The J Curve | Ian Bremmer | Talks at Google

So today we welcome ian Bremmer to AuthorSoogle New York. Ian Bremmer is president of the Eurasia Group, the world's largest political risk consultancy, and currently teaches at Columbia University. He writes for the International Herald Tribune, and his work has been featured in the Harvard Business Review, the Washington Post, the Financial Times, and the New York Times. His recent book, the J Curve A New Way to Understand why Nations Rise and Fall, was named Book of the Year by the Economist and Google's own Vint Cerf. You guys heard of Vint? Cerf says of the J Curve. This book is a must read, and not only for its insight into foreign policy. Individual institutions can be assessed on the J Curve as well and their evolution similarly evaluated. A stunning analysis notable for its depth, scope and clarity. On that note, please join me in welcoming Ian Bremmer to Google New York.

Let me talk a little bit about first, why I think this stuff matters, and then explain what the J Curve is, how it actually affects, how it applies to some of the places that we think about around the world, both in terms of places that we have some conflict right now, like Iran, North Korea, Iraq, Afghanistan. Also some places that, frankly, there are more opportunities, like China and India and Brazil. That's sort of what I'd like to do. So first, why this stuff matters? I said I run this political risk consultancy, Eurasia Group, and my shtick is that politics matters to the markets. Furthermore, that politics will increasingly matter more to the markets over time. That if we look out over the next 10, 20 years, we will see that for several structural reasons, politics will increasingly matter more. I love Tom Friedman. I mean, anyone that can sell 2 million books on globalization to Americans deserves applause, right? But I think what Friedman's gotten right is that over the last 20 years, he's correctly identified the basic paradigm, which is the world is becoming flatter, markets are becoming more efficient, the invisible hand of the economy is making things work. My argument is that over the next 20 years that will increasingly not be true. That increasingly the visible hand of politics will be causing dislocations and volatility to global markets. And I think that's true for four basic reasons. The first is that energy is increasingly coming from unstable parts of the world. It's not coming from the North Sea with the maturing fields there, the Gulf of Mexico, it's coming from West Africa, the Persian Gulf, the Caspian Basin. And furthermore, the people that are making decisions about where to buy their energy are increasingly not the international oil corporations, they're the national oil corporations. They're not ExxonMobils, they're the Sinopecs. And so as a consequence, and they think of energy much more strategically than they think of it as just a market driven commodity. As a consequence of that, over time, until there is new energy source, energy technology, new infrastructure, we will find that energy markets will be cyclical, but they will be cyclical upwards because of this political driver. Second point is that increasingly we are finding that the upside for economic growth globally is coming not from the developed world, but from the developing world, from emerging markets. I would define an emerging market as a country where politics matters at least as much as as economics to market outcomes. We know that these markets are less stable fundamentally than developed states. As a consequence, politics is increasingly becoming a driver. A third point is that we are seeing the dangerous technologies are becoming more diffuse. It's becoming increasingly easy for rogue states and organizations and individuals to disrupt global markets. I'm not just talking about North Korea and Iran and proliferation, though we could talk about that. I'm also talking about the fact that Hezbollah was able to hit Haifa with ballistic missiles over the last summer before they couldn't do that. What happens this next summer when they can hit Tel Aviv? Increasingly, a country like Israel becomes economically unsustainable, certainly threatened as that occurs. That's a driver fundamentally. And the fourth and final point is that the United States is increasingly living in a world that is moving away from a US led unipolar system to a more multipolar system. And that is true in the absence of effective architecture. So if you think about what the architecture is that we have today for governance and the creation of public goods, we're talking about the imf, the World bank, the United Nations Security Council, NATO, all the rest, the proliferation regime. All of these things were created for a geopolitical environment that no longer exists today. I am not suggesting the world is going to hell at all. I'm not suggesting this is all downside. No, what I'm suggesting is that if it was economics that were the fundamental drivers and we didn't have to pay attention much to politics if you were in the global marketplace for the last generation, I think that's true, but I think increasingly over the next 20, we will, and it will become much more significant as a consequence. That's my basic argument. Okay, if you buy that, and maybe you don't, but if you accept it, then you need to understand what drives political risk. How do you think about it? And there are two components of political risk. One is stability. The second is shock. If you have a country that's relatively stable and a shock hits it, you don't have much of a problem. You have a country that's unstable and a shock hits it, you have a much bigger problem. So imagine that you have an election for a head of state that a majority of the citizens believe is illegitimate. Further, imagine that the ultimate outcome of that election is determined by a partisan vote of the top judicial organ of that country. Right? And that could happen, right? In fact, we saw that it did in Mexico last year when Obrador was not able to pull it through. We also saw it happen in Ukraine with the Orange Revolution. We also saw it happen in the United States in the year 2000 when Bush won the election. Now, my point here, frankly, is that that actually shows, not that the US Is a screwed up system, it actually shows that shocks don't matter in the United States very much. Just like Hurricane Katrina, I mean, after 2000, you know, there was this appalling, according to many people, political crisis, but there was no change in foreign direct investment in the U.S. credit ratings didn't change. You know, there were no riots on the streets. After Hurricane Katrina, you had a mayoral election that happened pretty much without a hitch, despite the fact that no one's actually rebuilding the city. If the same thing had happened in an emerging market, you could have flame on the streets. So you can make a lot of mistakes if you're stable. Those mistakes may be big, but they don't fundamentally impact the investability of that country. Okay, we can talk about whether we like that or not. That's normative. I'm simply talking as an analyst for the perspective of understanding this stuff. As a political scientist, shocks happen all the time. You can have the assassination of a leader, you can have a tsunami off of Indonesia. You can have an election that goes awry. It's very hard to predict the shock stability. On the other hand, if you can get your hands around how, how stable a country is compared to another country, and if you can understand why a country is stable and whether it is becoming more stable or less stable, you can then have a pretty good sense of what your risk is likely to look like when you're investing or exposed to that country. That's effectively what the J curve tries to address, is if stability is what matters to political risk and political risk is what increasingly matters to the global economy, how do we think about a country's stability? So let me explain briefly what the J curve is. There is a curve. It does look like a J It looks at two variables. The vertical is a country's stability, which I would define as the capacity and willingness of a group of leaders to implement stated policy in the incidence of shock. So a shock occurs. You thought you had a contract, you thought