The Implosion Of China

The rebels and Taiwanese secure South China
and cross the Yangtze.

Our little study group recently considered the question of the implosion of China as a state. This may sound a bit odd at first, but it does have some foundation and is a potential future that is worth thinking about. China, as a national entity, has been around for thousands of years. During this time, it has waxed and waned, it has grown and it has shrunk. It has been subjugated and it has conquered all before it. China, as we currently understand the political entity to be, has been in existence only since 1949. It would be wrong to assume that the current boundaries are entirely stable, given the perspective of thousands of years.

We have written before about the boundaries of China expanding. It is now time to think about the possibility of the boundaries of China contracting. There is a certain method to this way of thinking. It was a nineteenth century Chinese historian, Wei Yuan, who first identified a series of cycles which Chinese politics appears to follow. Starting arbitrarily in the cycle at a period of 'chaos and humiliation' (the quru), this is followed by a period of 'rejuvenation' (fuxiang), and then followed by a period of 'wealth and power' (fuqiang), before returning to a period of quru again. The narrative is that the nineteenth century represents a period of quru, the Communist revolution and the post-Mao reforms represent a period of fuxiang, leading to the current situation of fuqiang. If any of this is true, then the future of China will be one of continued fuqiang, followed by a period of quru. It is this boundary between fuqiang and quru that interests us.

The question of how to tackle this came into focus when we came across the magazine 'Modern War 19'. It contains a nice article on the subject, but more importantly, a game by Ty Bomba to frame the scenarios. As always, we started by playing the vanilla game to see how things might work out. In the run through, the Rebels took the opportunity to place their capital in Hong Kong and to work outwards from there. I thought this to be a nice touch because of all the places where a revolt might originate, South China has to be at the top of my list. In the run through, the rebel forces enlisted the support of Taiwan and drove most of the government forces back north of the Yangtze River.

It was an interesting game, but really does need some modifications. To start with, the forces of Taiwan are over-estimated. I think that we may clip their wings in future run throughs. I wasn't at all comfortable with a scenario set that just had two sides. I think that future games ought to be set at the level of the Military Region, with the politics set to invite the players to set themselves up as modern day warlords and fragmenting China on a regional basis. They could have a degree of autonomy within their regions and compete over the distribution of resources, a political mechanism that has to be added to the game. We could almost pose the game as one of regionalism against nationalism. We also need to work on a mechanism which induces the various regions to rebel against Beijing. The bond market might be a likely place to spark a sequence of events leading to civil disorder. It is certainly a point at which the prosperous coastal regions might baulk at subsidising the less prosperous inland regions.

The game still has a lot to offer in an area which is not widely considered. It is on our agenda to develop a series of scenarios around the disintegration of China in the coming months.

Stephen Aguilar-Millan

© The European Futures Observatory 2017

Living With Climate Change

A recent edition of New Scientist contained a special report on the theme of how to live with climate change and how to beat it. I thought this an interesting development in how we approach climate change. Previously, climate change has been treated as something which is avoidable, if only we can act to prevent it. This series changes the base assumption. It starts from the premise that disruptive climate change will happen, and works towards the consequences of it happening. The special report certainly had my attention.

The special report consisted of seven pieces, with a number of side boxes, that set out the basic case. The first article - 'The New Normal' - establishes a number of speculations about what the climate would be like if the earth were to be appreciably warmer. For example, we can expect spring to begin earlier than it has in the past, or that nights are warming faster than days. These all act in conjunction with natural swings in weather patterns, and it is too early to discern which are due to human activity and which are due to natural variation that would have occurred in any case.

The second piece ('Can We Limit Warming To 2˚C?') and third piece ('Is Runaway Change Likely?') are essentially different sides of the same coin. The second piece outlines what it is that we will need to do in order to limit warming to 2˚C. It seems to be a tall order given that it would require unprecedented levels of international co-operation and an unprecedented commitment of resources. If we do nothing, the article forecasts temperature rises of 3˚C to 5˚C, relative to 1850-1900, by the end of the century. That then begs the question as to whether runaway climate change is likely. The third piece addresses this question, and suggests that it is probably too early to tell. There is much about the climate that we don't know, and this is one of those points at which we are pressing the boundaries of our knowledge.

