In the December 2012 edition of the Sign of the Times we presented a wish-list of events that we hoped would come to pass in a peaceful and prosperous 2013. While the US did avoid the fiscal cliff (barely), many of the other events required to deliver a more peaceful, prosperous and free world did not materialise: India’s economy has not recovered, Sino-Japanese relations have deteriorated further still, Europe is still muddling through its currency crisis and the Syrian civil war continues, just as deadly as in 2012 albeit with significantly less press coverage than before. Although these remain on the wish-list, as this year comes to a close, the final Leader in 2013 points to a number of key events in 2014 that have the potential to be the events and catalysts or triggers for changes that can shape our markets, world, and lives for perhaps many years ahead.
Date:May 2014 (or earlier)
Event:India’s general election for national parliament - the largest democratic exercise in human history with over 500m voters.
Significance:120m (or approximately 25% of the electorate) will be first-time voters, and as such are an unpredictable voter group, who could hold the key to the country’s future.. With nominal per capita income at approximately twice what it was at the last general election in 2009, India’s young democracy is now gradually moving from identity-based to results-based politics. The ruling coalition government led by the Congress Party is facing a restless electorate and strong anti-incumbency headwinds (losing heavily in recently-concluded state assembly elections in four major states) as the economy slows with high levels of inflation and interest rates. The opposition coalition led by the Bharitya Janata Party (BJP_ has been galvanized by the emergence of a charismatic leader in Narendra Modi, campaigning on the success of his state and his effective governance and administration as an example for the country. However, both the BJP and Congress are also contending with a large and growing base of regional parties which have gained strength over the last decade, particularly in state legislatures. These regional parties, with strong bases of support in their home states, will likely be critical to forming a ruling coalition and are a disparate group at odds with Congress, BJP and each other. Eyes will also be on the follow-up to the Delhi success of the Aam Aadmi Party (AAM) to see if there is a nationwide impact. Emotions are strong for and against Mr Modi and will make for a fiery election that may well be difficult to call despite the recent state elections and the polls.
Date:Estimated Mid- 2014
Event:The United States overtakes Russia as the biggest oil producer outside OPEC as shale production ramps up and total output of oil and natural gas liquids exceeds 13 million barrels per day by the end of the year.
Significance:Shale gas has transformed US energy competitiveness, with the US producing more oil than it imported at the end of 2013 for the first time in 20 years. With energy demand growth levelling off and US crude oil production driven by shale drilling surging by 50% since 2008, North America is moving closer and closer to practical energy independence. More importantly, the accompanying falling demand by the US for energy imports has made China the world’s largest importer of oil. At current demand projections China is expected to consume twice the energy the US does by 2040. While shale has the potential to positively impact energy output in other countries, (2014 will see up to 400 new shale wells being dug outside of US borders, mainly in Russia and China), the US continues to be the biggest beneficiary of the shale oil and gas boom, with an energy independent America afforded economic, political and security breathing room that other major emerging powers such as China and India lack. This has the potential to fundamentally shift and perhaps questions important power balances and relationships in what has otherwise been touted as the 21st “Asian” Century.
Date:Before end of 2014
Event:India completes commissioning its first nuclear powered ballistic missile submarine, the INS Arihant, a key step in the build-out of its naval capabilities
Significance:China is currently engaging in a significant naval build-up and has pursued a “string of pearls” strategy securing ports and bases along its sea lines of communication and commerce from Asia to Africa, many in India’s backyard in the Indian Ocean. As the United States withdraws military power from Central Asia and the Middle East over the longer term, other countries will need to fill the security void to secure sea lanes (and land-bound commercial interests in the region). Within this context, India is in the process of an unprecedented naval expansion with total annual naval spending growth at 37-fold between 1988 and 2012, as India seeks to build a navy capable of protecting national interests in an expanding sphere of influence coupled with a more active Chinese South Asia strategy. With India widely seen as being outmanned and outclassed by China’s People’s Liberation Army across the 3,500 km long mutual land frontier (having underspent in both defence and infrastructure development in the border region), India sees the need to be a naval power that is a potential balance for China’s growing military weight. Both China and India have legitimate security interests to protect in the Indian Ocean: the question remains whether they will work together constructively to protect these interests or engage in a costly and dangerous arms race in which India feel encircled and China feels at risk of being strangled at Indian end of the Malacca Strait chokepoint.
Date:Expected in 2014
The Event:The Shanghai Tower in the city’s Pudong District, a 125 story mixed-use building that at 632 meters will be the second tallest building on the planet, is projected to be officially completed in 2014.