you had an agreement, a joint venture, whatever, a treaty. To what extent is what you believed still the case after the shock occurs? That's stability, right? Stability is the vertical axis. Openness is the horizontal axis. Openness is both openness internally to Google, to Internet searches, to satellite phones and cell phones, the ability of people to migrate across borders, foreign direct investment, all the rest. Also the ability of individuals to communicate within a country to one another, free media, non governmental organizations and all the rest. Okay, if you look at those two axes, the vertical is stability and the horizontal is openness. I argue that what you get is something a little interesting. The result looks like a J. To explain briefly, you have some countries that are stable because they're open, like the United States and Canada and Japan and France and Britain. You have other countries that are stable because they're closed. North Korea, Cuba, Iraq under Hussein, Afghanistan under the Taliban. Countries that are stable because they're closed want to stay closed. They need to stay closed. Because if you start to open that system, it becomes an enormous and fundamental threat to the sustainability of that country. You can move both ways along the curve. Countries do. Furthermore, the left side of the curve is much steeper than the right side of the curve. Meaning if you fall off, you're at the bottom of the curve. You have a country that's suddenly falling apart. It is a lot easier and faster to create stability by declaring martial law and closing the country down than it is to build institutions, openness and governance over time. On the other hand, the curve is ultimately higher on the right hand side than it is on the left. Because if you persevere in building those institutions, you will eventually become more stable. Final point, the entire curve shifts up or down on the basis of the economic resources available to that country. So if you're Saudi Arabia and oil prices go from 65 to 20, then your entire curve and every point along it shifts down. If you're China and your growth is consistently 11.5% or whatever you'd like the number to be, because there's questions about Chinese numbers, then your curve is going to shift up. That's the J curve in a nutshell. Now, let me talk specifically about some places, about what I think happens. Let me give you an example. I think that there's a great analogy to be made between Russia, Iraq and Afghanistan. You look at Russia, Soviet Union closed system stable because it was closed. Gorbachev comes in, perestroika, the glasnost opens the system up. System falls apart. Country goes to the bottom of the J curve. Boom. 1991. Yeltsin comes in and he says, we're going to create open institutions, democracy, free media. The United States comes in, they say, shock therapy. We're going to help these guys. We're going to talk about bringing them into NATO. NATO, Joint Russia Council and all of the rest. Energy dialogue and so forth. The Russians make massive mistakes. Yeltsin, of course, goes on massive drinking binges and largely isn't seen for periods of time. The United States loses interest. By the end of the Clinton administration, everyone asks who lost Russia. Russia doesn't make it very far to the right hand side of the curve. Putin comes in, he creates far more stability by systematically closing the country off. Right? And now in 2007, US Russia relations at a worse path than they've been since before the Cold War. Same thing true with European Russian relations. The Russians going after local NGOs, local media. Putin has 78% approval ratings. Russia has become more stable by moving back to the left hand side of the curve. I would argue that Afghanistan and Iraq very similar, just earlier points in the process. Right. In both Afghanistan and Iraq you had systems that were stable because they were closed. Why did Saddam Hussein not have a problem with oil for food sanctions? In part because he was able to control all the money that came in. The worst thing you could have done to Hussein was get rid of those sanctions and let foreign direct investors come in. He wouldn't have been able to control the resources anymore. Country could have fallen apart very quickly if that were the case. Cuba is the same situation, of course, and Washington officials on both sides of the aisle understand that. Right? But if you look at Cuba, when they tried to reduce, when Clinton tried to reduce sanctions against Cuba, the Cuban government responded by shooting down a civilian aircraft. At which point we had the Helms Burton act, at which point sanctions were tightened, at which point the Cubans were happy again. Cuban government, right. And they maintained control. And now 47, 48 years, through Castro's rule, he's still there. You want to get rid of Castro. Easiest way to do it, allow massive foreign direct investment. Suddenly they don't control it anymore. In fact, the one way that Cuba would probably fall quickly is if they find oil. You know, Repsol has been drilling for oil outside of Cuba. They put about $75 million into the geology over the course of the last couple years. They say that it looks promising. I have no idea, I'm not a geologist. But nonetheless, if they were to find significant oil, you would then have a Cuban American demographic that is anti Castro but is increasingly getting older and doesn't care as much. The younger Cuban Americans are wanting to do business there and they don't have the same historical background. But you would also have an American oil lobby that would say you're going to let the Europeans invest there and we can't. You've got to be kidding me. Oil lobby trumps the Cuban diaspora lobby. Country opens up, sanctions are gone. You know, Castro and his regime is probably very limited in its capacity. So you really want Castro out root for them to find oil. That's kind of perverse, but I think it's the way it works. Iraq, Afghanistan, both countries, you know, closed stable systems at the time, massive military intervention. Countries fall apart, move to the bottom of the J curve. But the amount of time and capital and effort and propitious security environment that would take to build these folks up, the right hand side of the curve is nowhere near what the international community is actually prepared to spend. And so what are your options? Well, you don't really move to the right. You either fall off the curve into chaos and civil war or move back towards a more authoritarian system. In Afghanistan, you're probably seeing the latter. In Iraq, you're of course seeing the former. Fairly straightforward. A couple other points as we look at other places around the world. This is not all despair, right? It really isn't. There are many countries that are moving towards the right of the J curve moving up. You look at Brazil five years ago, when Lula ran for president in Brazil, you had Wall street bankers saying, if this guy wins, it is a disaster. We're leaving the country. Sao Paulo, you went and you talked to the local bankers and the elites and they would tell you if this guy wins, he's going to nationalize assets, he's going to default on international obligations, the country will collapse. Lula won and it didn't happen. Last year I went to Brazil just before the elections. I talked to the same people and they said, if Lula wins this election, we're going to have five more years of mediocrity. And I said, oh, that sounds like the United States. Right? Politics are banal. A lot of people don't vote in the United States. Why? Because it doesn't affect them that much. At the end of the day, they've got their PTAs and they've got their golf matches and everything else. And in Brazil, increasingly, we're getting to the point that the average person doesn't have to care as much about politics. You can say that's depressing, but it's stable. And what we are seeing increasingly is that Brazil, as it moves up the right side of the curve, is becoming more stable. It's becoming a developed state. It's not really an emerging market anymore. It'll be investment grade, probably by 2009. Mexico, same story. One of the reasons why I would argue the Mexico elections debacle didn't have a very significant impact on the markets it. In Ukraine it did. That's the