We Read (And Liked)… World Order

Henry Kissinger’s World Order 1 is a great read for anyone who wants to quickly brush up on some core tenets of geopolitics. The beginning of the book takes the reader from the end of the Roman Empire to the subsequent attempts by various powers to re-create a stable equilibrium over the next 1500 years of European history.

To understand geopolitics, investors have to understand European history. Today’s international order is essentially Europe writ-large because the “principles of national independence, sovereign statehood, national interest, and non-interference” were all transferred from Europe to its colonial charges. Fundamentally then, China and Russia are as much “European” states in the Westphalian sense as Belgium or Burundi.

Kissinger’s message is that “order” is not naturally a product of geopolitics, but rather a cultural and political construct that has to be designed with care and defended with a combination of both normative legitimacy and realist pragmatism. And most importantly, all members of the international system have to ‘buy-into’ its construct.

The rise of non-European powers, however, has undermined this global order. According to Kissinger, China, Russia, and various Islamic powers, all struggle to merry the contemporary global order born in the post-WWII era with their own, pre-Westphalian perceptions of how an international system should work.

China has historically ordered the world hierarchically, with itself at the center. The Islamic world has separated the global system into the “House of Islam” and the “House of War.” Russia has rejected any order based on elegant balance-of-power mechanisms through its history and has sought to secure its position through expansion.

While Kissinger’s discourse of non-Western perceptions of international affairs borders on caricature, he makes an important point:

“The result is not simply a multipolarity of power but a world of increasingly contradictory realities. It must not be assumed that, left unattended, these trends will at some point reconcile automatically to a world of balance and cooperation – or even any order at all.” 2

In other words, the world is not just multipolar because the U.S. is in relative decline and various regional powers have gained enough ‘hard power’ to pursue their own “place in the sun.” Multipolarity is philosophical and normative, eroding the legitimacy of Westphalian principles upon which the current global order rests.

How does Kissinger see the world evolve in the near future? Without action from the world powers – namely America – to counter present-day multipolarity, Kissinger is pessimistic. Without a concerted effort to reconstitute a new international system the penalty for failing “will be not so much a major war between states… as an evolution into spheres of influence identified with the Westphalian model as against the radical Islamist version. At its edges each sphere would be tempted to test its strength against other entities of orders deemed illegitimate.”

This is similar to what we wrote in our April 2014 Monthly Report titled Multipolarity And Investing.We posited that the main risk for the world “is that competing geopolitical blocs may become large enough to undermine economic and financial globalization. A ‘Eurasian bloc’ that includes China with a large pool of savings and a sizeable middle class, combined with Russia and its massive natural resources may not need as much interaction with the rest of the world as its constitutive members require today.”

In essence, the world begins to “slowly resemble the geopolitical backdrop of George Orwell’s 1984, bringing to life the famous phrase repeated throughout the novel that “Oceania was at war with Eurasia and in alliance with Eastasia.”

This is a world that lacks an international order but is split into regional ones. It is not necessarily a violent one, but it is also no longer globalized. Many crucial geopolitical assumptions that investors take for granted today – such as the slow but steady progress of emerging markets towards developed world status – may be impeded by the consequences of rival spheres of influence. China and Russia – maybe Brazil and Turkey – may decide that painful economic and political reform for the sake of competitiveness vis-à-vis developed economies is too onerous. Instead, the alternative route may be regional hegemony and the erosion of globalization.

A paradigm shift of this magnitude is impossible to forecast. Some data – particularly on global trade – suggest that we are already at the apex of globalization, but the data may simply be reflecting deficient aggregate demand, not geopolitical seismic shifts. Nonetheless, Kissinger does not really offer a coherent answer as to how such a future should be prevented. It concerns us that a statesman of Kissinger’s stature is at a loss for words before the dire forecast he leaves us with. And considering that he is 91, it is doubly concerning that this may have been his last book.

  • 1 Kissinger, Henry. World Order (2014). New York: Penguin Press.
  • 2 Emphasis added.
  • 3 Please see BCA Geopolitical Strategy Monthly Report, “Multipolarity And Investing,” published April 9, 2014, available at gps.bcaresearch.com.