We are, however, not doing nothing. The fourth piece asks 'Have We Reached Peak Emissions?' This is an interesting question. It does suggest, with an evidential base, that the carbon intensity of our economic activity has started to plateau. The developed economies are polluting less, and the emerging and developing economies are moving to green technologies without an intermediate phase of using fossil fuel technologies.

The fifth ('How To Cope In A Warmer World'), sixth ('Will We Have To Geoengineer?'), and seventh ('Can I Make A Difference?') pieces move on to address the consequences of disruptive climate change. In short, we are urged to cope with a warmer world by a more vigorous process of risk assessment, we don't really have the technology to Geoengineer at present, and we can make a difference, but very few of us choose to do so. We are quite comfortable in our existing way of doing things, and we are resistant to change our ways.

I found the special report disappointing. I was hoping for a deeper analysis than I received and I was hoping for a greater focus on the consequences of disruptive climate change. I do think that it would be an interesting exercise to consider what the consequences of, say, a 5˚C warming might be, and then to consider how we might live within that constraint. I see this as an important piece of work because, armed with these ideas, we could then assess what technologies we will need in the future but presently don't have, and then deploy investments into attaining those technologies.

We are currently stumbling along in the hope that something may turn up to ease the climate pressure, but it may turn out that is a future without us. If we don't like that possibility, then we might like to do something to change it. I'm afraid that this special report doesn't really help us in this task.

Stephen Aguilar-Millan

© The European Futures Observatory 2017

Brexit In A Single Picture

This picture, which appeared in The Economist of July 29th 2017 under the title 'Northern Uproar' (p. 24 UK edition), caught my attention because it explains the Brexit vote in England in a single picture. The picture shows that public transport investment spending per capita between 2016 to 2021 in London is roughly the same as that for the rest of England combined. It shows how skewed transport investment is towards London. Other areas feel that they are not receiving their fair share of the cake. This story is repeated across the public sector. It is the same for schools, social services, the NHS, elder care, and housing. It helps to foster the belief that the regions are being left behind. This is where the people left behind live.

It is really toxic. The benefits of globalisation have been enjoyed by London over the past two decades, whilst the regions have been allowed to decline. Some politicians have talked about regional renewal, but not a great deal has been delivered. We are now in a position where a good part of the costs of Brexit will fall disproportionately upon London - especially in the financial services sector - much to the indifference of the rest of England.

We should note that the chart shows future spending plans as well as past expenditures. If it remains as it is, then the divide between London and the rest of England will simply increase. Ordinarily that would not matter too much, but as the regions have recently discovered, there are more voters living in regional England than there are living in London.

Now that muscle has been flexed, can we expect more surprises like Brexit?

Stephen Aguilar-Millan

© The European Futures Observatory 2017

Is America's Decline A Myth?

Until recently I had been of the view that the narrative of American decline was more myth than reality. After all, in terms of hard power, the United States can deploy overwhelming military force anywhere in the world. In terms of economic power, the US is still the largest economy in the world and the threat of being excluded from American capital markets remains quite a powerful threat. Equally, American soft power - the cultural power to make others think your way of thinking - is still a leading source of advantage in the world. From a near term perspective - say, the next 10 years or so - American decline is unlikely to manifest itself.

From a longer term perspective - say, from the middle of the century and beyond - I am starting to have my doubts. My pause for thought has been caused after reading two books by Edward Luce - 'Time To Start Thinking: America And The Spectre Of Decline' and 'The Retreat Of Western Liberalism'. The first book makes a fairly good case for American decline, even if it is a bit off in terms of timescales.