Significance:While impressive in height and ambition, nearly everything about the tower represents a throwback to the time at which it was conceived and when building started in 2008. At that time the government was supporting the economy with a massive stimulus package focused on fixed asset investment, the build-out of real estate, the development of tier one cities and crossing the 50% urbanisation rate through the growth of mega-cities. Five years onward, each of these assumptions has been challenged and China’s stated growth and development models have moved considerably, making the projects like the Shanghai Tower appear increasingly out of sync with the times. China has taken steps to deflate its property bubble, has sought to reduce fixed investment growth in favour of increased consumption and has focused urban development on smaller cities to support more even development and bridge the growing wealth gaps between urban and rural areas. Ideally, the completion of the Shanghai Tower, conceived in a different era, should be the concluding piece of China’s old development model. The urbanisation challenge for China calls for massive investments and a new architecture for the urban centres of China in which prestige projects will need to play a much smaller role.
Date:August 15, 2014
Event:Japanese commemoration of the end of World War II, which typically involves a visit to the controversial Yasakuni war shrine by Japanese ministers, in either official or private capacities.
Significance:Sino-Japanese relations have deteriorated steadily through the course of the year to reach a current post-World War II low. Both countries have failed to find common ground over which to engage on the disputed Senkaku/Diaoyu Islands and the recent introduction of China’s air defence identification zone (ADIZ), encompassing the disputed territory as well as overlapping with Japan’s own ADIZ has poured oil on the fire. Both countries are losing out today as a result: Japanese exports to China this year fell to a four-year low this year, while imports were also down. A dysfunctional relationship between the two countries is clearly in no one’s interest, but neither party has been able to make an effective first move to de-escalate. Japan’s commemoration of the World War II next year, traditionally an event that has placed severe strain on relations, has the potential to be seen as a clear signal for a step-change towards the fall of the relationship. The Japanese cabinet refraining from visiting the shrine or sending offerings, would signal a break from the position of previous administrations and extend a symbolic olive branch to China with the potential to cool down the heated rhetoric between both countries that is making constructive engagement impossible. However, domestic pressures, face or ego may well be too strong for either country to take the initiative to continue what has been one of the most mutually beneficial development and collaboration stories in Asia of the rise of China in modern times.
Date:Expected September 24, 2014
The Event:Indian launched Mars probe enters Mars orbit after a 300 day journey making India the fourth sponsor in the world (behind the US, Russia, and the EU) to complete an interplanetary journey.
Significance:India has called the project one of national pride as well as a "technology demonstrator" of the nation’s capability for developing the technologies required for design, planning, management and operations of interplanetary missions. Although the cost of the program at an estimated US$73m are significantly lower than the US$600m average the US spends on an average Mars mission, the tangible economic benefits of the program remain doubtful. For one, no country to date has succeeded in reaching Mars on its first attempt, making the date above a potential non-event and the entire mission an expensive learning experience. While the program has a big signalling impact, particularly versus China, which has not yet launched its own Mars mission yet, India to date has not been able to build a strong aerospace industry and the country continues to underspend on R&D across the board relative to other countries (spending less than 1% of GDP on R&D annually, compared with 2% in China and 2.7% in the US). India’s new leaders will need to take a long hard look at technology and research spending priorities in India moving forward and focus on investment areas with much higher multiplier effects in terms of employment, education and technology spill-over, rather than on costly prestige projects that arguably fall lower in the list of a mature democratic leadership while major issues of poverty, education and basic infrastructure remain unfinanced.
Date:By year-end 2014
Event:The number of active mobile phones in use globally will surpass 7.3bn, exceeding the world’s population, with an estimated 85% of the global population having access to mobile technology.
Significance:Some time during 2014, global mobile phone penetration (defined as the number of active mobile phones as a percentage of the total population) will exceed 100%, with more active mobile phones in circulation than there are people on the planet. Further, given the growth of mobile broadband and internet, this mobile growth will push global internet penetration beyond 40%, providing nearly half of humanity with access to global communications and content. Whether this shift represents an opportunity or a threat depends largely on how the players use their new adopted technologies: As we have seen in the Arab Spring, mobile communications and internet can be an effective agent for initiating change. Governments on the other hand, will likely seek to benefit from their citizens’ connectivity. Some will use it as a tool of engagement, providing individuals with a direct communication channel to the government and spreading effective and targeted propaganda, while others may go further and seek to restrict access, censor content and control the follow of information and communication. In any case, with continually increasing connectivity, the big news events of the previous year(s), cyber-espionage, censorship, international cyber-warfare and technology enabled regime changes will only grow even larger and occur more frequently in the future.
