Top Risks and Ethical Decisions 2011

• Introduction
• Discussion
• Questions and Answers

JOEL ROSENTHAL: Welcome to all of you. I see a lot of new and old friends. For me, this is one of the highlights of the new year.

Thanks to Ian Bremmer and the Eurasia Group, we came up with a creative idea for doing this event, organizing it around top risks, as they relate to ethical decisions at the global level. This is our third year doing this. I hope we'll do it for many years to come. For me, this is great fun. These are great friends up here on the podium.

I also want to thank our corporate sponsors for this event. I see Jon Gage from Booz & Company, strategy+business magazine, also HP, a loyal supporter of ours, and, of course, the Eurasia Group. Thank you all.

I'm now going to turn it over to Art Kleiner, who will be our moderator. Thank you all for coming.

ART KLEINER: Good afternoon. Herman Kahn used to open sessions like this by saying that there were only two events of importance in all of human history. Then he would say, "I'm sorry to say that this meeting is not one of them."

The two were the Agricultural Revolution and the Industrial Revolution. While today's meeting here at the Carnegie Council for Ethics in International Affairs may not be pivotal at that level, the themes that we're dealing with here are as important as any themes in any conversation anywhere, including the other big meeting that's happening down in Washington today.

It is our third year. It has been two powerful sessions, and we look forward to a third. With this session, we look ahead one year to the risks that we foresee potentially occurring, the institutional and decision-making responses that might occur, and the ethics involved in those responses.

By implication, we're looking ahead to a much longer-range future in terms of the way that those risks and those decisions can play out. Last year's session was one of the few places, at that time, that you might have heard that the relationship between the United States and China could deteriorate. That level of prescience is something that we look forward to again. Whether we get it or not, we look forward to it.

This is an interactive session. There will be lots of time for questions and answers. It's built around, as Joel said, the annual list of the top ten risks compiled by the Eurasia Group. Those risks are available in more detail at www.eurasiagroup.net. We are going to look at the ones that have the most significance in terms of the discussion today.

I would like to briefly introduce the panelists with us. Ian Bremmer is perhaps best known as the founder of the Eurasia Group and the author of The End of the Free Market: Who Wins the War Between States and Corporations?, which came out last year, and several other books, such as The J Curve and The Fat Tail.

The most impressive thing for me about Ian is that he coined the definition of emerging market as "a country where politics matters at least as much as economics to the market," which is a really interesting and influential way of framing it. He's an American political scientist and frequent commentator and writer. He will start.

He'll be followed by Daniel Altman, who has the distinction of having been on the staff or editorial board of The New York Times, The Economist, and The Harvard Crimson. He also has the distinction of having published a book that came out yesterday, which is Outrageous Fortunes: The Twelve Surprising Trends that Will Reshape the Global Economy, from Times Books. Prior to that, he wrote Power in Numbers: UNITAID, Innovative Financing, and the Quest for Massive Good, coauthored with Philippe Douste-Blazy. He'll go second.

Our third panelist is Zachary Karabell, who is a columnist with Time magazine. His column is called "The Curious Capitalist." He's also the president of RiverTwice Research. He is the author of Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It. He has a background both in journalism and in investment banking.

There's a lot more that could be said about each of the three panelists, but we're very interested in what they are going to say about what's on the horizon. So let me ask you, Ian, if you will.

IAN BREMMER: Thank you very much. Before my time starts, let me just say two quick things.

First, to Joel, who is president of the Carnegie Council, it is a privilege to be affiliated with this august and not fusty organization. This is one of the most fun events that I look forward to all year. It's great to be working with him again. He's a good friend. I'm really happy to be a part of it.

I'm so glad that Art is willing to imitate life and appear as our grand man to moderate this session. I don't always say that it's a real privilege to be with two intellectual powerhouses on the same panel, because usually it's not the case. But today it is. Both of these guys are fantastic. It's really not just their bios; they are intellectually very engaged, they are very curious, and they are not really that biased. That is going to make this a very fun conversation. They're fun. They're friends. I think it's going to be a lot of fun.

Let me now start my time and talk about where we are in 2011. If you want to go through all the risks, I'll take questions on any of them. We talk about red herrings, two things that aren't likely to occur that people are worried about—for example, Iran, which we think is not a serious risk over the next year, probably a little longer than that.

There are some good-news stories there, too. Let me talk about the big ones, especially because we're talking about ethical decisions and the implications of all of this.

The big risk this year was this concept that we came up with, the "G-Zero." I don't believe we're in a G20 world, but we are entering into a truly new world order. When the Soviet Union collapsed, we went from the G7 to the G7 plus one. Europe got more powerful. Germany got bigger. You had some new independent countries you could invest in. Certainly the global security balanced changed. But in terms of the way the global economy was run, you had a bunch of advanced industrial democracies that were calling the shots, and they continued to. Plus one is not a new world order.

The world we are heading into now, where emerging markets are becoming the dominant drivers of the global economy—is that global rebalancing? That is a new world order that is not a G20. A G20 implies that there are just a larger number of countries that are getting together and actually coordinating policy. We will not see that. We will see an absence of said governance.

A few things about the G-Zero that are interesting to point out. As you hear what the big economists are saying right now—I'm taking off for Davos on Monday, and everyone is talking now, the newspapers are calling up and saying, "What's Davos going to be about this year? What is the world going to be talking about?"

This is the year that we're getting out of the financial crisis, no question. It's harder for some, like in Europe, than it is for others. But, nonetheless, this is what we are looking forward to going ahead.

The big banks are all coming out now with their projections. Standard Chartered just came out with one, talking about the super-cycle, that the world is entering into a period of 20 years of oversized growth that will be driven by the world's emerging markets. As we look to 2030, they expect that we are going to see 70 percent of the world's growth in the emerging-market world, not in the developed states. It's the third such super-cycle that we have seen in terms of global growth in 200 years.

Jim O'Neill, who coined the term "BRIC," has been letting it be known that he is about to come out with his own very big report that is going to break up the BRICs and talk about the new growth economies. The big emerging markets, more than just the BRICs, are going to be driving the world's economic growth. If you are looking at the world economy and you are an economist, you're saying, here's the chance that we're going to break out of these economic doldrums, and life is going to get better.

I'm not an economist. I'm a political scientist. I happen to believe that the kind of growth you get matters on the basis of who is leading it. What does it mean that we're going from a world where the developed countries were doing most of the driving to one where the emerging markets are doing most of the driving?

Number one, you get an absence of governance, because there are costs implied with the level of political willingness to do global lifting. There are responsibilities implied with global leadership. Emerging markets have less experience and willingness to engage in providing those responsibilities and costs that come with stakeholdership. And it's not just true of China; it's true of Brazil, Turkey, and Russia. We're going to see less governance. The G-Zero matters in that regard.

