An Unconventional Superpower

First edition of Abraham Ortelius‘ map of Asia (1572), displaying a vast network of waterways across East Asia, advocating his belief that a shipping route existed through China to the Northern Sea and thence, by way of the Northeast Passage, to Europe.

 

By Tim Abington. Tim is a 6th form student applying to study International Relations at the University of Birmingham in September.

Despite what would appear to be voters’ best attempts to say otherwise, there is still a case for multilateralism. Why? Because time and time again the physical world proves it can quickly overwhelm the human one when single states are simply not able to cope with a geography that ignores the human notions of sovereignty or national borders.

When talking about geography it’s hard not to use a map. Maps should be used more – they illustrate points in a direct manner that is hard to ignore.

So now, turning to your nearest atlas, flick to the relief map of the Middle East and glance at the contours. They show that anti-immigration arguments of misled compassion are missing a major point. Syrian refugees enter Europe partly because geography leaves little alternative. To the East are the Zagros and Elburz mountain ranges; to the South, the Syrian desert; neither are particularly hospitable or inviting to humans. To the West, the European plains, a flat relief, easily navigable and a moderate climate. It is ironic that one of the geographical factors that helped Europe conquer the world is now pushing it into a retreat.

Another geographical factor, climate change, goes well beyond that cliché image of a lonesome polar bear. It causes floods across Northern India whilst turning Southern Spain into a desert. Consequently, agriculture – always sensitive to its environment – is facing its biggest test in decades.

The Earth is getting warmer and crops are feeling its effects. Just as the English lawn turns yellow in summer, maize will wilt and die. Temperature rises will reduce growing seasons, increase heat stress and increase the range of various pests and disease vectors. There is no doubt that the ‘everyday staples’ will be affected by climate change. Last year, orange juice concentrate prices rose 21% as poor weather wreaked havoc with Brazilian harvests. Conditions are not going to get any more favourable, as the globe warms and air masses heat up, they hold a larger quantity of water vapour, resulting in greater precipitation. Quite simply, it rains more.

Across Northern Bangladesh the most common form of cultivated crop is Boro Rice, ideally suited to growing in shallow water. Yet all too easily, the entire crop is washed away by a rainfall that is just too much for paddy capacity. Rice forms the staple diet in South East Asia, so the issue is not limited in scope to just Bangladesh.

Staying in the region, South Asia is actually a perfect example of how international cooperation is required to overcome geographical barriers. The region is covered in rivers, wide and vast bodies of water, they ignore borders and flow as geography allows. The river sources are generally located in the Himalayan highlands of Nepal whilst the mouth flows out across the deltas of India. Any decisions made by Nepal, whether they be the building of dams or reservoirs, will have consequences all along the river basin, leaving rice paddies destroyed and populations displaced. Nepal imports $204 million of rice from India; it is in its interest to cooperate and minimise disruption to rice yields, humanitarian moralism aside, its own population needs feeding.

In September 2013 an article appeared in the ‘Financial Times’, “First Chinese cargo ship nears end of Northeast Passage transit”. 40 years beforehand, such a headline would only have been found in a science fiction novel. Yet a Chinese vessel, sailing from a port of Cold War enemy South Korea to the Netherlands – NATO and EU member – successfully completed a passage through Russian and Norwegian waters. The City saw it a testament to commercial enterprise and a sign of possible profits to come; multilateralists as proof of a need for international cooperation. International cooperation is required at all times, even more so than the current ‘hot spots’ of Suez and Panama, as ice, lack of infrastructure and a lack of civilisation in general make this a high risk (but arguably, a high reward) shipping route.

To maintain its pride of place as ‘the cheapest option’, container shipping operates to a ‘just-in-time principle’ – there is no place for petty disputes when it comes to arctic shipping. Information is needed and if that means cooperating with other less-desirable nations, then so be it.

These examples are but a tiny proportion of the multiplicity of cases where multilateral action is needed to respond to geographical hazards. The common theme across these responses is that it is in many nations’ best interests to act in concert, not so much due to ‘ideologies of cooperation’. Instead, multilateralism is required to counter geographical circumstances that overwhelm single nation states. Geography poses challenges, be it extreme weather, physical landforms or climate change. At the same time, international cooperation allows states to maintain their independence whilst overcoming these difficulties.

Geography remains a factor that will continue to determine domestic and foreign policy and any attempt to ignore it will, for the moment, remain futile.

PS21 is a non-national, non-governmental, non-ideological organisation. All views expressed are the author’s own.

Achieving Foresight with Impact

Cat Tully is founder of School of International Futures; a think-tank that builds the capacity of policy-makers, decision-makers and civil society to use and gain impact from strategic foresight.

 “Doubt is not a pleasant condition, but certainty is absurd”  Voltaire

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Chiliean Vineyard. Latin America’s success in the wine industry is attributed by one insider, interviewed by the author, to careful consideration of the region’s future trading prospects over 20 years ago.

Farhad Manjoo’s NYT article Why We Need to Pick Up Alvin Toffler’s Torch makes a depressing yet compelling diagnosis of the fate of “futurism” or “foresight”, a discipline designed to encourage long-term thinking in the face of uncertainty. “It’s not just future shock…” he writes, referring to Toffler’s 1970s book that describes a state of individual and community paralysis in the face of rapid change …”we now have future blindness”.

Foresight, he argues, has predominantly failed to achieve impact in a reactive and short-term world.   The abject failure of many government and corporate strategy functions to be remotely prepared for a UK Brexit referendum outcome- leaving many CEOs and leaders scratching their heads why they have these functions (and abolishing them in at least one famous US financial governance institution)- is only one of many examples of this phenomenon of “future blindness”.

I agree with the symptoms described by Manjoo, but having my spent career working in strategy for governments and the private sector, the last six specifically addressing systemic failures in the application of foresight in many different countries around the world, my diagnosis is different. In particular, I see three challenges that require attention if we are to rekindle Toffler’s flame.  We must overcome political discomfort in addressing the future, address the failure of the foresight field to share its own success stories, and help governments deal with the volatile, uncertain, complex and ambiguous environment they face.

Manjoo identifies both supply and demand-side failures that have encouraged “small-minded and short-sighted politics”, quoting Elisabeth Drew on the “near-total failure of our political institutions to invest for the future.” He identifies both supply and demand factors in the failure of the futurist discipline to influence policy-making.

On the supply side, a focus on prediction and self-promotion (Manjoo doesn’t go as far as saying crystal-ball gazing or snake oil selling – but others have) has compromised the reputation of the field. A crucial tenet of foresight is that it should not be about prediction but helping others to consider multiple future outcomes to build resilience.

On the demand side, the growth of partisan politics has trumped all other considerations for assessing the value of future policies, resulting in underinvestment in the skills, mindset and structures need for long-term decision making.

It is correct to conclude these failures result in ‘future blindness’, but even in less partisan environments, we are continuing to under- even dis-invest in long-term thinking despite well-made and respected arguments from all corners, including the United Nations, the World Economic Forum and the Oxford Martin School.  All this, despite CEOs and country leaders lamenting unprecedented levels of global uncertainty and calling for resilience and flexibility and growing regulatory requirements around preparedness and risk management. So, why does innovation in this field prove so difficult to embed?

