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How could talks with North Korea resolve the problem once for all?

During his first official visit to Tokyo as Secretary of State, John Kerry hinted at the possibility of talks with North Korea provided certain strigent conditions are met.

It is timely to list a number of imperatives which are instructive in understanding the North Korea conundrum -

(a) If the North Korea regime collapses, there will be millions of hungry refugees invading China's borders, a humanitarian disaster of perhaps biblical proportions. That's why China keeps on feeding the North Koreans even if China's hand is bitten a number of times;

(b) Both Russia and China don't want a nuclear North Korea as this would trigger the positioning of nuclear weapons by Western allies near Russia and China's borders. What is more, this would spread nuclear armament in the region and beyond, neutralizing their own nuclear strategic advantage. For China, the added fear is a nuclear Japan.

(c) However, North Korea is trying to emulate Chairman Mao who ordered and possessed the Bomb in1964, regardless of everything else. Chairman Mao famously said that China would rather do without trousers (as the country was so poor) than giving up possessing the Bomb. At that time, China was subject to continuous risks of nuclear blackmail from the West and possessing the Bomb was seen as a sure-fired deterrent for preserving national sovereignty and dignity.

(d) For China, North Korea may act as a buffer and a useful bargaining chip against the West . But North Korea regime collapse is not necessarily all bad for China as China, rather than America, will be much more influential in deciding whether a collapsed North Korea is going to be united with South Korea and if so, on what terms (perhaps on condition that America should henceforth withdraw all its forces from a united Korea, which would be a justifiable demand with unification under South Korea). (The China Choice, Hugh White, Black Inc, Australia, 2012, pp. 89-93)

All these explain China's ambivalence in dealing with North Korea.

This also point to the possibility of a long-term negotiated settlement through initial talks behind the scene - North Korea giving up nuclear weapons once for all in a credible, verifiable way in return for an iron-clad guarantee for North Korea's sovereignty and security. This could take the form of a multilateral security treaty including U.S., China, Russia, Japan and South Korea plus abolition of sanctions, joint economic aid and the hope of entry into the World Trade Organization. I mentioned the idea of an iron-clad security guarantee for North Korea in a recent BBC radio program of 29 March, 2013. 

There is no guarantee that the North Koreans would buy that settlement, as the regime is now celebrating 100th birthday of the country's founding father, Kim Il Sung, hailing the country's right to possess nuclear weapons.

Nevertheless, nuclear weapons is a means to an end. In "The History of the Peloponnesian War", Thucydides wrote in 431 B.C.E that wars generally originated from fear, honour and profit, the three basic needs of people and nations - security, identity and prosperity.

With North Korea's ever-increasing escalation of dangerous theatrics to secure its ultimate goal of regime stability, national security and development, perhaps the idea of an iron-clad multilateral security treaty guarnatee coupled with powerful tools for economic development may at least be worth a try. 

The Future Report 2012

The Report, produced by Global Futures and Foresight, a strategic futures thinl-tank, looks into global stratefic drivers in the coming decades up to 2050.

Download The Future Report 2012, Global Futures and Foresight

The EAGLEs and NEST will dominate world growth 2012-22

"The EAGLEs and NEST (countries) together are expected to contribute 68% to world growth between 2012-2022, led by China and India, both with a higher share than the U.S. The G7 economies will add a mere 16%", according to the following research by BBVA -

EAGLEs Outlook 2013 Report

The Role of Emerging People

For background on The Soaring EAGLEs, please click here.

China and the World by 2030

Heralding his forthcoming book ("China 2030, Springler, June 2012") in a presentation on 9 May 2012 to the Oxford China and World Economy Forum, Hu Angang of the Institute for Contemporary Chinese Studies, Tsinghua University, oulines how China's economy would regain its one-third share of the global economy by 2030, similar to the position it held in 1820.

With a GDP per capita over half but a total size more than double of the United States (in PPP terms), coupled with advances in science and technology, human capital, innovation and a greener and more equitable economy, China would be experiencing a kind of Renaissance reminiscent of the country's glorious past.

