model is that the vertical axis. Bear with me for a second. No whiteboard. Whiteboard is stability and the horizontal axis is openness. Stability, the ability and willingness of a country to implement stated policies in the incidence of shock. Openness, both internal and external. You know, NGOs, can they operate? Foreign direct investment, does it happen? Transparency, does it work? Google, Can I search on anything I want to in this country? Town hall tests, not insurance. Deal. The whole thing. Okay. And what we find is that that relationship looks like a J. In other words, some countries are stable because they're open. The United States, Canada, Japan, France, increasingly Mexico. Some countries are stable because they're closed. North Korea, Cuba, increasingly Iran, increasingly Iran, Saudi Arabia, China. Okay, now, I'm not saying that all those countries are identical in the same way that the countries of the United States and France and Canada aren't identical. Just bear with me for a second. Couple other things you need to know about the J curve. First, it's much steeper on the left hand side than the right. Which means that if you are, you know, a country like North Korea and you suddenly open up just a little bit, the ability of that country to fall apart quite Quickly is high. It also means that if your country has fallen apart and you want to suddenly build stability quickly, it's much faster to do so by declaring martial law and closing down the borders and maintaining complete control over information and transit and the rest than it is to try to build open and legitimate institutions. On the other hand, ultimately the right hand side of the curve is higher than the left, because if you persevere over decades and build those legitimate and open institutions, you will ultimately become more stable than if you went the closed route. Final point on how the J curve works. The entire curve shifts up or down on the basis of the economic resources that are available to a given country's leaders. So oil prices go from 20 to 78. Saudi Arabia's entire curve shifts up. Chinese growth goes from 11% to 5. China's entire curve, every point along it goes down. So North Korea and China are not on the same curve because North Korea has no money, their people are starving and eating tree bark. The Chinese are growing at 11% a year. China's curve is a hell of a lot higher. China's hope is that they can grow so fast they can actually get through the dip in the curve without massive dislocation. As a political scientist, I am somewhat skeptical. I'm not completely skeptical, but we can talk about China in a bit. That's the way the J curve works. Let me tell you some implications of the J curve and go country by country on some interesting places. First point, right? Countries that are stable because they are closed, want to stay closed, need to stay closed. It is an imperative for them to be closed. Okay? When Cuba had sanctions against it that suddenly Clinton was talking about reducing. The Cuban government response was to shoot down a civilian aircraft. And then of course, Helms Burton came into play. Sanctions were made tougher and the Cuban government was happy again. 47 years Castro has been in place. Sanctions have clearly aided and abetted him. You want to get rid of, you know, Castro. Easiest way to do it, this is kind of ironic, is for the Cubans to strike oil. They've been looking offshore. Repsol's been putting some cash in. If the Cubans strike oil, suddenly there will be two lobbies in the United States on Cuba. A Cuban American lobby that is getting weaker but will still want to maintain sanctions, and an oil lobby that will say, the Spaniards and everyone else are making money and we can't, we need to get in. That will really pressure the removal of sanctions. Then you can see foreign direct investment that would be massive and overwhelming into Cuba and then the revolution would be over relatively quickly. So you want Cuba to open up, throw it out just for the heck of it. I mean, you know, it's Google. We can throw out any ideas we want. This is my 10% time here. That's the way I think of it. North Korea, the United States historically says, right, that if the North Koreans continue to behave the way they do, they will be punished. And that punishment will be isolation. Let's explain something very clearly. The North Koreans require isolation. They do not want tourism. They don't want foreign direct investment. They do want to be paid off, right? But they do not want all of a sudden to be brought into the international system, because that is the end of the, of this North Korean regime. Chinese get that. Actually, increasingly, the United States get that. The United States says that their policy on North Korea is complete, verifiable, irreversible denuclearization. Cvid. And the Americans have said, north Korea, if you reprocess plutonium, we will be very, very upset. And they reprocessed plutonium. And we were very, very upset. And then we said, if you test a nuclear weapon, we will be extremely angry. And they tested a nuclear weapon, and we are extremely angry. There's no question. I sense the anger in Washington when I go, but we are not doing anything. We have capitulated. Why? Because we understand that actually we don't and we can't and there are no policies, right? So that's where we are on North Korea. You know, part of the problem with Iran is that Iran is not North Korea. What I mean by that is that Iran does not have the level of stability, the level of control over their population. This Iranian government understands that the best way for them to ensure their power over the medium to long term is to control information, is to get rid of free web access, is to get rid of moderates in the newspapers, is to exclude, you know, the folks that would be complaining about the Iranian