My previous experience working on both the demand and supply side of this field, and then founding the School of International Futures to specifically address these failures, has provided insight into three additional points that are central to the challenges we face.

First, meaningful conversations about the future are deeply political in nature and should challenge closely-held and comforting beliefs (Jim Dator’s carefully worded profound second law about the future is that “the future must, at first sight, seem ridiculous”).  In 2006-7 when the UK government was developing its first National Security Strategy, scenarios outlining an unwinding of globalisation and financial de-growth were rejected as unfeasible and unacceptable.  The translation of insight about the future into better decision-making in the present must address this human response.

The participative foresight agenda can also be difficult for decision-makers to accept – our belief that citizens must be active participants in conversations about the future, not just so-called experts. This shift of power in decision-making can be seen to be both radical and often initially uncomfortable.

Second, the foresight field has fallen short in making the case for its contributions to effective decision-making.  There are few easily accessible case-studies showing the impact of foresight exercises, often due to the fact that success stories aren’t captured, curated and narrated more widely, or remain proprietary. But this is also an issue of causality, long timeframes and leaders, who in the rare case that they stay long enough in position to see the results, might prefer to attribute effective foresight to individual brilliance rather than process.

A more damaging issue is that some (even many) foresight exercises or processes remain theoretical and do not ground insights from into tangible implications for decisions today.  It certainly does not help that some foresight projects and programmes highlight only the obvious or take too long to deliver insights, resulting in genuine questions about the field’s relevance and value.

Finally, the impact of volatility on democratic governance systems undermines effective policy-making for the longer-term.  I don’t necessarily think we are in a more risky or uncertain world… (a debate for another time)…but I fear the assessment of being overwhelmed is essentially correct.  And our narrow bandwidth is overwhelmed by the infinite stream of alternatives beyond the terms of democratically elected office, or financial quarter, just as our individual minds are overwhelmed by the flood of data around us.  There seems to be reducing returns to governments in investing in policy decisions for the future, and therefore in the institutions that enable decision-making in the longer-term.

Nik Gowing and Chris Langon’s disturbing report, ‘Thinking the Unthinkable’ recently exposed a perilous deficit in the ability of leaders to spot, identify and handle unexpected events. The report, based on in-depth interviews with corporate and public service leaders, found that public and corporate institutions do not provide leaders with reliable or comprehensive horizon scanning that will prevent the surprise or ‘shock’ from ‘unthinkable’ events happening.

2016 is a unique year to address these challenges head-on. I am optimistic about the possibility of a major governance shift in the next three years driven by a global appetite for innovation arising from the Global Goals for Sustainable Development (SDGs).  The Global Goals has effectively been a global scenario and visioning exercise out to 2030 – taking a complex adaptive systems approach to achieve a sustainable, equal and fair future for all, respecting planetary boundaries.  This framework is driving changes in long-term governance and emergent strategic planning in countries as varied as Costa Rica, Israel, Finland and Rwanda.  There are two ways we can build on this momentum.

First, we must recognise and integrate foresight– not as a separate esoteric skillset done by “futurists” but – as a regular part of policy-making or standard organisational decision-making processes.  Within governments, there must be a recognition that engaging systematically with the future is a core civil service skillset and that effective foresight requires us to take a participative approach, engaging with our citizens and communities.  Within businesses, we need to integrate foresight into strategy and planning processes, and look to collaborate across sectors and industry when necessary.  And when these exercises are done – we must capture the results and value of foresight work to share our successes, and also acknowledge our failures. I like the wine example that is quoted below – a personal testimonial is a powerful way to show impact, value and attribution.  We need much more of these – and SOIF is busy collecting these stories internationally.

“Our wine industry’s current success is due to an exercise we did 20 years ago examining our future – it’s why we’re beating the quality of our neighbouring country’s wine“ SOIF Latin American Interview

Second, we need to go beyond creating institutions to create long-term governance ecosystems.  It is not enough to introduce a single innovation in the bureaucracy (e.g. to establish a foresight unit, or introduce foresight as a core competency for civil servants).  It is not enough to do so in the executive (e.g through a Minister of the future, cabinet meetings on Future trends, or coalition agreements between governing parties).  It is not enough to do so in the legislature (with Parliamentary Committees of the Future, Ombudsmen or Commissioners of Future Generations, or creating legal obligations for Public bodies to protect future generations), or even in the judiciary through “Future care duties”. (These are all real-life examples in countries as varied as Sri Lanka, Wales, Costa Rica, Finland, South Africa and Germany).  Instead, we need to take a systemic approach to encourage and mainstream long-term thinking by tackling different aspects of the state – that engage and in turn are supported by civil society, academics, philanthropists, and the private sector.

After all, foresight is a holistic approach that can empower people to shape a better world for this and future generations.  In a world that appears to be full of confusion, echo-chambers, populism and polarisation, foresight needs to be at the core of what governance is about – collaborative conversations about the future that return agency, meaning and power to people as citizens.

PS21 is a non-national, non-governmental, non-ideological organisation. All views expressed are the author’s own.

‘Womenomics’ in Japan

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Sally Herd spent two years living in Japan, where she worked at the Canadian Embassy in Tokyo. She is now a political consultant at Burson-Marsteller in London. She tweets @herd_sally

As the Japanese prime minister said in an address to the United Nations General Assembly in 2013, “enhancing opportunities for women to work and to be active in society is no longer a matter of choice … it is a matter of the greatest urgency”.

Japan is a country with an eternally sluggish economy, with an aging, immigration-resistant population. Abe’s “womenomics” offers a solution with its core tenet that a country that hires and promotes more women grows economically, and no less important, demographically as well. So in order to boost the Japanese economy, Prime Minister Abe turned to a long ignored asset: women.

Japanese women are among the best educated in the world. Yet only 65 percent are employed (and half of those are part-time workers), as compared to 82 percent of men. Work culture in Japan—which includes long work hours and limited leave — makes it challenging to reconcile career aspirations with domestic obligations. Up to 70 percent of Japanese women leave the labour force when they have children, and most do not return.

In response to this stalled development of women in the workforce, Prime Minister Abe pledged to create a society in which ‘all women can shine’. He acknowledged that women had long been an under-utilised resource in the Japanese economy and promised to boost female labour participation rates, increase the presence of women in corporate board rooms and improve gender equality.

Two years on, the initial hype may have faded, and critics lament that Abe’s economic experiment has failed. However, it is now, more than ever, that Abe’s ‘womenomics’ experiment needs to succeed.

The success of womenomics is integral to saving Japan’s flat-lining economy. The world’s third largest economy is crippled with stagnant growth and deflation. Government debt is mounting. Bringing more women into the workforce is a key way of raising Japan’s economic game. According to “Womenomics”, a Goldman Sachs report, it was estimated that if the employment rate of women in Japan equaled that of men, it would boost the country’s GDP by as much as 12.5 percent.

The success of womenomics is also central in helping Japan beat its demographic issues. Japan’s birth rate slumped to a record low in 2014. Some estimates say that by 2050 the population could be as low as 97 million – 30 million lower than now. A drop in the number of 15 to 64-year-olds is predicted to lower potential growth and shrink Japan’s GDP. That in turn is expected to harm the pension system and other elements of social welfare. The impact in rural areas is predicted to be especially damaging, putting the very existence of some communities in danger. Without a significant change in the birth rate, Japan is facing a demographic time bomb.