Download Hu Angang - China and the World by 2030 

Sobriety needed in shale energy exuberance

There is global shale gas euphoria, particularly in the United States, which has the world's second largest shale gas reserve with ready fracking technology to extract this abundant energy resource. It seems a god-sent answer to America's prayer for total energy independence, cheap and "greener" fuel, creation of millions of jobs, and boosting a lack-lustre economy. There is increasing expectation that America will be able to export its excess energy, earning more profits and global influence, notwithstanding sharpening debate. There is even renewed optimism of a new American Century.

The reality is often hidden beneath the surface. In "Fracking Hell: The Untold Story", a LinkTV documentary on YouTube exposes the alarming risks of ground and surface water pollution and the threats to local environment and civilan lives as a result of a sudden skyrocketing jump in fracking activities across America.

China has the world's largest shale gas reserve, which is however located inside much more technically-difficult topography. See the collection of reports and data in The Golden Age of Gas

China's fracking technology is not as advanced but the United States has indicated willingness to share it. If so, the vast opportunities for an energy-hungry and energy-security-obsessed China seem only too good to miss.

But it seems that the fracking technology is not as ecologically safe as it is made out to be. If the environmental and health fall-out from fracking is allowed to multiply, the expected shale gas bonanza could well turn into a mind-boggling nightmare that could eventually spell an ecological if not socio-political "Collapse". 

In his eponymous work (Penguin Books, 2006) on the disappearance of past civilizations including that on Easter Island, Jared Diamond provides an apt warning that the shale gas exuberance needs a strong dose of sobriety. The alluring music of energy abundance could well turn out to be the songs of Sirens to ecological doom.

Apart from ecology, there is also a sharp warning from Shalebubble.org, "the joint effort of Post Carbon Institute, Energy Policy Forum, and Earthworks, with the goal of providing critical analysis — using industry and government data — to counter the false claims that domestic supplies of shale gas and shale oil (tight oil) will ensure energy security and significant long-term economic benefits to the US".

According to a summary on their website, the current  shale oil and gas frenzy is "nothing more than a bubble" with diminishing returns, a "drilling treadmill" of a "frentic pace of drilling to offset declines", and "Wall Street (promoting) the drilling frenzy in order to profit from mergers & acquisitions, resulting in prices lower than the cost of production".
 
If Shalebubble.org's analysis is true, the current shale oil and gas euphoria may well morph into a huge bubble that is going to burst in a ecological disaster of epic proportions with tears from environmentalists and investors alike.

Europe - death or re-emergence?

With almost monthly, if not weekly, twists and turns in the prognosis on the future of a Europe struggling to cope with a looming sovereign debt crisis and the challenges for long-term economic viability, pundits could be forgiven for being uncertain as to which way the Eurozone and the rest of Europe would be heading.

A YouTube slide presentation by Stefan Molyneux on Freedomain Radio, purportedly the largest and most popular philosophy show on the web, paints a general picture of impending demise.  Click here

Molyneux's presentational style is persuasive, backed up by slides full of instrucstive data, although not many people are convinced by his subtle refrain that it's all the fault of "statism"(and he is referring to the West!). It seems that, according to him, if all state interventions and regulations are lifted, all would be well.

In any event, it seems fair to say that notwithstanding some signs of improvement, Europe is by no means out of the woods. Indeed, according to Bob Janjuah at Nomura reported on Business Insider. Europe may well be heading for another global market clash by about 25 - 50%. Click here

A much more authoritative, indepth and insightful analysis is offered by Professor Klaus Schwab, Founder and Executive Chairman of the renowed World Economic Forum, in his thought-provoking e-book "The Re-emergence of Europe" released on 14 December, 2012.

Download Professor Klaus Schwab, WEF - Re-emergence of Europe, December, 2012

Looking back on the recent history of Europe, Professor Schwab argues that the importance of the European project extends far beyond economic integration. It underpins the long-term peace of the continent, as exemplified by the award to Europe of the Nobel Peace Prize 2012.