government who do exist in spades right now in the parliament and in all sectors of civil society in Iran. And they think one of the best ways of doing that is actively provoking a conflict, talking about Israel and the fact that the Holocaust, from their perspective, didn't happen. Having these conferences about that, saying that Israel should disappear, proactively, proactively provoking on their nuclear program. Now, are they going to win? Look, there are two clocks right now in Iran. There is a reform clock and there's a nuclear clock. They're both ticking. One of them is going to go ding First. Okay, right now, unfortunately, it's a nuclear clock. It's ticking a lot faster. Having said that, there is real pressure on the Iranians right now. I'm happy to take questions on it if you want. And we're starting to see more internal complaints against the Iranian regime, and maybe that will start to make that clock tick more quickly as well. We will see. It's an incredibly dangerous issue. You want to ask me over the next 12 months, what is the single biggest political risk for the market? The biggest described as most likely occurring closest to time today and greatest impact on global markets? If it happens, number one is Iran. Nothing's even close. Okay, now let me talk about a few other countries on the curve. When I think about the curve, and I think about the excitement of emerging markets in the world economy, I think about Adam Smith and I think about the invisible hand, and I think about economists that talk about emerging markets, and it has this extraordinary sort of this gravitational pull. Markets emerge, some emerge faster, some emerge slower. Sometimes they get. They hit speed bumps, but it happens. The world gets flatter, Right? J curve tells you that some countries work that way, other countries don't. You can be at different points on the curve. Curve goes down before it goes up. But you can also move both ways along the curve. Let me just give you a few examples of this. First, the easy ones, right? Brazil, Mexico, Indonesia, East Europe, Bulgaria, countries like that. These are countries on the right hand side of the curve. They have been emerging, they are continuing to emerge. And as they further globalize, they become more stable, more politically stable. They create not only more business opportunities, but those business opportunities create more political stability for the people within the country. They are in the process of developing. Some have developed already. You look at Brazil, okay? Four years ago, Lula had an election. And when you talk to Brazilians, they said, oh, my God, you know, so Paulistas who were running banks and the rest, they said, if Lula wins, it's going to be a crisis. If Lula wins, we're going to see nationalizations, we're going to see default on debt. I was just in Brazil right before elections last year. I had a chance to talk to all of those Sao Paulistas that hate Lula. And you know what they told me? They said, oh, my God, if Lula wins, it's going to be a disaster. It's going to be four more years of mediocrity and only moderate growth. Mediocrity? What does that sound like? Four more years of mediocrity? It sounds like the United States, Right. And I don't mean anti Bush, anti Kerry. I don't care if you're a Democrat or Republican. Again, the markets don't care. My point is that the reason why only 50% of Americans can vote and the rest don't have to deal with it is because at the end of the day, most Americans think, eh, it doesn't matter, it's banal, the choices aren't any good. Let us focus on golf and the PTA and our kids and everything else. Local tax abatements, the things we care about, the things that matter to us. You can do that. You can increasingly do that in Brazil because Brazil is emerging and because now it's a question of are they going to move on pension reform, Are they going to really push entrepreneurialism, Are they going to put some cap on the minimum wage and social payouts, those sorts of things. This is not about are they going to fundamentally turn their back on the international markets? Brazil, India, east shore, a number of countries are in that box. And if all of the world's emerging markets were in that box, you would not have a problem. This would all make sense. The problem is that they aren't. There are three other boxes. One other box are countries that are emerged or emerging on the path of emerging but might not continue, that might start to submerge, might start to move in the other direction. Lebanon's a good example of this has been one of the major, you know, sort of central hubs for capital for all petrodollars in the Middle East. And yet now you go there and I was in Beirut just a couple months ago and it's hollowing out. Lebanese, very smart, extremely savvy, very internationally in orientation and they're very well connected and a lot of them are leaving for opportunities in Dubai and other places because of the increasingly difficult security environment. Not only because of the war that occurred with Israel, but also because of the demonstrations that have grown with Hezbollah. You know, tourism is down, projects have stalled, and you're seeing Lebanon hollowing out the same way Armenia hollowed out another diaspora culture in the 80s and 90s. I got a question for you. I can think of one other diaspora culture that has extremely smart and sophisticated business folk that is in an increasingly difficult environment that might face a hollowing out over the next years. That's Israel, right? That's the big question, because Israel just had last week their market hit records, the stock market. Is that sustainable long term? Turkey is another good question. Slightly different issue. But what happens when Turkey is. When it's clear that Turkey is out of the EU accession track, not many people think they're going