Behind the dense forest of exotic acronyms is a simple fact: the catch-all classification ‘emerging markets’ has lost much of its usefulness. It was invented in the 1980s, by World Bank economist Antoine van Agtmael, to replace the now-defunct acronym LEDCs (or ‘less economically developed countries’) by which the West had until then blithely referred to the rest of the world. The term ‘emerging markets’ served as a useful way to refer to fast-growing although crisis-prone markets like Russia, China and Mexico.

Within the term ‘emerging markets’ was quite a 1980s-assumption: these markets would follow the development route laid down by ‘developed’ economies, until they arrived in the neo-liberal end point reached by the US, the UK and other western countries. And the phrase also came to have strong associations with the currency and debt crises of the 1980s and 1990s.

But things have changed. The bigger emerging market countries have now overtaken the weaker developed markets, not just in total GDP, but also in the pricing they pay on their sovereign debt. Emerging market countries like China and Russia have accumulated trillions of dollars in foreign exchange reserves, and are now the main creditors of western sovereigns. In the 1980s, emerging markets depended on the west for capital inflows. Now the situation is reversed, and the US and EU depend on China to buy their sovereign debt.

It was partly to recognize this shift in economic power to emerging markets that Goldman Sachs economist Jim O’Neill introduced the now-famous acronym BRICs (Brazil, Russia, India and China) in 2001. It was a runaway success. A decade on, and MSCI has launched a BRIC index, there are several BRIC-focused funds, BRIC-focused blogs, BRIC conferences, and the leaders of the BRIC countries even held their own BRIC summit in 2009. 

However, the success of the acronym, and the increase in capital flows to BRIC markets that followed, quickly led to questions and criticisms of the BRIC tag. In 2008, for example, when Russia’s economy slid into recession following the war with Georgia and the Credit Crunch, some analysts suggested Russia should be dropped from the grouping. This suggestion was sufficiently alarming to Russia that it organized not one but two BRIC summits in Russia in 2009. .

Beyond BRICs

Some analysts and economists have pointed out that the BRIC grouping misses out as much as it includes. Jerome Booth of emerging market fund manager Ashmore Investment says: “I came up with CEMENT: Countries in Emerging Markets Excluded by New Terminology.” What, for example, about Indonesia, which has a bigger population than Russia, greater political stability than India, and an economy set to grow by 7% in 2011? Both Morgan Stanley and emerging market fund manager Templeton have suggested turning the BRICs into BRIICs.

What about Turkey, which emerged from the Credit Crunch in remarkably robust health? Its stock market is up 12% year-to-date, while the MSCI BRIC index is down 2%. Turkish president Abdullah Gul told the Financial Times it “wouldn’t be surprising we start talking about BRIC plus T” – although that acronym hardly rolls off the tongue.

Other investment banks, perhaps jealous of the kudos Goldman won with its BRIC creation, have tried to make their own acronyms go viral. HSBC’s ex-CEO Michael Geoghegan tried to float CIVETS: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. He said: “Each has large, young, growing population. Each has a diverse and dynamic economy. And each, in relative terms, is politically stable.”

But investors did not take CIVETS to heart (one says: “BRIC sounds big and serious. Isn’t a civet some kind of animal hormone gland?), and the acronym lasted little longer than Geoghegan, who is departing from HSBC.

Rival firm Standard Chartered has tried this year to introduce the ‘7% Club’, which would include any market whose economy is growing at rates of 7% a year or more. Standard Chartered says: “Focusing too much on BRICs has its limitations. One is that there are several other countries that are not far behind and could plausibly be in the top four within a decade or two, most likely displacing Russia or possibly Brazil.”

Having an acronym with a fluid membership allows for any outperformers to join and underperformers to drop out. But the 7% membership rule makes for some strange members in the club: China, India, Vietnam, but also Turkmenistan, Sudan, Sierra Leone and Chad. Anyone for Sudanese debt?

