The J Curve: A New Way To Understand Why Nations Rise and Fall

September 12, 2006

Introduction

JOEL ROSENTHAL: Welcome to you all.

This is really a pleasure for me not only professionally, but personally, to introduce a very good friend of mine and a friend of the Carnegie Council, Ian Bremmer. I was so excited about this event today that I almost took my tie off, in Ian’s honor. Maybe I will for the question-and-answer session, depending on how we do.

Ian is a very unusual personality, who has been a joy to get to know. I’m just really delighted that we are able to provide this forum for him and his work tonight. It’s very appropriate.

Before I get into the introduction, I have a bit of breaking news. I heard today that on the Barnes & Noble list for bestselling books, Ian’s book was actually first on the foreign policy list. Tom Friedman actually has positions 1 and 2, for The World Is Flat and Beirut to Jerusalem, but The J Curve is number 3 and closing fast. I want to be the first to congratulate you, Ian, on that. That is really quite an accomplishment.

This is actually the first public event where Ian is going to talk about his work. So we are privileged to provide the venue for this.

I think the Carnegie Council is an especially appropriate venue, not just because of our personal relationship, but also because of what we do, which is to focus on ethics. Ethics is always, for me, about the idea that we can do better; we can develop better choices, better options, and deliver them in terms of real policies that will make the world a better place.

Ian was just joking before we started that, "Yes, in my spare time, I’m trying to make the world a better place." I know that that’s just false modesty on his part. I think it’s part of what he does.

This book was really an eye-opener for me. I always judge books by one standard—and it’s a pretty high standard—which is that after I read this, do I see the world differently? Boy, did I see the world differently after reading this book. It’s a very profound theory, which is easy to put to the test. That’s what I am presuming Ian will do today and what we can do together in the question-and-answer. But I did see the world differently after reading this book.

The other thing I realized, too, is that Ian is a hedgehog. Those of you who know me know I follow Isaiah Berlin, who always makes the distinction between hedgehogs and foxes. The hedgehog has one great idea and is able to integrate and to synthesize what he sees in the world into this great idea. I have hedgehog envy. I have always wished that I could do that. I see a lot of stuff. I struggle very hard to integrate those things. As I try to pull it together, it always scatters, somehow. I have especially high regard for people who can do this kind of synthesizing and integrating around a very profound idea.

Finally, I know that Mr. Carnegie himself would be delighted to welcome Ian here. Mr. Carnegie had a particular view of the world, and one that was especially sensitive to individual people. He would recognize Ian as a self-made man, somebody who came to New York and built a business, somebody with great intellect, with great character, the capacity to work very, very hard. I know that that was something we bonded over, through our mutual friend and mentor, James Chace. I used to think that I worked hard, and then I met these guys.

But they work hard in a certain way. They don’t take themselves too seriously. They have a great sense of humor.

With all that, I introduce my friend and colleague, Ian Bremmer, who will talk to us about his new book, The J Curve. Thank you for coming, Ian.

Remarks

IAN BREMMER: Thank you, Joel.

You see why I wanted to start with Joel here, and the Carnegie. I really love this guy. I say that with no false modesty. It’s always great to be sharing a stage with Joel. We don’t do it enough, frankly. We have seen each other more in the last several months. In fact, if there was only one good thing that came out of James’s passing—and I can’t think of anything else—it is that it actually gave us more excuse to work together. I really appreciate that.

It’s nice to be here. It’s nice to be with friends. I have been working on this book for a couple of years now, and I haven’t really told many people about it. So now that it’s actually here and a reality, I am ready.

We start the roadshow tomorrow, but before that, Joel said we should do the first event here at Carnegie. I thought, what a great idea. So I’m delighted. I’m sorry that you are still wearing your tie, but I’m going to work on you. I almost never wear a tie, but a particularly more difficult audience is going to be next Wednesday night, when we do O’Reilly, and I am told that I have to wear a tie for him.

I also don’t know how I feel about being called a hedgehog, for a couple of reasons. First, I remember when I first came to New York and the first-ever press I ever got was in New York Magazine, where they referred to me as the molodoi amerikanets, "the young American with a hedgehog haircut and cartoony glasses." Then, of course, having just read Phil Tetlock’s book on making political prognostications, hedgehogs don’t always come off so well in that book.

So I don’t know if there is an inside story there.

Finally, I just want to recognize publicly, to everybody, my editor, Alice Mayhew, who is here from Simon & Schuster, who is well-known as the best in the business, but also managed to find this manuscript when it was very rough and in a very early stage and said, "You’re the next Tom Friedman." I said, "That’s good." So I am working with her and Simon & Schuster, and I’m delighted. They deserve some credit there.

Let me turn to the book. It’s called The J Curve: A New Way To Understand Why Nations Rise and Fall. Before I tell you what the J curve is, let me tell you why the J curve is.

I am a political scientist by training. That’s what I do. Wall Street doesn’t have a lot of political scientists. In fact, if you go to a bank nowadays, you see lots of economists, lots of strategists, but no political analysts. And politics increasingly matters to the global markets. I try to straddle both of those fields. I try to be a political scientist who also understands the markets. That is sort of an interesting place, right in between Washington and New York. It’s sort of Wilmington. That’s the way I think of myself.