to get in, but people hope they'll at least stay candidate members for a long time. What happens if they don't? We know that anti immigration sentiment, especially towards Islamic populations in Europe, is growing. What happens? Does Turkey, which is so extraordinarily indebted, do they start to submerge? A lot of this stuff is papered over right now because we're in such a massively high liquidity environment that anyone that wants to invest just says, go, go, go. Let's get the extra point in return. There's no risk, there's no downside. But that's not an ongoing life for global markets, and we're going to have to differentiate. So Turkey could be in for big risks going forward in 2007. That's an open question. Okay, so that's the second kind. Third kind. Third kind. You can tell I'm gearing up for China. The third kind in the box is are those states that are resource nationalizers. The Russians, the Venezuelans, Bolivia, even Chad. You look at what happened to Russia, very similar in my view of what happened to Iraq and Afghanistan. We can talk about that. Russia in the 90s, right? 1991, Soviet Union collapses. All of a sudden, Yeltsin comes in. The United States is very excited. We're going to have shock therapy. We're going to have privatizations. Everyone's going to work with Russia. We're going to bring them into the global market, bring them into the global system. You've got privatizations. They don't go very well. The Russians say they're very excited about being a part of this, maybe even getting involved in NATO long term. G7 becomes G8. Suddenly Yeltsin, serious alcoholic, major problems. No longer in power. Effectively, the United States loses interest. At the end of the second Clinton administration, everyone says, who lost Russia? So, classic story of the Soviet Union being stable because they're closed. Soviet Union falls apart. Russia slips to the bottom of the curve, starts to move a little bit to the right. Everybody loses interest, loses willingness. Russia, bottom of the curve. Then what happens? Putin comes into power today, 81% approval ratings and actively moving against trends of globalization, cutting off whole swaths of the Russian foreign direct investment market from multinational corporations. All these strategic sectors, energy, metals, mining even look at places like telecommunication and automotive, and you see the direction that it's moving. Resource nationalism. Do we see that in Venezuela? Yes. Russia is more stable today than it was under Yeltsin. It is not more open today than it was under Yeltsin. That is a bargain that the Russian people are happy with. They feel humiliated by what happened to them in the 80s and and 90s. They feel like they lost East Europe, they lost Ukraine, but now they're gotten it back. They lost some of Central Asia. They're working on getting it back. The United states pushed for 10 years. Baku, Jehan an energy pipeline, biggest US policy in this region to get energy resources from the Caspian, across the Caucasus into Turkey, away from Russia. Russia doesn't like that. Russia's trying to turn that around. US Russia relations moving in a more negative direction right now than that of US relations with any other major emerging market. And I wouldn't necessarily call Russia an emerging market. We need to change the terminology here. Right. That's the third box. Fourth box. You're all waiting for the fourth box. Fourth box are countries that are indeed globalizing, some slowly, some quickly, but they're not on the right of the curve, they're on the left of the curve. These are countries that are globalizing, but they're stable because they're closed. They have to varying degrees, authoritarian system. Saudi Arabia belongs in that box. A lot of Gulf states belong in that box. But those countries have a pretty strong hand in their ability to globalize. They also have smaller populations. China is in that box. The problem with China, right. Fundamental issue with China is that the more China globalizes, yes, they create more economic opportunities globally, but they also create fundamentally more possibility of political stability instability against the Chinese system. And as I look forward, I see this as one of the big global risks out there. Again, they can get away with this to a degree if they continue at 11% growth. But are they going to continue straight through at 11% growth? There are so many scenarios I can paint for you that says that this is going to be a very rocky road. What happens if avian flu hits? I'm not talking about pandemic that kills millions of people. I'm talking about just human to human transmissions that lead the World Health Organization to increase their threat level. And suddenly you have travel restrictions on China. Because they've been completely opaque in the way they've dealt with the international health community in terms of what they're doing locally. That would have a significant downside impact on the Chinese growth. What happens if we see military strikes on Iran or even just escalation vis a vis the Iranians? The Iranians cut off oil from the south of Iraq and one plus million Barrels a day suddenly off the market. That would have a pretty significant impact on China in terms of input costs to grow the economy. They're not doing 11% when that occurs. A hard landing in China, hard landing in India is okay. You can have social instability. It will be limited to a couple of different regions. Doesn't affect the political, political system in India. Hard landing in China creates instability for the entire system. And if you ask the Chinese government, what are your priorities, they say, economic growth, stability. That's like asking the Bush administration, what are your priorities? Iraq, Afghanistan. And they'll say, both are absolute priorities. Both are things we have to do. Right. But we know you can't