Goldman Sachs’s Jim O’Neill has sought to create a new acronym to acknowledge the rising stars coming after the BRICs in emerging markets: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam. He has dubbed these countries the ‘Next 11’, which is probably catchier than, say, SKIVE PIMP BNT.

The NEXT 11 tag has already had some success – Castlestone Management launched a Next 11 fund in August 2010, and BNP Paribas launched a Next 11 ETF.  Jeffrey Sacks, emerging market debt portfolio manager at Principal Global Investors in New York, says: “The Next 11 tag is interesting because it catches the middle tier of rising stars, and all the markets in it share quite similar economic fundamentals.”

Its the PIIGS, STUPID

Meanwhile, a sign of the times of how bad things have got for developed markets is analysts have started to invent acronyms to group them together in ‘bad groups’. The main example of this is the PIGS acronym, for the weaker Eurozone economies of Portugal, Italy, Greece and Spain, although some analysts prefer to include Ireland to make it PIIGS.

No one has owned up to inventing PIGS, indeed, Barclays Capital analysts have been banned from using it, as it has led to fury among PIGS policy-makers, with one Portuguese politician calling it a racist plot fried up by the British media to deflect attention away from the weak UK economy. The British press responded by inventing its own acronym, STUPID, to include the high deficit economies of Spain, Turkey, UK, Portugal, Italy and Dubai.

But some investors warn that such acronyms, droll as they are, can make the markets less safe. Gerard Fitzpatrick, senior portfolio manager at Russell Investments in London, says: “These acronyms can spread systemic risk. They create herd behaviour, with investors mindlessly running from anything tarred with the PIGS brush.” Jerome Booth agrees: “The problem with all these acronyms is they’re short-cuts. They save you the effort of thinking. Thinking is hard work.”

But these sorts of neural shortcuts are not confined to acronyms. There are many types of classifications and groupings that have a big influence on investor behaviour, but which can be arbitrary or misleading if followed too religiously. Perhaps the most influential classification is how sovereigns are treated by big index providers like MSCI and S&P’s.

For example, investors and analysts have been expecting MSCI to upgrade Taiwan and South Korea, both of which are investment grade, to ‘developed market status’. However, it has yet to do so, despite other indices like S&P and FTSE graduating these countries.

Bankers in the GCC have also long been waiting for MSCI to upgrade GCC markets like the UAE from ‘frontier’ to ‘emerging’, which would instantly lead to large capital inflows from index-tracker funds. But so far they’ve waited in vain.

Another huge driver of investor behaviour is the stamp given sovereigns by rating agencies. Indeed, whole economic policies are designed with a view to preserving ratings, as the British government’s anxiety about the UK losing its AAA sovereign rating show this year. Much of Russian finance minister’s economic policy from 2001-2003 was designed to win Russia an investment grade credit rating, which it finally did in 2003 – although financial reforms notably dropped off following that achievement.

The loss of investment grade, meanwhile, can be a traumatic event – take Standard & Poor’s downgrade of Greece to junk status in April 2010, which was enough to cause the EU to call for rating agencies to act in a “responsible and rigorous way”, during “this very difficult and sensitive period”. The other rating agencies then followed suit, leading to Greece falling out of the MSCI investment grade index.

The rating a sovereign is given has a huge impact, then, on its market perception and on its domestic economic policy – on government spending on schools, hospitals and other critical public services.  And yet, if the Credit Crunch has shown anything, it is that rating agencies are over-worked and under-qualified organizations manned by analysts who would often far rather be working at an investment bank. They are just as prone to inaccuracy and fallibility as other areas of the market.

One investor says: “There are all sorts of classifications and generalizations that get slavishly followed and  which prevent people from looking at fundamentals. And the media is responsible for a lot of it. It’s journalists who are most obsessed with coming up with catchphrases, or awards, or lists of ‘who’s hot’. Too many investors outsource their thinking to analysts or hacks. People need to think for themselves.” Think for ourselves? PIIGS might fly.

Enjoy this? There’s more by me on psychology and philosophy at my blog, The Politics of Wellbeing.