Top Ten Books On Geopolitics

A number of clients and colleagues have asked me for a recommended reading list on “geopolitics.” This is the “top ten” list.

Geopolitics, as a discipline or social science, does not exist. Furthermore, for many investors, it is simply a catch-all term for everything that is not economics or finance, but that still leaves a vast subject area that covers everything from history, political science, sociology, anthropology, qualitative methods, and psychology. Within each of those disciplines, some methods and ideas are more relevant for investors than others.

My reading list is therefore an eclectic mix of topics that cover qualitative methods, psychology, and political science (with a special skew towards international relations theory and the ‘classics’ of geopolitics). I only recommend two history books, largely because I believe one should always be reading history. The two books cover the episodes I think are particularly relevant to contemporary geopolitics: Imperialism and late 19th century European history.

Readings that you will not see recommended in my list are works by Halford Mackinder and Alfred Thayer Mahan. These two men are considered the fathers of geopolitical strategic thought, but I recommend that instead of reading their work in detail, investors read summaries of their work (such as my own blog post on the subject). Both have influenced strategic military planners from Wilhelm II to U.S. defense planners at the Pentagon, but their ideas are fairly simple to digest and do not require careful study.

Below is therefore a “top-10” list (I could not actually keep it to just 10!) of books that I believe will stimulate investors to think outside the ‘market’ box. Some books are useful for methodology, specific subject areas, and different levels of analysis (society, state, international system, human nature, organizational behavior, etc.). Therefore, I try to assemble a best of the best list, each with a little description for why I am recommending the particular book. They have all influenced my thinking and my own eclectic (‘fox’ as opposed to a ‘hedgehog,’ to use Isiah Berlin’s terminology) approach to analysis. Note that I tried to keep this reading list fairly up-to-date with recent titles and as such it ignores a slew of philosophical and theoretical works that have shaped modern social science. The point of the list is to focus on readable and accessible works.