However, there are enormous hurdles that stand in the way of changing Japanese society’s views of women in the workforce. Tellingly, last year, Japan ranked 105th among 136 countries in the Global Gender Gap Report issued by the World Economic Forum.

Employees in Japan traditionally work exceptionally long hours, making it difficult for mothers with young children to stay in the workforce. As of 2013, there were still 22,741 children on waiting lists nationwide for daycare facilities. Likewise, the rapidly growing problem of caring for one’s elderly parents has not been adequately addressed by Abe’s policies. More than 95,000 Japanese, 80 percent of them women, quit their jobs to care for relatives, mainly parents, last year. Those women who do return to the workforce usually find themselves locked into low-paying, part-time contract jobs.

Moreover, fathers rarely play an active parenting role and government policies actually reinforce the breadwinner system by giving tax breaks to households where one spouse works only part time. Japan’s out-dated social norms and government policies may explain why 70 percent of women give up their jobs after having their first child.

Another challenge for female employees in Japan lies in the workplace itself. At the very top of corporate Japan is the “bamboo ceiling”—so-called by women for being thick, hard and not even transparent. In 2011, 4.5% of company division heads were female, up from 1.2% in 1989. But relative to other countries the numbers are still dismal. Of the most senior, executive-committee-level managers in Japan, 1% were women in 2011, according to a regional study by McKinsey. The equivalent figure for China was 9% and 15% for Singapore.

Furthermore, societal attitudes towards working mothers may explain why there are so few Japanese women in senior managerial positions. Workplace discrimination and bullying of pregnant workers is known in Japanese as matahara, or “maternity harassment.” According to Rengo, Japan’s biggest trade union confederation, a fifth of young mothers experience some kind of office harassment.

Since Abe’s first unveiled his womenomics policy, there have been small shoots of progress. Government initiatives such as increased childcare leave benefits, subsidies and tax incentives for companies deemed “women friendly”, reduced waiting lists for child-care programmes and greater workplace flexibility, such as teleworking, have helped introduce one million women to Japan’s labour force.

Nevertheless, when it comes to womenomics, Abe’s “to-do list” remains long. The Prime Minister must re-adjust Japan’s idea of work-life balance by convincing both men and women that long working hours have many disadvantages for both societies and companies. Societal factors such as in-work bullying against pregnant women and working mothers must be challenged from the top-down.

While critics suggest womenomics will end with Abe’s departure, optimists believe that a generational change by 2020 would ensure women’s empowerment becomes the norm rather than a political buzzword. In short, Abe needs to prove that womenomics is for real, not some national corporate-social-responsibility exercise. The country’s future literally depends on it.

Roundup: Our top five posts on economies and markets

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The world economy is looking a bit bleak after the recent crisis in Greece and crash in China. Read these five posts to learn how international politics and foreign policy can interfere with markets all over the globe.

The Deflation Shock: Geopolitical Ramifications of the Global Commodity Price Drop: In this article, David Murrin, author of Breaking the Code of History, examines the impact of a global deflation period in various regions.

Deflation driven by loss of global demand like this is not easy to combat, as the Chinese are now realising. For commodity prices to be where they are now, it is clear that the world as led by China is suffering a slump in demand, which suggests that economic growth is much lower than the world’s stock markets are trying to reflect. This suggests that an imminent and very large asset reprising will take place in the months ahead.

How did London become ground zero for the global plutocracy? Peter Apps, executive director of PS21, looks at the transformation of London properties into vehicles for tax evasion.

London – and, for that matter, the global network of trading cities it gave birth to such as Dubai, Singapore and Hong Kong – promises both the rule of law and utter opacity. It’s just the right balance to appeal to dubious people with colossal quantities of money.

According to Transparency International’s analysis of data from the Land Registry, 36,342 London properties are owned by what they call “offshore haven companies”. That means trusts or companies headquartered in places like the Channel Islands or British Virgin Islands. These can be remarkably effective in masking true ownership.

Two World-Changing Deals: Greece and Iran: Jack Goldstone, expert on revolutions at the Woodrow Wilson Center and George Mason University explores both deals and their effects on foreign currencies, US foreign policy and their respective regions.

After endless, and sometimes seemingly hopeless, negotiations, diplomats have produced two new multinational deals that go a long way toward righting what’s been going wrong in the world: one on nuclear development in Iran and the second to keep Greece in the euro.

Both of these deals provide better outcomes than failed negotiations would have. They demonstrate that dedicated diplomacy can still achieve positive solutions within an integrated global system that is more or less still functioning.

When markets meet geopolitics: an interview with Emad Mostaque: Watch this video interview with Ecstrat strategist Emad Mostaque to learn about the implications of the stock market crisis in China and Greece’s sovereign debt crisis on the global economy.

The structural factors that have contributed to both the Greek and the Chinese crises have been brewing for a while, but one of the key things is that they’ve effectively come to the end of their rope in many ways. Greece came to a point whereby it basically needed a bailout. In China’s case, it basically came to the point whereby the government can no longer refinance its economy through the stock market.

PS21 Insight: Eurozone clinches deal, serious strains remain: Finally, for more on the Greek deal, read our report on the referendum, with insight from Sir Michael Leigh, senior advisor to the German Marshall Fund of the United States, Giulia Pastorella, Italian political economist, and Peter Apps, executive director of PS21.

Leigh: The continued readiness of both sides to seek a compromise rather than slam the door is encouraging. The result, though, is a muddle-through which Greece and the creditors will find hard to sell to their constituencies. The improvised series of finance ministers and summit meetings demonstrates the lack of a dependable system of Eurozone governance and the prevalence of short-term political thinking over sound economics.

When markets meet geopolitics: an interview with Emad Mostaque

On September 2, 2015, PS21 interviewed Emad Mostaque, strategist at Ecstrat, on the implication of the stock market crisis in China and Greece’s sovereign debt crisis on the global economy. In the video above, Mostaque looks at the role of national and global monetary institutions and the levers emerging markets.

The structural factors that have contributed to both the Greek and the Chinese crises have been brewing for a while, but one of the key things is that they’ve effectively come to the end of their rope in many ways. Greece came to a point whereby it basically needed a bailout. In China’s case, it basically came to the point whereby the government can no longer refinance its economy through the stock market.

The Deflation Shock: Geopolitical Ramifications of the Global Commodity Price Drop

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David Murrin is the author of Breaking the Code of Historythe culmination of decades of personal research across a wide range of disciplines. David compellingly argues that human behaviour is not random, but determined by specific, quantifiable and predictable patterns fuelled by our need to survive and prosper. He has called this cycle The Five Stages of Empire, which due to its fractal nature is applicable to empires, all the way down to the cycle of the individual. According to David, to resolve the issues confronting us today we cannot merely study the past. The human race will need to understand this precise algorithm of behaviour that has caused us to re-enact the same destructive cycles in ever-greater magnitudes, in order to change our future. He is also a Global Fellow at PS21.

We have for quite a while now been predicting a sharp period of deflation from 2015 to as late as 2018. This prediction has been based on the Kondratieff cycles’ second phase, which corrects the first impulsive stage of commodity inflation. We maintain our view, despite the assurances of various central banks, that this is only a short-term dip. Indeed, the ongoing decline in global commodity prices suggests that these deflationary dynamics will accelerate in the next 12 to 18 months.

