Monthly Archives: December 2013

Three stories from 2013 that will matter 20 years from now

In reviewing 2013, The Atlantic recently took a deep look into the future. Rather than list the most significant events of the past year by their immediate impact, editor Moses Naim presented us “the stories from 2013 that will reshape the world long after this year draws to a close”. The stories Naim chose were: the shale-gas boom, America’s battered reputation abroad, tensions in the Middle East, China’s new assertiveness, and growing discontent over social inequality.

There is no doubt these stories are big, and will matter for years to come. But Naim only picked stories from the headlines, while the developments that matter in the future are often those contemporaries overlook. Take the 1980s, for example. Everyone back then knew that the slow collapse of the Soviet bloc or China’s turn towards a market economy would be a big deal for years to come. But hardly anyone foresaw that the rise of Islamist militancy in Afghanistan or Reagan’s financial deregulation would shake the world two decades later. In this spirit, here are the three most overlooked stories from 2013 that will shape our world for years and decades to come:

1. Crowdfunding

Following the 2008 financial meltdown, the U.S. government embarked on a string of regulatory reforms culminating in the Dodd-Frank Act. In effect, the new regulations made lending more difficult and less profitable for banks, discouraging the type of risk taking that led to the crisis. But while banks are curtailed, private equity and hedge funds are largely left to do whatever they want. In commercial real estate, which I cover for the Real Estate Weekly, this regulatory imbalance has already led financing to shift from traditional bank loans, which have become more rare and expensive, to private equity.

This is where crowdfunding enters the picture. In September, the Securities and Exchange Commission made it legal to raise funds from accredited investors in the U.S. via the internet. Since then, crowdfunding startups have become almost hyperactive. Much like private equity, crowdfunding is now subject to less stringent regulations and capital requirements than banking, which means they can delve into more risky projects and offer higher returns.

Such legal incentives matter. With banks constrained, the newly liberated crowdfunding firms will join private equity in shifting financing away from banks. Ten years from now, will you still deposit your $5,000 savings with a bank if you can get twice the return by investing them in a crowdfunded skyscraper or in private equity funds, which are increasingly targeting small-time savers?

For centuries, financing has been dominated by the banking sector. 2013 could be the year this begins to change.

2. East Africa’s Monetary Union

We can ignore Africa because the whole continent is a basket case full of corruption and civil wars, right? Wrong. One day, Africa’s economy will be huge. And 2013 might be the year its turnaround finally took off with a surprisingly little-noticed policy decision.

In November, Rwanda, Uganda, Tanzania and Kenya signed a deal to establish a single currency within ten years.This could be a huge step for several reasons. First of all, it is undisputed that enlarging a market spurs growth. Rwanda and Kenya, despite all their troubles, are already very innovative, for example in their use of mobile-phone banking. With wages rising in China, a unified, low-wage market in East Africa with improved communications and innovative financing could attract much more foreign and domestic investment.

Monetary union could also make the region more politically stable. Once countries are tied together in a single market, each member state has an interest in keeping the others peaceful and stable. If an insurgency broke out in one state, other governments would be far more likely to help and  intervene quickly than they are today, in order to prevent the union from losing credibility. In essence, this would be the military version of the bailouts we recently saw in the Eurozone. Rebellions frequently break out in Africa because governments and their armies are weak. But rising up in rebellion against four governments simultaneously is daunting, even in East Africa.

There are still many factors that could derail the monetary union – from inter-ethnic tensions over corruption to spillover from Somalia’s civil war. But if it succeeds, the union could grow to include more and more countries, kick-starting a new age of African stability and prosperity.

3. Commercial Drones

In November, Amazon CEO Jeff Bezos announced that he intends to use drones to deliver parcels. This could be the first step towards the use of commercial drones across the world. Dystopia? Probably not.

According to Neil Jacobstein, commercial drones could be the next internet – developed by the military but soon spreading out to transform the world. In The World Policy Journal’s recent fall issue, Jacobstein makes the case to legalize their use, albeit with strict security regulations.

He has a point. Drones, if safe, can revolutionize our world much in the way the internet has. They could drastically reduce transportation costs, bringing the world closer together and boosting growth. In the long run, they could also lead to a revival of remote areas. Who needs to live close to shops if you can have everything you need (maybe even Thai Food from your favorite restaurant?) delivered by drone into the Canadian wilderness?

Commercial drones can create a new world of physical (not just technological) connectivity. This is why, twenty years from now, Bezos’ 2013 announcement  could be far bigger than any speech by Barack Obama.

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The Economist says 2014 is like 1914. Is it?

Here’s an interesting thought: we may be months away from World War III. This, in essence, is the argument by an op-ed in The Economist’s holiday issue. Looking back at new year 1914, the (unnamed) author concludes that the world back then was living in globalized prosperity and no one saw the catastrophe coming. This complacency, the author writes, was in part to blame for the war’s outbreak. A hundred years later, the author finds a similar complacency with regard to the territorial dispute in the South China Sea:

Yet the parallels remain troubling. The United States is Britain, the superpower on the wane, unable to guarantee global security. Its main trading partner, China, plays the part of Germany, a new economic power bristling with nationalist indignation and building up its armed forces rapidly. Modern Japan is France, an ally of the retreating hegemon and a declining regional power. The parallels are not exact—China lacks the Kaiser’s territorial ambitions and America’s defence budget is far more impressive than imperial Britain’s—but they are close enough for the world to be on its guard.

Which, by and large, it is not. The most troubling similarity between 1914 and now is complacency. Businesspeople today are like businesspeople then: too busy making money to notice the serpents flickering at the bottom of their trading screens. Politicians are playing with nationalism just as they did 100 years ago.

The comparison between China and Germany – and Europe in 1914 and Asia in 2014 in general – seems like a stretch. Germany went to war because it felt its back against the wall and was loosing the peace. It was encircled by a hostile triple entente that had more economic and military strength, and was fearful of falling behind the booming U.S. and industrializing Russia, as historians like Niall Ferguson have argued. A quick victory through a surprise attack in the near future seemed like Germany’s best chance to become a true world power.

China today, on the other hand, knows that it is destined to become the world’s leading economy and a military superpower within the next few decades. Unlike Germany in 1914, time is working in its favor, and going to war over territorial disputes now would only derail its rise. Similarly, Japan can’t afford any war in the near future, crippled by government debt and a weak military. A war may still happen once China is no longer on the rise and feels its time has come, and once Japan has built up a stronger military. But that won’t be anytime soon, and certainly not in 2014.

While World War III isn’t imminent, the article makes the important point that we should never underestimate the potential for another great war. Much like 1914, Westerners today have taken over the naive view that wars only happen in poor countries. The lesson of World War I suggests otherwise.

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Is the Iran Deal as Bad as the Munich Agreement?

Not at all. Read my take on why Munich’s failure makes a strong case for appeasing Iran, written for the World Policy Journal’s blog: http://www.worldpolicy.org/blog/2013/12/03/munichs-failure-reason-iranian-appeasement

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