'Time To Start Thinking: America And The Spectre Of Decline' outlines a model of American decline. It starts with the relative impoverishment of the American middle class. In addition to the question of growing inequality and social ossification, it makes the fairly innocuous point that the middle class is also the consuming class, and that falling middle class incomes imply falling rates of middle class consumption. We now know that since the dot com crash in 2001, US levels of consumption had been maintained by growing levels of debt. The liquidity crisis of 2007 exposed just how vulnerable American consumers had been. To stylise Warren Buffet, the tide went out and an awful lot of them were swimming naked.

In itself, this might not be a cause for concern. However, it does have a consequence that could have been reasonably foreseen. Growing inequality, the loss of manufacturing jobs overseas, and slow economic growth have all contributed to a squeeze on the American tax base, which has served to squeeze the American education system. This education squeeze has caused the stagnation of productivity growth in the US. Improving productivity is the key to improving salaries, and is underpinned by improving educational standards. In fact, the reverse has happened. Falling educational standards (at an international level) have led to falling productivity, which has brought about the sluggish growth that has restrained wage rises.

The consequence of this vicious circle is that innovation rates in the US have fallen as well. In this sense, America has started to lag behind more dynamic economies, especially those of East Asia. Reduced innovation rates have been compounded by the development of a governmental bureaucracy that the author claims is stifling American competitiveness. The Asian economies are outcompeting the US, which is why American companies have shifted their production to Asia.

Within American society, the winners are looking to cement their gains - with the result of tax cuts further eroding the tax base upon which the American educational system rests - whilst the losers (the people left behind) becoming far more angry. This is polarising American society and is making America more ungovernable, particularly through the rise of the Tea Party in Congress. Mr Luce finally caps his model by drawing attention to the sheer corruption of Washington, at all levels, which ensures that nothing significant will change. The model is now set in concrete.

'The Retreat Of Western Liberalism' continues the theme outlined in 'Time To Start Thinking', which is not just the decline of America, but expands to include the decline of the whole notion of Western Liberalism. There is definitely a theme developing.

The book is an easy read, consisting of an introduction to frame the issue, and then four arguments on the theme. The first argument - the demise of the 'Washington Consensus' and the rise of the 'Beijing Consensus' - is the one that I warmed to first. It continues the argument of the previous book in holding that the political classes in America and Europe have failed their constituents, allowing for the rise of the easy populism of the Brexit and Trump varieties. In the view of the author, they are both likely to damage the prosperity that underwrites the liberal order, making things worse rather than better.

This is the argument of the continued decline of the Western order. Counter-balanced against this is the rise of the rest of the world - mainly of Asian nations, with the primus inter pares being China. How should the West - principally America - accommodate the rise of China? This is the question addressed by the second argument, and it provides an uncomfortable experience for Westerners. The main conclusion is that a confrontation between America and China is inevitable. Sadly, the direction of policy is heading in that direction.

This theme is developed further in the third argument, which is all about how to avoid springing the 'Thucydides Trap'. "How does the established power react to the rise of a potential challenger?" (p,156). The Athenians went to war, and lost. Mr Luce believes that a similar result will be obtained if America violently confronts China. The answer, according to the author, is the reinvigorate Western Liberal Democracy. To reverse the direction in which it is heading.

Mr Luce presents his ideas on this in the fourth argument. The main contention is for the West to renew it's main strength - Liberalism. The belief is that free markets deliver prosperity, which is what underpins a liberal democratic order. It provides a counter against the protectionism and mercantilism that currently has hold of us. It counters the nationalism and xenophobia from which we currently suffer. In order to achieve this, we need to combat the chumocracy and cronyism in which we live. By developing a more open society, we will enhance our prosperity and renew our democracy. The book ends with a rallying cry that could serve as a call to action.

One question that the reader might have is whether or not action is needed? The main premise is the decline of America and Europe and the rise of China and Asia. What happens if that doesn't occur? It may be the case that China becomes old before it becomes rich. It may be the case that China falls in on itself under the pressure of it's own internal contradictions. It may be that there is a confrontation between China and America, and China loses. There are many working parts that might cause this vision not to happen.