I believe political risk matters—in fact, I believe it matters increasingly over time—for a number of reasons:

  • Because dangerous technologies are becoming more diffuse. Rogue states, rogue organizations, and rogue individuals, can cause more danger to the global markets, even us, in terms of oil prices and in terms of homeland security and all of these sorts of things—such as our pensions.
  • Because global energy increasingly comes from relatively opaque and unstable parts of the world.
  • Because China and the BRICs in general—Brazil, Russia, India, China, and the emerging markets—are the most exciting places for foreign direct investment because that is where the global economy is growing. But those are countries that are fundamentally different from the United States or Western Europe. They are emerging markets. I would define an emerging market as a country where politics matters at least as much as economics to the markets. If you find a country where that is true, it is an emerging market. When that is no longer true, it has emerged. It has become investment-grade. Mexico is going through that process.
  • Of course, the fact that we are moving from a U.S.-led unilateral, unipolar system to a more multipolar system, but the multilateral architecture that exists was built for a geopolitical time that no longer exists. Whether you are talking about the G7 or the G8 or you are talking about NATO or the Security Council, those geopolitical conditions no longer hold today.

So if political risk matters, how do you think about it? There are two components of political risk that matter. One is stability and the other is shock. If political risk is how politics affect the global economy, you need to understand if a country is relatively stable, and then whether or not a shock is going to hit it. A shock can be anything. It can be a tsunami off of Indonesia. A shock can be a political assassination. It can be an oil spike. It can be an earthquake. It’s very hard to predict a lot of shocks. So if you are a corporation or if you are the U.S. government, you have a hard time getting your hands around shocks.

But stability you can get your hands around. Stability is much simpler to think about. Stability, if I had to define it, is the capacity and the willingness of a government or set of leaders to implement stated policies in the incidence of shock. So here you are: You are dealing with a country—you can be a government, you can be a corporation, you can be an individual—and you have certain policies. You have a certain policy environment that affects you. Suddenly something changes. There has been a shock. Does that context still exist? The more that you can count that it will, the more stable the country is.

For example, I want you to imagine for just a second that there is a country where there is an election for a head of state. The results of that election are considered fraudulent by a majority of the constituents. I want you to just imagine this for a second. Then I want you to further imagine that the ultimate decision of who becomes the head of state in that country is determined by what is considered to be a polemic determination of the top judicial organ of that country.

I can see around the room that a lot of you recognize that this is actually something that has been happening in Mexico over the last several months. [Laughter] It is also something that happened in Ukraine, with the Orange Revolution. It is also something that happened in Taiwan, with President Chen. It’s also, of course, something that happened in the United States in 2000.

A lot of my friends from all of these countries’ emerging markets around the world will tell me, "You are such hypocrites. You talk about democratization and the way we should run our countries. Look at what you do in your own nation."

I say, "You miss the point. It’s the very fact that you can have something that is such a fundamental political FUBAH [fouled up beyond all hope] that has no impact on social instability, no impact on the credit markets, no impact on foreign direct investment." It implies that America is fundamentally stable. The shocks are the same. It happened in Taiwan. The markets went down 7.5 percent the next day. They had to close them. Everyone was concerned. It happened in Ukraine. The country fell apart.

It’s happening in Mexico, and there is social instability, but the peso stayed the same. I would argue that Mexico looks more like the United States in terms of stability than it does like Ukraine. Ultimately, we will find that the presidential election in Mexico, as "bosh" as it was, actually does more to help Mexico explain its stability to the world than if it hadn’t happened. That’s a controversial statement, but I believe it.

So that’s my set-up for all of this. I know I can’t do this in the media, but I am giving you why I think stability matters. If stability is what you want to get a handle on, how do you understand whether or not a country is going to be stable? This is what the J curve addresses. The J curve shows the nonlinear relationship between stability and openness. If you want to think about this visually, you have a vertical axis that describes how stable a country is; you have a horizontal axis that describes how open it is. The relationship is nonlinear. It looks like a J—indeed an italicized J, so you draw more attention to it.

The reason that that is important is that there are some countries that are stable because they are open: the United States, France, increasingly Mexico, Japan. There are some countries that are stable because they are closed: North Korea, Turkmenistan, Cuba, Burma. The left-hand side of the curve, stable and closed, is steeper than the right-hand side of the curve, stable and open, showing that it is easier to close your state off quickly through martial law than it is to open it quickly and become stable through building civil society and open institutions over time.

If you believe that, if you accept my basic premise that this is the J curve, that sounds fundamentally buyable. The Economist did this review last week, which I was delighted with. They said that books on graphs are very important. First you had The Tipping Point and then you had The Long Tail, and now you have one graph that describes, arguably, The Economist said—the most important geopolitical notion out there: What makes states move up and down? One graph with a J curve.

You all get that, right? I am hoping you’re going to tell everybody, and suddenly tomorrow The J Curve will beat Friedman. That is the intention. I know, it is laughable, but I’m working on this.

If you buy that, it has some fairly striking implications for what you think about policy. Let me throw a couple out.

First of all, leaders of closed authoritarian states have good reason to keep the rest of the world out. The United States does a much better job as the world’s policeman than it does as the world’s parochial school. The North Koreans have been misbehaving badly, and the United States responds to North Korea by saying, "If you continue this, we will punish you," like children, "We will isolate you." Condi Rice has said this, Cheney has said this, Bush has said this. The Clinton administration used to say this, "We will isolate you. We will send you to your corner."