Professor Schwab points out that nothing less than a trajectory to greater banking and fiscal union, if not political union, would support long-term viability of the Eurozone.

Exit for devalution, however, would create much larger problems that it is purported to solve, according to Professor Schwab. "An overwhelming number of economists, international civil servants and plicy-makers argue that a fragmentation of the eurozone would cause a new depression and massive wealth destruction around the world and would also end the period of economic integration that has characterized world politics since the end of the Second World War."

Notwithstanding huge social reactions and nationalistic divisions, as of October 2012 there has recently been some noticeable movements towards greater convergence. A process of "internal devaluation" of debtor countries in the form of contraction of relative domestic demand has seen significant shrinking of budget deficits and a greater balance between income and expenditure, with sharply falling unit labour costs.

"Consequently, countries such as Ireland, Portugal and Spain have experienced a generally strong performance in exports and are now registering a current-account surplus .... Amazingly, Irish, Portuguese and Spanish export growth has not only kept pace with Germany's in recent years but have out-performed the UK's", Professor Schwab explains.

Contrary to binary thinking - either austerity or growth - Professor Schwab believes that a mixed approach is feasible, including structural reforms particularly in the labour markets, product regulation and a mix of government spending in a growth agenda.

Professor Schwab's prudent prognosis is that "Europe will survive and its currency - the euro - will remain intact, even in a truncated form (if just one country were to exit, for example). After a crisis of several years (possibly up to ten), Euorpean momentum will begin to grow again and will even surprise us positively ..." His relative optimism is based on Europe's unique and valuable assets - generally high-quality human capital and good governance, especially as regards sustainability, and quality and dignity of life. 

Many painful and arduous reforms remain to be tackled, to be sure, including creative destruction of a system of excessive welfare entitlements to improve long-term productivity and competitiveness. However, there is no immutable reason why some of the weaker states could not "take the bull by the horns" in emulating Germany's earlier succcessful economic and social reforms.

Many risks and obstacles remain on the way, according to Professor Schwab. He groups them into three broad categories: (1) Political and societal backlash (2) Policy miscalculations and (3) Capital flight and bank runs.

In terms of the social acceptability of reforms, Professor Schwab believes that a turning point has been passed and "from now on .... there are likely to be more surprises in Europe in general, and the Eurozone in particular, on the upside rather than on the downside."

If Professor Schwab's optimism proves to be prescient, as the world's largest economy up to now, a better and more viable Europe, which is "still founded on the same social values and freedoms as before", would have a profound impact on the future world order, and "ultimately for mankind as a whole".

China's water risks

According to China Water Risks, a Hong Kong -based non-profit think-tank on the subject, water moved from the sidelines into the spotlight in China 2012 and is expected to stay in 2013.

In an online report "2012 Review and 5 Trends in 2013"of 4 February 2013, the NGO says, "In China the tipping point has come. Li Keqiang, China’s next Premier-to-be in March, said that China’s limited water resources have become serious economic and social development constraints; saving water and improving water-use efficiency are priorities".

The 2012 Review highlights the following -

(1) Water remains a top priority for the Chinese government;
(2) More floods & droughts;
(3) Low levels of water in lakes and rivers and potential  diversions;
(4) Reputation at risk with more pressure from naming-&-shaming campaigns & public protests;
(5) Investors & Companies continue to play catch up

The 5 Trends in 2013 are -

(1) A pro-water government;
(2) Multi-pronged approach in managing water for agriculture;
(3) Energy security – no choice but to plow ahead with hydropower & fracking but tech could save us;
(4) Supply chains continue to be under fire; and
(5) More corporate action and financial institutions incorporating water risks into valuations.

According to World Economic Forum's Global Risks 2013 Report, Water Risk continues to stay in the top five global risks by Likelihood and Impact.