point. So there are good stories. India, another place, lots of difficulties in investing in India, don't get me wrong. But from the political stability perspective, when the Indian government actually gets around to creating the institutional framework between New Delhi and local policymakers at the province level, and they create a reformist piece of legislation, it's. It doesn't change. They're building on a solid base. Maybe they're very gradual. Maybe the growth is slower than China. There's no question. But the fundamental political stability is actually quite high. We talked about Russia, but I should at least talk a bit about a place like China. China is very interesting in my view, in that it's fundamentally different from India and Brazil. China's on the left side of the curve, not right now. What do I mean by that? China is globalizing. So is India and Brazil. As India and Brazil globalize, as they have more economic opportunities, they also become more politically stable. As China globalizes, they create more economic opportunities, but they also create more challenges to the existing Chinese political system. What's happening in China? As they globalize, the whole curve shifts up, but they're on the left of the curve and they're moving towards the right, which pushes them down. And so the question you have for China and the Chinese officials is can they raise the curve sufficiently through economic growth to get through that dip as they continue to globalize? And if they can't, how do they react? Now, there's an open question as to whether they can do it, but the second question is, does the growth continue at this level? One thing you have to understand if you're in that position as a Chinese official, is that you need the 10% growth continually to ensure that social instability doesn't get out of hand, given the nature of the Chinese political system. And I can give you many scenarios that create a Hard landing for China economically over the next five years. Avian flu, I'm not talking about killing hundreds of millions of people. Let's. So let's just imagine that we have a increase in numbers of human to human transfers in cases in avian flu. And the World Health Organization increases the threat level from I guess it's four to five. And suddenly as a consequence, with China's complete opacity around the way avian flu has been handled, there is a travel restriction on China that's not killing a lot of people. That's merely stopping Chinese trade. That would lead to, to a significant downtick. What if there were strikes, military strikes on Iran in 2008 that would lead to a significant downtick because of the massive spike in oil. What if there were, as Japan remilitarizes and changes its constitution, if we were to see significant anti Japanese demonstrations in China, considerably bigger than what we saw two years ago, I think it was in May, that could easily lead to a significant downtick in China. I'm not suggesting these are 50% likelihood. They're not. But I'm saying if you look at all of the possibilities of a serious lag in Chinese growth, let's say they're 10% total or 20% total. The point is it leads to very significant political instability in India. It doesn't. India, you have massive riots, they're largely constrained to individual systems. India's problem is not that it has a surfeit of democracy, it's that it has a surfeit of decentralization that makes India hard to invest in. It takes a long time. At the same time that decentralization also leads to a lot of political stability. At the end of the day, individual local threats have a hard time percolating up and becoming systemic. In China that's not true. So in India the growth may not be as high, but in China the downside is much greater. Final point before I sort of open up to questions. I haven't talked much about the Middle east outside of Iraq. I'm happy to talk anywhere in the Middle east if you like. Saudi of course. There's been a lot going on recently. Israel, Palestine, Lebanon, Syria. We've got some discussions between Condi Rice and some of the principles in the Arab world going on just today. But I think Iran is very interesting. If I had to look out over the next two years, the single largest political risk globally in my view is Iran. When I say largest, I mean likelihood of the risk occurring, impact on the global markets, if it occurs and nearness in likelihood of that risk occurring to today. Just from a temporal perspective, I think that when you look at where Iran sits, you have to understand that this is an economy that is not doing well. They understand it. This is a government that is not nearly as stable or as totalitarian as the North Koreans. The North Koreans at the end of the day simply wanted to be paid off. And as long as that would happen, they were pretty risk averse. They weren't really trying to rock the boat. The Iranian government on the other hand, actually knows that long term they're going to have a problem staying in power. And as a consequence, what we've seen from the Iranian government is large numbers of attempts for domestic political reasons, largely to go after, to create international incidents, to actively provoke the international community to take domestic focus away from their economic failures and onto the nuclear issue, Israel, the British sailors and the rest. That means it is a rational strategy for this Iranian government to actively create provocation. If we had Supreme Leader Khamenei, President Ahmadinejad in this room right now, that would be pretty remarkable. And if we could ask them, is it in your interest if sanctions, further sanctions are put on you by the Security Council? I think they say yes. If we were to further ask them, is it in your interest for Israel to engage in surgical strikes against your nuclear facilities in Natanz? I am not sure they would answer yes, but I think they'd have to consider it. I think we have to recognize that that's why the Iran issue is so incredibly difficult to resolve. Now, if you are the United States, how do you deal with that? If you really want to destabilize the Iranian regime or change the motivations of the Iranian people to force the economic issue and, and you know that military options are very bad options. The smartest thing to do, which I think is inconceivable politically right, would not be to cut the Iranians off. You don't want Alcatel to be cut off because they happen to be wiring Iran. Wiring Iran is a good thing. You don't want American congressmen say let's sanction Alcatel because they're doing business in Iran. No, what you really want to do is open the, tell the world that the Strategic Petroleum Reserve is open for business so that speculators come out of the market and you tell the Saudis, we need you to overproduce. You've got 1.5 million barrels right now, spare capacity, you're going to flood the market. We know it's going to hurt you economically. But if you don't do it, there's going to be military strikes and that's worse for everybody. And crash the price of oil down to 30, 40 bucks. That will create real problems for the Iranian government. Inconceivable that it's going to happen. But if you wanted to really look at what motivates and doesn't motivate the Iranians, going through this process of niggly sanctions helps them domestically, doesn't hurt them economically. Let's recognize that. I am not suggesting, let's go to Washington and tell them all, here's what you're going to do. I'm sensible about the fact that it's politically inconceivable. We can talk about why. But you know, between us here at Google, I think we have the ability to talk about what the actual drivers. We should at least know what works first, then we can know what's possible. But figure out what actually does and doesn't work. Figure out what motivates individual leaders in countries to maintain stability, to stay in power. And I think that fundamentally, as we've seen on Cuba, as we've seen on Iran, as we've seen in Iraq, as we've seen on many occasions, we fundamentally get a lot of this stuff mixed up. And that's really why I wrote the book. That's really what our company does. And I'm delighted I had a chance to chat with you about that. So I'm happy to take all of your questions and I'll sign books afterwards and I'll start right there.