However, the trends exposed by the two books do give us a great deal to think about. Each one has the potential to give rise to an interesting set of scenarios. For example, one on which we are currently working is the possibility of an implosion of China. I may comment further on this in a future post. It certainly does provide some interesting material. My point is that American decline is not inevitable, and that renewal is a distinct possibility.

Of course, that does mean moving away from the fatalism that wants to 'Make America Great Again!'

Stephen Aguilar-Millan

© The European Futures Observatory 2017

Donald Trump's Baltic Challenge

I was recently given the opportunity to play Donald Trump in a wargame that examined some near term futures for the Baltic States. The operational brief was fairly loose, in that I could determine my own objectives, so I thought that I would have a look at how 'Offshore Balancing' might unfold as a policy option for the US.

I set myself three objectives as Donald Trump - one long term and two short term. The long term objective was to ensure that Europe took a greater responsibility for it's own defence. The first short term objective was to get Finland and Sweden to become more engaged in the European common security architecture; and the second short term objective was to encourage the European nations to pay their way within the common NATO framework. Perhaps we might unpack those objectives?

The policy of Offshore Balancing is one in which the United States draws back from it's international obligations, and leaves it's regional partners with primary responsibility for their own defence. In the shape of a transactional President - such as President Trump - this means holding greater amounts of fiscal resources within the continental United States. It is a marked change of policy for America, and creates a degree of uncertainty on the part of the allied nations as to whether or not the United States would adhere to it's security guarantees.

Sweden and Finland are not NATO members, but are part of the European Union common security framework. I thought that it would be interesting to try to drive Sweden and Finland away from their implicit neutrality and closer to the NATO framework through the European Union structures. How would Sweden and Finland respond to a less engaged United States?

I have been reading about the problem of burden sharing in NATO for over thirty years. No effective solution to the problem has been found in that time. There is a target of NATO members to spend 2% of GDP on defence, but very few do. Instead, they rely upon the American taxpayers to fund a common defence structure. This is a classic case of what economists call the 'free rider'. By defending it's interests in Europe, the United States also defends the interests of the European NATO nations at the same time. A more transactional President might seek to change that situation, and that was what was wrapped up in my objectives.

In the game, I sought to achieve my objectives using two strategies. The first was to relax financial sanctions upon Russia. To encourage Russia to be a bit more aggressive towards the Baltic. This happened as we moved up towards the nuclear threshold. I don't quite think that the European NATO allies quite understood that the US under President Trump wouldn't underwrite their aggression with an American nuclear umbrella. I don't think that it had sunk in fully that Europe would be on it's own unless they accepted the demands of President Trump, and that wasn't a particularly good place to be.

My second strategy was aimed at Germany. In particular, the German twin surpluses - the trade surplus (currently 8.0% of GDP) and the fiscal surplus (currently 0.5% of GDP). I was using a post-Keynesian sector balance argument to the effect that Germany needed to operate a fiscal deficit in order to redress the trade surplus, particularly the trade surplus with America. Putting this into English, I was arguing that the German government should debt finance a programme of rearmament, which ought to purchase military equipment from American suppliers. This argument wasn't especially successful, but it was a long fuse that had started to burn slowly.

In the end, in the game, we retreated from the nuclear threshold. That, quite clearly, is in nobody's interest. I think that I did manage to plant some seeds of doubt in the minds of the European NATO allies about how responsive the United States would be to a more aggressive Russia. I think that I did encourage Russia to be more aggressive towards the Baltic States. This did result in a certain movement of Sweden and Finland towards the European security framework. However, my one takeaway from the game is how long it takes to bring a policy anywhere near fruition. In my view, Offshore Balancing is a long game, requiring a great deal of patience, persistence, and skill. I doubt whether the current incumbent of the Oval Office has these.

I now have a template against which I can measure events as they unfold. Will truth be stranger than fiction?

