turkey - why don't we hear more about it?, page-14

Hi Dub, funny you should bring it up. I have been fascinated this article/interview below for some time now.

It was published on Bussinessspectator.com.au back in March. I don't have the link as I copied this off an email I sent to my mates.

Stratfor founder and author of 'The Next 100 Years', George Friedman, talks to Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz to explain:


Alan Kohler: George, the assumption is that we’re witnessing the transfer or the shift of geopolitical power from the US to China and that this has been sort of if anything accelerated by the global financial crisis, but you’re predicting that China will fragment by 2020, in your book. Can you explain why you think that and why the global financial crisis will not prevent it?

George Friedman: Well, in the first place you have to remember that China is very much a Third World country. Of the 1.3 billion Chinese, well over 1.1 billion have a standard living on the order of Nigeria. If you go to Shanghai and drive to Pudong, you can get the illusion that this is a European or American country, but just walk blocks away from the centre and you’ll see a very different China.

Secondly, the Chinese economy is a hostage of the foreign international system, but primarily of the American economy. China is incapable of domestic consumption on the order of production. So, when the United States catches cold, China gets pneumonia and that really is an important thing to understand – that China does not have an economy as we understand it in the sense of substantial domestic consumption. The Chinese economy is overwhelmingly export-oriented and therefore China is a hostage to its consumers. People point out that the Chinese invest a great deal of money in the United States. Well, there are several reasons for that.
For one thing, they are desperately concerned that the American economy remain dynamic or else they can’t sell their products. For another thing, there’s nowhere else in China to invest that money. I mean, part of China’s liquidity crisis is the lack of opportunities in China commensurate with its economy. And finally, the tremendous internal tensions that have always existed in China have caused it to exist in one of two conditions; either in a condition of regionalism and internal crisis or with a very powerful central government that seals it off from the outside world. When the British arrived there in the 1840s, it was in the latter state. The British forced their way in and created more than a century of chaos, of regionalism and warlordism. Mao then clamped the controls on. Deng Xiaoping wanted to make a massive gamble that this time in Chinese history China could both be open to the outside world and simultaneously maintain its internal stability. That’s being tested now, intensely, as the slowdown in the American economy causes unemployment, regional tensions and security crackdowns. It’s not accidental that the Chinese today shut down YouTube. The Chinese are desperately concerned with the security situation in China and well they might be. So, for all of these reasons, the talk about China becoming a challenger to the United States is as frivolous as the talk in the 1980s that Japan would be a challenger to the United States.

AK: Australia has pointed its economy directly at China and if China is hostage to the US, Australia arguably is hostage to China. So, how long have we got?

GF: Well, I think that unlike China you have a substantial internal economy. Unlike China, there are other consumers for your products and I think you have a much more diversified economy than the Chinese do, but certainly I mean to the extent that you are dependent on China, you’re in the same position as you were in the 1980s and 1990s with your heavy dependence on Japan, but you weathered that. You weathered that because you have a modern economy that has some flexibility built in, but remember from Australia’s point of view you’ve been here before. You were here with the Japanese colossus.
Stephen Bartholomeusz: George, you’ve made a couple of references to Japan there and you draw a direct parallel in the book between what happened to Japan in that post-war period and more recently with what’s happening in China and what might happen in China going forward. I think you described it as “Japan on steroids”. Can you elaborate on that parallel?

GF: Yeah. Neither China nor Japan has a market financial economy. The decisions on investment were made on social and political bases, therefore the economies’ deployment of money was inefficient and therefore both Japan and China had enormous non-performing loan problems. Both were managing their banking system essentially by heavy export surpluses that allowed them to stabilise the banking system. When the global situation went through a cyclical downturn, the Japanese in the early 1990s found themselves unable to sustain their growth in exports and suddenly the entire Ponzi scheme, if you will, started tumbling down.
The Chinese have both much larger non-performing loan problems and they also have substantially larger reserves than the Japanese had at the time, but they’re facing now the cash-flow crisis of declining exports and right there was the problem that hit the Japanese and it’s hitting the Chinese now.

