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The only answer lies in diplomacy

Publication Date : 25-06-2014


July 2014 marks the 70th anniversary of the Bretton Woods Conference held in 1944, in preparation for the post-war global financial architecture.

This month marked the 70th anniversary of the Allied invasion of Normandy that eventually ended the Second World War in Europe.

The war in Asia only ended after the United States dropped two atomic bombs on Japan.

Both turning points confirmed the rise of the United States as the dominant economic and military power, centered on the U.S. dollar as the primary reserve currency.

Much has changed since 1944 — not least the emergence of the European Union, the collapse of the USSR and of course, the recent rise of the emerging markets, notably China, India, Asean, Brazil, Turkey, Saudi Arabia and South Africa.

In the last 70 years, five distinctive mega-trends account for the major shift in geopolitics — demographics, economic re-balancing, technology, financialisation and climate change.

First, the world population has more than tripled from 2 billion in 1944 to 7.3 billion this year and may rise to 9 billion in another 20 years.

The advanced economies, particularly Japan and Europe, are aging very fast, whereas the emerging market populations of Africa, Middle East, South Asia and Latin America are still rising.

Second, faster growth in the emerging markets has narrowed the gap between the rich and poor countries (global convergence), whereas the widening gap between the rich and poor within almost every country has created growing social and income inequality (the great divergence).

The Credit Suisse Wealth Report 2013 reported that 0.7 per cent of the world population owned 41 per cent of total global private wealth and the top 8.5 per cent owned 83 per cent of the wealth.

Third, technology through telecommunications and computing power has networked the world and spread information rapidly, changing social behaviours through social media and empowering civil society and new institutions that challenge the established order.

Fourth, financialisation, defined as the size of the financial sector relative to the real sector (using GDP as a proxy) has risen sharply as a result of financial liberalisation and innovation.

Most governments brought down their domestic government debt after the Second World War, but domestic debt (mostly private debt and debt incurred by the financial sector) rose from 100 per cent of GDP in 1980 to an average of 370 per cent in 2012, rising to as high as 550 per cent in Europe.

Financialisation has enabled the big and powerful to concentrate wealth and has been a significant channel for inequality.

Fifth, climate change is already apparent, as temperatures rise and polar icecaps melt.

Last September, the U.N. Intergovernmental Panel for Climate Change warned that if the world sticks with “business as usual,” global temperatures may rise by over 4-6 degrees Celsius — far beyond the 2°C increase that has been deemed “safe.”

With extreme weather creating more natural disasters, food and water shortages are potential trigger points for social unrest and conflicts.

Even as U.S. President Obama's speech to West Point last month pointed out that the United States military has no peer, the U.S. is facing three fronts simultaneously in Eurasia.

In Eastern Europe, the events in Crimea and Ukraine suggest that armed conflict may escalate.

Russia has already announced that it will cut gas supplies to Ukraine with effect from next Monday.

In the East China and South China Seas, the U.S. pivot to the Pacific, coupled with the rise of China, has stirred up a hornet's nest of tensions.

And in Central Asia, a large part of Iraq is being over-run by ISIL (Islamic State of Iraq and the Levant) insurgents.

Using the latest techniques of fund raising, ISIL even produced an Annual Report that openly trumpeted its achievements in terms of terrorist activities and military procurements.

If the current Iraqi Government in Baghdad cannot hold, then the U.S. plan to withdraw from Afghanistan in 2014 will be in jeopardy.

If both Iraq and Afghanistan fall to Islamic insurgents, then the entire Middle East would be destabilised, negating the whole purpose of the post-9/11 “war on terror,” including the controversial invasion of Iraq.

These are dangerous times. Politics in many countries is becoming more fractious and polarised.

The European Parliamentary election results last month suggested that there was a swing in the votes towards both the far right and the far left, at the expense of the centrist parties.

People tend to forget that the global unrest is partly due to growing social inequality.

In many of the regions with growing social conflict, unemployment is on the rise and the inequities are being blamed on immigrants, foreigners and other racial or religious minority groups.

Moderate voices are ignored as fundamentalist and extreme views get more than their fair share of press.

Thomas Piketty's bestselling book “Capitalism in the 21st Century” made a fundamental point that historically, rising inequality in income and wealth was reversed mostly either by war or revolutions.

We have got into this dismal state because dysfunctional politics does not allow tax and other policies to address such inequities.

Whilst Piketty's book has framed the issue of inequality as the center-stage of global tensions, there is as yet insufficient discussion on how to deal with such inequities.

Strengthen the bulge bracket of middle income masses, and they will be the stabilising force for peace and stability.

It is the polarisation of income and wealth that leads to fragmentation and conflict.

In 1919, after the end of the First World War, the Irish poet W.B. Yeats wrote a famous poem called “The Second Coming.”

Nearly 100 years later, the words remain apt: “Things fall apart; the centre cannot hold; Mere anarchy is loosed upon the world.”

Politics is the art of compromise. Without compromise, there is no diplomacy, only conflict. If peace and stability is to prevail, the center must hold. As Churchill famously proclaimed, it is time for jaw jaw, not war war.

(Andrew Sheng is Distinguished Fellow of the Fung Global Institute)


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