Apparently I need the mic. Okay, here we go. So you've talked about a couple of different factors about politics and about the economy. And I wanted to ask you about a third factor in one country in particular, which is hard line religion involved in politics. So I wanted to get your opinions or your thoughts on Turkey, which is a country I feel like is moving very nicely in the right side of the curve, from what I understand, which is limited, but currently has an election coming up. It's a country with a long history of military coups which kind of seems to swing back to the left. I just wanted to hear your thoughts on what's going on in Turkey right now and how that affects societies that are in that state.

Yep, that's a very good question. Of course, Turkey right now you've got a big crisis which has roiled the markets 8% down at 1 point because the military made a late night intervention after the Islamist AK Party nominated Mr. Gould, the Foreign minister, to be the next president. That's what's kind of going on in Turkey. Turkey right now. You know, let me say a couple things to respond to your question. The first is that if I was to look at what are the drivers that cause gravity towards the right hand side of the curve, what are the things that create stability over time? One of the biggest, most successful drivers has of course been the European Union. Right. Massive institutionalization, lots of economic incentives attached to it, regulations, rule of law, all the rest. And the Turks have been on an accession process for years now. Now. I don't think they're going to get in, frankly. I don't think they think they're going to get in. But the very fact that they're candidate members on that process has created a significant amount of stability. It's moved them quite a bit up the right side of the curve. Now, is that immutable? Could they start to slip down? Yes, they could. They certainly could. Especially if anti Islamic sentiment in Europe grows so greatly. And we know that Sarkozy's likely to win in France. You know, we're probably going to see a conservative government come in place in Britain relatively soon. We've got one in Germany. Anti Islamist, anti immigrant sentiment on the continent especially is growing dramatically. What happens if the Turks are thrown out as a consequence? Might they slip? Might they backslide? My hunch is, no, not sufficiently. They'll backslide a little. But will they actually turn back towards a really authoritarian system? I don't think so. Couple reasons for that. One, that's very interesting. If you look at Turkish banks and Turkish industrialists, people like the Sabanci Group, the Koch Group and the rest, the beautiful thing about them is they take the pain. You go to Russia and you want to see if the Russian economy starts to get shaky. The oligarchs leave immediately. When you see the oligarchs leaving, you should say, why am I still here in Turkey? The international investors go, the Turks stay in. They're actually quite committed to their market. They don't do a lot of international investment for a while, especially back in the days of Suleiman Demiral and the rest. They were trying to really be the Greater Turkey. And they did a lot of investment in Azerbaijan and Kazakhstan and places like that, Uzbekistan. But the reality is that the Turks are really committed to their market and their local economy. And they're pretty smart. They've got a serious technocrat basis in the country. A lot of good bankers, a lot of good industrials, been there for a long time. That helps first point, last point. Second point on that though is I would compare Turkey to Thailand just had a military coup in Thailand, right? Military came in, generals came in and they said, okay, this government too corrupted, too much of a problem. And then what happened? Now they're stepping out, they're putting a new constitution. I think within a year's time Thailand will be more or less back to normalcy. What I see the military as doing in both Thailand and Turkey is in both cases it prevents them from getting all the way to the right hand side of the curve. It creates a limitation in the ability to create free and open functional institutions in those countries. But, and this is an enormous but, it also prevents them from sliding too far down. In other words, you can't get a fundamentalist Islamist government in Turkey no matter what the locals want because the military will stop it. You can't get Mr. Toxin in Thailand creating a democratically elected corporate estate that's massively corrupt because the military will stop it. So you've created a ban. And there's an upside there and there's a downside there. But I think it's a great question and I like the question.

Yes, sir.

Yeah, I have a slightly different kind of question. You chose J and not U or some other letter. What that implies is you think the stability by being closed can't go very far up. But certainly the leaders in the closed countries like China, they probably think that by making system close they have a pretty good system. People on the whole they can believe, which may or may not be true, but they can believe that on the whole they're quite happy and they'll continue to perpetuate that. What's the rationale for the being on the left hand side being limiting? That it doesn't go up as much as on the right side?