have two absolute priorities. @ some point, you make one a priority. Iron Iraq is clearly a higher priority for the US And Afghanistan is a reality. Ultimately, stability is a higher priority for China than economic growth, than openness. We must recognize this. Okay? And at some point in the future, it is quite likely that China will be forced to make a much tougher decision, not just nibbling around the edges in favor of stability as opposed to more openness and globalization. And when they do, the business environment is going to get much worse. When they do, the US China relationship is going to deteriorate significantly. I do wonder to what extent Google will be doing business in China in the next three years. Will you make the decision to leave? Because at some point, of course, the business that you're doing in China is antithetical to your mission statement. The compromises that you've been forced to make are antithetical to the business you want to do long term. Now, the Google hope has been, my understanding is that over time, China changes. As a consequence, you'll be able to actually get a normal business model, like much of the rest of the emerging world, into China. It's possible. It's also quite possible, I would say probably more likely, that you won't. The United States government has actually been dealing with this reasonably well. And this is the same government that's not been dealing with the Middle east reasonably well. Right. The United States has a hedging strategy. Now, the reason why they have a hedging strategy is because the people that have been running US Policy on China are not the national security guys. They are Mr. Zoellick and Mr. Portman and now Mr. Paulson, who know a thing or two about the upside and downside of globalization. And they're saying, unlike North Korea, you know, rogues state that you're punishing because they're not doing what you want. You're isolating. The United States is saying to China, wow, we need you guys economically. We know you have massive human rights issues and we're not going to isolate you or punish you. You're going to bring you in. We're going to support wto, we're going to support the Beijing Olympics. We're going to hope that you globalize so fast economically that the politics follows and you reform yourself right out of power. But we're going to hedge and that hedge is that we're going to develop strong relations in Japan and including a stronger military alliance and strong relations with India, including nuclear cooperation, which was not easy to get through Congress because we know that if China doesn't go well, we've got to have those good relations. I think the US has gotten that situation pretty well. And if you look at US relations with Japan and India, in both cases they're better than they've been in decades. Bush administration deserves credit for that. We're going to criticize Bush rightfully for Iraq and Iran. We should give Bush credit for India and China and Japan. Fair enough. But this is a real issue. Now let us recognize that Mr. Paulson has a window of opportunity and it's not long. He has a honeymoon period of 612 months to get something done with this, you know, sort of strategic economic dialogue. And it's happening at the same time the business environment in China for U. S based multinationals and others are getting hard, harder. You see the Chinese government coming out and saying the Ministry of Commerce just a week ago that they're going to start protecting Chinese brands more aggressively, that they're going to level the playing field for Chinese companies. Hard to have a level playing field if you're a US corporation without rule of law, without effectively trained judges. And this is going to become more problematic for major US multinationals who will get more public about this as we move towards 2008. And boy, I gotta tell you, it is an unfortunate coincidence that Beijing Olympics are happening at the same time as US Presidential elections. Because I know that major US presidential candidates are going to go after China when we get in 2008. In part because the business community is going to call for it, because they're going to be upset, in part because it's easy, especially with the US economy and the dollar doesn't look so great at that point. In part because the Chinese in an election year in China and this is an election year in China, the quintennial party Congress coming up in October, just because it's opaque doesn't mean they're not having elections. Let's recognize that not much is going to get done. And so, you know, you want to see movement on Renminbi that's beyond what you've seen so far. Uh, don't expect that in the next six months and all the rest, you know, I expect these situations are going to become more difficult in 08. Not to mention the fact that by all projections, China is expected to overtake the US in terms of carbon dioxide emissions in 2009. And if the United States is going to make a meal out of dealing with greenhouse gases and dealing with all of the expense they're planning on taking on, they're going to have to take on in terms of dealing with carbon neutrality and the rest, I tell you. You mean to say that Republicans and Democrats running for president aren't going to use that to beat the Chinese over saying, you've got to be a part of this, you can't have a free ride on Kyoto? Oh, yeah. I don't care if it's fair or not. It's going to come right? And I tell you, seeing right here in the Googleplex, you guys are a big part of where this goes. You got to know it because it's important. So that's where I leave you. That was kind of a fun and I think, at least somewhat provocative conversation. I'm delighted to see so many J curves around the room. I am happy to take some questions. I think I went a little long, but I don't have to go anywhere immediately. I'm having