The U.S. Dairy Exporter Blog: Market Analysis, Research & News

  • Doing Business in a Disorderly World

    By Margaret Speich November 10, 2015

    Doing_business_in_disorderly_world-108438-edited

    Council on Foreign Relations President Richard Haass takes USDEC members on a fast-paced, forward-looking journey around the globe.

    It has become a much-anticipated highlight at USDEC Board of Directors and Membership Meetings. In our morning session, we bring our members a well-known thought leader to address issues of globalization and their potential impact on global dairy trade.

    Last spring, for example, Oxford Professor Ian Goldin predicted emerging markets will expand three to five times the rates of older advanced economies, equating to about 3.5 billion new middle-class consumers over the next 15 years. Last fall, former CIA and NSA director Michael Hayden talked about the decline of nation-states and the instability and unpredictability that can bring to global business.

    Haass1

    The speaker at our Fall board meeting this year was Dr. Richard Haass, president of the nonprofit Council on Foreign Relations. His topic was “Doing Business in a Disorderly World.” The address took the audience around the world and back at breakneck speed.

    There is no easy way to summarize it. Perhaps the best approach is to identify headlines, followed by Haass’ forward-looking analysis, in his own words.

    As the senior USDEC executive overseeing our board meetings, as well as our communications, I must point out that Haass’ remarks do not necessarily represent the views of the U.S. Dairy Export Council.

    Fasten your seat belt for a guided business journey around the world, where Haass said the headlines include:

    China will remain a top-down economy. “My hunch is that will largely continue because what we saw a few weeks and months ago is the government lost its nerve after encouraging Chinese individuals to invest heavily in the market. It was a wildly successful policy when the market went up. When markets go down, as they inevitably do, the government essentially had a panic fright and decided to intervene because it was worried about the political consequences of people losing money. What is so important to remember about China is that one thing that is often hard to find in China is a communist. People don't carry around little red books anymore. The legitimacy of the party has largely derived from high sustained levels of economic growth and ever-improving levels of standards of living. That is now coming down. So, with the source of legitimacy to maintain social order not so clear, the government is going to keep, I think, a fairly large role in things. They have a lot of limits on them, demographic, the unexpected consequences of the one-child policy, the pollution limits where they have to reduce certain types of production. They have a massive challenge. China is undergoing about the toughest challenge because they are trying to change their basic economic model from export-oriented to stimulating domestic demand and consumption. Easier said than done. Much easier said than done. It will take a lot of time and a lot of friction because the people of China don't want to start spending more money because they are worried about retirement and health care as they get older. Very, very tough. “

    Japan has not found itself yet. “Japan has lost several decades. I am not quite sure Japan has found itself yet. It is technically the world's third largest economy in terms of a single country. The problems have not gone away. Demographically, Japan also faces real ceilings, an aging economy, zero immigration; it is not a very entrepreneurial economy in some ways. When was the last time all of you tried out your Sony Walkman? It is interesting. I had a conversation recently in Japan with a bunch of entrepreneurs. I was talking about Silicon Valley and the pride people have when they put on their resume all of the failures they had. Don't do it in Japan. It doesn't work that way. In certain ways, Japan is risk-averse. ”

    India is an exciting place, but possible conflict with Pakistan is worrisome. “I think India is an interesting place right now… and Indian democracy is stunningly robust. The problem in India is getting stuff done. Getting land to be made available is a nightmare. Getting stuff approved politically is really tough because of the Indian layer cake, because of the party system which is as complicated of a mosaic as you can find… (yet, despite these challenges) it will soon overtake China as the world's largest population, probably in about 15 to 20 years. I think the real question about India, the biggest problem is its neighbor, Pakistan. Pakistan is now getting close to 200 million people. It has the world's fastest growing nuclear arsenal. It is home to some of the world's greatest terrorist organizations and it is an incredibly weak civilian state. It is basically run by the military and intelligence organizations. At any time, I sort of feel it could unravel. The question is the next time, for example, terrorists come out of Pakistan and do something in India. I don't think the Indians are going to turn the other cheek. They will retaliate, and the question is: can they manage their rivalry? It is one of those where geopolitics intersects with all things economic, but these are countries with nuclear arsenals.”

    Egypt has not found lasting stability. “Egypt is the most populous country in the Arab world. Roughly one out of every four people in the Arab world is an Egyptian. Egypt right now has a veneer of stability, but I think it is just that a veneer. I do not think Egypt has discovered a long-term road to stability. It is right now quite a heavy hand from the government, and the problem is if there is no political space for those who want to act politically to act out their views, what do they then do? You can't incarcerate that many people. You don't want to be fighting that many people… and I don't think Egypt can be assumed to be a stable place for all time to come. I wish it were otherwise, but I don't think it is. The Middle East ain't Las Vegas. What happens there won't stay there.”

