As mentioned the other day, we are asking some big ticket long-term questions at SIBOS this year, such as:
- When will we know that financial systems work?
- How will we know when financial risk is not an issue anymore?
- What will America and Europe be doing when the economic power balance has shifted to Asia?
- Can we confidently create a way of investing for the long-term instead of our net present value short term view of today?
- Can we foretell a future where a human right includes "to not be poor", and what happens to work, life and war if there is no poverty?
- If money is just a way of exchanging value, and it's all now digitised, can we create digital money without the need for real money? How do virtual exchanges and virtual currencies change the commercial infrastructure?
- Could we create a world where financial transactions are sponsored, for example by Google ads, so that they are free? If so, what is the role of a bank and how will it make money, if all financial transactions are free?
This is all part of the focus upon the work of the Long Now Foundation and Long Finance group, of which I’m a part.
Long Now looks out at what will change over the next ten millennia, whilst the Long Finance looks out at a financial lifetime and how to build a financial system that could last 100 years.
In this series of discussions, I thought I would tackle one of the big questions we are considering: What will America and Europe be doing when the economic power balance has shifted to Asia?Regarding the shift to the East, this is not a Long question, as the shift has already happened, if you listen to some folks.But does it matter?If America is no longer the great superpower but just a power, does it matter?If Europe has zero competitiveness due to its fragemented structures, does it matter?And what about Latin America and Brazil, don’t they matter?And Russia?And the Middle East?The answer to all of the above is that of course it matters.Any shift of economic or military power matters.For example, we could pose a different view to the above if we really want to be Long, and ask: what happens when the balance of economic power is determined by Africa?When we think of our land masses and populations, the real matters are determined by commodities, capabilities, processes and capital.So let’s look at these areas, and then consider who has the balance of power and who will get it.When we think of commodities, we think of oil, metals, cocoa, gold and similar.Those who have an abundance of scarce commodities that have value are naturally going to be richer than those who have none but need them. The Middle East has lived on their oil riches for long and will do so for the near future but, in the Long Now, some will fail.This is because the oil riches are a finite resource, and will eventually be drilled to extinction.The illustration of this issue is no better exemplified by Yemen, where poverty is rife having squandered away millions in oil revenues years ago, and being unable to create any substitute.This is unlike the Emirates, who ballooned into a prosperous construction, tourism and trading centre, built upon sand.So when we talk about commodities we are talking about a finite property, which is why there is scarcity and value. From a Long Now viewpoint, it must beg the question: what are you investing your finite billions in today for the infinite post-commodity years later?The answer is that these nations should be investing in education, knowledge, brains and science, as these capabilities build a sustainable future.The capability battle is one that Britain used well to build an empire a century ago, and that America used well to create prosperity through the twentieth century. It’s also what other nations, such as Singapore and India have realised in building their empires of today.It’s all about looking at things that humans can create that are of value and, by building leadership in this area, it means that your nation can stay ahead of the world when it comes to technological, scientific or commercial scarcity.Britain had that scarcity during Queen Victoria’s reign, with a technological leadership based upon naval and military strength. This allowed one small nation to colonise many other nations. By doing so, the strength of the nation increased by being able to access commodities of those nations, and gain commercial value, capital and further technological strengths which became a virtuous circle.This leadership faded as the industrial revolution led to America, with its vast swathes of land and resources, to take over as the manufacturing engine of the world.In America, that leadership came from building cars and computers, creating value through innovation, and through using knowledge to gain power over capital, commodities and resources.Today, this is the piece that is shifting to the East. China’s leadership is based upon people, processes, resources and investment in capabilities for building cheaper, faster and better. China’s a nation that saw the weakness in the model of the world – the cost of manufacturing – and exploited it to gain growth. Now, having gained that edge, they are investing in all the other things to generate wealth from science and knowledge, and to maintain and sustain future growth.