Secondly, you are going to see a lot more volatility. If you look at peripheral countries in Europe—we call them increasingly submerging markets—Greece, Ireland, Portugal and Spain—economically they are not going to be performing very well over the next year. They won't be performing very well over the next several years. The austerity is going to hurt. But you know what? They're not emerging markets.

The political stability even of relatively volatile peripheral states in Europe in terms of rule of law, legitimacy of their political institutions, and their baseline social instability, compares very favorably to a country whose per-capita income is under $10,000 a year—even the non-authoritarian ones. There is still much more brittleness over the long term. The volatility in a world where the emerging markets are doing the driving is much greater than in one where it's the developed world.

That has implications for how you invest. You should hedge a lot more. You should be much more diverse in your portfolio allocation. But it also has implications for how we think about the world and the risks that are incumbent on us in the world.

Number three, a world that has that level of rebalancing globally is one where relative gains and losses attribute to very different sets of actors. It's great to talk about a world where absolute gains are the only ones that matter. But, as human beings, we don't live in a world like that. We don't like it when we don't do as well, relatively, as other economies.

Do I believe that the United States and China will get in bigger fights over this, structurally, over the long term? Yes, I do.

Do I believe that the West is going to engage in more economic populism and nationalism as a response to a structural change in who has access and availability to wealth and consumption capacity? Yes, I do.

A world where the emerging markets are going to start doing most of the consuming and growth is a world that will be fundamentally more conflict-laden, more violent, and less ethical. There are implications of that.

Fourth point is that countries that are moving from $20,000 to $40,000 per capita or from $40,000 to $20,000 have different levels of tolerance for things like garbage and emissions of nitric oxide and sulfur oxide than countries that are moving from $1,000 to $2,000 per capita, $1,000 to $5,000, or $5,000 to $10,000, as we will see happening in India, China, and Indonesia.

A world where the vast majority of the growth is going to be coming from countries that are going through that level of industrialization has massive implications for tolerance of dirty industrialization and resource stripping in a constrained global environment that will become more so. There are ethical implications for that as well.

The final point is that in a world where emerging markets and developed states have to engage in that rebalancing, we need to ask ourselves which are the values that the United States, Europe, and Japan have shared, whether we're talking about rule of law, liberal democracy and transparency, or a regulated free market.

Which of those have to be amended, adapted, or jettisoned altogether in order to be able to have a shred of cooperation or governance at the global level?

Hu Jintao is in Washington today. We have a big state dinner coming up—the biggest summit that we've had in decades. What are the rules of engagement? How much uncertainty are we going to see in those sorts of relationships? How evangelical can we be as the United States about values that we truly believe are ethically better?

Those questions are thoroughly and completely unanswered. They are not unanswerable, but they are unanswered. And they are ones that we should be addressing at places like Carnegie Council. So that's the G-Zero.

There are two others that I want to talk about briefly before I turn this over. We had a very nice little lunch before we did the session. Zach asked me, of all of the things that are out there, what are the game changers? What are the ones that could really surprise and screw this whole thing up?

We all know that Europe is going to have messy restructuring. We all know that the ability of the Europeans to actually continue with this austerity, and the French and the Germans to continue to fund it in a relatively clean way, is a big risk. I don't think I'm telling anyone here anything new. I don't want to spend time on that. Let me spend time on the two wildcards that are really big and can really hit.

Number one is North Korea. North Korea is going through a transition to a 27-year-old kid [Kim Jong-un] that nobody knows, including the 100 or so families that actually run North Korea. Now, it could be that the reason they decided to shell with artillery South Korean civilians is because they are trying to show those of us in the international community that this new guy is not going to take any guff. This could be.

It could also be that the reason they are doing it is because Kim Jong-Il wants to make sure that this complete unknown within North Korea is not going to get killed or ousted as soon as Kim Jong-Il goes, and they need to get the country on a real war footing, so that there are bigger fish to fry.

I have no idea which of those two is true. But neither do any of you. Neither do the Chinese, who are unwilling to push the North Koreans, not because they don't want to play ball with the United States, but because they are scared that if you push a totalitarian leader in the middle of a succession, you could get something very, very bad.

War on the peninsula is thinkable and will have massive implications. South Korea, no question, is done if it happens. War on the peninsula also has implications for the general geopolitical and geoeconomic balance in the region, where the Chinese are the dominant economy, and becoming more so every day, but the United States is becoming a very important strategic hedge for countries like Japan and South Korea.

Clearly, the nexus of geopolitical tension and conflict has shifted in the last several months from the Middle East to Asia. That's structural, and for the purposes of this conversation, permanent. We're going to spend a lot more time on those sorts of issues going forward.

Second big unknown out there is cyber. Cybersecurity and terrorism has historically been something we talk about in terms of organized crime and in terms of individual hackers. Geopolitics are increasingly inserting themselves.

I am not saying this because I am worried that we're going to have a massive, mega lights-out attack, 9/11, that's going to be cyber as opposed to the next avian flu or the next big terrorist attack that comes from al-Qaeda. It's different than that.

There is no rule of engagement on what is too much in terms of cyber attacks. The United States and the Israelis have used that to their advantage in terms of Stuxnet vis-à-vis Iran. There is a wonderful piece by David Sanger [and William J Broad and John Markoff] in this weekend's New York Times on that. But state-to-state conflict, state-to-corporate conflict is going to go up as a consequence of that, with very difficult-to-imply consequences, especially when it's hard to understand who the actors actually are.

Perhaps more importantly, and the biggest "known unknown" out there, is this is the year that Julian Assange, the founder of Wikileaks, goes down. I don't know if it's through legal means or extralegal means, but he's not going to be in operation in a year's time. That's a fairly safe bet.

The likelihood that there will be radical transparency fostered upon governments and corporations is real. The fact is that it has hit so far the U.S. government, and that there have been some implications for U.S. policies and relations with Yemen, Argentina, Afghanistan, and Pakistan. But the U.S. government is better able to handle forced transparency than any other government out there, and also much more able to handle it than, say, American banks.

We know that there are problems with banks and their information that these folks have been compiling. When that hits, the potential risk that the U.S. government has to intervene in a much more structural way with its financial institutions and the markets is one that really hasn't been thoroughly digested. And it's a real risk out there.

So those are the two big wildcards that we need to at least consider throwing on the table. They are less predictable than a lot of the other risks that are in the top ten this year, but they are kind of interesting to chew on.

With that, let me turn it back to you, Art. Thank you.

ART KLEINER: Terrific. Thank you, Ian.

Daniel, if you don't mind following.

DANIEL ALTMAN: A tough act to follow, as always. I trained as an economist. Ian trained as a political scientist. But I really have to say, I like Ian's approach. He really looks at the deep, underlying forces that are causing trends that could turn in the future rather than just extrapolating from what we see.

It's really important to do that in economics, as well as in political science. You have to understand the dynamics of systems if you want to see where they are going. You can't just look at a stream of numbers and say, "I think the next number is going to be X." So I'm going to try to take that approach forward as well.