lunch with some folks here afterwards. So let's take questions and move it around, starting in the back there. First of all, to translation in the Y axis in the curve. Right. Is there anything that shifts us along the X? Is there an X translation? And second one. By the time I got to China, I was dying to know where you put Singapore on the curve. Ah, yeah, that's a good question. Let me start with the second one. It's easier. Second question was heard. By the time I got China dying to know where I'd put Singapore on the curve. I put Singapore on the curve, kind of where I put Dubai on the curve. Right. I am talking about openness. I am not talking about democracy. Democracy is like technology. It's a tool. It can be used for good, it can be used for evil. It can be used for anything you want. It's a device. Algeria had democratic elections. They got closed down pretty shortly afterwards because they got results you didn't like. If you had democratic Elections in Pakistan, it'd be bad. You know, Musharraf was on Jon Stewart a couple days before I was. And. And he was asked in the seat of the heat question, he was like, if you had elections in Pakistan, who wins, Bush or bin Laden? Who saw that? A few people. Right. Yeah. And of course, Musharraf said, neither. That's not true. Right. And that's the problem, is that someone like bin Laden is going to do better than someone like Bush in Pakistan. In Saudi Arabia, if you had elections, you're not going to get what you want in Palestine, Palestinian territories, you've had elections, you got Hamas. In Iran, you had elections, you got Ahmadinejad. Now, you could say a lot of the Iranians didn't know what they were voting for. You can say the same in the United States. It doesn't matter. It doesn't matter. Singapore is very stable and it's also quite open. It's not democratic, but if you are living on the ground in Singapore, by most international measures, it's pretty open. Dubai is actually reasonably authoritarian, ultimately. Yet Dubai is a city state that is moving quickly towards a point where they will have less than 5% of their population. Local Emirati, it's the most internationally placed in the world. It's like Vegas in the Middle East. They're even talking, some of them talking about gambling and casinos and islands off of the coast, because not really Dubai, you know, they're not democratic, but they're stable and they're open. But you can do that if you're Singh or you're Dubai and you're small and you're growing massively, because then the increase in the, you know, in the vertical axis just lets you plow through it. It's harder to do if you're over a billion people. That's the issue. If you had a billion people in Dubai, I don't think they'd make the transition that easily. That's just me. You got infrastructure problems with a billion people. In terms of the question, you know, a very interesting first question is there is this shift in the vertical axis on the basis of access to wealth, is there a shift in the horizontal axis that can move the entire curve from left to right? And I think the answer to that, I've given that a lot of thought. It's not in the book, and I think the answer to that is yes, but I think it doesn't happen as quickly. And I could imagine sort of new environments globally, technologically, that could create, whether it's in terms of lifespan or you could imagine sort of genetic development that suddenly create sort of new species of humans, that suddenly you have massive ethnic and racial mixing, so you can no longer tell tribal distinctions and so forth. That could lead to a change in the entire curve that could shift it left or right. Ideology and the spread of radical religion of any kind, or even radical nihilism, if that doesn't screw with your mind. Right. That could move you in another direction, horizontally. I think the answer to that is yes. But the reason I didn't really deal with it in the book is for me, I'm talking about the next 10, 15 years, because that's what's really relevant for the people that are reading this darn book. And for the next 10, 15 years, you're going to see countries. You're going to see countries that. Where their curves will shift radically up and down. You will not see systemically that the curve is going to shift left or right in a radical way in the near term. So obviously, the potential for moves in the curve are speeding up over time because of exponential technological developments. Kurzweil and Martin Reese and all the rest. And know you. You guys know that better than I do, right? So that's. Those Are those questions next back? Yeah. Thank you for your very engaging discussion. I have two questions. One, where does Africa sit in the jp? And what countries would you consider nafta, in your opinion to be, if you would think are emerging countries without any. I wanted to also talk a little bit briefly on the relationship between China and Africa and for example, especially the relationship between Nigeria. Good questions on Africa and also on China and Africa. First of all, where do I see opportunities in Africa? Where do I see countries broadly or Africa on the J curve? I'd clearly differentiate it country by country. And also where I see China in terms of its relations with Africa, especially Nigeria. Let me start again with the back end question, smaller. Everyone's moving from big to small, I think. How do we tell that China is a superpower? One way we will tell is when Chinese embassies start getting hit with terrorist bombs. Okay, I'm very serious. When China is no longer the Me too kid and we support you ideologically, we're all in this boat together trying to like, you know, deal with the man, but that China is the major imperialist overlord as perceived by locals that don't have access to power in very unstable countries. My meaning here, and I'm saying this in a very