A power shift from New York to Washington, from Dubai to Abu Dhabi, from Shanghai to Beijing. The fall of globalization and the rise of state capitalism. President Obama shifting global opinion of the US back out of the red, but its a shift that is blown far out of proportion. 

These were but a few of the insights provided by Ian Bremmer, President of the Eurasia Group and author of bestselling books such as The J-Curve and the newly-released Fat Tail. A frequent contributor to the Harvard Business Review, The New Republic and The Financial Times, we were delighted to meet and converse with Ian at the Carnegie Council’s Public Affairs Breakfast Program on April 7, 2009.

With many portfolios down, the loss of equity and wealth have caused a severe impact internationally. Fears of global economic unrest leading to political instability murmur throughout contemporary society. 

When events unlikely to transpire actually occur, they will have a high impact and could have catastrophic effects. On a risk distribution curve, this is referred to as a “fat tail”, which could cause the downfall, in turn, of many well-known “fat cats”. 

Ian states that fat tails hit us, occurring almost every 15 minutes; his point and the theme of his book is that politics are now fundamentally driving them. 

The Eurasia Group rightly predicted that the most significant market impact internationally would be made from Congress, as opposed to the impact that could stem from actions by Iran or Russia. In this, he was referring to the steps made by President Obama during the economic crisis. The prestige Mr. Obama has in global leadership circles is indeed palpable but not necessary capable of accomplishing change in international collaboration, as witnessed during the G-20.

Impressionistic views of the G-20 summit:

President Obama has garnered a lot of political capital internationally, as proven in his reception at the G-20. However, it may not garner as much capital as one should expect. 

For example, when Mr. Obama earlier went out to France, speaking out in support of Turkey joining the EU - French President Sarkozy followed by stating that France unequivocally disagreed. “The ability of the US to create collective leadership in today’s environment is very limited“, noted Mr. Bremmer.

Overall the G-20 was a success, “it was a kluge, but a strong kluge. What it was not, was the beginnings of coordination of global regulatory policy or financial stimulus“. Mr. Bremmer feels that it went without saying that financial architecture strategy between the US and China are fundamentally disagreed upon and wouldn’t be altered at the summit or anytime soon.

Many felt that the US / China meetings that occured on the sidelines were a summit of the G2. Many now accept that China is a superpower at the level of the US. However, Ian feels that China’s capacity and willingness to play that role is not there.

Why politics are driving Fat Tails:

Over the last two decades, Eurasia Group wanted to understand globalization to a greater degree. However, Ian concluded that we are no longer living in a world being driven by globalization but now by state capitalism. We are now being driven by governments and by state actors. A series of events have served as prologue to this phenomenon; the creation of OPEC, the ascendance of national oil corporations, the rise of the BRICs and emerging markets, then the rise of SWFs on the institutional investment side, (there was no term for SWFs 5 years ago), etc. The tipping point for globalization being challenged by state capitalism? According to Mr. Bremmer, it was when Lehman Brothers went bankrupt.

With bailouts looming for many MNCs, it became clear that winners and losers are now going to be determined by government actors. When Mr. Obama came out last month stating that “we are facing economic catastrophe“, Ian took it as meaning the following: ” it doesn’t matter how many additional hundreds of thousands are laid off, if DC doesn’t get it right, we’re in serious trouble“.

The power shift goes beyond the move from New York to Washington. In the Emirates, one would previously look to invest in Dubai. Today, it is in Abu Dhabi, where a bailout of $10 billion was recently given to Dubai, and according to Ian, there will be more to come. In an environment where Dubai is potentially collapsing, liquidity being under constraint, politics begin to matter a lot more. Western portfolio managers have been sidelined, and instead political needs are being looked at foremost. It’s not about profit - its more about the allocation of funds that are made available.

There are consequences of a shift in power, specifically from Shanghai to Beijing, where statesments made by government actors clearly shift investor confidence abroad. As the Chinese look to work their way up the value chain by building infrastructure and increasing the technology of exports, their decisions will have an impact on the US dollar. If one was in Tokyo thinking about the Japanese allocation of currency, and one hears about the Chinese government suggestion for an alternative competitive currency, that has a domino effect of instability and a lack of investor confidence - and not just in the US dollar.

The geopolitical change:

As the world moves away from the US-led unipolar system, Ian argues that though there is a rise of “the rest”, we are not moving to a multi-polar system. He feels we are heading towards an abducation of leadership on the global stage. As an example, Russia has an interest in how Russia and perhaps its nearby post-Soviet states are run. However, Mr. Bremmer feels that Russia could care less as to how Latin America, for example, is run. 

Concluding remarks:

If one was to agree that we are moving towards a system of non-polarity and state capitalism, one must ultimately admit that those systems are not sustainable nor in equilibrium, and won’t deal well with global shocks. With regard to the United States, Mr. Bremmer feels the US is stable to deal with certain political or economic shocks, but that complacency is a dangerous factor, and may in turn end in the US not taking significant steps to address potential fat tails.

It was an interesting take on political risk in its broader relevance, the rise of unexpected shocks and a global economy’s preparedness for them and on where the Eurasia Group feels global polarity is shifting. I highly recommend picking up a copy of “The Fat Tail” and look forward to more insights from Mr.Bremmer.