Before I do, let me also say thank you to the Carnegie Council. I've been out of the country for several years. Coming back, it's great to have a friend here in New York. Thanks so much for having me.

One of the ways that I want to discuss how we look at those underlying processes is by considering what are the obstacles to making changes in our society and our institutions that could help us to address global issues going forward—things like climate change and how you monitor the financial markets.

Some of the most important things to consider are the difficulties of making long-term investments which have an up-front cost and pay off returns in the future, and the difficulties of creating coalitions which can solve problems together and overcome the free-rider problem that we so often have. These are two things that we are currently very poorly equipped to do. These by themselves are an important risk that underlies a lot of the ten risks that Ian has pointed out. If we could form coalitions and make these up-front investments, we would be able to avoid some of these risks.

China and the United States understand that a conflagration on the Korean Peninsula will be really bad for both of them economically. They have no interest in provoking that kind of thing. Perhaps they think that maybe there's a chance to assert more dominance depending on how that comes out. But the uncertainty associated with it is tremendous. If they could get together to ring-fence that conflict, that would be great, but there is always an incentive to defect from a coalition like that. If the other person is playing nice, your incentive is to be the aggressive one and get in there. We have a real hard time forging coalitions like this.

We also have a hard time making these up for investments. How are we going to monitor the financial markets? Are we going to invest by giving up a little bit of sovereignty, creating a monitoring system that could provide early warnings for crises like the one we suffered a couple of years ago?

That might pay off a lot in the future, because, let's face it, that crisis had some very major costs for us. Maybe giving up a tiny bit of economic activity in the meantime in order to fend off another crisis like that could be a good idea.

But we have a hard time doing that. One of the biggest reasons is that our leaders—not just politicians, but CEOs as well, increasingly, these days—face a very short time horizon. They are looking at a two-year electoral cycle, with a campaign that's 22 months long. That leaves them two months to do legislation. That's not very much. How are they going to stay focused on the long term if the benefits of these policies won't even accrue while they are still in office? It's a difficult problem for us.

There are two ways we can address it. One is by changing our institutions, both on the domestic and the global level. The other is by educating the public that these long-term investments and these coalitions are actually important; we need to convey that message to our politicians so that they can start to make those investments and participate in those coalitions. When we set forth on this journey, it's important to realize that what we're talking about is not necessarily trying to impose common values.

The meeting in Davos next week for the World Economic Forum talks about shared norms for a new reality. If you go on their website, you're going to read some language about coming to common values. There's no doubt that if you're doing business, common values are useful. You can find shared sources of trust. But to be honest, as an economist, if you're going to sign up to a new commitment to reduce emissions globally and combat climate change, I don't care what your values are.

If you can make a real commitment that's credible, I don't care where you're from, what your culture is. I don't care, in some senses, what the governance of your own country is. All I care about is that commitment. Common institutions can be much more important than common values.

If we restrict people by saying, "You've got to check your values at the door if you want to be part of this club," we are, first, going to have a much smaller club, and second, we're going to have a much less interesting debate about what solutions we should come up with to address these global problems.

I want to set that as the framing for my remarks. Now I'm going to talk a little bit about the predictions in my new book and how they relate to Ian's top risks for 2011. I'm not going to talk about all of them, because some of them are so security-related that for an economist like me, I would be way out of my depth.

I'll start at the top with the G-Zero. This is really an appropriate segue. If there is a G-Zero and we are facing this sort of vacuum at the top of global geopolitics, then who is going to be putting together these institutions? Who is going to be forming these coalitions and making these long-term investments? It's a really troubling sign for so many of the issues that we need to address right now.

Second is Europe. I wrote this book back in 2009. I was writing about the disintegration of the euro area and the European Union as economic entities. I didn't know that events would overtake me before the book actually came out yesterday. But it's nice to know that some of the things you write might actually come true.

What I did was, I looked at all of the countries in the European Union, except for Malta and Cyprus, and I tried to break them down by their long-term risks and their long-term opportunities. I just mapped them across those two axes.

What I saw was absolutely startling. Not only did we see four distinct segments going on different tracks in Europe—vastly different risks, vastly different opportunities—that those segments, which I calculated mathematically, were geographically distinct as well. You can actually see Europe breaking into four geographically contiguous parts that would be going on different tracks.

How are you going to maintain the euro area, a single monetary policy for all these countries, if they are going in different directions?

The euro was supposed to synchronize their economies so that you could have one monetary policy for all of them. It's going to become more and more difficult. This is going to become untenable. Adding to Ian's point, it's a significant risk for us in the coming years and in the long-term future.

I'm going to skip over cybersecurity because Ian has talked about that at length.

China is a difficult case for us from an ethical point of view. As Ian said, we believe we have values which are ethically superior, and we would like a country that is a big leader in the global economy to associate with some of those values, not just for the purpose of the institutions that I spoke about earlier, but simply because we think it would be a good thing for the world because of the influence that they wield.

What I wonder is the following: Does China have to decline in importance to start playing ball? Because that's what is going to happen.

If you look at China's growth right now, it's relying heavily on two trends that propelled growth in the United States and Japan:

• • First, a rural-to-urban migration, which tracks extremely well with growth in the United States and Japan in the 20th century.

• Second, copying technologies, reverse engineering, and producing things more cheaply. We know that this was a great force in Japan's growth as well.
  

But what happened in the United States and Japan? Eventually, after growing really fast, they slowed down into a nice glide path until they hit a stable long-term growth pattern.

We saw that in Japan stable long-term growth is not as high as in the United States. We think that some of the reasons for that are that their basic institutions, markets, legal protections, how they treat investors, the ability to innovate and be entrepreneurial, are not as good in Japan as they are in the United States, or at least not as favorable for economic growth.

What does this mean for China?

The same thing is going to happen. They're going to slow down as those two trends run out of steam, and they're going to settle into that steady long-term growth path, and their average growth rate is going to be lower than the average growth rate of the United States at that point, just the way Japan's was.

What does that mean?

The United States is going to start catching up again after China passes, because the United States is going to be growing faster. They'll close the gap, and the United States is never going to look back after that. Our institutions, for the purposes of economic growth, I firmly believe, are superior. The ones in China that will hold them back have roots that are thousands of years old, like Confucian philosophy, which sets up these arcane hierarchies in business, where it's very hard for ideas to percolate up from the bottom and innovation to occur.

Are they going to ditch those?

Not necessarily. This is really engraved in Chinese culture. It can be useful for creating trust in a system where trust is hard to come by, like the Chinese system today, which is so rank with corruption. But in a free-market economy, it is not so useful anymore.

Does that decline have to happen—which is going to happen, probably, two or three decades from now—in order for China to start playing more of a cooperative role? We'll see.

Going on to North Korea, obviously a conflagration on the peninsula could be a horrible outcome for the global economy. South Korea has become such an influential exporter now. Of course, China could go in and eat their lunch if things didn't go so well, because China's manufacturing capacity is waiting to occupy a lot of those markets where South Korea is just one or two steps higher on the skills ladder.