  1. Psychology of Intelligence Analysis – Richards J. Heuer (2005). This book is actually published online in PDF format; it was commissioned by the CIA and provides a great overview of how to do intelligence-relevant social and political research. It is a methodology book, but it is also extremely accessible, intuitive, short, and useful.
  2. The Signal And The Noise… Why So Many Predictions Fail – But Some Don’t – Nate Silver (2013). Another methodology book. Silver shows the value of Bayesian probability modeling (crucial for thinking about investment-relevant forecasts), but also cautions against an overreliance on quantification and data. A more thorough study, but also far more tedious to get through, would be Philip Tetlock’s Expert Political Judgment (2005). Tetlock shows that most political judgment is not expert at all.
  3. The Person And The Situation – Lee Ross and Richard Nisbett (2011). The latest edition of this social psychology classic is a methodological must-read for anyone studying politics and societies. It illustrates the folly of imbuing personality with agency, as opposed to emphasizing the context/situation. This book essentially makes the point that context/situation/constraints are far more relevant than preferences. That is a powerful point for anyone trying to predict policymaker moves.
  4. Guns, Germs, and Steel – Jared Diamond (1997). As macro of an overview of human development as it gets. Diamond stresses geography, climate, and biology. The book tries to explain European/Western dominance from a very macro, super materialist (as opposed to ideological and cultural) perspective. It is an exercise in geographic determinism. I don’t agree with all its conclusions, but it provides a worthy mental workout that forces the reader to accept that there are impersonal forces shaping outcomes.
  5. The Dynamics of Global Dominance: European Overseas Empires (1415-1980) – David Abernathy (2000). A comprehensive overview of European colonization and imperialism, this book attempts to explain why Europe conquered the world. Unlike Guns, Germs, and Steel, it uses micro-analysis to explain European domination, relying on social and political factors rather than geography. Particularly powerful is Abernathy’s argument that inter-state competition and the lack of a central continental power created European imperialism.
  6. Modernization, Cultural Change, and Democracy: The Human Development Sequence – Ronald Inglehart and Christian Welzel (2005). The authors argue that wealth changes human values, which then leads to demands for democracy. I don’t necessarily agree with all of the conclusions in the book – I am of the belief that development and modernity can be reversed, for example – but it is certainly an important contribution to the study of social and human development. Also, great survey data that should be updated soon on their website, I have used it in BCA Geopolitical Strategy analyses before.
  7. The Rise And Decline Of Nations – Moncur Olson (1982). A completely different view of modernization and development from Inglehart and Welzel, Olson emphasizes interest group choices and policies. Olson is also best known for his “collective action dilemma,” which specifically explores the dynamics of interest groups.
  8. The World In Depression, 1929-1939 – Charles Kindleberger (2013, 40th anniversary edition). Kindleberger introduces the ‘hegemonic stability theory’ through the study of the Great Depression. The idea is that the world, lacking a single superpower, was allowed to descend into a Depression. The new edition has an excellent foreword by Barry Eichengreen, whose Globalizing Capital (1996) really should have made the reading list as well.
  9. The Tragedy Of Great Power Politics – John Mearsheimer (2014 edition). Mearsheimer makes a compelling case for why the unbalanced multipolar system is the most volatile geopolitical arrangement. The 2014 updated edition also contains a chapter on why China will not rise peacefully. There are many books of international relations (IR) theory that could have made the list, but this one is, in my view, the most relevant today.
  10. The War That Ended Peace – Margaret Macmillan (2014). The best overview of European history during the late 19th and early 20th century, and how that period led to the First World War. It describes very well the unbalanced multipolar context that led to the Great War. It is an empirical/historical complement to Mearsheimer’s theoretical work. Every investor should know about this period of global history.
  11. The End Of Power – Moises Naim (2013). The premise of Naim’s book is that power – the ability of those in positions of power to shape events at the expense of others – is decaying everywhere. Naim argues that changes in values (very much along the Inglehart and Welzel line of thought), education levels, and wealth are empowering individuals and the less powerful. He also points out why this is such a dangerous development, potentially leading to an anarchic world.
  12. A Logic Of Expressive Choice – Alexander A. Schuessler (2000). This book illustrates why voters vote to express their identity, not because of expectations of policy outcomes. A must-read to understand how voter preferences are determined. For example, this is a useful paradigm that explains why the Greeks continue to support the euro at very high rates, despite their severe disagreements with the Berlin-Brussels axis over policies.
  13. The Capital – Karl Marx (The Oxford World’s Classics abridgement, 1999). One of the most useful studies of social systems and economics. The chapter on ‘exchange’ is a classic example of materialist dialectic, a structural approach to analysis that disaggregates all societal and cultural factors and concentrates purely on the material structure.
  14. The Protestant Ethic And The Spirit Of Capitalism – Max Weber. Marx’s Das Kapital should be read in conjunction with Weber’s ‘Spirit Of Capitalism.’ Unlike Marx’s materialist dialectic, Weber introduces cultural and societal factors in explaining economic development. The two works complement each other extremely well and illustrate the different methodological approaches to the study of politics, economics, and societies. Also, Weber’s book is far more accessible, shorter, and interesting than Marx’s tome.
  15. The Prince – Niccolo Machiavelli. An absolute must read for anyone studying politics. It is short, to the point, and the first attempt at a systematic study of politics by any modern Western philosopher. Machiavelli is considered to be the father of political science.

East Asia Blues: South China Sea Is Not Going Away Folks

A poll of BCA Research Investment Conference attendees suggested that most investors are worried about Russia and the Islamic State, but investment-relevant risk remains in East and Southeast Asia.

I just got back to our Montreal HQ after two days at the BCA Research Investment Conference in New York. It is always great to catch up with old friends and make new ones at our annual event. It is also always an honor to share the same stage as our invited guests and my colleagues.

It is a tradition at our conference to ask the audience a few questions before we begin each panel. I began my Geopolitical Update presentation with two simple questions: which geographical region do you expect to produce the most investment-relevant risk in 2015; and do you think geopolitical risk will increase, decrease, or stay the same in 2015?

Unsurprisingly, a majority of the audience expected geopolitical risk to increase in 2015. No arguments there. But when it came to selecting the source of that risk, most of our clients and invitees expected it to come from Russia (first choice) or the Middle East (second choice). Only 14% respondents thought that East Asia would produce market-relevant geopolitical risk next year.