Stephen Aguilar-Millan

© The European Futures Observatory 2017

UBI Caritas?

Once again, the idea of a Universal Basic Income has entered onto my agenda. I have to say at the outset, that the greater exposure to the idea I have, the less I like it. I have been spurred to action by the publication of a policy brief by the OECD on the costs and benefits of adopting a Basic Income as a policy option. As always, it is instructive to consider the assumptions made in generating the scenarios. However, we are getting a bit ahead of ourselves.

A Universal Basic Income is a payment made by the government to every eligible adult living within it's jurisdiction. Those supporting this policy point to the advantages that it could generate in unleashing the innate creativity of a population, freed from the chore of earning a living. People would be free to pursue their leisure interests and to develop creative new businesses free of financial pressures. It is advocated as a measure of social justice.

As a general principle, the idea has some innate attractions. The point about social justice is well made, but is UBI the best way to achieve those objectives? On a more practical turn, how do we decide who is included and who is not? What about UK citizens living abroad? What about overseas citizens living in the UK? What about children? What about pensioners? Each proposal for UBI answers those questions in a different way, which makes comparisons of the different proposals difficult to make.

The OECD policy brief excludes pensioners but includes children, albeit at a lower rate. In this study, working age benefits and tax thresholds would be replaced by a UBI. No new money would be applied to the scheme, so it would be a simple redistribution of existing benefits, including savings on administration costs. In this case a UBI of £230 per month would be paid to all adults and £189 per month to all children in the UK. The problem is that the OECD calculates that the UK poverty line to be at £702 per month. As a means of social justice, it would leave many of the people currently dependent upon benefits below the poverty line and without any further recourse to state assistance.

This highlights a fundamental flaw in the idea of UBI. The proposal would take state assistance, which is currently targeted at those most in need of assistance, and give it to everyone. Without any new money to add to the initiative, it would increase poverty rather than reduce it. We would all still need to work, even those who are incapable of work - the sick, the infirm, those approaching retirement. This doesn't sound like an act of social justice.

The proposals that do address the issue of social justice, such as the proposal of the RSA for a Basic Income, do recognise the need for more money to be injected into the proposal. How much more is often very vaguely couched. The RSA proposal places the hit on Income Tax for those earning over £75,000 a year. Other proposals have placed a burden upon Corporation Tax. I have reservations about much of this being collectable.

People and finance are fairly mobile nowadays. When Francois Hollande was elected on a policy of soaking the rich, the rich upped sticks to go and live abroad. It is notoriously difficult for American governments to get US corporations to repatriate their profits and make them subject to US Federal taxes. In the absence of capital controls and restrictions on emigration, a policy of soaking the rich would be very hard to enact.

This, again, is a fatal flaw in the idea of UBI. A UBI is, in terms of economics, a transfer payment. It represents the transfer of value from one person to another without any corresponding transfer of value. Getting something for nothing, one might say. For this to work, there has to be a transferor as well as a transferee. The question arises of why the transferor would want to give value to the transferee. We do in our daily lives when, for example, we give our children their pocket money. However, extending this into adulthood does seem to stretch the point.

There have been other societies dominated by transfer payments. One thinks of the Rome of Nero and Caligula, the France of the Bourbon monarchy, the Russia of the Romanovs. None of these ended happily. Perhaps that is where we are headed? Our sense of entitlement is now so great that we believe that everyone else owes us a living? What happens if we find out that this isn't the case?

Stephen Aguilar-Millan

© The European Futures Observatory 2017

Four Futures: Life After Capitalism

Four Futures: Life After Capitalism

by Peter Frase (Verso Books 2016)

ISBN: 978-1781688137

I am often astonished at the power of a really simple futuring technique - such as 2x2 matrices - to generate such interesting results. This book represents one such exercise. There are many of the conclusions that I don't agree with, there are some parts where I feel that the model is ill-defined, but the overall product is one that ought to commend our attention.