First of all, because the, if you look at closed systems, typically closed systems rely for their stability more on the individuals that run those systems than institutions. They tend also not to be very resilient in terms of their ability to react to stresses on the system. They tend not to be very fast moving as a consequence, especially if they're large countries. And I think that that is what generally limits the stability of countries on the left hand side of the curve. Having said, I want to keep in mind that the entire curve shifts up as the economy shifts up. I mean, you know, the end of the day, Saudi Arabia is a very closed system. Saudi Arabia right now is running massive budget surpluses because oil prices are so high. I could make the same argument about Oman. And, you know, at the end of the day, even a closed system can look pretty stable if it's a relatively small population and they're making masses and masses of money. You know, China, I think the reason why we're seeing demonstrations, you know, increase in number every year despite 11.5% growth. The reason we're seeing, you know, NGOs and the rest starting to, you know, sort of take on local cases, lawyers and the rest. You know, it's very interesting. The People's Liberation army has gone down from about 4 million total to just over 2 million since Tiananmen Square. It's much smaller. They don't have the army they used to have. The reason for that is because they have massively increased their police force. They've taken the army and they have created. Because the army's not good at dealing with social discontent, right? They don't know how to deal with it. They fight wars, and you saw that in spades with Tiananmen and the reaction to it. What they've done is they've created the world's largest, most effective riot police, bar none, and they're using them. And in the last year, we've seen for the first time, lethal violence against demonstrations since Tiananmen Square. The fact that we're seeing lots of that starting to percolate within China, even in the context of 11.5% growth, I think is troubling. I do not believe that that means that China's going to fall apart at all. But I think it limits the level of Chinese stability compared to the level of stability that one would see in a country like Canada, which is consolidated and open and has institutions that make it work. Let me be clear on one other thing, is that when I say openness, I do not mean democracy. I consider Dubai an open system. It's not democratic. But having said that, the Media's wide open NGOs are everywhere. In another five to 10 years, Dubai will probably only have 5% of its population as local Emirati. If you want to talk about something that's completely open, Dubai fits, right? It doesn't happen to have democratic institutions. Okay, maybe it fails a little bit on that. It's open in the same way you can say Singapore is open, but it can handle. It tolerates that level of stress. If there's a problem with Dubai, it's where it's located. If the problem with Dubai, it's because Halliburton just based its headquarters there, and they're probably the biggest terrorist target now in the Middle East. That's the problem with Dubai. The fact that if the US Goes against Iran, all the Iranian money flows through Dubai, and, boy, that's going to put pressure on Dubai. You're going to see terrorism Dubai in the next 24 months. I'm certain of it. And that is, you got to think that hurts the bubble at some point. Right. But if I think about how that compares with China, does China have that level of flexibility? No. So those are some of the reasons why it's a j. I could go on a long time on that one. Sir, what are your thoughts on Romania? I don't know if you know, but this year have been two major political events. One of them was that Romania has joined the eu. And the second one was that the parliament meeting the president last week. Yeah. I mean, Romania's had a series of political crises, of course, and one of the problems that Romania has is that in all of Eastern Europe, it has probably been the society that has been most controlled by a small local oligarchy. And keep in mind, if you look at all the East European countries, what Ceausescu did to Romania, the extraordinary urbanization that he created, it had no institutions for. You basically brought the peasantry to the cities, but you didn't actually create any industry around it. You didn't create any middle class around it. And so once Ceausescu was shot, you had this, in principle, very brittle, urbanized society that ended up. All of the money got controlled by a very small number of people, the Pounescus, for example, things like that. And we're not even talking about just energy and refineries. We're talking about advertising, we're talking about local hotels, the Intercontinental downtown in Bucharest. I mean, all of this sort of thing. And I, you know, if you compare that to Bulgaria, there's no question Bulgaria was the easier investment environment. I mean, I remember talking to news corporations in the early days when they were thinking about where they wanted to go in Eastern Europe, and they were thinking, Bulgaria, Romania. They went Bulgaria. For precisely those reasons, Bulgaria has won out Hungary, even though Hungary is much more expensive. Bulgaria and Romania are not so different in terms of level of infrastructure and baseline expenses. And education isn't so bad in Romania, but Bulgaria continues to win. Now, the fact that you're now in the EU in Romania is going to change this dramatically. So I think now Romania is starting to look cheap again, and I think there's going to be significant investment as a consequence of that. But, boy, the local corruption is horrible, and I think it's going to take time. That's my general view.

Hi. Another question about Europe in particular. I'd like to know your opinion about the current political situation in France in particular. So this is a stable country, but at the same time, there's lots of demonstration and people go to the streets when they disagree with the government. And last election last week actually showed that people care about politics in terms of. You had 85% of French citizens going to vote. So what is your.

That's a very good question. I was in London last week and I managed to have lunch with Michel Rocard, the old Prime Minister. And he's hilarious. I spent about an hour together and he was chain smoking Galois all the way through. I mean, it was a very French lunch. And I asked him. The first thing I told him is I congratulated him on 86% turnout because, I mean, the French really do care, I mean, about this election. And I mean, they are. I mean, in a sense, it's the exception that proves the rules, people talking about how remarkable that is. And I mean, I think that there is a meaningful sense that the nature of the French political system and the party system has a chance of changing somewhat. And I mean, if you, if you. I'm sure you watched the debate the other day, I mean, two hours of completely substantive issue back by back between Sego and Sarco on, you know, everything affecting the French population. And everyone that was in France was saying there's no one outside, everyone is watching this debate. That's pretty impressive. That's pretty impressive. But I mean, do I think that there's going to be a fundamental change as a consequence of France?

No.