What they don’t recognize is that if the intention is regime change, the North Korean government wishes to be isolated. In fact, they need isolation. Maintaining an isolated state, for North Korea, is absolutely critical to Kim Jong-il staying in power. They call it "the hermit kingdom." Their official ideology is Juche, the notion of self-reliance. These are not people that want the U.S. setting up an embassy. They are not people that want foreign direct investment. They are not people that want tourism. They want the world out. They would like money, and they are prepared to do lots of things to get it, whether it requires selling illicit materials or blackmailing international countries or just taking humanitarian aid. But fundamentally they want to be left alone.

That’s an important point. The recognition that, as long as they remain isolated, they will remain relatively stable, and that that stability is going to be difficult to challenge, is important for U.S. policy.

That’s the first point.

The second point is that there are a number of states out there for whom it is advantageous to try to close themselves off, and they have a relatively limited time to do it. The status quo is not sustainable for them. This is the notion that Fareed Zakaria, Jack Snyder, and others have talked about, liberal democracies. Democracy is not the same as openness. You will have a number of leaders in governments around the world. They get elected by more or less free elections. You see this in Gaza. You see this, to a certain extent, in Lebanon. You certainly saw it in Algeria. You saw it in Iran. In Iran, they bring a government in, lead by Ahmadinejad. He is voted in on a popular mandate. His intention is to try to close that country down. It is to get rid of the reformists. It is to get rid of the independent media. It is to get rid of a relatively open and diffuse and more local judiciary. He is prepared to actively provoke an international conflict to make that happen.

There is a big difference between Iran and North Korea. The North Koreans have largely wanted to be left alone, and as long as they are paid off, that’s fine. The Iranians actively see that because Iran is a relatively open state compared to North Korea, their present situation is probably not sustainable for them. If you were to ask me over the course of the last ten or twenty years to look around the Middle East and say which countries are relatively most open in terms of civil society, treatment of women, in terms of independent judiciary, openness of media and NGOs, number one is clearly Israel; number two is Lebanon; number three, until very recently, was probably Iran. This Iranian government recognizes that if there are democratic elections that continue over time, especially given demographic trends and their inability to manage the economy, they will get voted out. They don’t intend to be voted out.

I would argue that's part of the reason that they are making the claims that they are, that Israel should be removed from the map, that they should be moved to Europe (which, I suppose, in context, is a softening of their position), that the Holocaust didn’t exist, and the red lines they continue to cross in terms of the nuclear issue. Let's face it: The United States had very little credibility in terms of weapons of mass destruction on Iraq. They had very little political capital. Yet they managed to build a surprisingly durable coalition over the last six months against Ahmadinejad. It’s not because Bush has done such a great job on this. It’s because the Iranian regime has been provoking a conflict. We need to recognize that there is a domestic reason for them to do so. It is rational, for many of these leaders in Iran, to provoke a conflict.

We can talk in great detail about Iran, because I am very concerned about the likelihood of escalation, which I consider highly probable, in the near-term future. But let me leave it at that for now.

Third, China. I think China is one of the most interesting places out there. According to the J curve, it is important to recognize that the same things that make China wealthier, the same practices of globalization that make China grow and be more attractive for multinationals to go in and invest and invest and invest, also create greater political instability within the Chinese system. The Chinese government thus far has shown very little tolerance for that. We are seeing harder-line reactions to social discontent within the country. We are seeing killings of demonstrators for the first time since Tiananmen Square, in the last twelve months. We are seeing crackdowns on scientists that are working on avian flu that are at least at the levels as, and possibly more than, when they were working on SARS.

The Chinese government, I think, is making a bet. One thing I didn’t tell you about the J curve is that the entire curve shifts up or down on the basis of the economic capital that is available to you. For example, if North Korea were suddenly to strike oil, the country, on every single point along the curve, would go up. If oil goes down to $15.00 from $70.00 or $65.00, the entire curve for Saudi Arabia goes down. That makes an awful lot of sense.

So the Chinese are basically making a bargain. I have discussed this with the Chinese ambassador in Washington. It was an interesting conversation. Hu Jintao, of course, is an engineer by training, and he is trying to engineer a fix in the Chinese system. He is hoping that he can push the J curve up sufficiently far through economic growth that the instability that comes from political openness won’t break apart the Chinese communist system.

He might be right. He might be wrong. On balance, I think he’s probably wrong, and the political instability will grow, for reasons we can talk about. But here is one point: The Chinese system cannot afford—cannot afford—a sudden significant economic slowdown. In other words, God forbid that it is suddenly found that avian flu starts to have significant human-to-human transmission. It doesn’t need to be particularly virulent. It doesn’t need to kill a lot of people. Suddenly the World Health Organization ups their threat level from 3 to 4. It doesn’t mean a lot, except for the fact that you start getting travel restrictions. God forbid, because of the level of opacity in China, that there are travel restrictions. Suddenly growth isn’t 11 percent, but it’s 4 percent.

What happens if North Korea tests a nuclear weapon? The Japanese, with Abe as prime minister, decide that they are going to change the constitution and develop an army. Anti-Japanese social discontent in China grows out of control Japanese foreign direct investment pulls out. Suddenly there is real concern about investment in China, and suddenly Chinese growth isn’t 11 percent; it’s 4 percent.

What happens if there are strikes on Iran and oil prices aren’t $65.00, but they are $130.00, and China desperately needs that oil to continue to power its growth? Suddenly Chinese growth isn’t 11 percent; it’s 4 percent. Instability in the Chinese system, political instability, will grow dramatically. That is a very interesting point, in my view.