Economically I don't think it would be as bad as a conflagration, let's say, in the Middle East, because we are not seeing a lot of important commodities coming out of that particular small region of the world.

I would group Mexico into that category as well. The economic links we have with Mexico are strong. Would they be disrupted if things went a little worse in Mexico? I'm not so sure. So I'm going to skip over those two.

Capital controls are an interesting topic for us. We have seen capital controls grow before. The reaction to the Asian crisis in the late 1990s, in many of the Asian economies, was to impose some capital controls to stop something like this from happening again; to stop some mean old guy like George Soros coming in and blitzing your currency, then having all hell break loose, then having to deal with the IMF guys who didn't really know what they were talking about. To avoid all that, we may see capital controls again in this context, and to avoid other problems as well.

This creates an even stronger case for something that's happening already, which is the development of an offshore financial market which has a no-holds-barred approach to trading and all the exotic derivatives and strategies that may be off-limits in the traditional centers a couple of years from now. It's just going to push more money towards these offshore centers.

If there are restraints in any traditional market, whether it's a mature market like the United States or an emerging market which is established, like, say, a Malaysia, you're going to see more money going elsewhere. You can go online today to an offshore betting site and buy derivatives. You can bet on the value of markets and bonds and credit defaults. They're already doing it. It's just going to grow.

U.S. political gridlock is number seven on Ian's list. This is a really important domestic risk for us today and in the future. So much of what happens in this country in the next 20 years is going to depend on what we do in the next five years about our fiscal situation.

We just received this week the first warnings from credit-rating agencies that U.S. debt might be headed for a downgrade. We know from precedent, for example, with Ford and GM, when the rating agencies say that there might be a downgrade sometime in the future, that usually means that the credit has already degraded. In fact, it may have done so a couple of years ago.

We cannot take big risks with this. The one day that someone doesn't show up for our weekly Treasury auctions, we're in trouble. We don't know how much we borrow before we hit that point. We don't know which dollar it will be where we're over the hump. So we need to stay wide clear of that.

In Washington right now, what's clearly needed is one of these long-term investments. We need to get people together to say, "We have to make a sacrifice today in order to maintain our fiscal security in the future." But we're not seeing it.

We need a coalition, too. We need Republicans and Democrats to do this. And yet there is an incentive to defect and say, "Those guys, they want to belt-tighten and all of this, but, actually, we're going to propose new tax cuts because that's what the voters want for this electoral cycle," or, "We're going to propose more spending, because we need more stimulus." We need a coalition and a long-term investment in this case, too.

I'm going to say, for Pakistan, much the same as North Korea. A conflagration could be very costly, but perhaps not as costly as if it occurred in an area that was exporting a lot of commodities to us that was really pivotal in global markets.

Finally, I'm going to head to number ten, emerging markets. Emerging markets—a topic very dear to my heart, as I have lived for many of the last seven years in emerging markets—offer what is really an interesting and emerging theory in political economy that I have tried to elucidate a little bit in my book.

I'm calling it the pendulum theory. In a lot of these emerging markets you are seeing a swing back and forth from left-wing populist government at some points to right-wing, slightly more authoritarian governments, perhaps, more business-oriented governments, and it just goes back and forth. But in some countries it has started to still a little bit.

I ask myself why this is happening. Let's look at one of the prime cases of this happening: Brazil.

Brazil has the classic history of a South American economy, where we have seen dictatorships, populist governments, and a lot of political and economic instability for a century, but it has been settling down in the last ten years or so.

Why? They had a center-right government, with Fernando Henrique Cardoso, that came in and installed what we would basically term "Good Housekeeping Seal of Approval" economic policies—tight fiscal balances, reasonable monetary policy with rather high interest rates, and a floating currency, or at least quasi-floating currency. That gave the markets the confidence that Brazil was ready for stable long-term growth.

But that was not enough. You needed a character like President Luiz Inácio Lula da Silva to come in and legitimize those policies by saying, "These policies are working for us, but we need to redistribute the gains from the growth that has resulted in order to get a popular mandate for these policies," because when they were installed, they were imposed by a wealthy elite. He has done that. He has legitimized them and confirmed them.

This is now happening in Chile, and in Uruguay with Mujica. This could happen across the continent and in other places that have experienced the backlash against capitalism, such as Eastern Europe in the past ten years.

One of the places it could happen next is in Peru. If you look closely at international indices, Peru has been moving up the ranks, doing better and better when it comes to opening business, an entrepreneurial climate, and the quality of the governance.

Peru right now has a center-right president who has put in some of these policies, and it is possible that a center-left candidate, Ollanta Humala, will come into office to follow him. If that happens, Humala has the opportunity to be one of these center-left confirmers, like Lula. He could also go the Hugo Chávez way and swing it all the way back to the left. But he has the chance the confirm Peru's status as a class A emerging market.

I hope that, as more and more examples of this come to the fore, we'll see these risks reduced.

Thanks very much for the time. I'll pass it back to Art.

ART KLEINER: Thanks so much, Daniel.

Let me just ask you for one quick clarification. You said there were four regions in Europe. Very quickly, if you could tell us what those are.

DANIEL ALTMAN: One of them, which I call the laggards, are the ones with the biggest problem; they are the PIGS—Portugal, Italy, Greece, and Spain. It is every country that is south of the 49th parallel in Europe. Slovenia is in there, and France just touches in there, too. These are countries with extremely high long-term risks in terms of pension liabilities, government debt, and opportunities that are not so hot if you look at them in terms of the innovative and entrepreneurial culture.

We have another group which has low risk, but probably low opportunities as well. A lot of these are Eastern European countries, former Soviet satellites.

We have a group of wildcards that have high risks, but also high opportunities. These are countries with good institutions but are also bearing long-term risks and fiscal balances, such as Germany.

Then we have countries in the northwest corner of Europe, which are the leaders. These countries have relatively low risks and high long-term opportunities. It may be a surprise to a lot of people in this room, but Ireland is one of these countries. Using the old distinction, Ireland has a liquidity problem, but not a solvency problem. Right now they're having some trouble paying their bills. They have to do some fiscal belt-tightening. But long term, they have some of the best foundations for the growth of their economic market, and they also have very low long-term risk.

If you buy the book, it's the only graphic in the book that splits it into these four segments. You can see it. It's almost like looking at a map.

Thanks, Art.

ART KLEINER: By all means.

ZACHARY KARABELL: By the way, if any of you have ever been in a pub in Dublin, you know that there is no liquidity problem in Ireland. (Laughter)

ART KLEINER: Speaking of which, you can take us the next step.

ZACHARY KARABELL: I mean that with no offense. It's just an observation.

We all predict the future. It's an interesting exercise to look at trends. If you look at the legacy of people predicting trends over the period of time that people predict them, it's almost always the things that you don't know that become the problem, as opposed to the things that you do.