    Saudi Arabia will be targeted by ISIS. “Saudi Arabia, I think, has the seeds of instability. Tremendous splits within the ruling royal family; the secession was never quite, shall we say, worked out. Saudi Arabia is involved in a war in Yemen that I would call its Vietnam. I do not think it can succeed there. Most of all, when the group called ISIS or ISIL changed its names simply to the Islamic State, which was a wake-up call. What they were telling the world was that ‘we no longer see ourselves defined by geography. We see ourselves as going everywhere, not just to the Middle East but to the world. In any case, we are not geographically limited.’ Well, if you are the Islamic State, what could be a more important target than the country which oversees the holiest sites of Islam? Saudi Arabia is the de facto Islamist state. This is now the wannabe Islamic State. I would predict it is a question of when, and not if, there is a major challenge to Saudi Arabia. I don't know if it is tomorrow, a month from now, a year from now, three years from now, but it is coming. The real question is whether the Saudis are capable of handling it, given that their reserves are significant. ”

    South America has bright spots in Chile and Colombia. “Chile is by far the most successful country in terms of rule of law and political stability. Colombia is the biggest surprise… and it's amazing the degree of physical and political stability now compared to 10 years ago when the Civil War was raging."

    European business will be limited by structural problems. “The problem there, I would say, is largely regulatory. It is not so much the Greek financial crisis and problems with the euro zone and the fact that you have a common monetary policy and you have national fiscal policies… (rather), you have a true structural problem in Europe which I don't see getting fixed. The real problem with Europe is that nobody wants to hire because nobody can fire. Once you hire somebody it is a long-term commitment and it is a fairly heavy commitment. It is very tough.”

    Haass also spoke about several issues and trends that transcend geographical boundaries, including:

    Cyber is the new Wild West, and more complicated than the Cold War. “In some ways, it is even more complicated than the challenge we faced 70 years ago when nuclear weapons were introduced. Then, it was only a couple of players that had them―the U.S. and the Soviet Union. We quickly introduced things like deterrents and arms control. Well, with cyber, you have a zillion hands, if you will, on triggers. Lots of people can play on the Internet. We often don't know who they are. Most of them are not nation-states or governments, so they can do things without risk of retaliation. If you can do things without risk of retaliation, then it is very hard to deter them. You don't even know who is doing it. You can't identify who is doing bad stuff. We are wildly dependent on (the Internet). We want to keep it open because it is so valuable to commerce and our lives… but how do we try to discourage or prevent behaviors or uses of it that are so destructive? The honest answer is that it is the Wild West. We have not figured that out yet. The technology is miles and miles ahead of the rules.”

    The American share of GDP will go down. “We are 4%-5% max of the world’s people in this country.  As I constantly remind folks, this means 95 to 96 out of every 100 people do not live within our borders.  We are roughly now 23% of world GDP, but that percentage has to come down. Developing countries will grow at a faster rate and mature economies simply can’t. The good news is we don’t have to in some ways because our base is larger but the American share of GDP will inevitably come down. It doesn’t mean we are in decline.  It just means we are at a different state in our economic evolution. An export-oriented group like this one seems smart to me. The odds of your success are high.”

    The new normal is prolonged low growth. “My friend, Larry Summers, wrote a piece for The Financial Times, the salmon colored newspaper. Larry's argument is essentially that the problems we are having are not cyclical but they are structural. The new normal is one of prolonged low growth where deflation is a bigger threat than inflation, where downward pressures on prices are high. I think that may well be right so long as the world continues to ask the guys who run central banks to do all of the heavy lifting. What we have around the world, in many cases, is congresses and parliaments and the rest can't agree on fiscal stimulus. We, ourselves, are some of the worst offenders of it of late. So, the only thing that can happen is that central banks that are independent can lower rates. They have kind of done their thing. They basically shot their bullet. There are only two other things left. One is the fiscal and the other is fundamental reform. It is hard to get fundamental reform because politically it is so hard to push through political systems. Countries are often limited by debt and so forth. That leaves you with the monetary, basically at zero real rates. For that and for other reasons, Larry and other people have concluded that for the foreseeable future economic growth stays low. I think that is essentially right.”

    The United States must remain strong. “My argument is foreign policy begins at home; it doesn't end at home. This is not an isolationist argument. I am the last person in the world who would be an isolationist given what I do for a living. It is simply that I don't think we can sustain the kind of leadership we want to sustain in the world unless we are strong at home. Secondly, unless we sustain that kind of leadership, the world will be messy and that will come back to bite us… and if the world is messy, we are not going to be able to trade with it because it is simply not going to have the economic growth or the political stability that we need to either invest or trade. For all of these reasons, I think we have to be strong to some extent as a means to an end and how we shape the world.” 

    Whew! After hearing all that and more our members needed some reassuring news, followed by a break.

    Haass came through by reminding us that despite the flaws of the United States in an increasingly disorderly world, we remain the land of opportunity and stability for global entrepreneurs.

    "Which country sends the most people to the United States to go work in places like Silicon Valley?" Haass asked rhetorically. "You have China, you have India and after that you have the Europeans.

    "A lot of the best entrepreneurs coming out of places like France and the rest are not staying at home. It is very hard to start businesses there because of the problems. Once you hire, you are stuck. It is very hard to get access to venture capital and all of that."

    The bottom line is this: "There are lots of people coming over here."

    We must be doing something right.

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    The U.S. Dairy Export Council fosters collaborative industry partnerships with processors, trading companies and others to enhance global demand for U.S. dairy products and ingredients. USDEC is primarily supported by Dairy Management Inc. through the dairy farmer checkoff.  How to republish this post. 

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