One of the interesting questions about the Kondratieff cycle is that its price history has–until the past decade–been based on the cycle of the Super Western Christian Empires as these were the dominant industrial powers across the globe during the past two centuries. With the current dip in Chinese demand, we are now able to confirm that the rising Super Asian Empire has phased its commodity demand cycle with that of the West.

Why? Because this deflationary cycle has to a large extent been driven by the loss of demand within the Chinese economy. As such, we should expect to see that loss of Chinese demand continue for the next 12 to 18 months and the Chinese authorities wrestle with increasing economic dislocation.

Deflation driven by loss of global demand like this is not easy to combat, as the Chinese are now realising. For commodity prices to be where they are now, it is clear that the world as led by China is suffering a slump in demand, which suggests that economic growth is much lower than the world’s stock markets are trying to reflect. This suggests that an imminent and very large asset reprising will take place in the months ahead.

My concern is that this event will represent a global financial shock of greater magnitude than 2008 and possible of a similar magnitude as 1929. The Western Central Banks had financial levers to contain the shock of 2008, which are now no longer available, so the impact will be much greater. Indeed, the use of the printing presses in what we know as QE has inflated stock and asset prices to completely unrealistic levels, and the gap below to reality is probably greater than ever before. Hence, we should expect not only very deep price drops, but moves that are very powerful.

In Breaking the Code of History, we discussed the concept that shocks such as this deflationary shock affect every economy simultaneously and usually with the same magnitude. However, what differentiates the strong from the weak nations is the speed of the recovery and whether that recovery subsequently reached new highs.

Although this shock started in China, this is not the all clear signal that the Chinese challenge is ending, as I would anticipate that they recover faster than any other nation. Conversely, I reckon that the greatest losers will be the weaker Western nations. Certainly the EU is top of that list, but close behind is America. Thus, I would expect this shock to accelerate the power shift from West to East.

In addition to the effects associated with the long-term five stages of empires cycles, changes in the commodity cycle create geopolitical shifts in power of smaller cycle degree. In assessing the oncoming ramifications of global deflation, the first nations to consider are the commodity producers themselves.

Russia

Russia has been hit threefold with economic mismanagement, Western sanctions and lower oil prices, which have placed it in a very precarious situation. On one hand, there are the forces of economic implosion that might lead to civil unrest against Putin, but on the other hand, there is the argument that the West caused the problem via sanctions. Putin could use any external event to trigger a war to unite his people in a common cause to save himself. This situation needs to be carefully monitored and managed and is a very high-risk scenario.

The United States

The effect of the price decline on America as a high-cost oil shale producer seems to have been neglected with the ramifications of a massively shrinking nation’s shale oil industry. America will be forced back into the geopolitical sphere of oil importation and dependence on the Middle East and thus will have to show a greater engagement against ISIL. The boost to its economy from lower oil prices will not counter the overcooked price levels of the stock markets hyped on QE. However, in the long term the inactive oil shale fields will act as a national hedge for America as they could be reactivated when the oil price goes up again after the bottom has been reached.

Government subsidies would enhance this process. Politically, this shock will ensure that Obama’s popularity plumbs new depths and that he will go down in history as the most unpopular president ever, almost guaranteeing a Republican winner the next time round. As per 1929, American investors will be forced to withdraw their overseas capital to shore up the onshore balance sheets, especially in the emerging markets. This will create future opportunities for Chinese investment and increased influence.

Middle East

Saudi Arabia and Iran will once more become important due to the low cost of their oil. However, the civil war in the Middle East is expected to continue and intensify in complexity, especially if nuclear proliferation takes place.

Africa

Growth in Africa has been driven by the investment boom in commodities coupled with indigenous demographic expansion. The latter is powerful enough to maintain growth on its own, although at a lower level without the commodity boost. However, nations such as Nigeria with dependence on oil production will undergo considerable economic stress compounded by poor governance.

Meanwhile, the importer of commodities might not find lower prices as beneficial as one would have expected.

China

China will undergo a phase of significantly lower growth and retrenchment with the demand gap. However, this period of economic uncertainty should not be used to argue that a central demand economy does not work and will fail, but rather be seen as a similar dip to the Asian crisis and a healthy retracement. We would not expect to see no change in the aggressive expansive Chinese foreign policy, indeed it may become more so, in balance to its internal economic weakness. In addition, the Chinese will use this commodity dip to keep buying the best assets at the lowest prices, as they maintain a long-term view of their own growth just not present in the West.

Europe

The failed economics of Europe will make it most vulnerable to the effects of deflation and asset price depreciation. This will most probably provide the catalyst for the restructuring of the EU, with further knock-on effects for global markets.

Thus, in summary, we expect the months ahead to produce both large economic and geopolitical stress globally. Astute consumer nations should use these price dips to acquire cheap assets and reduce future dependency on importation. However bad the deflationary period may be, the ensuring inflationary period will bring its own significant geopolitical changes.

Earlier versions of this article originally appeared on DavidMurrin.co.uk on Monday, August 24, 2015 and Wednesday, August 26, 2015.

PS21 is a non-national, non-ideological, non-governmental organization. All views expressed are the author’s own.

China’s Dream, Russia’s Ambitions

China President Xi Jinping and Russia President Vladimir Putin along with other BRICS leaders, November 2014.
China President Xi Jinping and Russia President Vladimir Putin along with other BRICS leaders, November 2014.

Jack Goldstone is an expert on revolutions at the Woodrow Wilson Center and George Mason University and a global fellow at PS21. He is the author of “Revolutions: A Very Short Introduction.” Follow him on Twitter at @jgoldsto.

President Xi Jinping of China has been offering his countrymen a vision of China’s future that he labels the ‘Chinese Dream.’ This future China will be prosperous, respected, and environmentally sound; it will be influential and admired for its accomplishments in creating a harmonious, stable, and well-off society. In pursuit of these goals, Xi has cracked down on corruption, elevated the importance of environmental regulation and quality of life over simple pursuit of maximizing GDP, and sought to encourage China’s leadership in regional development through new institutions like the Asian Infrastructure Investment Bank. Xi has also sought to increase China’s influence in the region and the world through its role in international organizations like the BRICS, ASEAN, and the Shanghai Cooperation Organization.

Russia would seem to share much the same dream. President Vladimir Putin speaks of creating a Russia that is prosperous, influential, and respected. Russia and China also seem to share a political vision. Rejecting Western notions of multi-party democracy and separation of powers, both countries have leaders who believe that strong individual leadership and centralized authority, with no role for an active organized opposition, is essential to preserving stability and reaching their goals.

So it seems natural that China and Russia should become close partners. With similar visions, couldn’t each help the other achieve their goals? The recent deal between China and Russia for long-term supply of natural gas to China seemed to mark a new era of cooperation between the two nations. With visions of a new trans-Siberian high-speed cargo line that would allow Russia to serve as a major transit line between China and Europe, the opening up of Arctic sea lanes that would provide another global east-west link, and cooperation on a host of international issues, from containing Iran’s nuclear ambitions to fighting Islamic terrorism, Russian-Chinese cooperation would seem to have entered its strongest phase since the Sino-Soviet split.