Sometimes the things that you do know are going to become a problem do become one, but you're not prepared to deal with them. Often the things you don't know are going to be a problem become a problem, and you are not prepared to deal with them.

It's certainly important to think about what the operative trends are. It's equally important, in terms of what we do with all this, to think in terms of whether we are individually, corporately, communally, nationally, globally, and structurally prepared to deal with unexpected challenges to a system that we have, by human nature, become comfortable with. We all cleave toward and crave the status quo. And there isn't one, ever. So the degree to which we want stability and stasis is always at odds with the degree to which change is the only real consistency.

Just a kind of a bugaboo around this: We're in a period of time, on the other side of a crisis, where the voices come out talking about past patterns and how all this should have been predicted and whatever is a problem should be familiar because if you simply look at past patterns, the present is replaying them. Hogwash. The reality is, the present is constantly different in its variables and components to the past.

Ian was trained as a political scientist. Dan was trained as an economist. I was trained as an historian, although I do play an economist on television. One thing that you can glean from history is the degree to which it is singular as opposed to, in my view at least, full of lots of easy patterns. The only thing I think—and I'll leave it at this, as the kind of framing comment—that you can say about prediction is that the past is over, the future is unknown, and the present is confusing.

With that as an understanding about how we all have to muddle through, let me tell you about what's going on in the world today.

First of all, this echoes, but with a slightly different focus, things that both Dan and Ian have touched on and is very much in the category of the known, but in this case may very much be in the category of we really need to integrate this.

It's not just the rise of China, but it's what I'll call the China effect. It has been with us for a while, but it continues to intensify. The degree to which the financial crisis led to a brief but dramatic cessation of global economic activity allowed us to not quite have to deal with the consequences.

This is hardly such a trenchant, I-hadn't-thought-about-it-this-way observation, but, in my view, it's a real one and needs repeating. The China effect is a rural-to-urban migration, and it's an effect that is being felt and will continually be felt in India, Brazil, Peru and other places. It is a path of development that is very similar to the one that Europe and then the United States took, but it's happening with the benefits of modern technologies that allow for these processes to be much more rapid in real time than they were in the 18th, 19th, or 20th century.

The result of this is that, no matter how evident this is, the structural reality is, for all the technology in the world that we have, there are just certain things that still take longer than we might like. If you add in the degree to which things like regulations and sovereignty get in the way, there is only so much time it can take to find more copper, iron ore, resources, or to grow more food.

We can do these much more quickly than we could, and we're much more elastic than we were 100 years ago. But we are not yet elastic enough to meet this constant disconnect between the China effect and the amount of stuff that we can provide to feed the China effect.

Some of that feeding is literal. We are beginning to see once again, as we did briefly in 2007 and into 2008, a type of food inflation that nobody in our lifetime has lived with.

The story of the 20th century is one of food becoming less and less costly relative to incomes. People have done all these statistics. Before the 20th century, food was something like 50 percent of most people's expenditures, whether it was time or money. For all the talk about things getting more expensive, there is just no way that that is comparable in any society, except for pockets of rural India, sub-Saharan Africa, and rural China.

It's not that I'm saying we are going to go back to that, but we are beginning to see substantial food inflation, simply because you become middle class and you want to eat better, have more stuff, and you want to eat more meat. The intensity of meat as a call on grain is much more significant than the intensity of just eating the grain. I don't know what the threat implications are of all of these things that we are beginning to see as real dislocations.

Lots of people say, "We're going to see massive global instability." Then someone hears that there was a riot in Bangladesh and says, "This is just the tip of the iceberg." I don't think Bangladesh is the tip of anything, except that it's not going to do well when the icebergs melt.

Understanding how these things play out is rarely quite so dramatic and binary. Why none of us are talking about the environment as a threat is because, while it may be an X factor changing the status quo, how it does so, when it does so, and the actual implications of it are rarely as dramatic as two countries going to war because the price of wheat went from $5 to $15. But it is certainly a factor conditioning the global supply chain.

And it's not just food; it's base metals, it's commodities. It's oil to some degree, although oil, unlike food, is a bit more replaceable. There are ways in which you can fuel your economy, literally, other than petroleum. There is no way to build steel without iron ore, or at least not under current technologies.

There are ways of air-conditioning your buildings without copper, but they are much more expensive. Copper still has to double in price from where it is to make aluminum and alternate ways of air-conditioning your buildings an economically feasible replacement cycle.

We haven't seen anything yet in terms of the China effect and its effect on things like base metals, commodities, food, and pricing. That's going to create a whole series of opportunities and dislocations that we are just going to be with for a long time.

The second one, which has both a structural and an ethical dimension, is a bit more amorphous, but no less consequential, and that is, how does the United States deal with a relative change in power dynamics globally? Again, Ian has touched on this and Dan has touched on this. I'm just focusing it in a somewhat different direction.

Ethical, because how one uses power or deals with its change is, in some sense, a moral decision as much as it is a structural one. The United States for years has had the power to obliterate any enemy. Except with select moments in time, that's not power that has been exercised, either because of self-interest or because of a domestic moral climate that doesn't want to deal with the moral and ethical implications of destroying another country or another people, even though we certainly had and continue to have the power to do so.

But how a society deals with a structural shift in power—and I'm being very careful about that, in that whether or not the United States is in decline, not in decline, as in a 1970s moment that's going to be followed in the 2012 election by Sarah Palin and "Morning in America"—is something that remains to be seen.

That was supposed to be somewhat humorous, but obviously people are too worried about it to find it funny. (Laughter)

We don't know yet whether or not this is just another moment of handwringing and hair-pulling that is going to end with a resurgence and an efflorescence or a Tom Friedmanesque green economy of incredible potential, which would be great. But we just don't know yet.

We do know that the global power dynamics are shifting, and we certainly know—or at least I think we know—observationally that the way in which we have politically and domestically dealt with that reality has yet to live up to the better angels of our nature.

How we manage that shift both domestically and globally matters. It matters for the quality of life in this country. It also matters for the stability, to some degree, of the world, although I don't think we should overdo the essential role of the United States as the sole and utter arbiter of global stability, because that, too, speaks to a level of self-image that many people today in Shanghai, Mumbai, Dubai, São Paulo, et cetera, would find both offensive and surprising.

It matters how we manage this. The inability to manage this with anything resembling maturity—maturity meaning a reasonable, rational ability to deal with the world as it is rather than simply inhabit the world as we wish that it was—is a problem and will inhibit our ability to use what are still vast resources for future investment and effect. It will also make it more complicated for the world to shift the way it's going to shift anyway, whether we like it or not.

So that's the second one.

The third is extremely amorphous, and I will do my best, in three minutes, to make it more "morphous."

