Editor’s Note: On June 7-8, 2013, Lex Rieffel spoke at “Rethinking Global Challenges: Constructing a Common Future for Turkey and the EU,” an event hosted by Egemen Bagis, Turkish Minister for EU Affairs and Chief Negotiator.
1. The loss of a benchmark
I greatly appreciate the opportunity to attend this conference and be among such distinguished participants.
My brief remarks are divided into three parts: losing sovereign debt benchmarks, living in a crowded, wired world, awash in capital, and implications for Turkey.
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Much has been written and said about the adverse impact of the global financial crisis on employment and output. I believe not enough has been written and said about how it destroyed the world’s sovereign debt benchmarks and the implications of this loss.
When international capital markets took off in the 1980s, the 30-year U.S. Treasury Bond was almost universally used in the financial world as the benchmark for pricing sovereign debt.
Specifically, it was considered to be the ultimate long-term, risk-free asset. While its coupon yield fluctuated, its principal was considered safe because the United States would never default on its debt.
The sovereign debt of other countries was then priced in international capital markets with reference to the 30-year U.S. Treasury Bond, typically in “basis points”—a 100 basis point “spread” being equivalent to a higher yield of one percent per annum.
In the early 2000s, the 10-year U.S. Treasury Bond displaced the 30-year bond as the benchmark, partly because the Treasury suspended the issuance of 30-year bonds in 2002.
In the same period, 10-year Euro-denominated bonds emerged as a second sovereign debt benchmark, maintaining a small spread above the U.S. Treasury Bond.
In the five to six years since the Global Financial Crisis, the world has lost both benchmarks. The loss is not directly related to the crisis, however. It is related to the political failures in the United States and the EU to maintain the fiscal discipline that had underpinned their solid economic performance for 50 years following World War II.
In particular, partisan differences in the U.S. Congress made it difficult to lift the ceiling on government debt, thereby raising the specter of a U.S. Government default in a way that could not be denied.
Similarly, the inability of a group of EU members to respect the fiscal guidelines embedded in the Maastricht Treaty raised the specter of a break-up in the Union.
I submit that the loss of these benchmarks may be the single biggest impediment to better global economic performance in the near term.
Their loss means that global financial markets have been cast adrift. They are unanchored. They are like a room with no floor and no walls.
The loss of these benchmarks could be the main source of the current uncertainty that is discouraging companies and individuals from investing in productive activities. Investor uncertainty contributes to consumer uncertainty, and both are key factors in today’s high levels of unemployment and underemployment.
It is hard to conceive of satisfactory global economic performance without a credible sovereign debt benchmark, and it is even harder to see a new benchmark emerging in any other part of the world in the next 5-10 years.
We can only hope that the politicians in the United States and the EU will understand sooner rather than later the importance of these benchmarks and will take the steps necessary to restore them.
2. The crowded, wired world, awash in capital
The global landscape is troubled for a host of reasons beyond the absence of a sovereign debt benchmark. These include climate change, infectious disease, urban youth unemployment and nuclear weapons proliferation.
But I want to focus on three other problems: our crowded world, our wired world, and our world awash in capital.
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When I was born in 1941, five weeks before the Japanese attack on Pearl Harbor, the population of the world was roughly 2 billion souls. Today it is roughly 7 billion.
Demographers tell us that we will add, at a minimum, one billion people before the total peaks at 8 billion around 2045. Slightly different assumptions would produce a peak near 10 billion in 2100.
It is strange that there is so little discussion these days about population growth. The prevailing view seems to be that technology will enable people to live in harmony in a more densely populated world.
But I would call your attention to a related change since World War II that has been given even less attention: all of the empty and easily habitable spaces in the world have been filled. There is not an unclaimed square inch of land or sea on the planet. Vast areas previously untouched by man—especially in the tropics—are being cleared and replanted with oil palms and soya beans and a variety of industrial crops.
This suggests to me that the world is on the edge of a struggle for survival unlike any in the past. There are no more places that communities under siege can flee to, as the Pilgrims fled to North America. There are no more territories that can be colonized successfully.
Some experts believe urbanization is the answer to the problem of an increasingly crowded world. I am skeptical. What I see instead is urban youth unemployment that becomes more combustible year by year.
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Turning to life in the wired world . . .
What scientific or technological breakthrough in the past 50 years is having the biggest impact on our lives today? Is it sequencing the human genome? Is it “fracking” to extract natural gas?
In my mind, the breakthroughs in information and communications technology stand out above all others—in particular the computer, the internet and mobile phones . . . the wired world.
I see two looming dangers in the wired world, aggravated by living in an increasingly crowded world.
The first is mass mobilization. It is now possible to deliver a message that “goes viral,” prompting thousands if not millions of people to act, either constructively or destructively.