Here I respectfully – and considerably – disagree with our clients. While the probability of more tensions and noise from Russia and the Middle East remains high, the market impact of the two regional crises will likely remain muted. Meanwhile, East Asian geopolitical tensions continue to mount. The more investors ignore this region, the greater the likelihood that the market will be blindsided by a crisis.

Take this New York Times article from September 13 which reported that Malaysia had offered the U.S. a base from which to fly surveillance aircraft over South China Sea. The claim remains unconfirmed by Kuala Lumpur, but fits the pattern we have come to expect in the region where China’s neighbors are increasing military cooperation with the U.S.

The airplane in question, the P-8 Poseidon, is currently flown out of the American Kadena Air Base in Okinawa, Japan. A P-8 was recently ‘buzzed’ by a Chinese Shenyang J-11B Flanker B air-superiority fighter, causing a minor incident. Chinese officials went on the offensive soon after, publically warning the U.S. national security adviser Susan E. Rice, while she was visiting Beijing, that the Obama Administration should stop the “close-in” surveillance flights. The warning is unlikely to alter American planes to deploy (a lot) more P-8s to the region, with Boeing set to produce approximately another 100 planes for the U.S. Navy.

The U.S. uses the P-8 Poseidon aircraft to spy on China, and its submarine fleet in particular, from international waters. Washington’s claim is that its aircraft can operate within international waters beyond the immediate 12-mile territorial line. China, on the other hand, claims that foreign aircraft are not allowed to fly within the 200-mile exclusive economic zone without permission. The difference in views is further accentuated by China’s claim to nearly all of South China Sea.

The reason I am highlighting this news item is because Malaysia is not an obvious candidate to join America’s containment of China. Kuala Lumpur does have a territorial dispute with China – James Shoal, only 22 miles off the coast of Malaysian state of Sarawak (Borneo) – but the issue has not soured relations between Beijing and Kuala Lumpur thus far. Malaysian public also has the most unfavorable views of the U.S. out of the major East Asian countries (Chart 1), suggesting that there could be a domestic political constraint to closer military relations with Washington.


Malaysia: Not An Obvious U.S. Ally


Malaysia is a ‘litmus test’ for our Geopolitical Strategy theme that East Asia geopolitical tensions are rising. In other words, if even Malaysia is joining the anti-China coalition that America is building in East Asia, then our view that things will get worse in the region is probably right. Russia and Iraq are certain to continue to make noise in 2015, but it is difficult to see how either produces major, and global, market-moving risks other than in a few unlikely scenarios. East Asia, on the other hand, could blindside investors precisely because nobody is paying attention to it.

We Read (And Liked)… China Goes Global: The Partial Power

Investors are faced with disparate conclusions about whether China is a truly global power.

According to David Shambaugh’s comprehensive look at Chinese power and its current role in the international system,* China remains a partial power that will continue to struggle advancing its foreign policy preferences within the existing global order.** Shambaugh uses the term partial power to explain that while China’s importance in areas such as global commerce and energy markets is very large, it remains a limited power in terms of its diplomatic reach, cultural influence, role in global governance, and security presence on the global stage. We agree with this nuanced take on the rise of China.

Shambaugh’s most important finding is that Chinese policymakers are being forced to advance the country’s domestic and foreign policy priorities within a global system that is based on liberal rules and norms designed by America in the post-Cold War era. This is a problem because Chinese cultural and political beliefs are opposed to many of the current rules and norms of the game. China is also suspicious of today’s architecture because it was designed by Western powers when China was weak and incapable of influencing outcomes. The stage is therefore set for a revanchist power to take on the declining hegemon.

As a result, China will continue to engage with other states and international organizations only if the result of their engagement directly impacts their strategic interests. As China grows more powerful, it could become more resistant to the institutions and practices that have underpinned the global economy for the past few decades – such as the World Trade Organization or the IMF. In fact, Beijing is likely to attempt to erode those institutions actively whenever the opportunity is at hand. This will create more uncertainty for global investors, as well as opportunities to profit from changes in geopolitical landscape.