So the world water crisis looks critical, especially China. A stern warning is sounded in a report dated September 2012 by HSBC Global Research on Climate Change - "No water, no power - Is there enough water to fuel China’s power expansion?" Click here

Nevertheless, it appears from the Water Risk assessments that there is now a glimpse of hope as China's leadership, China's own NGOs and the private sector are all beginning to seize the moment.

The very active role China's NGOs are playing in addressing the country's water risks also testifies to the rapid development of China's civl society.

The World by 2030

The world is heading towards 2030 with much greater uncertainty as epochal trends and paradigm shifts are playing out. That's according to the latest report by the Washington D.C -based National Intelligence Council - "Global Trends 2030: Alternative Worlds" dated December 2012.

The report admits that global economic power is definitively shifting to the East and the South, reversing the historic rise of the West since 1750.

By 2030, the developing world will account for over 50% of the world's economy with China displacing the United States as the largest economy.

Power will become more diffused in a multipolar world, including individuals and other non-state actors, characterised by unprecedented urbanization, rise of the middle-class, new, disruptive, or lethal technologies, resource constraints, more aging populations, and risks of more crises and conflicts.

America will lose its global dominant position but is likely to remain primus inter pares amongst all nations. By all accounts, a great re-balancing of the world will be taking shape, perhaps not dissimilar to the European "long peace" set in motion by the Congress of Vienna in 1815, which was also a mutli-polar period of rapid social, economic, technological and political change. However, many a black swan could change the game along the way.

According to the report, how America will navigate this changed world is likely to shape its fate, including that of the United States itsef, for better or for worse. 

The full NIC report follows.

Download National Intelligence Council - Global Trends - Alternative World - November 2012

Extracts of the most salient tabular summaries are here.

Download Extracts - National Intelligence Council - Global Trends - Alternative World - November 2012

The NIC report may be put into better perpective with reference to the so-called soaring EAGLEs (Emerging and Growth-Leading Economies) here

Or when read in conjunction with the latest World Bank Report "China 2030: Building a Modern, Harmonious, and Creative High-Income Society", which was undertaken jointly with the Development Research Centre of the State Council. Click here

The following China-centred dynamics are also relevant  -

(a)  According to Goldman Sachs, by 2050 the top ten economies in the world will be, in descending order, China ($70 trillion), US (about $38 trillion), India (about the same as the US), Brazil (barely over $10 trillion), Mexico (just under $10 trillion), Russia, Indonesia, Japan, United Kingdom, and, lastly, Germany (about $5 trillion). Only four of the G7 would thus remain on this list. Except the US, the other three G7 countries, Japan, UK, and Germany, would fall to the bottom. The combined economic weight of the six so-called Emerging and Growth-leading Economies (EAGLEs), what may be called the E6, would be over two and half times more than the remaining G4. Amongst the EAGLEs are the so-called BRICS (Brazil, Russia, India, China and South Africa), of which China's economy is bigger than the rest of the BRICS combined.

(b) According to Huang Renwei, Vice President of Shanghai Academy of Social Sciences, compared with a rising China, the relative strategic power of the United States is declining due to-

(i) its mounting debt exceeding sustainable limits, threatening the status of the US Dollar as the world's dominant currency;

(ii) its increasingly constrained financial capacity is likely to reduce its military capacity, its R & D expenditure and hence its ultimate technological lead;

(iii) the American-dominated global alliance may come apart in a decade or two if the United States becomes less and less able to provide most of the public goods holding such alliance together; and

(iv) geopolitics are giving way to geo-economics where China is building a China-centric regional economic infrastructure (read regional production and supply chain) reinforced by such economic alliance as ASEAN-China Free Trade Area, the largest in the world by population.This is happening while the West, including Japan, struggles to re-start their weakened economies by one form of quantitative easing or another (read money-printing).