But recent commentary and headlines – particularly in the US – have claimed Turkey is turning its back on the West as the rift between Turkey and Israel deepened following the killing of 9 Turkish citizens by Israeli forces when they raided a Turkish ship trying to run the blockade of Gaza in May.

Turkey is an ally of the US and a staunch member of NATO, it has also been trying to get into the EU for more than twenty years, so why are some commentators saying Ankara is turning away from the West?

A new poll from the German Marshall Fund published  today suggests Turks are cooling in their attitude towards the EU and NATO and are distinctly less concerned about Iran than the public in Turkey’s NATO allies.

And over the past 8 years, under the leadership of the AK Party, which is rooted in political islam, Turkey has changed.

Reuters

In the domestic arena, it has reduced the power and influence of the armed forces which see themselves as the guardians of the secular legacy of the Turkish Republic’s founder Kemal Ataturk.

But AK has also made its mark in foreign policy. It has accelerated Turkey’s negotiations to enter the EU, even if Cypriot blocking tactics and the lack of enthusiasm in France and Germany for Turkish entry have undermined the momentum of those talks.

But Foreign Minister, Professor Ahmet Davutoglu, who is a respected political scientist rather than a career politician, has articulated a clear vision of Turkey’s international role – and it doesn’t involve turning its back on NATO and the EU.

Professor Davutoglu espouses a policy of ‘zero problems with neighbours’, others have called it ‘neo-Ottomanism’, which has seen Ankara reaching out to its neighbours to the north, east and south. This has seen the Turks return to the Middle East as mediators between Israel and Syria and to the Balkans where they have recently tried to ease relations between Serbia and Bosnia. It has also seen booming trade with Russia and Iran.

And it is with Iran that American commentators and, seemingly, the Obama administration, have the most problem with Turkey’s changing foreign policy.

Turkey, along with Brazil, attempted to revive talks over Iran’s nuclear programme in May, when Prime Minister Racep Tayyip Erdogan and President Lula went to Tehran and got President Ahmedinejad to agree to send some nuclear material abroad for reprocessing as a confidence building measure. According to the Brazilians, the initiative was coordinated closely with the US and the Iranians agreed to the three conditions the US had insisted on. But following the announcement of the agreement, the US Secretary of State, Hillary Clinton, rejected it out of hand.

Brazil and Turkey were not best pleased and responded by voting against the stronger sanctions against Iran in the UN Security Council.

President George W Bush’s response to the September 11th attacks was to tell the world “you’re either with us, or you are with the terrorists”.

Some American commentators’ response to Turkey’s dispute with Israel and attempt to negotiate with Iran, has been reminiscent of this zero-sum approach by arguing  that if Turkey adopts foreign policies the US doesn’t agree with, then it is turning against the West.

Turkey is an emerging power – sometimes bracketed along with the BRIC countries. It’s a member of the G20 with an economy expected to grow more than 5% this year. It sees a new role for itself as a regional power, but it does not seem to see that as being incompatible with remaining a member of NATO and continuing talks to join the EU.

As a senior AK MP, Ozlem Turkone, told the World Tonight’s Paul Moss, in an interview to be broadcast tonight “of course Turkey is still an ally of the West and the US, but the world is no longer a bi-polar world. New regional powers are increasing and Turkey can play as a regional power”

The reaction in government and think-tank circles in Washington to Ankara asserting a more independent foreign policy illustrates the difficulty the US seems to be having adjusting to the changing distribution of power in the world, particularly in the Middle East where it asserts stong national interests of its own.

The World Tonight is broadcast at 22.00 UK time on BBC Radio 4 and online

The conflict had several immediate results.

Already fraught relations between Moscow and Tbilisi plunged to new depths and diplomatic relations were severed.

Russia and three other countries recognised the independence of the breakaway Georgian regions of South Ossetia and Abkhazia.

And relations between Russia and the West – the US and the EU – deteriorated to their worst level since the collapse of the USSR – there was even talk of a new Cold War from western politicians.

