ChinaÆs increasing interaction with the Middle East is not surprising given the inter-dependence between a large energy-consuming country and the region which supplies the world with most of its oil. Further, cash-rich, sovereign funds in the Middle East are seeking avenues to put capital to work and China represents an attractive investment destination. Intermediaries such as investment banks are trying to facilitate 'constructive' dialogue between the two. This solidarity û obviously û has an impact on America as well. The US can stand on the sidelines and watch or try to involve itself - the latter not an easy option at the current juncture.
Professor Marvin Zonis was in Hong Kong to discuss the geo-political risks facing the global economy with a focus on these three regions.
Zonis began by clarifying that his own chosen subject ôgeo-political risksö should perhaps be interpreted as ôgeo-political uncertaintiesö because risks suggests there is some way to assess and quantify the danger when often there isnÆt.
He was unequivocal that "the greatest risk to the global economy emanates from the United States, due to years of fiscal mis-management".
He illustrated this with statistics. In 2000, the US had unfunded liabilities whose present value was $20 trillion. By 2006, this had increased, on a present value basis, to $50 trillion; the GDP for the corresponding year was only $13.4 trillion. Zonis attributed this to a spending spree in the US, terming the situation a ôtrain wreckö waiting to happen.
The three US programmes of Medicare, Medicaid and social security also came in for criticism by Zonis. He cited that the three, on a combined basis, by 2015 will equal as much of the US GDP as fiscal spending did in 2000. Zonis was equally scathing of the "staggering" asset bubbles in America, including the stockmarket and real estate, which he suggests are engineered to bloat the economy, for political reasons.
Zonis drew attention to the US current account deficit which is $900 billion per annum and being funded by non-US citizens. "Those who are funding the deficit will soon realise that since 1960 the US dollar has only lost in relation to other currencies - and that the US dollar will continue to devalue," says Zonis.
Moving his attention to China, Zonis commented that he sees significant risks inherent in the fact that China has been the worldÆs fastest growing economy over the last two decades. "I fear that the massive social unrest in China, which Chinese authorities had themselves identified as the biggest threat to future success, will indeed destabilise the country," he says.
Zonis believes that capital investment in China is not sustainable as private consumption in the country is only 40% of GDP, in contrast to 70% in the US and 64% in Japan. Capital investment in China stands at 45% of GDP compared to only 18% in the US. To reinforce this point, he gave the example of the 1,500 steel mills in China with a capacity of 100 million tonnes per annum which equals the combined steel production capacity of the US, Japan and the EU.
The last risk Zonis highlighted was that Chinese have a propensity to save and not to consume, which will limit ChinaÆs growth. He attributed this to the lack of social security, healthcare or free education in the country.
While answering a question about ChinaÆs ageing population, the only emerging market in the world with this malaise (which is more common in the developed world) Zonis highlighted an interesting drawback of this demographic: "innovation, creativity and a questioning nature come from the young".
Zonis aired an opinion which places him squarely at loggerheads with a number of specialists: ôAsia, in general, remains regrettably a proxy on the US economy. There is a limit to what Asia can do without the robustness of the US.ö Unfortunately, Zonis did not substantiate this statement and moved on to the Middle East, saying Iraq-Iran, Israel-Palestine and oil prices are the looming risks there.
The academic's overwhelmingly negative opinion on the US invasion of Iraq was arguably not very new but he still added some flavour to an old debate. Despite the number of US soldiers killed in Vietnam numbering 58,000, while in Iraq the comparable number is only 3,800, Zonis says Iraq is ôthe greatest debacle in the history of US foreign policyö. This is on account of the destabilisation the invasion has caused in the region.
Zonis says that 70% of the worldÆs oil reserves are in the hands of five countries (United Arab Emirates, Iran, Iraq, Kuwait and Saudi Arabia): "which all now hate the US". Zonis also sees the under-investment of oil-producing nations in capacity as a cause for alarm as he feels the world is ôliving on the edge with higher oil pricesö.
However, in a somewhat contrarian view, Zonis seems to feel that higher oil prices will be a disaster for emerging markets more than for the US and further he suggested that the US has not chosen to pursue the development of alternative fuels as it does not see itself enough at risk from the impact of oil price hikes.
In closing, Zonis made a point worth dwelling upon. He laid the blame for the First and Second World Wars and the Cold War on the inability of the world powers at the time to integrate rising and aspiring nations. He suggested China is in the same situation of being a rising world power today. He categorically states "the world will be vastly better off with a rich China" thus buys into the rise of the country, but suggests the challenge remains for developed countries to integrate China into the world system.
Zonis is a professor at the University of Chicago, and also heads Marvin Zonis + Associates, a political risk consultancy. He terms himself a ôglobal political economistö. Some of his views are radical (for example those on China) and others have been oft-voiced but overall he provided a balanced assessment - substantiated by interesting facts and figures - of the forces he sees shaping the world in the near-term.
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