Yet these appearances are deceiving. The cooperation between Russia and China is extremely one-sided, benefitting China but offering little to Russia in return. All the leverage is on China’s side, and indeed China looks set to get stronger while Russia grows weaker. For Russia to hedge its bets on a Chinese alliance is extremely ill-advised, as helping China achieve its dreams may produce the opposite effect in Russia.

Between a rock and a hard place

Russia would like to return to its days of being a superpower, or at least being a major power in a multi-polar world, regarded as an equal of Europe, China, and the United States. No doubt Russia is their equal in its contributions to world music, science, and literature. But if one looks at demographic and economic relationships, it appears that Russia is out of its league.

Russia has finally resumed population growth, driven by improvements in fertility and mortality. Its population today, including that of Crimea, is almost 145 million. Yet this good fortune likely will not last. Fertility was boosted by prosperity and generous government programs; with lower oil prices and Western sanctions limiting economic growth, fertility is likely to stabilize or decline. Given that the women now coming into their prime child-bearing years are those of the exceptionally small cohort born in the post-Soviet crisis years of the early 1990s, birth rates are certain to fall. At the same time, economic distress and looser rules on sales of alcohol will likely see mortality rise again. The drop in value of the ruble has also made working in Russia less attractive to labor migrants. Putting all of these trends together, Russia’s population is likely to decline again in the coming decades, falling to perhaps 130 million by 2030.

To the west of this modest-sized Russia (about the same in population as Mexico or Japan today) would be a European Union with 465 million inhabitants, and to the east, China with 1.4 billion people. Thus the European Union and China will likely, by mid-century, have 14 times the population of Russia. In terms of their economic output, according to the International Monetary Fund, the GDP of the EU today is $18.5 trillion, adjusting for purchasing power parity (PPP). That of China is $17.6 trillion. Together, they have economic output of $36.1 trillion, or 10 times the economic output of the Russian Federation ($3.56 trillion). Even if China’s growth slows to 5% per year from its present 7%, it is likely to continue to grow more rapidly than Russia; by 2030 it seems likely that the combined economic output of the EU and China will also be 12 to 14 times as large as that of Russia.

In short, Russia is facing overwhelming odds in trying to position itself as a third ‘polar power’ in Eurasia between Europe and China. It is as if Japan tried to be a third major co-equal power in the Pacific between China and the U.S. It is simply not sustainable. More likely Russia will be squeezed between the much larger and economically mightier regions of the European Union and China.

Simple truth

One can see the difference in strategic positions in the approaches being taken by China and Russia on the world stage. China is firm in expressing its territorial ambitions, especially in the South China Sea, but has so far avoided any overt conflicts. Instead, it has tried to win influence over its neighbors by offering investments, trade agreements, and institutions. It has embarked on a massive campaign against government corruption, and signed an important agreement on climate-change gases with the United States.

By contrast, Russia has found itself engaged in wars across its borders, first in Georgia and now in Ukraine, that have cost it international goodwill and millions of rubles but have brought few benefits. Russia has little in the way of investments to offer other nations; instead it is struggling to limit capital flight to save investment capital at home. Instead of agreements to broaden its trade, it has responded to Western sanctions by further restricting imports. Instead of cracking down on corruption and supporting international efforts on climate change, Russian business and government corruption remains largely immune to requirements for transparency and probity. And while the U.S. and China are assuming leading roles dealing with global climate change, Russia sits on the sidelines, its government and economy still heavily dependent on the sales of fossil fuels to countries that are in fact doing all they can to cut back on their use.

These differences reflect a simple truth: China is able to approach its dealings with the world from a position of strength while Russia is dealing from a position of weakness.

Reengaging with Europe

As stated, the Russian Federation will not be able to act independently as a third major power on the Eurasian continent – its population and economy are far too small, and its dependence on natural resource sales and unchecked corruption render it more and more like an under-developed nation, rather than a modern scientific and industrial one. If Russia becomes mainly a natural resource supplier and transit hub for China’s massive economy, Russia will be ever more dependent on the ups and downs of China, and the whims of its leadership. Down this path lies loss, rather than gain, of Russia’s autonomy and security.

So where can Russia turn to restore its strength? Oddly enough, the logical answer is to Europe. Together, Europe and Russia would be a reasonable counterweight to China in both population and economic might. Europe and Russia working together would span the entire Eurasian continent, and like the United States would be both an Atlantic and Pacific power. Russians are, despite their proud and independent culture, mainly European – Russian art, culture, literature, and religion are solidly within the European family, respected and admired for their contributions to Europe as a whole.

Yet instead of taking its natural place as one of the leading powers within Europe, Russia has essentially gone to war with Europe over the issue of allegiance and influence in Ukraine. This conflict over a small and economically modest nation (Ukraine’s economy of $370 billion, PPP-adjusted, is smaller than that of Peru or Romania) has moved Russia further away from full engagement with the multi-trillion dollar economy of the European Union. Of course, Russia’s long association and feelings of kinship with Ukraine have led to Russia’s military engagement there. But in the long run, this conflict, like that in Georgia, simply moves Russia further away from the logical position in which it would have its greatest economic and political strength, and that is through closer engagement with Europe, not conflict and separation.

If Russia is to win the world’s respect and admiration, it needs to return its economy to growth, reduce its dependence on natural resource exports, limit corruption, and open its economy to greater competition. Selling ever more raw materials to an ever-more-dominant Chinese economy will not achieve these goals. Instead, internal reforms, making peace in troubled regions, and seeking to take advantage of opening and further engaging with Europe are the ways that Russia can restore its strength.

The world has changed, and the Russian Federation will never play as dominant a role in global affairs as did the Soviet Union in the 1950s and 1960s. At the same time, the Russian people should never again suffer from conflicts as they did in the Second World War. Moreover, with the advance of Russian technology and skills, the Russian people have every reason to expect that even in a smaller Russian state, they will achieve new heights of prosperity and security. France and Britain are no longer superpowers, and Switzerland never was (except in watch production), but the quality of life their people enjoy today is something that Russians would gladly enjoy as well.

Russia’s strongest future is not as an isolated nation, but enjoying its status as one of the largest and most powerful countries within Europe. To fully realize that future, however, Russia will have to shift back to a course of engagement and friendship with Europe. The sooner that takes place, the better for Russia and its people.

This piece originally appeared in the BRICS Business Magazine English Edition No.6(10).

PS21 is a non-ideological, non-governmental, non-partisan organization. All views expressed are the author’s own. 

PS21 Insight: What will the new Suez Canal mean for Egypt?

A US aircraft carrier during its transit through the Suez Canal.
A US aircraft carrier during its transit through the Suez Canal.

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  • ‘New Suez Canal’ project likely won’t have as many economic benefits as hoped
  • Instead, it’s been called a vanity project for Sisi’s administration
  • Despite doubts, it likely doesn’t represent a threat to Egyptian national security
  • What it could do is restore confidence of foreign investors

Last Thursday, Egyptian President Abdel Fattah al-Sisi officially dedicated what many are calling ‘the new Suez Canal,’ an expansion that will run parallel to the original canal. In addition to allowing for more traffic to pass through and reducing ships’ waiting times, Sisi claims the ‘new canal’ will grow the country’s economy exponentially.