The Cold War analogies led some commentators to argue Russian foreign policy had taken a decisive anti-western turn and things could and/or should never be the same again

Two years later, the one thing that seems unlikely to ever be the same again is the shape and size of Georgia. If recognition from Russia was not enough, the recent International Court of Justice opinion that Kosovo’s unilateral declaration of independence was not against international law, makes it even less probable Tibilsi could regain control of its lost regions.

But otherwise those predictions and talk of a new Cold War couldn’t appear more misplaced.

Russian relations with Georgia remain hostile. Although the border has reopened in places and some business links survive, ties look set to remain frosty as long as Prime Minister Putin and President Saakashvili remain in office, given their dispute now has a personal animus that goes beyond the geo-political.

But when it comes to relations with the western powers, over the past year things have improved significantly.

One of President Obama’s most successful foreign policy initiatives to date has been the ‘reset’ of relations with Russia that has led to a new nuclear arms control agreement, START 2, but Washington appears to have been pushing at an open door. Though the talks over START took a bit longer than expected and the Russians bargained hard, President Medvedev genuinely seemed to want to do a deal.

When it comes to Europe, the Russians were reaching out to their arch rivals, the Poles, even before the tragic air crash in Russia that killed the Polish President and many of the country’s elite in April. Mr Putin, who has a reputation for playing hardball, handled the consequences of the disaster with a sensitivity that surprised many and Poland has reciprocated.

Russia knows Poland is now an important player in the EU and the overtures to Warsaw show Moscow wants to improve relations with the wider EU, damaged in the past few years by disputes from the disruption of gas supplies via Ukraine, to the killing of the former Russian agent, Alexander Litvinienko, in London.

What lies behind this change of policy in Moscow?

The reasons for the change of approach from Russia were outlined in a leaked Foreign Ministry paper in May  and they appear to be highly pragmatic.

The economic crisis came as huge shock to Russia’s leaders as the economy shrank by up to 10%. The fall in global economic activity led to a big fall in the price of oil on which Russia depends for much of its GDP.

The penny seems to have dropped in Moscow  that the oil and gas industry need to be much more efficient and the country needs to diversify away from reliance on the energy sector. So President Medvedev and Prime Minister Putin want to modernise the Russian economy, and they have decided they need good relations with the western economies to get access to investment and technology.

Last month, Russian Foreign Minister, Sergei Lavrov, wrote a significant essay in Russia in Global Affairs explaining the policy change in more depth

So is Moscow turning  westwards, rather than to its new partners in the BRIC bloc – China, India and Brazil – when it really needs help?.

Well this change could be a sign that the talk of the shifting balance of power in the world is overblown.

Equally, it could well be a sign that the emergence of new powers, alongside the presence of the traditional western powers, has given all states more options in foreign policy – and a country like Russia, which sees national interest through the lens of realpolitik, can pick its horses for courses in the global arena.

The World Tonight is broadcast at 22.00 UK time on BBC Radio 4 and online

Delivering the annual lecture at The Ditchley Foundation last week, Strobe Talbott suggested that the “promise” of the Obama Presidency – both in the domestic and the international arenas – is now “at risk”. “[W]hatever fate is in store for the current president of the United States”, Talbott argued,

“one thing is for sure.  His success in tackling the major issues of our time will depend on his establishing a degree of common purpose with his partners in national governance at the other end of Pennsylvania Avenue and with his partners in global governance around the world.”

- Elsewhere, over at The Cable, Josh Rogin reports on the slow progress of reviews into US development policy – the Presidential Study Directive on Global Development and the Quadrennial Diplomacy and Development Review.  The Economist, meanwhile, highlights Brazil’s growing identity as a significant aid donor.

- Finally, the head of the UK Financial Services Authority, Adair Turner, cautions against the default acceptance of prevailing economic ideology, suggesting that policymakers would do well to draw on a diversity of economic opinion. Joseph Stiglitz, meanwhile, explores the Keynesian prescription for the global economy.

It’s commonplace to describe the financial crisis as a once-in-a-century event, but I question whether that is the case. Perhaps we’re not in the midst of a short-lived financial shock, but a long crisis that stretches back into the 1990s.