So that’s three.

Number four, Israel. I hit some controversial states. As I said, I consider it to be the most open country in the Middle East, defined in terms of legally enshrined protections for Israeli Arabs—you won’t find those sorts of protections for minority populations throughout the Middle East—the press, foreign investors, the independence of the judiciary—all very important. They all guarantee these rights. But there are a lot of factors that are undermining Israeli stability. We see them in terms of the fact that Hezbollah militants now have weapons that can increasingly get deep into Israeli territory.

What happens if Hezbollah gets to the point that they can hit Tel Aviv? What happens if Israeli bankers start spending three or six hours out of every day in safe houses as opposed to doing their business? What happens when the Arab population trends in Israel—having not completed a unilateral disengagement because they can’t afford it—what happens at that point, when we start to see that the relatively open and fragmented Knesset has an Arab political party that can vote to swing the government one way or the other? What will the Israelis do?

The Israelis are on the right side of the curve. They are reasonably stable. But unless they make some serious choices relatively soon about unilateral disengagement and get it done, they are going to need to become either considerably less stable or more authoritarian. It is going to be tough for the Israelis, especially with the economic pressures that they are presently facing. I think that’s a real concern.

The last point, before I open it up for questions and Joel takes his tie off, concerns the United States and the members of the European Union. We all benefit from the stability of strong and resilient political institutions. There are some things that the United States and the Europeans do extremely well. As I said at the beginning, we can screw up a lot and we maintain stability, because the curve is not steep on the right. It is entrenched, it is established with institutions, and people won’t react as quickly as they would in an emerging or pre-emerging market.

By the way, that very entrenchment also makes it very difficult to suddenly make a change in a system that you really need. If you are China and you want to build infrastructure and you want to get rid of a village so that you can build a highway or, more importantly, if you want to change your coal-dependent economy and start building nuclear plants with abandon, so that you can get through what might eventually be $120.00 oil prices, you can do it. In the United States, you can’t build a wind farm off of Massachusetts because wealthy people in Martha’s Vineyard don’t want to see it from their houses.

So that level of stability can create a certain stickiness in terms of dealing with some of these big infrastructure issues that can hurt you.

But the thing that does concern me over time is that the trends in the United States that we are beginning to see—and this is probably where O’Reilly beats me up next week, so I won’t talk about it—the trends that we are starting to see about closing borders, the potential replacement of neoconservatism with neo-isolationism (on the right with Buchanan, on the left with Dobbs)—that you start thinking about protectionism, that you start closing off borders in the United States, making it more difficult for foreign direct investment, with the CFIUS [Committee on Foreign Investment in the United States] legislation, for example, making it harder for the best and the brightest immigrants to come into the United States—has the potential over time to undermine stability.

You certainly see this in Europe, with the likelihood, given anti-Islamic sentiment, which is growing far faster in Europe, on the continent, than it is in the United States, that Turkey is not going to become a member of the EU anytime soon. They might pull themselves out of that process. If that happens—the EU needs the labor, but this bargain between homeland security and economy could start to ebb away, over time, at the stability that has been grown.

So there is a reason why the United States and Europe are very firm in their stability, but it’s also important to recognize that we are, perhaps—with sort of notions of a gated community—making a series of decisions that over the long term could move us in a direction we don’t want to see. That is probably the most commonsensical of all the points that I bring up, and it’s probably the most political and controversial. But it’s nice to end with the United States.

Again, I want to thank all of you for welcoming me here. In the next four to six weeks, we are going to see if we can get this thing to really pick up in the United States and globally.

With that, let me open it to all of you.

JOEL ROSENTHAL: Thank you, Ian. I don’t think I have ever heard a presentation that was more suggestive in terms of questions. I am just going to go right to the floor.

Questions and Answers

QUESTION: Ian, you have spent a lot of time over the past few years at the Eurasia Group, promoting dialogue and activities with the United States and Russia, and the West and so on. Recently, you indicated in an interview with the New York Sun that you weren’t quite as optimistic there. How would you place Russia on the J curve today?

IAN BREMMER: That’s a very good question. I didn’t talk about Russia, it’s true. As someone who cut his teeth on the former Soviet Union, back when I was an academic, it’s something that is close to my heart. I lived there for a while.

It was very clear in the early 1990s that the United States and IMF-branded notion of shock therapy and democracy and openness did not go well in Russia. It went well, though with pain, in Eastern Europe, in many countries—Poland and Hungary and the Czech Republic. It did not go well in Russia. In terms of the inability to deal with mass poverty, in terms of mass privatizations that made a very small number of those extremely well-connected to the Kremlin billionaires overnight, in terms of corrupt privatizations, and all that, the average Russian saw, "If this is democracy, if this is openness, if this is the West, I don’t want it."

Putin today is sitting on 78 percent approval ratings. He is also sitting on $66.00 oil. Since Putin has become president, he has taken a number of steps that have made Russia more stable, but, definitively, more closed. Governors, for example, are no longer elected directly. They are appointed by the Kremlin. That is increasingly true in terms of the centralized judiciary. The "supergovernors" which oversee this have created a Kremlin-dominated bureaucracy, which is able to push rules down, as opposed to a more federal system.