Since it was announced last year, however, the plan has faced considerable criticism. This type of large-scale national project alone, critics argue, is not enough to pull Egypt out of the economic crisis that has plagued the country since its revolution in 2011. Additionally, it could weaken national security.

Below are some early conclusions from a selection of PS21 contributors. If you’d like to contact any of them directly, please email ps21central@gmail.com.

David Hartwell: former British Ministry of Defence official, now editor of Middle East Insider.

Amr Ismail: writer and commentator specializing in Middle East affairs.

There are fears that the new canal could hurt national security, which the Egyptian government has rebuffed. These concerns could be unfounded, but with the country currently fighting ISIS on the Sinai border, it seems unwise to ignore them completely.

Hartwell: Whether the expanded canal now… represents an enhanced security threat to Egypt is… an issue. The Egyptian army is of course currently in the midst of battling Islamic State-affiliated militants in the Sinai Peninsula. Since 2011 they have been loosely linked to very sporadic low-level attacks on the canal – mainly in the form of rocket-propelled-grenades launched in the direction passing shipping. The canal zone is effectively a closed military area with heightened security measures that have deterred any potential attempt to close the canal or damage shipping and there is little reason to suggest that these will not continue to deter attacks in the future. Areas of concern in the future though might be the planned new tunnels under the canal linking the Sinai to the rest of the Nile delta. These could become targets in themselves or conduits for terrorist infiltration in the future, although this has likely been weighed by the Egyptian security forces as a threat that can either be managed or deterred.

The government has also–somewhat ambitiously–projected high economic growth as a result of the new canal, which is unlikely. Most agree that the project will affect the economy, but just what the impact will be is still unclear.

Hartwell: The newly constructed stretch of canal will officially open on 6 August yet the extent of its economic benefit to the Egyptian economy remain unclear. While the Suez Canal Authority and Egyptian Army who have overseen the project confidently predict that annual revenues will more than double from US$5 billion to US$12 billion, others experts are more circumspect, suggesting that traffic may not reach the numbers projected until perhaps a decade in the future, suggesting that, at least in the short term, the new project will struggle to profitable. These fears echo concerns by numerous shipping experts who have also questioned whether the project is economically justified based on global shipping traffic trends.

Ismail: Although the project gives indication that Egyptian government is committed to develop the economy which [has] suffered a lot since 2011, problems like corruption and poverty still need more than a “new canal” to be solved.

One thing that everyone agrees on, however, is that the new canal has sparked nationalist sentiment in Egypt.

Ismail: Domestically, the new project [has] caused waves of patriotism in Egypt. The canal has played an important role in the Egyptian history and the struggle against colonization. The new canal was completed in one year under difficult circumstances, economically and in terms of security. As the canal is a source of pride and patriotism for the Egyptians, it is not hard to understand that the celebrations aim to enhance the national feelings of the Egyptian people at time the country is fighting Da’esh (ISIS) militants [on the] Sinai-Gaza border, and facing… political instability and terrorism from neighbor countries.

Hartwell: [The] economic concerns… underestimate the extent to which the project is as much a prestige political venture designed to bolster the domestic image of President Abdel Fattah el-Sisi as it is a project grounded in economic certainties. That said, as well as reflecting political kudos on Egypt’s new rulers, the scheme has nevertheless been designed to inject confidence into the economy and convince Western investors that the Egyptian economy is bouncing back from years in the doldrums as a result of the prolonged political instability in the country. While the scheme appears to have helped Sisi consolidate his hold on power, whether it achieves the latter aim of restoring investor confidence remains to be seen.

PS21 Insight: Iran deal implications go well beyond the nuclear

US Secretary of State John Kerry shakes hands with Iran Foreign Minister Javad Zarif, July 14.
US Secretary of State John Kerry shakes hands with Iran Foreign Minister Javad Zarif, July 14.

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  • While deal theoretically limited to nuclear program, much broader implications
  • Could help Iran back into international mainstream after decades of pariah status
  • Alternatively, need to placate hardliners could leave little real difference
  • Israel, US Gulf allies furious. Some believe the latter may now embrace their own nuclear programs
  • if the deal goes through, Iran could expect significant inward investment and economic growth
  • Islamic State conflict means other potential route to bring Iran into mainstream. More broadly, though, regional Sunni-Shi’ite tensions rising — which could again push Gulf states towards their own nuclear program

On Tuesday, July 13, the so-called P5+1 major powers — the US, Russia, China, France, UK and Germany — sealed a landmark nuclear deal with Iran.

Below are some early conclusions from members and contributors of the Project for Study of the 21st Century (PS21).

If you wish to contact any directly, please e-mail ps21central@gmail.com.

Please credit PS21 if you quote from this report

Contributors:

Nigel Inkster: former deputy chief of Britain’s Secret Intelligence Service (MI6), now head of transnational threats and political risk at the London-based International Institute for Strategic Studies and PS21 global fellow.

Hayat Alvi: Professor of Middle East Studies, US Naval War College, and PS21 global fellow.

Emad Mostaque: strategist, emerging markets consultancy Eclectic Strategy.

David Hartwell: former British Ministry of Defence official, now editor of Middle East Insider.

As expected, the deal is proving deeply divisive. For its backers, it provides the best hope since the Iranian revolution of bringing Iran back into the international community. For its critics, it is far too soft, still leaving a potential Iranian nuclear bomb on the table in the still quite near future and stripping away many of the levers of influence the outside world had.

The reality, of course, is that it is still too soon to say. Possibly, the return of decent economic growth and perhaps political liberalisation will make Iran much less likely to pursue a bomb. If regional tensions — particularly with the Gulf States — continue to intensify, however, it may end up fueling the very regional arms race it was supposed to stop.

Inkster:  The thing with this deal is that, as Robin Butler observed about the Iraqi (British) WMD intelligence (used to justify the 2003 invasion), it is being asked to carry more weight than it can bear.

Huge geo-strategic significance is being invested in what, at the end of the day, is a pretty technical agreement whose implementation is likely to be subject to constant niggling – and which in any case has a fifteen year sunset clause which in the overall scheme of development of nuclear programmes isn’t all that long.

The Arab world seems likely to begin looking at its own nuclear programmes with Saudi in the lead.

Alvi: This is a major political and diplomatic achievement for Presidents Obama and Rouhani.  Most of the Sunni Arab states and Israel are not happy with the deal, nor are they happy with the United States.  They are highly suspicious of Iran’s intentions, agendas, and potentially deceptive courses of action even within the framework of this deal.

President Obama has commented that this deal is not built on trust, but rather on verification.  The naysayers will only be satisfied – albeit partially – with rigid inspections that do not let up on placing Iran under the microscope throughout the 15 years.  It begs the question, though: do they not see that the absence of a deal would make the situation in the region more precarious?

Should the Iranian regime be trusted with this deal?  Probably not completely, but that’s exactly why their nuclear program should remain under the microscope.  That’s likely to happen, at least for the next 15-25 years.  That’s not a bad thing.

Mostaque: It’s a good deal with regards to its primary aim of curbing an Iranian nuclear breakout that falls in line with our expectations from March in its details.