I mean, look, when we see people, look, you've got 35 hours that you have to work every week there's time for demonstrations. I'm sorry about that. But if you look at, if you look at what's actually happening when the farmers demonstrate in France, when you look at the students and healthy student demonstrations that started with Nanterre and all the way along still happening today, these are issues that I think fundamentally are accepted as part of the uniqueness of French society. But do they affect stability in France? No. And actually, if you look at productivity in France on a 35 hour per workweek basis, they're actually doing better than Britain. If you recognize they're not actually working very hard and you bring that up, it's extraordinary what they're actually producing. I think that Ed Sarkozy recognizes that he's talking it through and Seguile Royale has had to deal with. That's one of the places she didn't look very good in the debates the other day. The problem that France has, and this is a problem that exists in many countries in Europe, is this massive anti immigrant sentiment. Right? I mean, if you want to be American, you can have an accent, not a problem. You don't need to speak English that well to be American. Hey, works, right? I mean, we're all immigrants, right? If you want to be, if you're a communist in the United States, they'll call you anti American. Right? But if you speak with an accent, who cares, right? I mean, Henry Kissinger was our Secretary of State. No one could understand him, but he was American. Right. If you are living in France as an immigrant, we don't care if you're a communist, but you better speak French perfectly. Right? You have to integrate completely. And of course that is not happening. And anyone that's been in these suburbs outside of Paris knows or has been down to Nice or has been any of these places knows that they have a massive and growing population. And the fact is that Sarkozy picked up the 30% of the vote. He did in very large part because Mr. Le Pen only got 10%. 10.8, I think it was. He was able to really say, this is an election that matters. 86% of the people voted. They weren't prepared because it's an election that mattered. They weren't prepared to throw away their vote on the hard right guy. But immigration, massive issue in France right now. And do I believe that that might eventually lead to the kind of policies that they will choose to start hurting the economy? Yeah, look, I was in Denmark a few months ago, Copenhagen, and that's, you know, there aren't many immigrants in Copenhagen, but that's all they were talking about. Now, of course, there was the Danish anti Mohammed cartoon flap and everything, but they'd already gotten through that at that point. The Nationalist Party in Denmark is doing pretty well. And they all told me while I was there for two days straight, they said, look, if we have to choose between a lower standard of economic living but having a more Danish country, we will choose. We want to be more Danish. We're prepared to put money on the table, give up economic growth, to be more Danish. I heard this consistently. And I'm not sure the French are prepared to make that trade off today. But that is the trade off that is increasingly being made in Europe, across Europe. You need the Turks in, you need more immigration, you need the labor. And yet the Europeans are moving away from that. Right. And one could make the argument that the United States has the potential of doing the same thing on homeland security. I mean, clearly the number of graduate students coming over from the Arab world, Pakistan and the rest, I mean, you know, Google knows it, I know it. Eurasia group, we've got 49 nationalities that work with us here in the United States. We can't get these guys visas every year. Bill Gates was complaining about this in Davos this past year. Thank God. You know, but the reality is, you know, one of the reasons we had to open a London office wasn't just the market there. It was because we could hire people. And that is absolutely going to hurt the US it will hurt France. There is no question. Will it create, you know, sort of an Iraq situation in France? Of course not. Again, you can screw up a lot if you're really stable. And, you know, that's good. The bad news about being really stable is because you're so stable, because you can screw up a lot if the system changes underneath you, you tend not to react until it's too late. Hence proliferation regime, hence, you know, US and climate change. I can go on and on, right? And you'll have to see systemic crises before someone does something serious. Hence energy dependency. Right. I mean, nothing will be done. Nothing can be done in the US for energy dependency for the next 15, 20 years. Impossible. Just not given fuel cells, just given the infrastructure build that would need to occur around all of that stuff. But, you know, we're just too damn comfortable. You got headlines the other day in LA. 365 for gas. Higher. I think that's what it was. Highest it's ever been. Average American doesn't care. It's not really turning people out in the polls. We are too comfortable in China. You will see, I think, as the environment becomes an utter disaster, that fuel cells will take off there first because GM will build a million lousy cars that. That do fuel cells that only go 30 miles an hour, that fall apart all the time. But the Chinese government will take some city someplace and say, if you want to drive in the city, you got to drive this car. That's it. You can't do that in the U.S. too comfortable. That's the problem. That's the France problem. France problem is complacency. It's not that you're going to have these demonstrations that will blow the roof off, sir.

So in Ukraine just this afternoon, the Prime Minister seems caved to the President.

And agreed to parliamentary elections.

And no Presidential elections. Have any thoughts on what the near term future is there?

Well, I mean, it's kind of interesting and it's sort of sad, of course, that, you know, at the end of the day, the Orange Revolution that everyone believed in has kind of turned. Has kind of blown apart. I don't know that. I think the problem is that the ability to form a serious coalition between the reformists and the Ukrainian. Right, you know, the Timoshenko, Yulia Timoshenko. Right. Just wasn't there. They didn't trust each other. Timoshenko has a hard time working with anyone. The Russians were using Timoshenko as a foil to try to bring down the government. They did effectively. There are a lot of Russian interests in the Donbas, Donetsk, in the mining areas in southeast of Ukraine, and they're not going to give that up. And they've been using that consistently with the pro Russian Yanukovych in Ukraine to basically try to forestall and turn around the Orange Revolution. I think they've largely succeeded. We saw what happened with the Russians prepared to cut off the gas pipeline to Ukraine. Even though it irritated the Germans and the Poles, the Russians didn't care. They view this as fundamentally their backyard, you know, and frankly, they're going to get it. And I fear the next place that might happen is Georgia, because The Russians take Mr. Saakashvili's opposition very personally and they've already cut them off. But the Georgians are a small country and they are fairly industrious and they're still growing pretty fast because they've managed to hook in with Azerbaijan and Iran. They've also got support from the US And a little aid to Georgia actually goes a long way, not like in Ukraine. But I don't think the Russians are done. I heard from one of Putin's advisors in the Kremlin that Putin actually talked directly about possibilities of how they could use this, the Kosovar example, coming down the pike in terms of independence, to ensure the independence of Abkhazia in Georgia, effectively using that to spur a civil war that would allow them to intervene and get rid of Saakashvili. They're taking it very seriously. And their view is the United States came in, they built this pipeline from the Caspian into Turkey, Baku, Ceyhan. The United States came in, put bases in the Kazakhstan and the Kyrgyz Republic. The Russians say, we got nothing out of that. We do not like the status quo. We want to roll these guys back. We want influence locally. And it's very interesting to see how much more Problematic. The Russians have been vis a vis Iran than the Chinese have been because the Chinese fundamentally don't want to rock the boat, but they want stability. The Russians see the Iranians as a useful geopolitical hedge against American and European interests in their region. That's a problem. Now, it is true that the Russians cut off the Iranians in Bushehr, but the reason they did that is because the Russians actually want to sell nuclear civilian technology and reactors globally. The Iranians had already paid 800 million of a $1 billion deal. There wasn't much money to be made from the Iranians anymore. That was purely about money for the Russians. But in terms of supporting the US on Iran, it is going nowhere, absolutely nowhere.