The basic premise of the book is that the liberal order established by the Washington Consensus has moved beyond it's shelf life. It's very difficult to argue against that belief. However, that in itself is uninteresting because it fails to consider what comes next. A futurist would keep one eye on what is likely to replace the Washington Consensus. This is what the author attempts to do.

The analysis has two critical uncertainties - the axes of the 2x2 matrix - a world of hierarchy as opposed to a world of equality and a world of abundance as opposed to a world of scarcity. This gives rise to four possible worlds - equality with abundance, hierarchy with abundance, equality with scarcity, and hierarchy with scarcity. Underpinning each of these worlds are the twin issues of automation and climate change. These rather colour the approach to each of the futures.

Each future is characterised by the dominant features that the author believes will be apparent. Equality and abundance is characterised by communism. Not the Soviet communism to which we have become accustomed. More the communism described by Marx, where the state withers away and we can all live our lives in relative harmony. Many have described this rather utopian vision, but the author sees it as possible if the singularitarians and transhumanists are any where near correct.

Hierarchy and abundance is a different matter, however. In this case, automation leads to material abundance, but the protection of intellectual property rights leads to the benefits of automation accruing to only a few. The 1%, if you like. This scenario is dubbed as one of Rentism, as a fortunate minority benefits from the rents accruing to technology. These are 'Rents' in the Ricardian sense. In modern times, we would call this 'passive income' - money for doing nothing.

The world of equality and scarcity is characterised as one of socialism. In this case, the scarcity of climate change has outweighed any benefits accruing from automation. However, the scenario has a sense that society sees itself as being in it all together, and the climate induced hardships are shared out on a widespread basis. There is a lot to commend this view of the future.

The final scenario - hierarchy and scarcity - is perhaps the darkest. The author labels this a world of exterminism. In this world there isn't enough to go round, and those at the top of the hierarchy secure the lion's share for themselves. It leads to a widespread reduction in population numbers, a scenario characterised by the dominance of security issues and, ultimately, genocide.

As with all futures, there are elements of each of these which are evident in the present. For example, one dimension of exterminism could be seen as the apparent indifference towards the poorer nations displayed by the richer nations. One could argue that the recent moves towards co-ordinated climate action represents a socialist solution - the pain is distributed amongst those most able to bear it. Equally, it could be argued that the world of Rentism is evident in the technology sector today, where the winner takes all, protected by barriers of intellectual property law. The world of communism is less evident today, but one could argue that the NHS exhibits elements of that world.

If each of the scenarios are present today, it is not unreasonable to take the view that elements of each scenario will be present in the future. In many respects, this is how we ought to approach 2x2 matrices. They highlight potential dominant themes rather than produce a specific blueprint for the future.

This is all to the good, but there were points at which I felt a little short changed. This was over both the critical uncertainties and the dominant issues. With a focus on two critical uncertainties - social relations and material abundance - I felt that the book missed more than it caught. For example, I would have liked to see more prominence for the mechanism of distribution (market based or centrally planned?) to complement the issues of social relations (ownership and control). I feel that the author missed something important here.

One major omission in the book was a time frame in which all of this was to happen. A sharper focus on this would, I feel, have shed better light on the dominant issues. For example, if the book had a time horizon of a couple of hundred years (it was sub-titled 'Life After Capitalism'), then perhaps climate change might not be a dominant issue because the climate damage would have already been done. Equally, in two hundred years time, ought our current concerns about automation seem quaint?

By not grasping the issue of time, the author opens himself to all sorts of challenges in the realms of dominant issues. I would imagine that most futurists would be able to identify five off the top of their heads (mine would be war, security, space exploration, the funding of public services, and the re-invention of humanity). By omitting a time frame, the author leaves himself open to the criticism that he ought to have talked about 'those' issues instead.

I quite liked the book. It is short and to the point. It is readily readable. The author has an engaging style of writing which makes the prose just flow along. It is an important work on an important topic that is not a hard read. If only academic texts could follow this lead!

Stephen Aguilar-Millan

© The European Futures Observatory 2017