Date:Nov 4 2014
Event:US Mid-term elections with the entire House of Representatives and one third of the US Senates seat up for re-election, as well as nearly 40 of the 50 state governorships.
Significance:According to Gallup, the current 113th Congress has the lowest public approval rating of any congress since it began collecting data . Congresses during the previous decades have enacted between 300 and 600 laws during their two year terms, compared to the 57 laws enacted by the current Congress in its first year. It is clear an electoral change in the next elections will be required to break the current deadlock in the US political system. The previous two US mid-term elections swept out congressional majorities in the House and divided the legislative and executive branches of government, with the 2006 Democratic victory under the Bush Administration and the 2010 Republican victory during the Obama Administration. In terms of 2014, re-winning the House and keeping a senate majority would give Democrats control of all branches of government, allowing the administration to push ahead on its currently blocked agenda. If Republicans can net six seats in the Senate, they will control both houses of congress and gain the ability to override tie breaking votes on legislation by the Vice President. However, US voters may well continue to be partisan and polarized along party lines and fail to catalyse a significant electoral swing that breaks the dynamics that have effectively shut-down government in 2013. Further, with low projected voter turn-out, the elections will create outsized voices for the more extreme wings of each party, potentially exacerbating the polarisation of US politics. In the absence of a more extreme catalyst, the US faces the prospects of another two lost years and China and India face the loss of the maximum US stimulus to their own economies.
Date:Year End 2014
Event:Final withdrawal of US combat troops from Afghanistan following 12 years of being on the ground.
Significance:While it is currently unclear whether the agreed up withdrawal will include all NATO troops or leave a contingent of troops for training supply and assistance, it is clear that the withdrawal itself, after 12 years of being on the ground amounts to an implicit failure of a land based War on Terror. In addition, rather than reducing instability and improving security, America’s withdrawal (with or without the US$8bn of civilian and military aid currently under review) significantly increases the chances of Afghanistan’s government and economy collapsing. With the country at the crossroads of South Asia, East Asia and the Middle East, and directly neighbour of Iran, a US withdrawal from the region will create a power and security vacuum that others will seek to fill. This represents a significant opportunity for both India and China. For two countries generally unloved by their direct neighbours, constructive engagement with and around Afghanistan offers a number of benefits. First, it increases border security for China’s increasingly unstable western region and for India’s northwest, where Afghan lawlessness risks spill-over into neighbouring Pakistan. Second, it provides an opportunity for each to play bigger roles as regional economic and political powers helping to solve an issue not of their own making. Finally, engagement with Afghanistan has significant potential economic benefits, with both India and China involved in pipeline projects routing oil and gas from the Caspian Sea through Afghanistan. While both countries have made exploratory visits and overtures to Afghanistan, the formulation, announcement and execution of a comprehensive strategy by either would have the potential to change the power dynamics in the region over the long term.
These events sit within a context of an end to low interest rates, a continuing turnaround in Europe, a more active Russia in the former nations that formed the Soviet Union, a bumpy recovery for Japan, a potential correction in US equity markets before a continuing rise and the roll-out of China’s Third Plenum power shifts. The events highlighted in the Leader have already been scheduled and are significant in their own right and/or as signals of things to come. In the coming Signs of the Time we will of course continue to cover more deeply these events and the underlying themes they are a part of as well as their impact on India, China and the broader world. Early in 2014 we will focus in depth, among other things, on the upcoming Indian elections, their potential impact on financial markets and the longer term plan to revive India’s stalling growth. We will also continue looking at how China plays out its role in the world and how the return of the US poses a challenge to the conventional linear thinking on the decline of American Power.
1. See appendix for definitions and sources
2. Having said that the pipeline of projects currently under construction today includes no less than three skyscrapers in China that will be even taller than the Shanghai Tower.
3. See the November Sign of the Times “The China Dream: The Role of China’s Urbanisation and the Rise of an Independent Class of Citizen
4. E.g. The largest aerospace company in India, Hindustan Aeronautics Ltd, has been developing an indigenous fighter jet since the mid-1980s that has still not received operational clearance.
5. Announced by the International Telecommunications Union and the Mobile World Congress 2013
6. See http://www.gallup.com/poll/1600/Congress-Public.aspx#1
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