Rather bad for oil and related markets, rather good for the Iranian stock market and those interested in investing in quite possibly the most interesting market in the world and one surprisingly easy to access once Banking/SWIFT sanctions are removed.

Geopolitically it adjusts the balance of power in the region, but not alarmingly. Obama will use his remaining months to force it through. I doubt the new President will reverse it unless Donald ascends to power.

Sanctions removal seems gradated and surprisingly broad including some I thought wouldn’t come off given Iran’s continued designation as a state sponsor of terror. Banking/SWIFT sanctions are key and will come off with IAEA verification

Full analysis here.

Hartwell: The Obama administration has taken the view that the Iranian nuclear issue should be dealt with in isolation of the other areas in which Iran is seen as a regional threat, be they Tehran’s support for terrorist groups in Lebanon or the Palestinian territories; its interference in Iraq; or its support for the Assad regime in Syria.

The nuclear agreement announced with Iran on 14 July confirms this view and, whether Obama’s opponents like it or not, it constitutes a significant foreign policy victory, appearing to lock Iran into an intrusive, albeit managed, verification regime and a long-term staged lifting of the most important sanctions related to Iran’s missile and military technological development. So-called ‘snap-back’ arrangements for the rapid re-implementation of sanctions add a further layer of security that should help win over some of the deal’s sceptics among the president’s own Democrat allies.

The next question is how this will follow across into the broader geopolitics of the region. In the battle against Islamic State, Tehran does find itself on the same side as the US and many others in the region.

This fight, however, is seen a considerably lower priority by many Sunni states in the region — probably including Saudi Arabia — than their broader confrontation with the Shi’ite power bloc led by Iran. This is particularly true in Yemen, where Tehran-backed Houthis face a Saudi-led alliance

In recent years, the US has tended to ally with the Sunni. It may now simply find itself caught in the middle.

Inkster: The agreement is highly unlikely to translate into a wider US-Iran rapprochement.   Indeed it is quite likely that Khamenei may have to give the more extreme elements of the regime their heads to show that he has not gone soft, so we may see more egregiously bad Iranian behaviour in the short term.

They (the Saudis) are unlikely to be able to purchase a self-assembly bomb but may invest in the precision-engineering skills needed to make their own – not necessarily with inputs from the Pakistani programme as these are easily monitored.

Regional public opinion will also be important.

Alvi: Also, regarding this deal, the Sunni Arab states do not like the idea of lifting any sanctions against Iran, because they see it as an opportunity for Iran to empower itself.  The reality is that Iran has managed to empower itself already, even while enduring harsh sanctions.  Look at how far and wide Iranian influence has reached throughout the Middle East, especially in Iraq in the post-U.S. invasion era.  Iran has also managed to manufacture and maintain its missile program, existing nuclear program and its still-strong military, its support for Hezbollah in Lebanon and Bashar al-Asad in Syria, and a host of media channels and online activities.  In the U.S., you can watch Iran’s Press TV in English, and you can follow President Rouhani and the Supreme Leader Ayatollah Khamene’i on Twitter.

Moreover, there is another side to the regional public opinion.  During my time in the Middle East, I often heard opinions criticizing Israel’s deceptive ways of creating and sustaining a nuclear arsenal, while the U.S. turns a blind eye.  The same is often pointed out about those countries that have built nuclear weapons programs outside of the parameters of the Non-Proliferation Treaty (NPT), which regulates nuclear programs.  Such countries include Pakistan, India, and North Korea.  Many in the Middle East region and even globally feel that Western powers exhibit gross hypocrisy in enforcing the NPT.

It remains to be seen how this will fit into the war against Islamic state.

Hartwell: The problem that policymakers in the West are likely to face, if they are not facing it already, is that bringing Iran officially into the coalition against IS would probably be good policy but bad politics.

Iran is already an unofficial participant in the war against IS through its support for Shia militias leading the Iraqi fightback against the group and by its support to Syrian regime and Hezbollah troops fighting IS in Syria and already therefore sees itself as part of the solution to the IS threat. Embracing Iranian support could allow intelligence sharing and co-operation.

It might even permit more informal and indirect tactical military co-ordination of the type that has surely already occurred in Iraq. Presenting a united Sunni-Shia-Western front to IS would also go a long way to combating the anti-Shia, anti-Western narrative that IS has fomented with the aim of provoking region-wide sectarian conflict.

There are of course no guarantees that Iran could be trusted to not use the legitimacy bestowed on it by such an ‘alliance’ to simply increase its level of interference in Iraq, Syria and Lebanon.

Formally embracing Iranian assistance brings with it many uncertainties, but surely no more than continuing to exclude Tehran from that rare thing in the Middle East – a fight against a genuinely common enemy.

Inward investment to Iran could now be relatively dramatic. Its stock market is now described as one of the “most interesting” in emerging markets. Its economy will now have access to technology — such as new aircraft — denied for a long time. Its underinvested energy sector will now have the opportunity to thrive.

The arrival of its oil on the market, however, may undercut already faltering global prices.

Mostaque: It is worth noting that Iranian oil is fairly low cost and the current outline of new production sharing agreements looks attractive, so this is oil that is highly likely to come to the market versus higher cost fields elsewhere. Iran has proved oil reserves of 160n barrels, 10% of the global total and the world’s largest proved gas reserves at 34 cubic metres (18% of global total). Not all Iranian crude will be exported however as it already consumes 2mbpd a day and sanctions removal will allow it to diversify downstream, with the bulk of production increase occurring in 2018-2020.

Ultimately, Israel — and Prime Minister Benjamin Netanyahu — may be the biggest losers here. Unless they do with the political battle in Washington to block the deal, their attempts to swing US foreign policy has failed.

The risk of a unilateral strike on the nuclear program remains.

Hartwell: Israel’s opposition remains absolute, and it has become increasingly clear in recent months and years that little short of a military force-backed sanctions regime that threatened the removal of the Islamic Republic would suffice for Israel’s security needs, as defined by Prime Minister Binyamin Netanyahu. The conclusion of this deal therefore leaves Israel isolated, with few credible diplomatic or military options to pursue. Obama’s threat to use the presidential veto to ensure the agreement passes through Congress merely adds to the lack of avenues open to Israel to block a deal many in the government regard as akin to Chamberlain’s 1938 Munich Agreement with Hitler.

Israel’s problem, as it has been for many years, though, is that many of its closest allies simply do not share its apocalyptic analysis of Iran’s intentions and motives, and Netanyahu’s failure to meet his allies halfway or to try to build a more constructive case against a nuclear deal with Iran amounts to a major foreign policy error of judgement.

Cyber Insurance – An Emerging Market

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This article originally appeared on Aspen Opinion. Download the PDF here.

Tom Allen is Head of Technology and Data Protection Indemnity at Aspen

No Longer Niche

There has been significant growth in market demand for data protection coverage, driven in no small part by the recent surge in sobering news about the aggressively evolving risks that companies face. For a number of years this was a rather specialist, ‘niche’ marketplace that didn’t find much traction beyond a sub-section of interested firms. The risks involved have been seen for years as being cutting edge, if not rather theoretical.