Here’s Paul Blustein on Alan Greenspan:

The Fed chief told the G-7 that in almost fifty years of watching the U.S. economy, he had never witnessed anything like the drying up of markets in the previous days and weeks.

Greenspan wasn’t speaking in Autumn 2008 when Lehman’s collapsed, however, but ten years’ earlier in the wake of the spectacular blow-up of Long-Term Capital Management, which lost $4.5 billion almost overnight in what the fund’s principals post-rationalised as a 100-year flood.

Long-Term (with its superbly hubristic name) was brought low by derivatives, just as Lehman’s would be a decade later.

(Robert Rubin, Clinton’s Treasury Secretary, was one of those left picking up the pieces – part of ‘the committee to save the world’, with Greenspan and Larry Summers. Rubin went on to preside over Citigroup as it needed a succession of massively expensive bailouts, when its derivatives tanked in the subprime crisis.)

The proximate cause of Long-Term’s failure was Russia’s Rouble crisis, when the country defaulted on its debt after the IMF refused to mount a second bailout.

The Russian crisis itself came in the midst of a long series of dramatic economic failures that hits the world between 1997 and 1999, mostly in East Asia (Thailand, South Korea, Indonesia etc), but which also battered Brazil and would devastate Argentina in 2002. Blustein again:

Time and again, panics in financial markets proved impervious to the ministrations of the people responsible for global economic policymaking.

IMF bailouts fell flat in one crisis-stricken country after another, with the announcements of enormous international loan packages followed by crashes in currencies and sever economic setbacks that the rescues were supposed to avert.

Greenspan believed that the crisis of 1997-1999 was caused by “more investment monies flow[ing] into these economies than could be profitably employed at modest risk.”

Ben Bernanke,his successor at the Fed, took a similar view. In 2005, he argued that, in response to the crisis, East Asian countries became net exporters of capital, rather than net importers. Even countries such as China, which had survived the crisis unscathed, built up reserves, in part to hedge against future financial turbulence.

In practice, these countries increased reserves through the expedient of issuing debt to their citizens, thereby mobilizing domestic saving, and then using the proceeds to buy U.S. Treasury securities and other assets.

Effectively, governments have acted as financial intermediaries, channeling domestic saving away from local uses and into international capital markets.

In the meantime, the money that had flowed into emerging markets was looking for a home. During the dot.com era, it found it in technology stocks. But they crashed in 2001, costing investors $5 trillion of losses. To restart the party, Greenspan then cut interest rates savagely (and even more so after 9/11). Rates were down at1% well into 2004.

As a result, the United States (and the UK and various other deficit countries) were faced by the toxic combination of low interest rates and what Bernanke dubbed a ‘global savings glut’ (e.g. lots of capital competing to find risk).

And my, how the debtors loved it! Bankers went stark raving mad, lending standards collapsed, and a massive asset price bubble was inflated. It ended in a colossal hangover (mostly confined to the West, it should be remembered), once US housing prices finally started to fall in March 2006.

In a seminar I led at Brookings with Bruce Jones earlier this week (discussing our recent paper with Alex on globalization’s woes), I argued that perhaps we should stop pretending the financial crisis started in 2007, but should instead picture it as a truly global crisis that has had (so far) three main waypoints:

• The East Asian crisis (with hits on other countries outside Asia).
• The dot.com crash.
• The ‘subprime’ crisis, (which may itself be triggering another wave of sovereign debt crises).

Admittedly, there was some push back to the notion that we are in the midst not of a shock, but of a slow motion car crash. But the connections seem strong to me. At the very least, it unwarranted to claim that recent events have been ‘unprecedented’ accidents that will only occur every century or so.

It all makes me think of The Way Things Go, a famous and fantastic film by the Swiss artists Peter Fischli and David Weiss – in which you watch unfold a chain reaction of levers, pulleys, slides, seesaws, and lots of whizzes, bangs and explosions. The full film is half an hour long, but the short clip at the top of this post gives you a flavour.