Robert Gottliebsen: If the Chinese have got a problem with declining exports and money, how are they going to fund the American printing press exercises?
GF: We have to begin by just pointing out something. The American printing press exercise depends on the net worth of the United States which currently, can be calculated at about $339 trillion. You can argue somewhat, but it’s well over $300 trillion. What the Fed is essentially doing – as it’s done before in the 1980s with the S & L crisis, with the Third World debt crisis, with the municipal crisis of the 1970s, it’s a very well-known and understood process in the United States – is drawing on its net worth by printing and taxing to underwrite the series of bad debts and failures. The idea that the Chinese are somehow funding it may be true in some short term sense, but more to the point what we’re really drawing on is our net worth. So, when an individual comes into financial trouble, you don’t necessarily look at his cashflow; you look at the total net worth that you can draw on. Iceland had no net worth it could draw on, it collapsed. That’s one extreme. At the other extreme you have the American economy, which has a net worth, quite apart from its enormous GDP, that is extraordinary and so you scale the financial problem against the net worth and you start seeing some solutions.

AK: And I suppose a part of that, or an extension of that, is how will China go with its fiscal stimulus itself – do you think that’ll work?

GF: Well, I can’t possibly see the Chinese replacing American or European demand – but particularly the American demand – with domestic demand in the time-frame that’s required, which is why the Chinese will do absolutely nothing to undermine the American recovery. The Chinese recovery, in fact I would say Chinese stability and survival, utterly depends on the speed with which the United States recovers. The Bank of China had this whole thinking about the US not being the reserve currency, which was pleasant thinking on their part, but the basic reality is that the Chinese economic cycle is an extension of the American. I think we’re starting to see some signs of recovery here in the States and certainly the Chinese are cheering that. I don’t think any of their stimulus could possibly affect consumption fast enough to make a difference.

RG: George, in your book you’re indicating that you think Mexico may in fact be the likely power that we attribute to China.

GF: Well, Mexico is the world’s 13th largest economy right now. Divide Mexico into two parts; the area north of Mexico City that has a standard of living and industrial base on the order of a mid-tier European country and the area south of Mexico City, which is much less developed. So, the area up north to the border is very substantial. If we take a look at the declining position of various European countries and consider who is going to be populating the top 10 economically, it’s very clear that countries like Mexico, Brazil, Turkey and others that I talk about are likely to be in that position. It doesn’t take much for Mexico to enter the top 10, so I think Mexico is certainly not only a major economic power, but a strategic power in that it occupies the same continent with the only superpower. It’s really the only country that could theoretically challenge or threaten the United States physically and that puts it in a very different position from other countries.

SB: George, you dismissed quite lightly the, possibly long-term, threat from militant Islam. Do you want to explain that?

GF: Well, look Islam has been in the condition that it’s been in for a thousand years. Islam is divided against itself religiously. It has divided itself ethnically; Arabs versus non-Arabs. It is divided between nation states. And it’s divided along a range of clan and tribal levels. The only time that the Islamic world has become a major international player has been under Turkish leadership; the Ottoman Empire and the Turks have very complex and very flexible views of how to play in the world. They’re far from fanatics, ever, and so the kind of threat that we talk about in the Islamic world, that the Al Qaeda wanted to create, was an uprising in the Islamic world and overthrowing of governments and the creation of a caliphate. So, Al Qaeda knew perfectly well that it could achieve nothing if it didn’t control the major Islamic nation state and therefore having failed completely to do that, the Islamic world, after the United States invasion and so on, has been reduced to the standard chaos it’s been in whenever Turkey isn’t powerful. So, it is an irritant and certainly there’s always going to be a threat from Islamic terrorism, but a strategic threat that can challenge the world it isn’t and won’t be until and unless Turkey emerges.

AK: Well, in fact one of the most surprising things about your book is the prediction that Turkey will emerge and become a military threat to the United States to the point of there being a war between them.