In terms of foreign direct investment, whether you talk about YUKOS and Mr. Khodorkovsky or whether you talk about my friend Bill Browder and Hermitage, the Russians have absolutely no problem. The biggest hedge fund has existed in Russia, though they have lost a lot of money recently and I’m not sure that’s still true. The Russian government is prepared to do basically what they want in terms of international norms and local openness.

What is interesting is that Putin has maintained the popularity for it—again, democracy not equating to openness.

It’s a problem for the United States. U.S. policy has certainly become more close to a number of countries over the course of the last couple of years. Japan-U.S. relations are probably better now than they have been at any point since the end of World War II. U.S.-India relations are also doing very well.

U.S.-Russian relations are probably at their worst point right now than at any point since Kosovo. This is after Bush and Putin looked each other in the eyes in Slovenia, and there was this deep and meaningful relationship. Putin doesn’t think he needs the United States. He doesn’t see the benefits. The fact that he gets a seat at the G8 doesn’t mean as much as it did to him anymore.

Again, we should not take away the fact that oil at $66.00 makes a difference. It’s a very interesting thought experiment: What happens if oil hits $20.00, if oil hits $30.00? Is that better or worse for the world? It’s better for the Asian economies. It’s better for the United States. in certain places. It’s worse for the oil companies. It certainly is problematic for Putin. But I think he has a lot of political capital built up.

A lot of people are very concerned about the upcoming 2008 elections in Russia, as creating instability. I don’t. I think Putin, if you look at the history—everyone wants to know who he is going to select. He has already made it very clear that he is going to select the next president, even though there will be elections. I think it’s not going to be Mr. Medvedev, the deputy prime minister. It’s not going to be Mr. Sergei Ivanov. It won’t be someone really well-known. It will be someone that he feels he can control. That person we probably don’t know. If you look at Fradkov as prime minister—a relative unknown before. If you look at Mr. Miller, in charge of gas—a relative unknown before.

Putin has a history of choosing loyal incompetents before he chooses disloyal competents. I think that’s very likely.

I think that what we need to worry about is not 2008. I think the electoral period will be fine. I think it’s 2009, 2010. Russia has a term for it, dva polnomochiya, “two powers.” Russia has never done well when it has been led by more than one head. It was true in the Time of Troubles. It was true in the mid-1990s, when Yeltsin was nowhere to be seen. It will be true again.

We need to recognize that Russia has a president; it doesn’t have a presidency. Russia has plenty of laws; it doesn’t have rule of law. The fact that we have a very strong Kremlin, but suddenly Putin is going to be out—he is going to put someone weak in—eventually, Russia is big enough that that’s going to cause some friction. There are fights that happen within the Kremlin. You have fights between Transneft, the pipeline network, for example, and Gazprom or the Ministry of Railways, which is moving 1.5 million barrels a day of oil by rail. It’s incredibly expensive. It has never been done anywhere in the world before. It’s really good for them. They make a lot of money. But Transneft doesn’t want that.

So what happens when they continue to get these benefits from Putin and suddenly the head of the Russian pipelines goes to the new president and says, "Can you help me out here? I could really pay you off?" That’s going to happen at some point.

So when it is rule of individual and not rule of institution, you can put someone weak in, but at some point this is going to bite you you-know-where. I think that’s going to happen, but it is not 2008.

QUESTION: First of all, congratulations on an incredible first speech. May all our careers get off to such an auspicious start.

You talk about the J curve. It’s interesting. You certainly highlighted some fairly incendiary parts of the world. What I was captivated by was this notion that it can move up or down, depending on the economic infusion into any of these economies.

When do you know that you are at the dip? We were talking about that a little bit earlier. There is the concept of a J curve in the capital markets as well. If you are monitoring an asset, you really want to capture the trough before it rebounds. But you don’t know that you are going to get it there or you don’t know what direction it is going to take, when. So that’s one question. Looking at it from an outsider’s perspective, is there any way we can analyze a given country’s predicament and assess that that is somewhere near an inflexion point?

The other question is, how do these curves intersect with each other? If you look at a static country-by-country analysis of what each country’s J curve might look like, you have even mentioned some countries that interplay with each other. You have Israel; you have Iran; you have Russia. There is oil; there are geopolitical issues; there is religion, obviously.

If you could touch upon each of those points, I would appreciate it.

IAN BREMMER: Those are two very good questions. Let me deal with the first one first: How do you know that you are in the dip?

It’s a lot easier to recognize that a county is in the dip when it’s doing relatively poorly economically than when it’s not. You can mask it. That’s the point. My argument would be that China is actually closer to the dip than they think.

The point is that if you really get close to the dip, there tends to be a lot of volatility when you are not doing, economically, very well. This is clearly true in Afghanistan today. I would identify Afghanistan as being real close to the dip, close to falling apart. Why? Because they are completely dependent on a relatively small amount of international aid, soldiers and just general intellectual and material support.

In the case of Saudi Arabia, at $65.00 oil, I will guarantee you that there is not going to be a serious threat to that country for the next few years. It’s just not going to happen. Suddenly you bring oil down to $20.00, and it changes. It changes fairly significantly. There are other things that are going to make Saudi Arabia more unstable—the fact that they can’t get their population growth under control. No matter what happens with the economy, if you continue to have 5.3 children per woman—not per family, per woman, which in Utah and Saudi Arabia are two different things—that, over time, is going to create more instability.