The analogy is not perfect though. Fischli and Weiss understood the causality that tied together their mish mash of junk and chemicals. They could tell you where it was all going to end up. Their whole thing had been intelligently designed.

Our economy, I think, has surpassed human understanding. We can bash, poke and kick it, and hope it will start running smoothly again. But it would be foolish to trust those who confidently pronounce this crisis over, and even less those who claim to know what is coming next.

Update: Alex sends me this 1999 essay on Long-Term Capital Management by Michael Lewis, who has written a much heralded book on the recent crash. Here’s an extract:

It is interesting to see how people respond when the assumptions that get them out of bed in the morning are declared ridiculous by the wider world. There is obviously now a very great social pressure on the young professors [who reinvented bond trading and whose models blew up Long-Term] to abandon the thing they cherish most, their hyperrational view of the world…

Oddly, the question that occupies them is not whether to push on with their models of financial behavior but how to improve the models in light of what has happened to them. ”The solution,” [Nobel Prize winner and Long-Term partner] Robert Merton says, ”is not to go back to the old, simple methods. That never works. You can’t go back. The world has changed. And the solution is greater complexity.”

My understanding is that BASIC was formed at China’s instigation. China agreed a Memorandum of Understanding with India in October 2009, committing the two countries to working closely together at Copenhagen. It then invited Brazil and South Africa to join the party, at a meeting in Beijing a week before Copenhagen started. Sudan was also invited to represent the G77.

According to Jairam Ramesh, India’s environment minister, the four countries decided that they’d walk out of Copenhagen together if necessary:

We will not exit in isolation. We will co-ordinate our exit if any of our non-negotiable terms is violated. Our entry and exit will be collective.

During Copenhagen, China worked extremely closely with India, with the two delegations meeting up to six times a day. It also engaged intensively with the other members of BASIC. In the final meeting with the Americans, China agreed to accept a limited international monitoring of its targets (India claims to have pushed China on this point).

The decision was also taken to drop language, setting a deadline for turning the Copenhagen Accord into a legally binding agreement. South Africa and Brazil both appear to have been unhappy with this decision.

Since Copenhagen, the BASIC countries have met once and have agreed to continue to get together on a regular basis. They want the Copenhagen Accord to set the stage for a ‘twin track’ agreement – with tough and binding targets for developed countries through Kyoto #2 and voluntary commitments for themselves under a new agreement.

No-one really knows how the US would fit into this picture. It is also increasingly clear that they and the US left Copenhagen with quite different impressions of what will happen next. The US believes that large emerging economies now have “very explicit activities and obligations”. I don’t think they believe they are committed to anything significant, beyond what they agreed at Bali or put on the table on a voluntary basis before Copenhagen started.

Over the past few days, the BASIC countries have lodged their “mitigation actions” with the UNFCCC, meeting a Jan 31^st deadline. Here are the highlights:

China and India have submitted their commitments using exactly the same form of words. They are both prepared to increase decrease their carbon intensity by set amounts – 40-45% for China; 20-25% for India.

These commitments are made reliant on “financial resources and transfer of technology” from the developed countries, in line with the 1992 Convention, though China has elsewhere made it clear that it isn’t expecting to get much money.

China also offers a bit more detail on its plans than India – saying it will “increase the share of non-fossil fuels in primary energy consumption to around 15% by 2020 and increase forest coverage by 40 million hectares and forest stock volume by 1.3 billion cubic meters by 2020 from the 2005 levels.”

Brazil goes quite a bit further, setting out a fairly detailed action plan that it says it expects will reduce its emissions by 36.1%-38.9% against business-as-usual by 2020.

This is a more robust target than China or India’s – as it implies a cap for emissions in 2020 (if that is, the Brazilians publish – or have published – what they expect BAU to be). China and India’s expected emissions can only be calculated if one makes assumptions about their economic growth.

South Africa, meanwhile, underlines that it negotiated both as part of a broader group of countries working for a deal, and within the BASIC coalition, disassociating itself ever so slightly from BASIC’s robust line during Copenhagen’s endgame.