provocative way, is that Chinese companies are taking more political risk than anyone in the World, they are investing massively. And the only countries that they can get into in an unfettered way, I mean, they're being kept out of Unocal. They're being kept out to a degree of the Canadian tar sands. They're being told they can't invest, you know, a lot of other places, but they are going into Zimbabwe and Angola and Burma and Sudan and Nigeria and all the rest. Now we've seen in Nigeria just last week and also last month, the first kidnappings of Chinese oil workers. Chinese don't know how to deal with that. It's going to be something that you will see more of in Zambia where the Chinese actually have been locking up copper. Right. You just had Zambian elections. This may be too much granularity for you, but kind of interesting story last year and the opposition candidate made China his entire issue and said, if I win, I'm going to recognize Taiwan as a sovereign state. I gotta tell you, if you're China, you're gonna be screwing up pretty badly to get the Zambian opposition to talk about Taiwan. Right. And the fact is that it's not because Taiwan matters. It's because the Zambians were really irritated. The Taiwanese are locking up resources, cutting cozy deals with the local authoritarian government. And they're seen as the problem in the same way that the US had been seen as the problem in the last few decades and the Brits were seen as the problem before then in the interwar period and the rest. It's coming. So the Chinese are, you know, the Chinese are locking up long term resources, but there are risks that come with that. That's my point in terms of where I see Africa. Africa's all over the place. I mean, there are some places that, you know, are obviously, you know, well along the path to becoming emerged. South Africa is maybe in a place that it's been strongly emerged but possibly, possibly could start to submerge. Right. I mean, you know, Mr. Zuma has less political capital than Mr. Mbeki, who has less political capital than Mr. Mandela. And yet they're saying that they want to really ensure that black empowerment in Africa occurs. But they're doing that in the context of local black oligarchs who have enriched themselves while corruption and local unemployment is still very high. And they promise that they're going to deal with land redistribution and hit I think, a 40% target by elections in January 2009. But there's no way that they're on path to do that through legal mechanisms. So now you have ministers saying maybe we need to do it through extra legal mechanisms. If you're in the Rand, you are worried about that there's volatility coming in South Africa. 2008 could be really rough. Right? Nigeria you asked about. We've got elections in Nigeria in April. You know, it's. We're clearly seeing, seeing that they've moved beyond just bunkering and kidnapping towards actually attacking energy infrastructure and going after government. And this is, you know, local AI job minority, you know, in the Delta saying we want more autonomy, want more control over our energy wealth. The good news in Nigeria is I think once you get through elections, you probably will move back to a more stable, codified environment with just 20, 20, 25% occasionally off the market, which is a bad environment. But it's what Shell has been working with for a long time. And ExxonMobil and the rest, you can deal with that. That's Nigeria. Kind of standardized Nigeria. But in the interim, around April, we could have some, we could have a lot of oil and LNG off the market, even some offshore stuff. We've seen some attacks on offshore facilities too recently. So the next few months are going to be ropey in Nigeria. I'm actually going out there in a few weeks. It's going to be very interesting. I'm not going to Delta. It's dangerous. I don't do that. But I'll talk to the government officials and the rest. So, I mean, I'm all over the place. You look at Angola, everyone's into Angola right now. You know, you look at Mauritania, Mauritania is coming online. People are excited. You look at Libya, I mean, North Africa, it's a little different than what you're asking about, but still, I mean, Libya is one of these countries. They moved away from WMD and potentially secretive discussions and, you know, suddenly everyone wants to invest. Final point on this kind of interesting. Bush said state of the Union. You are either with us or against us. Right? Big axis of evil speech. And I want to give Bush credit again. Libya chose to be with us in part because they hadn't gone that far down the path of wmd. They saw massive opportunities for investment. They said, you know, what if we just give it up and are transparent, we can suddenly turn ourselves around economically. We can make a lot of money. And they did. And they did move. Yes, Clinton and Blair started it, but they moved faster and more decisively because of Bush. The caveat. And the problem is that against us was also a viable choice. Right. Libya chose with us. But the fact is that what Bush did by creating that policy was say it is extremely dangerous for you to maintain an intentionally ambiguous policy about weapons of mass destruction, which means you either have to open it up fast or you should build as quickly as you can. North Korea chose build as quickly as you can and they've done better accordingly. The Iranians are choosing build as fast as you can. And we will see if they end up doing better or worse accordingly. But ultimately the issue is not whether they do better or worse. The issue is that they believe that that was the right strategy. So we have created some, let's say, paradoxical incentives for different countries on the basis of that policy. And again, the J curve should help to explain some of this. Right. Other question, sir. Iraq's motion along the J curve