We are at a moment in time where there are significant issues between what we think is going on in the world and what is actually going on in the world. The way in which we establish a mental, cognitive, statistical picture of what's going on in the world is relying on a set of metrics that were developed in the early part of the 20th century to measure a world of much more unitary and solitary nation-states, which we then use to measure the world as it is now.

So whether that's GDP statistics, trade, inflation, employment, flow of capital or goods—and I don't want to get too esoteric about this—the entire way in which we're essentially trying to figure out how we're doing relies on a map of statistics that would be like plugging 1930s street names and coordinates into your GPS and thinking that it was going to lead you to wherever it is that you plugged in that you needed to go. The reality is, if you did that today, you would drive into a wall, an ocean, or an unfamiliar town, or any and all of the above.

When we talk about things like trade—there have been some very interesting articles over the past couple of weeks about the degree to which we have decided that there is a trade imbalance in the world, particularly between the United States and China. We have decided so because our trade statistics say that there is.

If you actually look at the way goods are made, whether it's an iPhone or anything else, and you look at the way in which the value of those products accrues to multiple different countries in very different ways, and if you actually reframe your trade statistics in light of that, you could well show that we have absolutely no trade "deficit," or negative with time.

I don't know what it would actually end up being, because it's a very complicated set of data points that we would have to assemble that we are absolutely in no position to create. But imagine how different the optic would be if there was a summit today in the context that there is a trade deficit that China is suffering with the United States, because if you added up the supply chain, we are actually getting more benefit from these products than they are, or anything along the lines. Singapore is actually getting most of the benefit from both of us.

If you do that for every single thing we look at—think about the Congressional Budget Office trying to score the long-term effects of health-care legislation. Because of the way in which we have decided this works statistically, it can only score expected costs based on things like GDP and historical patterns of taxes relative to GDP. What if we recognized that there is no way that that scoring works? What would that do to our legislative debate about the future? It would do something very different than what our current legislative debate about the future is.

So in multiple ways, we're forcing ourselves into one pathway about how we think the world works, and we are continually surprised that the world isn't working quite the way we think it should. Our models and our maps tell us it should work one way, but reality is clearly showing that it's working another. We have absolutely no way out of this particular rabbit hole right now, one, because I don't even think we're fully aware of it. It's a little like The Matrix meets economics.

We need to be aware of it before we can even begin to think about what we should do about this. It's leading to a series of chronically wrong decisions that are leading to a series of continually unexpected consequences. None of that is avoidable in human history, human society, or human nature. It is however more avoidable than the current degree of it that we're making, partly because we have never been more sure that we can figure out and predict what the effect of a spending bill is going to be, and we have never been less capable of actually predicting what the effects are going to be, because so much of our statistical universe is flawed.

It is a risk that we are mis-measuring our reality and we are allocating on the basis of wrong measurements. It's one reason why every time GDP numbers come out this year anywhere in Europe or the United States and they look good, tens of millions of people are going to be really pissed off because it's not going to apply in any meaningful way to their actual existence.

Cisco will come out in a couple of weeks and, even if it disappoints Wall Street, they'll announce that they made billions of dollars selling routers and technology around the world. Fifty miles away, there are still going to be 10,000 people in foreclosure actions in Stockton.

Those two realities will sit side by side, and they will come together to form something called California's growth rate. That will add income to form something called national U.S. GDP. None of it will speak to any of that. Yet we will make decisions and elect or un-elect politicians based on what those numbers are supposedly telling us about a reality that only exists in some abstract statistical universe.

That's a real obstacle and a real threat to our ability to actually deal with the world as it is, rather than the world that this 1930s map is telling us we're actually in.

Those are my three things to be aware of in the year ahead.

ART KLEINER: While we're waiting for people to formulate questions, let me start.

All three of you talked about a crisis in governance, either, as Ian talked about it, within, between, and among countries or, as Zachary just said, in our kind of official perception and the way in which governance evolves from the statistics that we use. Also the underlying fact is the emerging economies.

Isn't there a theory that economic growth leads to better governance, because people demand it? Does that play a mitigating factor in all of this and reduce the risks and the problems?

DANIEL ALTMAN: There is a very difficult and entangled relationship between economic stability and political stability. It's very hard to sort out, but we have a few signal events that we can look at, where there is, perhaps, a lesson to be learned.

One of these is actually going back to Brazil. During the first term that President Lula had in Brazil, there was a pervasive political scandal called the Mensalão scandal, where Brazilian legislators were receiving monthly payments in return for favors. The opposition learned of the scandal. It was all over the papers.

The opposition came out publicly and said, "We are not going to try and overturn this boat because of this scandal, because we know that that would harm our economic stability and growth. We will take note of this. We will bring it up in legislative proceedings. We will use it in our campaigns. But we are not going to try to destroy political stability, because we know that economic stability will also suffer." That is an event where you could see the link very clearly.

An answer to your question is that there are plenty of countries where people have essentially signed a deal with their government, to say, "If you give us growth, we're not going to make trouble and ask for a lot of human and civil rights," Singapore being a great example, to some degree Taiwan—until, perhaps, recent years—and to some degree in China, where, as people get wealthier, they're willing to say, "Fine. You can pay me money in exchange for more rights and more freedoms."

But there's a limit to that. Some people in China, for example, are starting to get closer to that limit. It will be very interesting to see how that develops.

IAN BREMMER: These are country-specific questions. Compare the United States to Europe. In the United States, you have a social contract with the government that basically says, "We want access to cash and consumption." Immigration in the United States, as a consequence, is a highly politicized topic, if we think we lose jobs and money. It's not really a cultural issue.

In Europe they're prepared to accept lower economic growth if you can give them more cultural, political, and social homogeneity. These are countries that are largely at the same level of economic development. Yet the way that they formulate their questions and their calls on their governments is dramatically different.

I completely agree with the point that Dan just made about the fact that there are social contracts that get to be cut. In Saudi Arabia, you are not paying taxes. You're pretty rich. You're a lot richer than you were ten, 20, 30, 40 years ago. The generations are doing very well. As a consequence, the government largely gets to do whatever the heck it wants, and the Saudis don't get a call on a lot of things that in countries that have $5,000 per-capita income, they actually do.

But the most important question out there is, what does this mean for China?

One, because China is the country, as Zach said, that's going to have massively outsized impact. We've seen nothing yet, in terms of commodities and in terms of political implications. What does it mean for China?

India will have that impact in ten, 20, 30 years, and will start to in the next ten. But India is also very decentralized, so it's not likely to have the same sort of implications as it does in China.

In China, as they get wealthier, there's no question that the government is becoming more responsive. Authoritarian governments have politics, too. Just because they don't get to vote doesn't mean that they won't be much more vocal about what it is they want.

What it is they want and the fact that their government is becoming more responsive doesn't mean the government will become more responsive to anybody else in the world. In fact, structurally, the government will have to become much less responsive, even though they want to maintain a good relationship.