GF: Well, remember that Turkey today is the world’s 17th largest economy. It is larger than Saudi Arabia, larger than Greece, larger than most European countries economically. It also has, in my opinion, the most substantial military, not only in the region, but in Europe. Its military is far better, far capable and far larger than the German for example, the French. The British may be able to give them a run for their money, but apart from that, Turkey is one of those countries that most people have systematically ignored and it has emerged as a major player.
It’s not accidental that President Obama, after he finishes talking to the Europeans, is going to make his next stop in Turkey. The American administration understands that it needs Turkey to block Iran in Iraq, to negotiate with the Syrians, but the Turks are also extremely influential in the Caucuses, where the United States has interests in relation to Georgia and Central Asia where Turkish officers are training most of the armies – the Russians are trying to push them out – and of course in the Balkans where Turkish businessmen are to be found everywhere.
So, the issue is not whether Turkey is going to be a major regional power. It is certainly a major regional power right now. The question is what is the historic leader of the Islamic world going to be like in 50 years and what is its relationship going to be with the rest of the world and I’m simply saying that it’s very easy to see the manner in which Turkey will resume its historic position in the region because it lives in the sea of chaos. It’s in its interest and the interest of others that that chaos be stemmed and it’s frankly the only force in the region that can fill that vacuum.

RG: Do you think it was worthwhile the Americans fighting in Afghanistan and that situation? Would it have been better to leave the Turks to handle Afghanistan?

GF: I think it’d be better to leave anybody to handle Afghanistan! The original mission of the war in Afghanistan was to defeat Al Qaeda. Al Qaeda no longer exists; the original cell I should say that mounted the attack. There are a lot of wannabe, make-believe Al Qaeda groups around who call themselves that, but the real threat of Al Qaeda has gone because essentially it has been destroyed systematically. The idea that 30,000 or 60,000 American troops with the help of Australia, with the help of Germany, is somehow going to transform this country is absurd. Alexander the Great couldn’t do it, the Russians couldn’t do it and the British couldn’t do it. Not only can’t the United States do it, it’s not in the American interest to do it. That’s yesterday’s war.
It’s particularly the case because the line of supply from Pakistan has become so insecure. There’s no one in Washington at this point who really believes there is any solution that we want to get out of Afghanistan aside from creating a reasonable coalition government that will fall apart as soon as we leave and it’ll go back fighting among themselves, but the United States of course is concerned about exactly the protocols of exiting and so the president is prepared to send some more troops as a gesture. He’s also prepared to be asking the Europeans for more help and it’ll be very interesting to see how they say no. They certainly will say no. That’ll be interesting to see exactly how they say it since they love Obama so much.

AK: How dangerous do you think the situation in Pakistan is?

GF: Well, the situation in Pakistan is not dangerous in the sense that I think a lot of people think it’s coming apart. I don’t think Pakistan is coming apart. I think Pakistan has been playing a double game from the beginning of the war. The core of Pakistan is the military and the core of the military is the Inner Service Intelligence, or ISI. The ISI was always extremely close to the Taliban and in some ways it helped create the Taliban. It helped put the Taliban into power. What we’re seeing now however, is something a little different rather than destabilisation. All of the illusions are being withdrawn. The basic institutions are asserting their strength and they have no real interest in fighting the Taliban nor in securing American alliances, so the danger is not the fragmentation of Pakistan. The danger has always been there and it’s now showing itself very clearly. The Pakistani government does not see its interests as aligned with the American interests. It sees its interests as convincing the Americans that they’re aligned and making gestures and that just makes our position in Afghanistan that much more impossible.

SB: George, in the book which is ultimately about the next century as you see it, you ascribe a lot of the portents to demographics and the changing role of women in the family unit in particular. What are those major trends that you see and what kinds of impacts will they have on future shifts in global balances of power?