as a result of the Bush administration exercising regime change. If you see anything there in terms of differing economic risks going forward. Iraq. How can you say the markets don't care about Republicans or Democrats? Iraq. Yeah. The question is what do I see about how Iraq has moved in the J curve? I mentioned before briefly that I see Iraq and Afghanistan. It's very similar to Russia. Now here's the situation. I said Russia, left hand side stable, closed, falls apart. Soviet Union falls apart. Russia moves a little bit to the right, but it takes years and money and commitment and favorable security environment to move them up the right hand side of the curve. That wasn't there. And so as a consequence they moved back to the left. What do we see in Iraq? What do we see in Afghanistan? Regime change. The US going in with lots of countries in Afghanistan, some countries in Iraq, Taliban gone, Hussein gone. Countries go from stable and closed to chaos. Bottom of the curve. Right. And in both cases the US said we want to move them to stable and open. But as we are seeing the political capital and the political will to move these guys up the right hand side of the curve, which will take decades and masses of money and commitment is not there. Right. And so as a consequence, they won't move to the right. They will do one of two things. They will either fall off the curve into civil war and chaos, or they will become more stable by moving back towards a more authoritarian state. And in Afghanistan you see that the latter is more likely in Iraq, perhaps the former. Right. That's where we're moving now. Let's keep in mind that Iraq is not a unitary state. And actually from a market perspective, there is a massive boom going on in places like Suleimani and Erbil in the north. Turks are investing there. That's good. Everyone says there's going to be a war between the Kurdistan and Turkey. Well, if that were true, would Turkish companies be taking massive pieces of new energy infrastructure and developments in all these new Kurdish energy fields? I suspect they wouldn't. There's a lot of money to be made in cross border trade between Turkey and the Kurdish region. And the Kurds know that if they declare independence, jig is off. So they ain't declaring independence. They keep the US troops there, they keep the Turks off their butt and everything is okay. Right? That works. This is YouTube. I can't say but sorry, we'll x that. But in terms of, in terms of, I want the under 18s to watch this. In terms of, you know, where I see the markets going forward on the Kurdish region, I think there's actually going to be real investment happening not just from Turkey, but from Europe and from Japan over the next year. And let's keep in mind that even civil war in Iraq is disastrous from a humanitarian perspective. It is disastrous for the Bush administration and for Blair. It has second order effects as a consequence. But market impacts in the Middle east are not huge, right? At least not near term. Market impact of Iran starting to go neck to neck with the United States in a proxy war in Iraq, that's a big deal because then you can see oil come off the market from the south and that has knock on effects throughout the Middle east and the global economy. So that's what I'd say there. In terms of market impact on Democrats and Republicans, I do think there's market impact, but I think it's much less than the transitions that you would see in other countries in emerging markets. I am not arguing that politics doesn't matter in developed states. That would be bad for my business. Why would I argue that? What I'm arguing is that economics are the fundamental driver. Where in emerging markets politics are the fundamental driver, right? I mean we've just seen a swing, you know, of about 30 seats right in Congress away from more free trade towards more pro labor. Does that matter in terms of, you know, fta, does that extension, does that matter in terms of US protectionism? Of course it does. But let's recognize that that was the House. You got to get it through Senate. Senate's tight, a lot more moderate, a lot of people in their 70s and 80s. Just one democratic senator dying, which almost happened, can suddenly swing the Senate back. So checks and balances still work. And so we need to recognize that when people say the sky is falling, eh, you know, the world's not flat, the sky's not falling. Okay. That's where I would come out on that. I'm sort of in between. Yes, sir. Yeah. Next. Yes, sir. So you mentioned economic growth is one way of raising the curve. Do you have any other ways? Because it seems like raising the curve is the only way to get countries from the left hand side over to the right hand side to not lessen stability while they need to transition. Well, I mean, I wouldn't say I see other ways of raising the curve, but I do see other forces. Effectively. What I'm saying is the closer you are to the bottom of the curve, there's this magnet underneath that pulls you off. And there are some things that can happen in countries that can, in a sense, demagnetize you, that can make the pull, even if you're at the bottom, somewhat less right. For example, and this is whenever you have a model, I've got this great model and everybody says that this is a cool model and people read the book and that's great. But at the end of the day, Eurasia Group has to make investment advice to people that live in the real world and not within the parameters of my model. And in the real world, the only factors that impact the country are not just stability and openness. So, for example, I don't, I didn't talk at all about the impact of a charismatic leader. Mandela existed in South Africa. There weren't many people like him. He was unique in South Africa at the time, not only because of his history, but also his connection to the Christian