I think that’s the issue. In the places where you really want to invest because they are doing relatively well economically, the dip can sometimes be extremely difficult to identify. The way you really try to get at it is, if suddenly there is a little hiccough, how much volatility do you see? If there is a little bit of a shock, if things get a little bit worse, given expectations on the ground, do things start to really fall apart? In India they don’t. India is not near the dip. Why not? India just had a lot of terrorist activity in Mumbai. Not only did the markets go up 3.5 percent the next day, because people weren’t concerned, but the Indians didn’t do anything with Pakistan. They delayed their relationship at the highest level. They said, "We’re not going to talk to them right now." But the mid-level relations that have been going on cross-border, the sharing of security information and so forth, to make sure that you don’t suddenly inadvertently pick off a general with a mortar round to start some real problems—that didn’t stop.

That implies to me, given the hiccough of the terrorist bombings, that India is not near the dip.

But if there isn’t a shock, you can go along for quite some time. Ukraine went along for quite some time near the dip without a shock. Then a shock hit—boom, a lot of people got hurt.

So that’s kind of my answer to that question.

In terms of interplay, I could answer that any way I want, how things come together. Let me tell you one thing that interests me. You asked about interplay and you talked about the Middle East. I do see the Middle East as a place where there is a lot of interplay. I think we need to recognize that the Iranian situation has the possibility of metastasizing. People say that Iran has a difficult time playing the oil card. Condoleezza Rice said they can’t play the oil card; it will hurt them as much as it hurts us. No.

First of all, the Iranians have been playing the oil card. There is a reason oil was up to $75.00. It was because they were playing the oil card. They were talking it up. They were testing advanced torpedoes in the Strait of Hormuz. That’s not playing the oil card? What do you think they’re doing?

But aside from that, you have a state of emergency in Basra, in a Shia area. The Iranians helped to provide security on the ground, through training and arms, to ensure that oil infrastructure that is in very densely populated parts of the Shia territory in Iran—not like in Saudi Arabia, where it’s isolated and it’s easy to defend. What if they stopped doing that? Suddenly 1.1 million barrels a day coming out of the south of Iraq might be more problematic. They can play that oil card.

What about Shia-Sunni demonstrations and tensions? What about the fact that after the Iranian-led Hezbollah flame, with them providing weapons for militants in Hezbollah—I’m not suggesting that they actually made an order and said, "Please, take these two soldiers," but they certainly provided the weaponry to make the possibility of some shock that would then escalate the tensions, so they could then be seen as the good guys and try to put it all together. They certainly were involved in that.

After that happened, we started to see serious Sunni-Shia tensions in places like Bahrain, where suddenly—there’s a Shia majority in Bahrain, but it’s run by a Sunni monarchy—you had the Shia opposition party splinter and a group that said that they were going to participate in upcoming parliamentary elections in December saying, "We’re not going to. We want more rights. We want autonomy. Change the constitution or there’s violence."

So I am very concerned that Iran escalates, and it’s not just Iran. I think those interplays—I will tell you one more, since I get to talk about anything, one more Middle East one.

There are a number of actors right now in the Middle East that, I would say, all want to get away from the status quo. They are not well-coordinated politically, but they play off of each other. Number one is the existing Iranian regime. Number two is the militant wing of Hezbollah, not the political leadership that has been elected in the Lebanese parliament. Number three is the intelligence and military wing around Bashar Asad’s government, not Bashar himself, in Syria. Number four is Muqtada al-Sadr and the Mahdi Army in and around Baghdad in Iraq.

I would say all four of these players see the opportunity, by provoking conflict in the region, to change what they consider to be a status quo that won’t serve them well over the long period, to make it more beneficial for them. They are absolutely playing off of each other.

The concerns are that that hurts the United States and Britain, which already have degraded political capital because of what has been happening in Iraq. It makes Israel less sustainable over the long term, economically. Look at the fact that the Israelis had to call up 50,000 additional reservists—50,000 able-bodied young Israeli men and women to serve in the military. Their economy cannot afford that, but they had to do it.

So there is an interplay—of course there is—between all of these countries. As the world is more globalized, there’s an interplay, too—I am going to give you one more, which is outside the Middle East, just because it’s fun.

One of the things I find interesting by being in my position, where I am a political scientist that also deals with the markets, is that I get to go to Washington and I get to go to New York. You talk to people that only look at one and not the other. So you get to be much brighter than you normally deserve to be, because you have stuff that people don’t talk about.

I remember giving a briefing at the White House. I was talking about North Korea. There were a lot of people there that had forgotten more about North Korea than I could ever learn—you know that old saw. I was talking about what might happen in the context of nuclear testing. One of the fellows—I don’t want to say who it was, because he’s still around—said, "A nuclear test, at the end of the day, in North Korea"— this was a couple of years ago—"wouldn’t be a bad thing, in the sense that the Chinese and the South Koreans and everyone else would suddenly realize that the North Koreans were playing for keeps, that they were completely intransigent, so they have to support the United States."

Everyone was talking about this for a while. I said, "What about the South Korean economy?"It was as if I had said something that no one had ever thought of. They said, "What?" I said, "What about the South Korean economy? What happens when the North Koreans test a nuclear weapon and the South Korea equity markets and currency crash the next day?" That’s the one thing that every hedge fund client that we talk to—and there are many—are concerned about in terms of their investments on the ground. What do you do about that?

You know what they said then? They said, "Will you write us a paper on that?" The people working on North Korea in Washington are dealing with proliferation. They are dealing with security issues. They are not dealing with the markets.