Question.

Sure.

In more general terms, is there ever a point at which the right side of the J starts to tip over a little bit and creates another weird looking letter? And also globally, is there a J much like we have a doomsday clock for the globe, is there a J that sort of looks at the globe?

Yeah, that's interesting. You know, the funny thing, I've just finished the paperback version, which is cheaper and will be, I guess, out in September. They put September 11th as the due date, which is strange. And I actually sort of ruminated about whether or not there might be a global J curve a la, you know, depending on globalization and all the rest. I think there might be. I think there might be. I mean, certainly, you know, there are times where the world seems to become structurally more or less vulnerable, a la level of nuclear proliferation, a la nanotechnology running into grey goo, a la Bill Joy and all the rest. I don't know. Now we're going into Google territory, but I think it's possible. The first question is, can it tip over? What I would say is no, but I do believe that countries, even countries that are far up on the right side of the curve, need not stay there forever. You can make mistakes if the mistakes are of sufficient magnitude. It could be. What would happen if There were another 911 in the United States? First time, 9 11, God forbid. First time 911 hit right. The reaction was domestic. It was, everyone's coming together. We're going to find an external enemy. Bush, after the State of union speech. 91% approval ratings. January 2002. You guys remember that seems like a very long time ago. 91%. Almost every one of us in this room for some period of time, a week or two, thought that Bush was doing a pretty good job, right? But if you were to have another 911 now, it seems to me that the reaction we would likely to see in the US Would be divisive. It would be finger pointing. We blame it was you guys were supposed to be fighting the war on terror and you lost it. I think that there is no external, easy, external enemy you could find that you could point fingers at. It would be much more homeland security. It would much more debate over privacy and individual rights and all the rest. The whole Guantanamo issue and all of that. And that could, over time, you know, start to actually erode at some of the foundational stability that has been built up in the United States. I think that's possible. It is much more possible in a country like Lebanon where it has been happening, right. War happened. Lebanon used to be the bank for Saudi Arabia. They call it the Paris of the Middle East. Anyone here that's been to Beirut? It is extraordinary. It's still a lovely place to visit, except when it isn't. But the real problem is that if you are Lebanese and there's a major Lebanese diaspora all over the world, they're very industrious businessmen. And in the last year, everyone under 35 in Beirut with a little nightclub or a restaurant or is building a small hotel, you name it, they're leaving. They're going to Dubai or Abu Dhabi or Qatar where they can make big money. Or Paris. That's a country that was much farther up the right side of the curve and structural considerations suddenly moved it down. That could happen in Israel. That would be dangerous. The fact that we are starting to see this was the first year that Israel had more immigration than immigration, I believe over the course of a very long time. And the emigration you're starting to see is coming from the people that can leave. Those are the people you don't want to see go. Armenia. Armenia, another place that happened, right. 30% of the population left Armenia from 1986 to 1995, I think it was. And it was the people, the Armenians with cash that had connections that could get out. The country's hollowed out completely now. What's Armenia? It's nothing. There's no economy. There's nothing left. It's a diaspora population that travels to Armenia and they give money and humanitarian aid. Then they leave. That's it. It's horrible. That could happen in Israel. Diaspora populations move, right? And so they are much more vulnerable if you have a sudden shift in stability.

Sir, suppose you wanted to open up the Soviet Union. I mean, you've pointed out that after glasnost and perestroika, they Moved to the bottom and started moving towards the right. But that didn't happen for 70 years before then. And you know, their government was continually propped up by, you know, Western aid, by detente, by, you name it. It was only when we started cutting them off that they found they had to open up to avoid complete economic disaster.

So.

I don't understand, you know, whether you would advocate more globalization and you know, more trade with a country like this or less.

Well, certainly, you know, in the case of Eastern Europe, right, I mean, the fact that there was a very active effort by Radio Free Europe, for example, and that there were lots of these captive nation support programs and the rest definitely helped to create much greater ties and discontent within Eastern Europe and support for the west than otherwise would have existed. And we saw a lot of that with also Samizdat and the rest even in the former Soviet republics. But I think when we talk about whether or not sanctions work, okay, that's basically your question. When do sanctions work? Sanctions do a couple of things, right? The first thing they do, if they're effective, first of all, you can talk about sanctions, but if they're sanctions that only you apply and nobody else applies, then it's not a sanction. It doesn't matter if a sanction is applied, that is effective. One, it cuts off the economic capacity of that country. So it shifts their curve down. Two, it actually makes them, it moves the country, makes the country more isolated. Now more isolated can be a useful thing if the country is on the right side of the curve. Hence WTO complaints against the United States or Europe tend to be useful sticks to bring about the right sort of policy. If the country's on the left hand side of the curve, those sanctions actually allow the individuals in place to, to have more control. Now if the economic. So you have cross cutting purposes, the hurt of the economic sanctions brings the curve down, but at the same time the isolation caused moves the country to the left of the curve and creates more consolidated stability. So what you have to figure out is which is greater. You have to weigh them. Is the greater effect the fact that you're hurting them economically or is the greater effect the fact that they're becoming more isolated and as a consequence have more control of their domestic population? And what's interesting is because the curve is so steep, sanctions are least likely to be effective for countries that are the most totalitarian. North Korea, right. A little bit more openness causes enormous amounts of instability. So you can throw them as much money as you want, but if that money is linked to any sort of foreign direct investment, they say no. When the train blew up in North Korea and it killed a couple hundred people, a couple thousand were injured. It was a few years ago, the South Koreans offered all this money to North Korea and the North Koreans said no because the South Koreans wanted to send it by truck into the area. And the North Koreans didn't want shiny new South Korean trucks with people dressed well that the North Koreans could see they needed to create, maintain the Potemkin village that they had created. And it was only when the South Koreans agreed to take the same aid and bring it by boat and ship it to a port, have the North Koreans unload it and then bring it in. And by then another hundred people estimated had died two months later. So that's.