That's why the Hu Jintao meeting is so interesting. He's coming over here and he wants a good trip with the United States. He just decided a few hours ago that they are going to spend $45 billion on their latest version of a spending spree. That will make some corporations happy. They want to say the right things on North Korea and Iran, whether or not we actually get any closer to cooperation.

Structurally, what the Chinese people want, need, and are demanding effectively from their government, is increasingly going to put their government in a path of confrontation with the developed world.

I agree completely with Zach that we have not yet begun to understand what that actually means for our own long-term national interest and how we should formulate policy. If the early indications are anything to go on, we will not handle this well. We will cut off our collective noses to spite the rest of it. That is something we need to think about in terms of our top risks going forward.

DANIEL ALTMAN: Can I give one sentence to add on to that?

In Saudi Arabia, the social contract works because there are still people there who remember what Saudi Arabia used to be like. Their children will not have that memory.

ZACHARY KARABELL: I don't mean to pooh-pooh the question, but I'm going to slightly pooh-pooh the question. The only good governance is somebody else's government. Nobody's government is satisfactory to the people who are under, with, or of it.

I would very much agree with Winston Churchill: Democracy is the worst possible system except for all the other possible alternatives. And I'm not sure that would hold true today.

There is a magical formula to how a society goes from being mostly dysfunctional to only a little bit dysfunctional. It really is a magical formula, because if it weren't magical, the IMF and the World Bank and the economists of the world would have found it and shared it and everybody would find a way to use it to become rich.

I would never, as a political scientist, try to figure the magical formula out, because it seems to me that that's always a moving target. Values, standards, and needs all change.

Right now, the Chinese government is a good government in that it's providing more affluence to more people in a way that, from anything you can glean, many people in that particular society find minimally acceptable. But I don't know if we would say that's good governance.

IAN BREMMER: You're being a little bit over-provocative—

ZACHARY KARABELL: Over-provocative at a lunchtime event with you?

IAN BREMMER: Never.

First of all, there are people of the moment. You look at Lee Kwan Yew in Singapore. This is someone who captured the collective imagination and made their people incredibly proud. The patriotism and support for government is there. They don't think anyone has better governance than they do. There is a lot of this around President Yudhoyono in Indonesia right now. There has been a lot of that around Lula when Brazil got the World Cup and the Olympics.

What's so interesting right now is that you are seeing this extraordinary shift from the comparative have-nots that felt like they had been beaten down for a long time—the West has gone and exploited them, taken every dollar they could—and suddenly they are coming into their own. Some of them have a lot more to grouse about than others. Clearly there are going to be big governance challenges for these guys over the long term.

But the pattern of anti-incumbency that we have seen in spades across the developed world is not one that we're seeing right now in much of the developing world. That's structural, and we don't know how to deal with it, especially because it raises questions about how effective and how moral authoritarian states are.

You don't get to vote in China. Yet many of them seem reasonably happy with the government they have had for the last 30, 40-plus years. We're going to have to address that.

One interesting point that I want to throw out. I was with Tony Blair a few months ago. He was talking about the fact that we needed to step up and really show our leadership in the G20 and all the rest. My response was, as I raised at the beginning of this question, "The Chinese are much happier with their government today than a lot of us sitting around the table are with our own. How do you address that? How do you respond to that?"

Tony Blair said, "When you look around the world, you see that people want democracy. It's a very tough question, but ultimately, the Chinese will come around; when they get richer, they're going to understand that we have the right system."

You know what? I don't think that's just Blair. Obama believes that. Republicans believe that. The vast majority of Washington truly believes that their values are fundamentally, not only better, but will prevail, even in countries where they don't accept that.

You know what? We may be right on the former. I'm not sure.

On the latter, I feel fairly convinced that we're wrong. The faster we get that joke, the better off we will be. But to get from here to there—you want to talk about change in the United States. I don't see that change.

QUESTION: As you rightly point out, the Industrial Revolution was a great game changer. Now, when we have the developed nations giving their technology to the Third World, particularly China and India, they have rivals now in the markets. Unless they retain their technology, skills, and the innovation, how can they compete?

The reason why we have in the United States a structural unemployment problem is because we exported our jobs, innovation, and R&D. How the hell can we compete unless we devise a way to restrict the export of our jobs, R&D, and innovation for at least three to five years, so we can manufacture them here and create the jobs that are gone? Otherwise, we're going to have a real economic problem in this country.

ART KLEINER: Anyone want to tackle intellectual property and offshoring?

ZACHARY KARABELL: This is certainly the nub of our own economic questions about what we do. I certainly respect that.

We're not accurately reading what has gone on in the past 40 years. In 1970, there were about 18 million manufacturing jobs. There are about 12 million now. There are 11.8 million, and it has actually gone up about 100,000 to 200,000 this year, because Detroit, largely, has rehired, on the other side of its bankruptcies.

Those 12 million manufacturing jobs in the United States today produce about $3.1 trillion of goods, in 2005 dollars, relative to $1.5 trillion of goods in 1970. Manufacturing as a share of output of the American economy has both grown and been actually about the same of the overall economy, even as it has required far fewer jobs, because what we tend to produce in this country is higher-wage, higher-value components, many of which we do, in fact, export.

The notion that we no longer make stuff and we have exported all these jobs is a commonly accepted explanation for issues we have, but it is simply not correct.

I'm not making these figures up. You can shake your head about the way in which you interpret that, but you cannot shake your head about the reality. We now produce far more in manufacturing than we ever have, much more efficiently than we ever did.

We are unwilling to produce those things that we do not produce at a pay scale that our current economy simply could not support. You cannot live in this country on the wages to support a $50 DVD player that multiple countries in the world can. China will not be able to live on those in ten years.

QUESTIONER: That was the point I was making.

ZACHARY KARABELL: But there's no reversal of that process, unless you want to shrink our economy, which would be a really interesting debate.

Do we need to keep growing?

I don't think that's part of our political discussion. It would be an interesting part of our political discussion. Do we need to keep growing? Are we, on aggregate, actually prosperous enough to not need to keep growing?

I don't expect that to be part of our debate.

QUESTION: Sondra Stein. Picking up on the question that I was going to ask about unemployment, and accepting what you're saying—that, in aggregate, we're manufacturing more—can we sustain the millions of people who are unemployed, given internationalization and an increase in technology?

Maybe we have to all work 20 hours a week, but I don't see that happening. What's going to happen to the people? What will be the effect?

Although they say, in my understanding, that unemployment is 9-point-something, in reality it's much higher. What are we going to do? Or are we going to do anything? What will be the effect?

DANIEL ALTMAN: Overall we have some opportunities.

To go back to the earlier question, when we are all making decent wages and producing high-value stuff, when China has gone as far as it can go and other countries have gone as far as they can go, we will be competing on institutions. We will be competing based on, where is the place that you want to do business? Where is the place that offers the best fertile ground for innovation? The United States is in a good position to compete on that basis.