This view has changed over the last 18 months. There has been a steady drumbeat of high-profile losses arising from data breaches which have received plenty of publicity. In 2014 data breaches in the U.S. totalled 783, an increase of 28% over the previous year.1 The trend looks to be escalating as in the early part of 2015 there had already been 174 breaches with 99.7 million records exposed.2

aspen

Recent events have revealed the fluid nature of the liability, the adequacy of current cyber security policies on offer and also company management’s attitude to risk acceptance and mitigation for breach scenarios. Attacks on retailers Target in 2013 and Home Depot in 2014 demonstrated the magnitude of the threat and the attacks on JPMorgan Chase in 2014 and Anthem in 2015 confirmed the point. The breach at Sony, late in 2014, highlighted the fact that the release of confidential company information can disrupt not only customer relations but also employee relations. It was not only the reputations of top executives and their clients that were jeopardized by the disclosure of emails. Moreover the unfolding saga was amplified by the media and the data was readily accessed and replicated from the otherwise rather arcane world of download sites.

Governments concerned about threats to national security as well as their economies have engaged in high-profile efforts to ‘jawbone’ businesses into taking IT security seriously. Regulators worried about the rights of individual consumers and investors have moved decisively to press the issues home. President Obama’s 2015 State of the Union address included an update to the 2011 Cyberspace Legislative proposal. This included new initiatives on the all-important breach reporting rules with simplification and standardization of the existing 47 state laws into one federal statute. Elsewhere, the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations previously announced that its 2014 Examination Priorities will include a focus on technology, including cyber security preparedness. Executives are now much more aware of the financial costs – and the difficulties of estimating them – and also the costs in terms of their career if an incident should show them to be ill prepared. The CEO of Target held himself personally accountable for the breach and resigned in May 2014. The IT and consulting industries have picked up the theme with their corporate customers. Demand for related insurance products has ramped up in the North American market and is gathering momentum in the EU and elsewhere.

aspen 2
Increasing Complexity

Underwriters and brokers have been working to publicize these products for years and are of course delighted that the topic has moved to a more central stage. Yet current events and the general state of public awareness about the issues highlight just how complex a challenge the rise of ‘cyber threats’ poses to the insurance industry.

First and foremost, the increasing complexity and scope of attacks resulting in data breaches must challenge the market’s assumptions about the frequency and severity of losses. Underwriters have always seen the continually evolving threats to IT security as an arms race between hackers and the IT security industry; yet many have been surprised at the ambition and scale of some recent attacks. In this context, pricing models have limited predictive value and need to be constantly re-assessed.

At Aspen, we have always held the view that ‘cyber insurance’ is an unfortunate term, as it seems to mean everything and nothing at the same time. Indeed, not all cyber threats are viewed by the insurance market as being meaningfully insurable – the chief example being the theft of a company’s own intellectual property. Much of the feared impact of cyber warfare sits outside the scope of most commercial insurance offerings. Nonetheless, the desire by many brokers for an allrisks policy approach has resulted in a lot of disparate issues being bundled together as underwriters strive to add new features to their products.

The market trend, until recently, has been for underwriters to seek differentiation as opposed to uniformity. The result is that product approaches, wordings, coverage triggers and so on vary widely across the marketplace as competitors strive to add features. Ironically, in our view, one of the longstanding challenges to the broad acceptance of these products has been their complexity – buyers sometimes struggle to fully understand exactly what they are buying.

Another self-imposed challenge arising from the lack of product uniformity is that it aggravates the difficulty insurers and reinsurers face in assessing their aggregate exposures. This is hard enough given that loss scenarios are based on known/perceived vulnerabilities, which themselves evolve.

Insurance and loss prevention go hand in hand but some of the risks that governments are seeking to transfer into the insurance sector might easily challenge the industry’s capital. At some stage in the future, a different approach may be required for certain risks. As in the case of terrorism, governments could, via a reinsurance grouping, help fund high-level risks of the insurance industry. Facilitation of a market through such an arrangement could increase supply by spreading large losses and help provide data to support more accurate pricing of the risk. It would also help increase demand through encouraging a greater understanding of cyber risks and the financial value of defending against them.

Specialist Approach

Aspen continues to view this evolving area as presenting opportunity along with threat. Our focus remains on risks tied to data protection obligations as well as liability for providers of IT products and services. Different industries face different threats and regulation still has a substantial role to play in shaping risk profiles. In our view, the industry probably needs to stop trying to bundle so many disparate issues into a single product. The industry and its customers will all benefit from the evolution of specialist products. The risks cannot be effectively underwritten unless the data has been defined, protection policies understood, the consequences of breaches identified and employees trained in prevention procedures. While developments in the big picture are continually changing, it is even more important to employ a disciplined underwriting approach with clarity of wordings, transparency of underwriting method, an alert and responsive claims service, and a keen ear for customers’ needs.

References

  1. Identity Theft Resource Centre(ITRC), IDT91, 2015 Data Breach, 11 March 2015
  2. ITRC, Data Breach reports, 20 March 2015

London Discussion on Greece, Eurozone: Key Takeaways

greece-321799On Friday, February 2015, PS21 hosted a panel discussion in London on Greece, austerity and the future of the Eurozone.

The panel comprised the following:

Peter Apps: executive director, PS21 (chair)

Maria Prentoulis: lecturer, University of East Anglia. London spokesperson, Greek ruling party of Syriza

Tina Fordham: chief political analyst, Citi

Alex White: former official, HM Treasury. Research analyst, Politikos

Paul Taylor: European affairs editor, Reuters

The discussion was off the record to facilitate a full and free exchange of views. Attendees included activists, academics and members of the London financial community.

Below are some of the key takeaways from the conversation from PS21 executive director Peter Apps.

Attendees were largely confident a deal would be found between Greece and its creditors for the immediate bailout (which indeed happened later that day). Going forward, however, there were considerable worries over the future of the Eurozone project are mostly in the medium and long term.

The January election victory of Syriza — a party that then he insisted a year earlier — in Greece was seen as a sign of a wider backlash against establishment parties and figures across Europe and beyond. An untested political party and leadership inevitably faced is the learning curve under very difficult circumstances.

A problem, it was felt, was the opposing political narratives in Greece and other for Eurozone states and those in the centre, particularly Germany are also parts of eastern and central Europe in particular. While Syriza reflected popular Greek sentence that Germany was being unnecessarily harsh, the German political narrative blamed profligate Mediterranean states and gave little room for its negotiators to back down.

In the Greek, it was felt Syriza achieved sufficient (though really very limited) concessions to present a political victory back a wire sticking significantly to meet your requirements. In the longer term, however, are worried that it would become ever harder to “get to yes”.

A Greek exit from the euro, it was felt, would remain utterly disastrous primarily because of the second order affects in other states, particularly runs on the banking system. Financial markets are now pricing a much lower risk of Eurozone breakup compared to 2012. Still, there was a feeling that sometime in the next few years a country might well fall out of the euro with massive financial and geopolitical consequences.

The wider geopolitical situation, however, was also seen a factor, particularly growing tensions on NATO’s eastern flank of Russia. If anything, it was felt that might modestly reduce the risk of the Eurozone allowing the project to fail.

The key country to watch remains Germany, where peripheral parties opposed to further bailouts continue to gain ground. A major shift prior to elections in 2017, however, was seen still remaining unlikely. France will hold elections the same year and Britain may hold its referendum on EU membership if the ruling Conservative party win a general election this year.

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