So what do you think of Sharonsky's idea that reductions in sanctions should be tied to human rights openness?

I think that I wouldn't want to make a sweeping statement like that. I think that these things have to do far more with what kind of sanction and where the country actually sits on the J curve. I don't believe that you can make it. Human rights are clearly important, but they're clearly one. Everyone complains about the United States being hypocritical. And I think the reason they complain about the US being hypocritical is not because the US Formulates policy different than anyone else. It's because they pretend to. The United States says that they have this great evangelical zeal and that we have these extraordinary values. We support liberty and human rights. In Uzbekistan over the last year, the United States has made human rights a linchpin of its policy. You know why? Because there's nothing else we're doing in Uzbekistan. In Pakistan, you've got human rights, which is an issue, but you also have nuclear proliferation cooperation. Frankly, the Pakistanis have provided more support for the US on nuclear proliferation information over the last two years than any other country in the world. That's really important for the US if you were asking me as an academic, do I care about human rights, sure. If you're asking me as a policymaker that actually is responsible for the lives of Americans, I have to say I'm going to weigh those human rights against the information on proliferation. And I'm not going to tell you which way I'm going to come out until I've actually looked at all that. And I think it would be utterly irresponsible to ask an American politician to do any differently, just like a French politician or a German Politician. We have values. Those values are strong, they're important, they inform our foreign policy, and they should. But that's very different from saying that, you know, we're going to, we're going to base our sanctions policy on human rights. And I think Sharonsky's playing for his audience. I think basically he's a smart guy, but I don't buy it.

Thank you.

Last one.

And this will be the last question.

Okay. I hope this isn't a little obscure, but I was intrigued by the potential for sort of scale dependence in your concept. The reason was the hesitancy to speak to the point of whether or not there's a global J curve. Now I'm intrigued because from in other areas we see curves like this fairly regularly. For instance, if we're studying complex adaptive system systems, if we replace the word openness with supply of low entropy, essentially a curve like the J curve, even with the vertical axis being stability or sustainability, ends up being a characteristic of just about every complex adaptive system from the simplest, like amoeba and below, all the way up to, in theory, universes.

Now.

I wonder if you could say more about why there might not be a global single J curve. And also have you used done the same sort of fascinating analysis you have of the J curve, but at layers at levels of scope below the country level? I think you mentioned before something about companies, but have you gone below country? And why won't it work above country?

Well, I mean, I'm not sure that it works below either, frankly, because I haven't spent anywhere near the amount of time, you know, in research around them. I mean, this was originally data driven project in the sense we were looking at country risk models and looking at the impact of different globalization measures on stability. And as we looked at all these countries, emerging markets mostly over the last 20, 30, 40 years, we found, you know, sort of this relationship. And I said, aha, I should probably do something with this. So, you know, I think that, I mean, and as the book came out, there were lots of folks that, you know, so were asking me questions like this. Religious institutions was one place that I thought the J curve might be an interesting sort of way of thinking about it, you know, sort of what a closed, you know, sort of, you know, sort of stultified religious institution might look like and how it might be able to, you know, the ability to move from that to one that is more to a unitarian system or something like that and how that might work. Corporations, definitely. I think that was what Vint actually was talking about. When he read the book, he thought that was sort of a natural application of it. I think it'd be fun. Maybe at some point the two of us will do something on that. We've talked about it, but we've never been in the same city long enough at the same time to do.

A.

Reason why it might not work. Globally, I wonder. When I think about the world system and I think about. Well, when you say globally, it depends on what you're looking at in the world. I mean, if you're talking about, you know, sort of the world, you know, in terms of. As a. If you're talking about Gaia, that's a little different from talking about global markets, right? I talk about global markets. I talk about global markets and global politics. So would it work for that confluence of the geopolitical space that we think about globally? And in that regard, I wonder, is the world more or less like, how devolved is it, how networked is it as a system? If I think about things that create instability, you know, Ray Kurzweil, someone I love to read, even though he's a little bit out there, right? This is the age of spiritual machines guy and all of that, you know, has this notion that, you know, over time, you know, sort of everything, we all work towards singularity. And he's obviously very optimistic about the future of the human race. And one of the examples he gives, well, look at the level of redundancy that we see globally. And he talks about, for example, everyone was worried about all of these Internet viruses and that the Internet viruses were propagating so much more greatly than the ability to deal with it. You'd have all these people that were working on it, and eventually the system would collapse. I think about energy and the fact that today the global energy system cascades. It's a bathtub. You take 500,000 barrels out of production in Nigeria, it hits absolutely everyone. If the Straits of Hormuz close down, we're all in serious trouble. Everyone is in serious trouble. But are we moving towards a system where increasingly energy infrastructure will become decentralized? So you'll get your energy, it'll be created locally. We'll have local fuel cells and all the rest. If that happens, that system will become much more robust. It'll look much more like Kurzweil's world, but the markets may not. And I'm struggling with what the global markets ultimately, what they ultimately are iterating towards. Are they becoming more globalized or not? Are they really becoming sort of more integrated or are they becoming more fragmented? That's not clear. Today's global markets are actually in some ways fragmented because of the extraordinary liquidity. But I don't think we can hold that. So that's just. I mean, this is a tough conversation. I mean, it's because I don't have an answer for you, but I'm at least try to give you a few of the things I'm thinking about. It's a nice big structural question to end the talk with. Thank you guys for sticking around so long. This was an awful lot of fun for me. I hope you enjoyed.