See Huang's remarks (in Chinese) on Xinhuanet on 20 December 2012 here

(c) Rapidly being ""internationalized", the RMB, though remaining non-convertible on the capital account, is already ipso facto "eclipsing" the U.S. Dollar as the world's "reference currency". Click here

(d) according to “World Intellectual Property Indicators 2012” released by the Switzerland-based WIPO (World Intellectual Property Organization) on 11 December 2012, China tops the world in 2011 patent applications. China also leads head and shoulders in trademark applications as well as industrial design. As a developing country, China is therefore well on track to overcome the Middle Income Trap. Click here

(e) As the world is increasingly becoming eco-conscious, China is starting to lead in a number of renewable energies, including solar, wind and hydro. In particular, China is pushing for the rapid development of electric cars, through heavy state subsidy towards private ownership and intensive research and development, including green battery technologies. This promises to revolutionize the world's entire auto industry.

(f) Shale gas is set to change the shape of the world of energy. Click here for "The Golden Age of Gas" In addition, the widespread use of abundant shale gas in America and China will weaken the strategic clout of the Middle East and other oil-producing countries, with all that implies. As the world's leading energy consumer for a long time to come, China is well poised to benefit from America's expected shale gas bonaza and her own vast shale gas reserve, the world's largest, provided problems of water scarcity, groundwater pollution and lack of advanced fracking technologies can be overcome.

In sum, provided China continues to maintain an even keel in the run-up to 2030 (though that is by no means a foregone conclusion), the country, together with or in addition to America, is set to influence, if not shape, global dynamics much more than the National Intelligence Council report seems to imply.

A new era of manufacturing sans frontiers

A November 2012 McKinsey Global Institute report “Manufacturing the future: The next era of global growth and innovation” identifies the following global dynamics of manufacturing  -

• 16% share of global GDP
• 70% share of global trade
• advanced economy manufacturing jobs have dwindled from 62 million in 2000 to 42 million in 2010
• 30-55% share of service jobs in manufacturing
• 19 cents service input for every dollar of manufacturing output
• 3 of 5 global manufacturing groups where China leads while 2 where United States leads
• $342 billion in advanced economies’ trade deficits in labour-intensive goods
• $726 billion advanced economies’ trade surplus in innovative goods

In particular, the report points out that manufacturing contributes disproportionally to global exports, innovation and productivity growth (Exhibit E2) – 

• 70% of exports (2010)
• 77% of private sector R & D (2008)
• 37% to productivity growth (1995-2005)
• 16% to value-added (2010) and 20% to value-added growth (2000-10)

But manufacturing employment in advanced economies registered minus 24% from 1996-2006, when it represented only 14% of employment.

Download MGI- Manufacturing the future - Full report, Nov 2012

Five global manufacturing groups are identified – 

1. Global innovation for local markets (34% of global value-added)

     Motor vehicles, trailers and parts
     Other transport equipment
     Electrical machinery
     Machinery, equipment, appliances    

2. Regional processing (28% of global value-added)

    Rubber and plastic products
    Fabricated metal products
    Food, beverage and tobacco
    Printing and publishing

3. Energy-Resource-intensive commodities (22% of global value -added)

   Wood products
   Refined petroleum, coke, nuclear
   Paper and pulp
   Mineral-based products
   Basic metals

4. Global technologies/ innovators (9% of global value-added)

   Computers and office machinery
   Semiconductors and electronics
   Medical, precision and optical

5. Labour-intensive tradables (7% of global value-added)

   Textiles, apparel. Leather
    Furniture, jewelry, toys, other

The McKinsey study concludes that the distinction between manufacturing and services is becoming blurred. The whole manufacturing process is becoming granular, each input to be considered in a global matrix of total factor performance “across the full range of factor inputs and other forces that determine what it costs to build and sell products.” “An exciting era of global manufacturing is ahead –driven by shifts in demand and by innovations in materials, processes, information technology and operations.” “These innovations include new materials such as carbon fibre components and nanotechnology, advanced robotics and 3-D printing, and new information technologies that can generate new forms of intelligence, such as big data and the use of data-gathering sensors in production machinery and in logistics (the so-called “Internet of Things”.