So there is another interplay that is very important, which is the interplay between politics and economics globally—more importantly, the interplay between politics and markets globally, which is fundamentally different than just politics and economics. I think that is something the J curve has a lot to talk about.

QUESTION: First of all, congratulations on the success of the book.

There was an editorial in The New York Times called "Closing of the American Book." It stated that, for the first time in history in America, 50 percent of people across the board—rich, poor—were not reading. One of the conclusions was that this was serious on a political level because people were pulling back, isolating within themselves. They weren’t proactive. The author of the editorial—this was what it was about.

The other thing is, I read just the other day that $3 billion or something like that is spent a month in our war. In terms of nations rising and falling, does this indicate a serious fall, potentially, in the United States, or even currently? How would these issues, if at all, fit into the J curve?

IAN BREMMER: I appreciate the point that the United States—still, the average American does not spend as much time thinking about global issues as they probably should, given the growing importance of them, given the growing danger of the international environment, given the responsibility that the United States has and, increasingly, that the rest of the world has, the rest of the developed world has especially, in trying to manage those challenges.

But I would also say, it’s September 12 today. Yesterday was not easy for anyone here in this room. It wasn’t easy for me. I think about the effect that 9/11 has had on all of us. I am not talking about the towers coming down. I am thinking about the way it has affected our world, the way it has affected the Middle East, the way it has affected Afghanistan, the way it has affected the way we all think about how we live together. There is not much that you can say out of any of that that is positive in any way, but there is one thing you can say that is positive, which is that it makes Americans think much more about what’s happening outside.

I tell you, Tom Friedman, love him or hate him, was not read five years ago or ten years ago the way he is today. I think that The Economist didn’t have the subscription rates, and Foreign Affairs didn’t have people going to it.

It’s funny. The Economist said—I can’t remember the exact term—that this left you a bit depressed in terms of all the challenges. But I am a pretty optimistic guy. I talk about political risk all the time. Economics is the dismal science. Political science shouldn’t just be about sticking your head in the sand. It should also be about what the opportunities are.

I have talked about a lot of risks. I think we need to recognize that there are countries that have been emerging successfully. I was just in Brazil last week. I was there right before elections, coming up in three weeks’ time. The last time Lula was running, the markets said, 'This guy is going to nationalize property. He’s going to default on debt, and we have to head for the hills." Today, politically, Brazil looks like Switzerland. I think they are going to have microeconomic reform. They are engaging in political reform. They are moving towards political centrism, all the different parties. Lula is doing well, but he is also bringing in reformist-oriented individuals. They are making a difference.

I could point to lots of things like that.

Unfortunately, war sells, so people are going to ask me about Iran and North Korea and all of that. But there are good stories out there.

The second question was about Iraq. Let me just say, briefly, no. It has potential impact long-term. But at the end of the day, does Iraq itself make the United States today markedly less stable? Not by itself. It takes a lot of these hits. Unfortunately, there have been a lot of these hits. It’s not just Iraq. It’s Iraq, it’s Iran, it’s overstretch of the military, it’s the dangers of protectionism, it’s some economic decision-making that has not been ideal, in terms of relations with China and others. You add all these things up, together with mounting deficits and everything else—I am not the economist here. It takes a lot of those hits; ultimately you are going to start hurting your position.

But the good news is that we can make more mistakes than the others can. We really can. That’s fortunate, because we do.

QUESTION: You will have to pardon my intransigence, but I would like to briefly preface my question by revisiting the Economist review, which seemed to me not to suggest the grand monumentality of graph books, but rather their common failure to match empirical observation with equally shrewd prescriptive analysis. This, I guess, would be my challenge, and the Economist’s as well, to the J curve, which is not that your regression is incorrect, but rather that your suggestions for how one shifts from the left side to the right side—those being by having the West attempt to create openness in these societies by doing a Radio Free Europe, if you will, of media projection, of bringing societies into the global economy. Where has this been successful, save for, perhaps, Estonia? How, given the "nuclearity" of Iran, or North Korea, can we afford to have those societies dip into the basin of the J curve as we attempt to bring them out into the right side?

IAN BREMMER: I think that’s a very good question. I certainly viewed the Economist’s as a very positive review. God help me if I can have the failure of The Tipping Point. I’d love to get panned like that. That will work for me.

But to answer the serious question that you asked—though I like intransigence; as a political scientist, I do this—I would say that you have two points. One is, you have policy recommendations, and two is, you have how things work. I am not suggesting to you that the thing that you want to do is destabilize North Korea today. That is a question of policy. We can debate that. I could have a good discussion with you.

I am suggesting that it is common fact that the U.S. policy is to get rid of the North Korean regime as it stands today. If that is your policy, then going about it by trying to isolate it is counterproductive. There is nothing to debate on that. That is a fact. The question is then, do you want to do that or not?

My issue with the Bush administration is not really about their goals. At the end of the day, the Bush administration’s goals are laudable. At the end of the day, the Clinton administration’s goal were laudable. They all want to live with liberty and freedom and happiness and economic growth and prosperity, first for the United States, but then for everybody else. I believe they really want that. I’m not just making this up. I believe that, fundamentally, their goals are good.