But in reference to your question—how are we going to employ these people? We have a real opportunity as the global economy continues to integrate. It comes from two places. It comes, one, from our commercial culture, which was founded in this country over 200 years ago, in a nation of immigrants, where you had to find things that would appeal to people, no matter where they were from.

You had to find—I don't say this pejoratively—that lowest common denominator that you could sell to anyone. P.T. Barnum found it. The guys doing infomercials on TV have found it. It is something that we can use, because it's the same skill you need in the global economy to sell to anybody. We can sell our stuff better, we can sell other people's stuff better, and we can teach other people how to sell the way we do.

The second part, which is really an opportunity for so many Americans, is creating bridges to new markets. There are tremendous opportunities for middlemen and middlewomen in the future of this global economy. When we do an investment in a new market, when a firm decides to have an engagement, open a branch, a subsidiary, you need lawyers, accountants, translators, the people who open that market, the gatekeepers. People who can do that are often people who bridge cultures themselves, and this country is full of those people. There are jobs for those people in this global economy.

How do we get those jobs? We need to make long-term investments in education and research in order to make sure that we can continue to climb up the skills ladder. We need to continue to take advantage of this fertile ground we have for innovation by making investments that will lead to it being possible.

IAN BREMMER: I want to buy that. I do. It's an optimistic view of the United States.

For Dan to get to the optimistic view, he's talking about 20 or 30 years before the Chinese actually run out of the cheap labor and productivity values and all the rest.

Where is the United States going to be in 20 or 30 years, comparatively speaking? Where will the U.S. political environment be?

We don't know. Thus far, indications are that it will be more problematic.

What will the U.S. fiscal climate be like?

That's one of the big risks. We have to get that right. We aren't showing that indication.

What will the dollar be like? Barry Eichengreen was here a week ago talking about his real long-term concerns about the ability of the U.S. dollar to continue to provide its role as the reserve currency, which gives us a lot more flexibility to implement some of these things.

Another question. There's a general presumption that China is not going to be able to develop their own technology in 20 or 30 years' time, and that when American corporations finally decide that they don't have any more technology to give them because they're not getting market share in return—and by the way, it will take American corporations a long time to learn that because, as we see, when Boeing isn't willing to do it, GE steps right in. It's a collective action problem.

The only way you stop them from doing that, since they're competing against each other, is U.S. industrial policy, which is a dirty word in this country and creates less efficiency. Lord knows you don't want the bureaucrats doing that.

But even if the Americans stop sending them that sensitive technology, do we believe, given how much money the Chinese are putting into basic education and Americans aren't, and given how many patents they are actually now developing—and most of them are operational and process patents; they're not about the high-range entrepreneurship—are they really not going to get it?

Is Confucianism so baked in that we're comfortable that over the next 20, 30 years, the Chinese won't be able to develop this new technology?

I don't want to make that bet. It might be true, but I don't want to make that bet. And I fear we're making that bet.

That's how I respond to some of the underlying foreboding you have.

ZACHARY KARABELL: I'm going to give two pragmatic answers, very quickly.

One is on innovation and R&D. Smart companies are recognizing that if you're going to give away your technology to access the Chinese market, you had better spend more money on R&D to maintain an innovative edge. The more companies that do that, the better; the fewer companies that do that, the worse. Every time you say, "I'll give you 50 percent of my patents to access the Chinese market," you ought to up your R&D budget 50 percent, to realize that you have five years, tops, before that technology is worthless.

On the short-term unemployment problem, Dan may be right in the longer term. If you're going to deal with 10 million people who are structurally unemployed and 20 million who are actually structurally unemployed, one, we have to stop pretending that this is going to go away as the "economic cycle" improves.

Second, if it's not going to go away as the economic cycle improves, take a page from the New Deal and find jobs. If you're going to pay people to not work, you can also pay them to work, and have that money actually be productively used. All the education in the world is not going to educate the 45-year-old who lost his or her job.

QUESTION: Based on your top risks and ethical decisions for 2011, as a university administrator, my question is, what would you encourage undergraduate and graduate students that are in school now to be focusing on if they are interested in international relations and international business?

ZACHARY KARABELL: The Eurasia Group is hiring.

IAN BREMMER: There is that.

Political science is becoming a more interesting and relevant field. That's not a glib answer, but it usually is.

Clearly, commodities are going to be a hot area—food and foodstuffs and all the rest. Defense is coming back. You're going to see arms races in this environment.

One thing we didn't talk about is that the G-Zero is not a sustainable long-term outcome. What happens as a consequence of it?

You probably get more regionalism. More regionalism and bloc behavior creates more conflict. As a consequence, you'll see more conventional issues of rearmament among countries that historically haven't necessarily done as much. That will be interesting. And, of course, languages.

Those are some fairly obvious things. But since emerging markets will get so much of this economy, don't go to Britain to do your junior year abroad. Don't go to France. Go someplace more exotic. Get the language. Get the experience. Learn something about a different culture that's going to matter more in the long term. It can be Peru. It can be Brazil. It can be China.

We have so much more focus in our universities on these European junior-year-abroad programs, and even Japan. We should stop that and we should get our people some experience in the countries that are going to eat our lunch.

DANIEL ALTMAN: We need something even bigger though. And this might be good news for you if it happens. We need to do a much better job, not just in making long-term investments in education, but also of managing the transition from a less globalized to a more globalized world. Economics tells us axiomatically that the gains to the winners outweigh the losses to the losers. But we have to make sure that we share those through the transition.

One of the ways would be to fast-forward another ten years from where Zach was talking about to a new GI bill that really helps to put people to where they can get more learning and skills. We're terrible at retraining people who lose their jobs from globalization in this country. A new GI bill could help us to do that, and I hope that's one of the investments that we'll make.

ART KLEINER: Let me make two observations. The gentleman at the middle table raised the question: Any solution requires more investment, and yet every problem requires a lack of viable investment. One of the themes that is under the surface of much of what you have said is more intelligent investment.

The problem is, as you have noted, the idea of what an intelligent investment is—there isn't necessarily much consensus about that. Smarter conversations about what smarter investment means probably will be demanded, and at some point we'll need to move to action.

The other thing that I noticed in the questions that we did here is that whenever you talk about the top risks that are coming forward, the natural response is, risks to what? What are we trying to protect and do we need to start to worry about where the danger is?

All three of the questions we heard, and much of what these extremely interesting presentations and conversations have told us, is that the risk is to our peace of mind.

There's probably a sense among these emerging nations that the industrialized countries, in one way or another, are coasting. It doesn't feel like that here. But in an era where a bestselling book can be by an Asian parent condemning Western parents for their lackadaisical acceptance of play dates, all the way up to government officials talking about the way in which we become a borrower nation instead of a creditor nation, there is, perhaps, a crisis coming in our attitude of what represents a viable way to lead one's life and one's country's future.

It's pretty clear we don't have the answers there yet, but I very much look forward to continuing hearing about the questions. Thank you all for coming today.