On the indentified five manufacturing groupings, what the report has not stressed, however, is that –

(a)  Products and items in one group may be imbedded in another.  For example, wood, rubber and metals are an integral part of motor vehicles and machinery and equipment are essential in the energy-resource-intensive commodities group.

(b) Technology, creativity, and brands run through and between the groupings so that advantages in one group can be embedded in another group or groups.

(c) The global value chain without borders ensures that value migrates to where it can best be created, almost anywhere in the world. This translates into a breaking up of the finance, design, production and back-up services of a single product.

(d)  Therefore, the reference to China leading in three groups and the United States in two groups is at best relative.  For example, Lenovo, which has acquired IBM computers, and Huawei Technologies are becoming China’s global leaders in their own right in various computer sectors, while the largest profits in the textiles, apparel and leather sectors, a grouping where China is supposed to lead, are reaped by the world’s top luxury brands in advanced economies.

(e) The highest profit margins of manufacturing are captured by proprietary technologies, patents and brands. As China has found to her own cost, “labour-intensive tradables” may be reaching their sell-by dates. As a nation develops to a certain level, reaching the so-called "Lewis Curve Turning Point", rising wage and other rising input costs will become no longer commensurate with the relative low prices of products fetched. As a result, the country has to upgrade, innovate, and acquire patents and brands to survive. This is exactly what China is trying to do. As the latest “World Intellectual Property Indicators 2012” (11 December 2012) shows, China has now become, for the first time in a century, the first developing country taking the baton from Germany, Japan and the United States as the world’s top patent filer. Click here

The Mckinsey report, nevertheless, is instructive that in a rapidly changing and increasingly inter-connected and inter-dependent world, businesses and policy makers need to be agile and adaptive in honing new ideas, technologies, and talent to stay globally competitive, as a new era of manufacturing emerges that promises to know no rigid groupings and geographical or national borders.

London to lose top spot to Hong Kong as world financial centre?

In a study released on 12 November 2012, the London-based Centre for Economic and Business Research (CEBR) forecasts that "By 2015, the number of financial service jobs in Hong Kong - which was less than half the London number in 2005 - will have overtaken the number in London and Hong Kong will be the main international financial centre in the world". Click here

Although London will always retain its many unique strengths, the surging size of the Chinese economy and the rapid internationalization of the RMB, for which Hong Kong is being honed as a global platform, are likely to add credence to the prediction of the report.

The following studies are also relevant -

(a) "Eclipse: Living in the Shadow of China’s Economic Dominance", Arvind Subramanian, Senior Fellow at the Peterson Institute for International Economics, Washington D.C. This suggests that the Chinese yuan (RMB) has already eclipsed the US dollar as the world's "reference currency" and on track to becoming at least one of the world's leading reserve currencies by the mid-2030s. Click here

(b) The latest OECD report here “Looking to 2060: Long-Term Global Growth Prospects” dated November 2012 suggests that “China will overtake the eurozone in 2012 and the US within the next four years to become the largest economy in the world.  By 2060 …… the combined GDP of China (27.8%) and India (18.2%) will be larger than that of the OECD – and the total output of China, India and the rest of the developing world (57.7%) will be greater than that of developed OECD and non-OECD countries (42.3%)”.

By 2016-2020, China should be on track to becoming the largest economy at the centre of a global production and trading system (including the ASEAN-China free-trade area, the globe's largest by population). The country will also be home to the world's largest cohort of middle-class consumers, many of whom are outwardly mobile both physically and financially.

Provided Hong Kong doesn't lose her plot and maintains an even keel on a broad front, riding on China's economic and financial transformation in the coming decades, Hong Kong should be well-positioned to capture the world's financial top spot ahead of London, New York or Singapore, not just in financial service jobs but in the fullest sense of the word.

Hong Kong should be able to continue to count on her many blessings, including a world-class commerical infrastructure, financial depth and expertise, a free port status, a low tax regime,  internationally-recognised rule of law, and uniquely, a special relationship with mainland China under the ""One Country, Two Systems" formula.