These are indicators of building capability leadership through scientific and technological research.India saw a different weakness in the world’s model – the cost of service – and their strategy was therefore to invest in knowledge, and specifically to use their brainpower to gain economic growth. The use of English language and investment in technology skills, restructured the world’s knowledge chains in the same way as China re-engineered the world’s supply chains.It is these investments in human capabilities that led to other nations, who had the commodity resources to support the wealth of manufacturing and services growth in China and India, to also enter a growth phase, particularly Brazil and Russia.Now, Brazil has invested in human capabilities to sustain their growth, whilst Russia is still a fragile economy due to a lesser focus on building such a sustainable future.So that outlines two cycles of economic power shifts: commodities and capabilities.The thing that now makes the difference is that, if you start with an abundance of resources and use the investment capability of such resources to create capabilities, which nations get the Long Win, as in they become a superpower.This is all down to processes.The two go hand-in-hand, and are easily reflected by Germany and Japan.Since the 1970s, we all say that Germany and Japan are the world’s leading nations in terms of their excellence in making cars and electronics.This is because Germany and Japan had a huge squeeze on capital after the War, and therefore had to create efficiency and effectiveness in processes. Luckily they could do that, thanks to a clean spread of land and knowledge that had a focus upon creating processes that maximised the efficiency and effectiveness of manufacturing.Just look at the work of W. Edwards Deming in post-War Japan to see how Just-in-Time manufacturing re-engineered the world.So where does this lead us to, in thinking of the Long Now future world?Who will be the future superpower?Not Europe, if the region continues in its current form.This is because Europe has a problem with managing the four dimensions of commodities, capabilities, processes and capital, mainly because Europe is a grouping of 27 individual nations rather than a singular whole. This is why Europe is bad at dealing with these, although some nations within Europe excel, as in Germany. This is why Europe is grappling with the question right now as to whether the Union can survive long-term if one or two nations are good at building a sustainable model of wealth, whilst having to give it all away to support the nations that aren’t.China and America are different as they are a nation and not a region. Admittedly, they are not a singular whole either – China and America are a formation of many individual states, like Europe – but they do have centralised governance for strategic planning and control, as well as a common language and currency. Again, I know some will be tutting at this point, saying that Mandarin and Cantonese are different languages and almost half of America speaks Spanish, but it is fundamentally different. This is because these nations do have a cohesive structure for planning, investment and management of commodities, capabilities, processes and capital, whereas Europe does not. Europe may in the future but, right now, it does not.Equally, many claim that Europe fails due to disparate and historical legacy infrastructures, whilst America succeeds by starting as a new Nation, with a new currency and agenda. China’s a new nation, in terms of infrastructure, and again can exploit and leverage that capability.So when we look at the capabilities criteria, China and America are the two large nations that both fit. Russia, Brazil, India and Africa would be the other contenders.We can leave Africa off the list for the moment, as they suffer the same paranoia and fragmentation as Europe. Similarly with Russia, for they need some serious investment in people and capability if they are ever to maximise their resources and opportunities.So, America, China, Brazil and India are the four Long Finance nations on the radar.They are all single nations with central planning structures and a relatively new Nation mentality, which means that they are not bogged down by legacy infrastructures from an economic viewpoint.They all have strong capabilities and access to resources, so we don’t need to think of these as an issue.Therefore, for the next century, the superpower from these four will be based upon processes.And here’s where it gets radical.America has been very good on process, and India is very good on process.Everything is in signed off in triplicate, checked, double-checked and authorised.The thing is that this procedural approach to processes is not adept for the new millennia process, where the fast beat the slow.Today’s globalised world works in seconds, not years, and the heavy-duty processes and rigid disciplines of the twentieth century will fail in the twenty first.So, for these reasons, America and India may be hindered culturally in the Long Finance twenty-first century, which leaves Brazil and China.You probably think it’s China, don’t you?China will be the Big Superpower of the twenty-first century.Well, maybe not.Maybe Brazil holds the balance of power for the Long Finance world.The reason for this conclusion is that China will be contracting in power in 2050-2060, due to their single child policy.The lack of new blood and an aging population could drag China’s economic tiger into a toothless and clawless sloth in the Long View.Meanwhile, Brazil has the commodities, capabilities, processes and capital to be the world’s largest economic force in the next century.If that’s the case, North America will feed off South America, and will be the subservient economy to Brazil. It will be a reverse relationship to the structure of the twentieth century, where you had the poor South and rich North.Similarly, Africa will have been raised from poverty, and India and China will still be forces of power, but not necessarily THE force of power.Europe will still be fragmented, with member states fighting for capital and control just as they are today, and Russia will still be tipped as the next big economy and, if the government does invest more strategically in commercial capabilities and processes, it just might make it.Meanwhile, I’m moving to Australia as, in the picture I’ve just painted, the world has turned upside down. All the wealth and control that was in the Northern Hemisphere has moved to the South, and so the natural juxtaposition of London will to live in Sydney.Interesting.Instead of coming from a land down-under, I’ll come from a land up-over ... G’day mates.