One of the easiest predictions to make is that this will happen for the first time on a cross-border scale within the next ten years. Neither oceans nor mountains nor national borders will be capable of containing these actions, as they have in the past. When they happen, I fear the actions are more likely to be destructive than constructive.
The second danger is that the instantaneous communication of today’s world seems to be having the effect of separating younger generations from older generations. As declining fertility—births per woman—produces smaller age cohorts for younger people, and as democratic governance becomes more widespread, we may discover that older people are outvoting younger ones to shift public spending away from programs benefiting the young (like education) and toward programs benefiting the old (like health care).
As a result, the young could become increasingly alienated from the old. In any generational struggle, however, the young will presumably have an advantage because of their greater mastery of information and communications technology.
In short, in the increasingly wired world, “the good life” could be harder to attain for both young and old.
There might be even bigger dangers inherent in the field of biotechnology, potentially having as big an impact on the lives of our grandchildren as information and communications technology is having on our lives.
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Turning finally to life in a world awash in capital . . .
I was born in a period of anti-globalization, when international conquest was the order of the day, not international cooperation.
Out of the disorder of World War II, the Bretton Woods system—embodied in the International Monetary Fund and the World Bank—was created to foster global cooperation. The Bretton Woods system was a liberal system, but not with respect to capital movements. Capital controls were considered essential to maintaining fixed (but adjustable) exchange rates, which, in turn, were considered essential to liberalizing trade and payments for goods and services.
How different the world is today! Countries began removing capital controls in the 1970s, after the breakdown of the fixed exchange rate system, and now it is not too much of an exaggeration to say that we live in a world dominated by international capital flows, even driven by them. Driven to the point of forcing us to think seriously about whether we have let the trend go too far.
I have suggested that filling the earth with more than 7 billion people is incompatible with global peace and prosperity. I am now suggesting that trillions of dollars chasing yields in every nook and cranny of the world, motivated by asset managers more concerned about their bonuses than systemic risks or social benefits, is incompatible with global peace and prosperity.
I am no Luddite. I believe that private capital should be allowed to flow across borders to activities where it obtains the highest financial returns. But not freely.
How many more crises do we have to suffer from before we take steps to stabilize private capital flows, to mitigate the herd behavior clearly associated with both inflows and outflows? I applaud the leaders in Europe who have had the courage and foresight to work toward introducing a financial transactions tax.
How many more crises before we insulate our financial regulators from regulatory capture by a financial industry that seems oblivious to the “too big to fail” threat?
For ordinary citizens to sleep well at night, I believe that banking will have to become boring again, as it was before the deregulation of the 1970s. Boring does not mean inefficient. It means finding alternatives to the mutual back-scratching with few compensating social benefits that is endemic in the board rooms of international banks and their multinational client corporations.
3. Implications for Turkey
I see four implications for Turkey.
1. Turkey is lucky to be neither a member of the European Union today nor more deeply integrated with the Middle Eastern economies. Being in the middle has a lot of advantages.
But don’t misunderstand me. I am a big fan of the European Community and the eurozone project. I believe the current problems can be overcome. And I believe the community will be stronger with Turkey inside instead of outside.
2. It is not too soon to start building walls, or at least filters, to protect your citizens from external shocks. You will not be alone. Others have already started. Thanks to Nassim Nicholas Taleb, we have a better understanding of “black swans.” We have not seen the last of them. They are a phenomenon of complex systems, and we live in a world of increasingly complex systems.
3. “Paying taxes is glorious.” We owe this phrase and this insight to Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy in Singapore. He was explicitly echoing the words of Deng Xiaoping who said at the beginning of China’s great reform era in the late 1970s: “getting rich is glorious”
Mahbubani was calling attention to the cultural aversion to paying taxes in most Asian countries and how this has the potential of preventing them from escaping the “middle income trap”.
I would expand the concept to the whole world. My best guess is that the countries 50 years from now that are most successful in achieving just and prosperous societies will be those are able to extract the most taxes from their citizens—willingly. Or turning it around, those countries whose citizens are most willing to pay taxes to their government are going to have the most enviable standard of living.
One way for Turkey to leap frog other countries is by rising to this challenge and building public sector institutions that Turkish citizens are happy to fund with their taxes because they are getting tangible benefits for relatively little pain.
4. Focus on the young. It is young people who make revolutions, not old people. It is young people who go on rampages and destroy property at random, not old people.
For many years it was possible to believe that education was the way to make young people content: a college degree for everyone. Now we are seeing that the jobs we assumed would be waiting when students graduate are not always there. I don’t see any country that has come up with a good strategy for addressing this challenge. The challenge is as great in Turkey as anywhere else.
If Turkey can discover some effective strategies, it could be a lifesaver for other countries, too. My best guess is that successful strategies will involve a large component of volunteer activity that builds social capital while also developing marketable skills.