church and the rest. And that allowed him to make sacrifices in South Africa and make compromises with the white community that other leaders would not have been able to do. Right. So the impact of an individual leader matters, but it's not in my model. But I think we need to recognize, and I do talk about that in the South Africa chapter, the impact of culture matters. You know, the fact that there is a communitarian element in Hinduism that you know that granted you've got, you've had cast aside in India, but you've also had a sense that, you know, you can have massive poverty, but people will look after one another and ensure that you don't have massive debts coming from that. And that means that, you know, large amounts of local poverty does not create the same level of instability in Indian communities that it will in other countries. Fair enough. Although we see that with globalization, precisely that level of Hinduism and the communitarian aspects are starting to break down. So over time, India may perversely be a less attractive place to visit, but a better place to invest. Is civil war automatic and is there a proxy war that automatically comes as a consequence? I'm not sure it's automatic, but it's far more likely. You know, I was in Dubai when the Iraq Study Group paper came out. It was very interesting to see, I mean, first of all, at the Arab Strategy Forum, Wes Clark get absolutely pummeled by the Arab audience who was so upset about the Iraq Study Group. I mean, you know, the fact their view was, look, the United States went in and you broke the this and now you're saying you're going to leave and we get to clean it up. That is not acceptable. I mean, from my perspective, the Iraq Study Group was quite a bit like the initial argument to go into war in Iraq, which was lots of very great experts were consulted. They got all the research and data they could, but they were predetermined to want the outcome of going to war. And so they took all the data that they got and, and they fed it into that filter. And I think the Iraq Study Group said, look, we have this political environment in the United States where everyone wants to withdraw. There's no political support for staying in. And so we're going to talk to lots of smart people and collect all this data and then we're going to feed it into the filter of how we get out. And that's fine if you're the U.S. but what if you're Britain and your British forces are good enough to die next to the United States and they know a lot more about insurgency and father fighting it than the US does. But for some reason, when the Americans go and present the Iraq Study Group, where are the Brits? In London there were a lot of people that weren't happy about that. Where is the Gulf? Where are the Saudis? There's a reason the Saudis were extremely, the Saudis are far, far happier with the US Troop surge. Now I don't, I personally don't think the troop surge is going to work. I think it's too small and I think it's too late though I think it's probably directionally the right strategy. And the one interesting thing is even if it doesn't work, when it doesn't work, the US Will be more aligned geopolitically with its Gulf allies in the region. And that does perversely make the likelihood of a Saudi supported proxy war with the Saudis coming in and putting cash towards Sunni militias to battle the Iranian supported Mossi army. Shia Militias somewhat less likely, if that's a good scenario. I mean, I hate to end on that, but you know, but let me end on something positive. You know, as I said, I do think that political risk is both up and downside. Right. And we've talked about a lot of downside because that's where people are always most interested is, you know, if it leads, it leads. But let me talk about. There are a lot of places out there that I see in terms of big headline risk that I don't see as risk at all. Likelihood of China going to war against Taiwan, effectively zero. It's not something serious. Likelihood that North Korea actually escalates and leads to a real downside impact on South Korea effectively zero. At least in the next two years. South Koreans, unlike the Iranians, are not, the North Koreans are not trying to provoke a conflict. They just want to get paid off. And as long as the US and the Chinese understand that, which they now do, you're not going to have fundamental instability coming out of North Korea. And I can go even Venezuela causing lots of problems. But what are they actually talking about? Nationalizing? The biggest thing that they've, you know, that they've really gotten, you know, a lot of support out of locally in the last year has been nationalizing a golf course. And I'm worried about that because the quality of golf in Caracas will deteriorate. You know, but in terms of the fundamental issue is the Venezuelans need to pump oil. They need to sell to the because the quality of the crude is lousy and the Chinese can't refine it and the Americans need to buy it. And so at some base level, U.S. venezuelan relations are reasonably stable. So there's a lot of hum and ha. So you know, let me leave you at least with the fact that the more people get excited and worked out of shape about political risk, the more that opportunities can also be left on the table because companies will act like ostriches and say we don't want a deal too risky for us. That would also be a mistake. But okay, let me leave with some despair if that happens. I have to. If that happens, you know, the possibility that neoconservatives in the US will be effectively replaced by neo isolationists and will move towards, you know, a wave of protectionism which has negative global impact on the economy does become more likely. So there you have it. Thank you all very, very much. I'm delighted to be here at the Googleplex and thank you for your attention. See you guys.