Some analyses contend that Chinese power is understated and that the international system will be increasingly shaped by Beijing in the near future. Others argue the opposite, that China is years away from seriously influencing global affairs. Which view is correct? Does it matter?

The second source of uncertainty investors will need to grapple with comes from within China itself. Shambaugh does a good job describing the inconsistencies and opaqueness of the Chinese foreign policymaking process. For instance, after explaining the various actors and bureaucracies that influence Chinese foreign policy, Shambaugh contends that China’s national security decision-making process is “unclear, uninstitutionalized, and unregulated.” This is concerning.

The growing presence of the U.S. military in the region, along with the multitude of calls coming from China’s neighbors for a more assertive American footprint in Asia, will increase the importance of understanding if, how, and when China will react. Unfortunately an opaque policymaking process makes that exercise very difficult. The result is, as we have been arguing at the Geopolitical Strategy for some time, a growing probability that investors are caught off-guard by Chinese response to American strategy of containment.

* Shambaugh, David (2013). China Goes Global: A Partial Power. New York: Oxford University Press.
** David Shambaugh is an international authority on Chinese domestic politics, foreign policy, and international relations in Asia. He is currently the Director of the China Policy Program at George Washington University.

We Read (And Liked)… War! What Is It Good For?

War is not only inevitable, but it is also very good for humankind.

This is the message that Stanford historian and archaeologist Ian Morris argues in his provocative War! What Is It Good For?* Apparently it is good for a lot! Morris contends that violent contests between human societies foster in-group cooperation, technological innovation, and eventually human progress itself.

In a sweeping survey of history – surprisingly readable considering the scope – Morris shows that war, and eventually conquest, led to the decline in violent deaths from 20% to just around 3-4% by the first century AD – to even lower levels today. Although war is perhaps negative in the short term, in the long term it forces societies to organize on an ever larger scale that ultimately suppresses violence in the broader human population.

Underpinning Morris’ argument is a thoroughly Darwinian mechanism. Just as with biological evolution, human societies get bigger and more sophisticated, or they become extinct. The lesson from history for humans is therefore to get bigger, meaner, better organized, and thus more proficient at killing other societies on a mass scale. In the process, societies eliminate internal conflict and discord, replacing countless micro-conflicts with the ability to wage a few macro ones. In this way, Morris can claim that the 20th century, which produced some of the most extraordinary organized killing campaigns known to man, was actually far more peaceful than any major time period that preceded it.

Morris is not the first to make the argument that war makes states. Charles Tilly, one of the most famous sociologists and political scientists of the 20th century, famously compared the state to an organized crime syndicate. The state organizes itself and collects taxes in order to fund what is essentially a protection racket. States that do not to perform this function efficiently ultimately fail.

What can investors take from these pro-war arguments? Morris’ book is a great read for the late-summer, full of fascinating anecdotes from history; but is all this emphasis on the evolutionary quality of war in any way applicable to today’s world?

I would say yes. As the world enters a multipolar era where no one state is in charge, it is likely that geopolitical tensions and wars will increase in frequency. If as Morris and Tilly argue, war has an organizing quality, perhaps then internal discord will dissipate in the face of increasing geopolitical conflict. Take American political polarization. It was at its nadir during the early days of the Cold War (Chart 1). Perhaps what American policymakers need to overcome their ideological differences is a clear external threat. Similarly, perhaps what Chinese policymakers need to pursue painful structural reforms, or Europeans to strengthen their integration, is the clarity of purpose that comes with geopolitical competition.

Chart 1: Could Cold War Lite Assuage Polarization?

GPS Cold War Chart

The problem with this view is that we have no evidence that economic and financial globalization is sustainable between geopolitical rivals. The late 19th century saw a considerable increase in globalization, and it was multipolar, but European countries also coordinated their relations via the Concert System established by the Congress of Vienna following the Napoleonic Wars. If today’s multipolar system goes down the path of competition and tension, it is likely that it will erode globalization along with it.

*Morris, Ian (2014). War! What Is It Good For?: Conflict And The Progress Of Civilization From Primates To Robots. London: Profile Books.