GF: Well, it’s important to understand that the population explosion as it happened in the 20th century is over. In the 20th century the population of the world quadrupled from a little over 1.5 billion to about 6 billion. The United Nations projections say that in the next 50 years it will only increase by 50 per cent and in the next 50 years after that by only 10 per cent. This is a sea-change. Capitalism has always been built on the assumption that there would be more people, more markets or soldiers, more everything. It’s not going to be the way. It’s hitting the advanced industrial economies hardest in the sense that the birth rates in these countries have declined as low as 1.3 per woman where replacement is at 2.1 minimum. The Europeans have been hit very hard. The Japanese have been hit very hard. The United States has not been hit so hard, not because the native birth rate hasn’t plunged, it’s because we’re very good at managing immigration and the immigrants tend to have higher birth rates, so we’re still at about 2.1 which is a pretty good advantage.
But what has to be understood is that the birth rates are falling everywhere in the world. There’s nowhere they’re not falling. Even if you go to Bangladesh, they have come down from about 6.3 to 5.1. So, you have three tiers; one of which is an already-reached non-replacement advanced industrial world, the second of which will be at zero population growth. These would be the Mexicos, the countries like South Korea; they will be achieving zero population growth certainly by the middle of the century. And the third tier, the poorest countries, will be reaching it probably not this century but early 22nd century. The problem that we are facing is that in the old economic manual, you have land, labour and capital. The shortage has always been one of capital. The problem has always been one of creating capital. The problem in the 21st century is going to be labour. Labour shortages are going to be endemic and therefore two solutions are obviously in place; one will be immigration. We will go to a model where countries will actually be bidding for immigrants, I suspect. Because of the shortage the cost of an immigrant will go high. But also we’ll be looking for technologies that replace labour and my expectation that the dominant technology we’ll have in the 21st century, certainly there’ll be others, but the dominant one will be robotics. Anything that replaces labour will be of inherent value.

RG: George, you also said that you thought that energy would come via solar and particularly space solar replacing oil. How confident are you about that and if you’re right of course it means electric cars?

GF: Well, I’m confident of the idea that we have a serious problem with the hydrocarbon economy. A part of it is a geopolitical problem which is that the sources of them require high expenditures on war and it would be very nice not to have to do that. The solar problem is threefold; night, clouds and the fact that to generate enough you’d really have to cover huge areas of land to be able to maintain industrial output of what we have and very frankly, it would be, and this is surprising, solar power would be an ecological disaster.
The one place where solar power works is in space and NASA has a programme underway researching and planning for a space base on the research of solar power. In space there is no trouble locating very large rays. We know how to do that. We know how to get radiation back to Earth in the form of microwave radiation that’s received, transformed and put into the electric grid. What we don’t know yet and what the US is concentrating on right now is storage systems. The one advantage of hydrocarbons is that it’s a superb storage system. You can leave in your car for six months, go back, turn the key and the energy is still there. We don’t know how to store electricity very well and every time your computer runs out of electricity, you realise that.
The United States is now initiating as part of the president’s stimulus package a huge program on electrical energy storage. It’s a complex series of problems, but I suspect over the next 40 or 50 years the Federal Government with its own usual inelegant clumsiness will spend enough money to come to some theoretical solutions, some of which are already available. That’s going to be the issue. But if there’s going to be space based solar energy, then also whoever controls space will be in a tremendous problem position politically and economically to kind of model the international economy. The United States is the country that has the greatest ability to do this and so one of the things I say in the book is that imagine the United States with its current power also having the power of Saudi Arabia and that’s a fairly sobering thought for some and delightful for others, but I think that’s what we’re looking at. I think the argument for solar power is made. I think putting it onto Earth is impossible. And the interesting thing about what I just described is that not one of it is theoretical.
We know how to do all these things. It’s also interesting to watch Jeff Bezos at Amazon and Branson at Virgin Air, both of them putting large amounts of money into trying to develop inexpensive lift platforms to take goods into space. Their explanation for why they’re doing this is to encourage tourism. I’ve got to chuckle. I mean that is quite an investment for a few rides, but they understand fully that whoever develops the lift capability at a cost effective basis is going to be able to do things in space that you can’t do anywhere else and one of them is energy generation.

SB: George, you’re talking about soft solar energy. In the book you make only the most passing of mentions of global warming. You dismiss it as a serious issue. Why’s that?

GF: I don’t dismiss it as a serious issue, but the issue is driven by expanding population and I see population expansion slowing down. I also see hydrocarbons being replaced and I think this is the solution to global warming. The solutions that are normally suggested are for example the conversion of solar energy. Well, I think that’s going to be done that way. It’s just not going to happen the way the Greens think it will happen. So, I do take seriously. I expect it to be handled during the century, but I certainly don’t expect that the solution is going to be drastic cuts in standards of living that are voluntarily undertaken in order to prevent whatever outcomes come from climate change. I mean that’s an interesting theory that’s not going to happen. What’s going to happen is that a change in demographics and a change in technology will deal with it.

AK: Thanks for your time, George.

GF: Any time!