But I also believe that you can get fired for bad execution, especially Bush, who said, when he first came in—who remembers this? Devin [Director, Global Policy Innovations, Carnegie Council] reminded me just a couple of moments ago that he wanted to be a CEO president. You get fired as CEO for executing that badly. Everybody wants to get their stocks to the moon. But I tell you, you look at the execution on Iraq—you can argue whether it was moral or immoral to get rid of Hussein, but no one can argue that the execution has been horrific.

This is my point on Iran today and on North Korea today and on Iraq today. By the way, North Korea goes well before the Bush administration. It goes to Clinton as well. The execution has been systematically bad. Part of the reason for that is because they have misunderstood how the J curve works.

So that is the way I would answer that. We can talk about policies and what my policy recommendations might be for different places. But I actually don’t think that is the fundamental point of the book.

QUESTION: Just one point of disagreement. Rumsfeld would argue that they’re doing a great job. Not everybody thinks it’s bad. Very few bodies do. I want to ask you about Venezuela and Chávez’s way of looking at the world and whom he is buddying up with—Bolivia and Cuba and so forth. What does that say about your thinking on the subject?

IAN BREMMER: Even Rumsfeld was looking real defensive in his public speeches a couple of weeks ago.

A little anecdote on Rumsfeld. I used to get in trouble for this in Europe whenever I did it. I used to always say in the early days, when Iraq was just starting in terms of the war, that I thought that Rumsfeld was one of the most effective secretaries of defense the United States had ever had, in terms of looking well ahead of the curve and understanding that the military needs to be transformed, which the generals were strongly opposed to, understanding that the threats were going to come from rogue organizations and not the traditional army-versus-army. He got that, and he was disliked for it.

Unfortunately, he was also possibly the worst secretary of state the United States has ever had. He tried to do both jobs. That was to our peril. That was to our peril.

So that’s my quick view on Rumsfeld.

In terms of Venezuela, I think we need to recognize that the reason the Venezuelans have been as intransigent as they have, in part, is because they also have money, and they feel that they can get away with it. They are playing with the Russians. They are building Kalashnikovs, getting a license for it. They are exporting to Colombia. They are destabilizing there. They are buddying up with Bolivia and Evo Morales, and the coca plants and growing—and who is nationalizing gas. The Venezuelans are prodding them.

At the end of the day, U.S.-Venezuela relations aren’t really that bad. They are bad at the rhetorical level, but not much has happened. I would argue that that is for two very simple reasons—mutual dependency. The Venezuelans have a lot of oil that they actually need to export. Nobody has the refining capacity to deal with that heavy, dirty Venezuelan crude. The Chinese can’t do it. They have to sell to the United States.

It also just takes a long time to get those tankers over to other places, and it’s problematic for them.

So from an economic perspective, if you are Chávez, you can go against local landowners that are part of the old nobility and so forth, but you don’t really want to come after nationalizing big U.S. assets, because you don’t want to irritate them too much.

The United States needs that oil. The United States relies on that. So they don’t want to make this relationship really crash.

So at the end of the day, it’s one of these places where everyone complains, "Chávez is a pain," but I’m not that worried about it.

There are so many headlines. Political risk is very sexy now. Everyone wants to talk about political risk. You get to talk with everybody. But a lot of the stuff is noise; it’s red herrings. Ted Galen Carpenter writing about the coming war with China over Taiwan—no way. One million Taiwanese businessmen are living in the mainland. They voted with their feet. They are making good money. That’s the reason why Chen is going down. That’s the reason why, ultimately, China wins, because they have integrated Taiwan. That’s why they can be so patient, because they know they are winning.

That doesn’t mean there aren’t going to be market blips around the Beijing Olympics 2008, for lots of reasons. It doesn’t mean Taiwan won’t say vitriolic things that will cause trouble. But at the end of the day, Taiwan is fine. I would worry if I had a deal with a Taiwanese company to do business in China, using the good offices of my Taiwanese to help me, because they are so "preferenced' in China, because suddenly, when they are not needed as much, you could get really hurt there. That would bother me. That’s a political risk. But it’s not the coming war with China, at least not over that. Over Japan and North Korea, that’s a different story. But that’s not what he talks about.

QUESTION: You haven’t mentioned the expanded European Union. A very great difference between the stable core of countries, which may or may not be as stable as they have been, and the newcomers from the former Soviet Union, East and Central Europe. What do you think?

IAN BREMMER: I think that the incredible economic and institutional pull of the EU accession process actually has done a great deal of service to create real stability in these East European countries. That is most obvious in the first round of accession with Poland and so forth, which feels pretty much like a European country, at least to the extent that Portugal feels like a European country. But it is even getting there with places like Croatia and Bulgaria and the rest.

I don’t think Ukraine makes it, frankly. People used to talk about Russia eventually in the EU. They don’t talk about that anymore. They barely talk about the joint Russia-NATO Council, which still exists but is a dead letter.

You did mention former Soviet states. Of course, the Baltics are a different story. They are very small. They were only in the Soviet Union from the Molotov-Ribbentrop Pact until the demise, so they didn’t have the same level of Russian imperialism and colonialism that a number of other economies did. They were also very small, and they had the historical and economic ties with the Scandinavians, which made a difference—linguistic and so forth.

But in terms of the rest of the former Soviet states, they have largely not cut it. That’s unfortunate.

But I think the EU shows great success in terms of the model of institution-building over time, with hardship, on the ground in a lot of these countries.

JOEL ROSENTHAL: Thank you. It has been a wonderful hour.

blog comments powered by Disqus

Read MoreRead Less