Like Brazil, it sets out a 34% deviation below business-as-usual in 2020, and a 42% deviation by 2025. Its figures are based on this study.

It also, with some hedging, commits itself to a peak year for its emissions:

With financial and capacity building support from the international community, this level of effort will enable South Africa’s greenhouse gas emissions to peak between 2020 and 2025, plateau for approximately a decade and decline in absolute terms thereafter.

Try asking the Chinese governments when it expects the country’s emissions to peak and you’ll be as welcome in Beijing as Larry Page and Sergey Brin. It’s worth noting, though, that South Africa emits much more than China on a per capita basis and has comparable emissions intensity – facts that it admits puts it “in a difficult position” in climate negotiations.

My conclusions:

• BASIC is here to stay, but it’s not entirely on the same page as yet. The four countries talked recently about harmonising their commitments on emissions – it’s not clear how that will happen.
• If I had to guess, I’d say that China will be able to keep the alliance together – and probably will also keep the G77 on side. (The latter is probably bad for poor countries, with high climate vulnerability and low emissions.)
• BASIC, the US, and the EU are also some way apart, despite their willingness to sign up to the Copenhagen Accord. BASIC thinks the Bali negotiations are ongoing. The US thinks negotiations have been put onto a new footing. The Europeans are hoping for the best.
• It’s going to be another rocky year for the international climate regime, especially with few governments expecting cap and trade to pass the US Senate.

Whether or not that’s right (and like Willem Buiter, Martin Wolf is also a good deal more downcast than the Lex team), it’s interesting to compare today’s Lex column with what they had to say about capital flows to emerging markets just a couple of days ago.  Here’s the bit that made me sit up:

Take Brazil and India, the globe’s ninth and 12th biggest economies, according to the International Monetary Fund’s latest estimates. While the developed world is expected to shrink by 2 per cent this year, the IMF reckons Brazil will grow by 2 per cent, and India by 5 per cent. Why? One answer is that they have stable banks, relatively closed economies, and large internal markets. This has insulated them from much of the global turmoil.

The contrast with East Asia is stark. Singapore’s economy shrank at an annualised 17 per cent rate at the end of last year, South Korea by some 20 per cent. Yet this is not for lack of capital. Asian economies, after all, are global creditors. Their economies have shrunk instead because they are heavily oriented towards collapsing international trade. Meanwhile, their local markets are undeveloped and weak. Asia’s challenge is how to best deploy its accumulated surpluses to boost domestic demand.

None of that amounts to a rationale for protectionism as a response to the crisis, of course; Buy America is still a stupid plan.  But the data does seem to me to put a question mark over a core plank of current orthodoxy in international development thinking.

For one thing that everyone agrees on in the development world is that integration in the global economy is a central route out of poverty.  (The disagreements have been about the extent to which such integration necessarily implies trade or financial liberalisation, not the more basic point about integration per se – hence the old argument over protection of infant export industries a la China or South Korea, where the subject of dispute is ‘how’, not ‘whether’).

There’s a kind of parallel here with last summer’s panic over export restrictions on food, when import-dependent countries that had placed their trust in the reliability of liquid international markets for food (like the Philippines) suddenly felt very burned when export restrictions appeared in over 30 countries.

In both examples, the underlying analytical issue is the apparent trade-off between growth and profitability in the good times and resilience when the shocks and stresses start to pile up.  Unfortunately, for countries that lack the benefit of Brazil and India’s insulation, it’s probably too late to think about putting buffers in place.  (If you wait until the panic buying is already underway before you start assembling a stash of canned food under the stairs, then you’re just making the problem worse…)

Image Author: mike_is_scrumptious

Assume a robust global deal on climate and the world’s cities will have to transform their infrastructure, economies and societies in little more than a generation.

Assume uncontrolled emissions growth and they face growing impact from a less hospitable and more volatile climate.

Either way – big changes are on the way. Few cities’ leaders grasp the scale of the challenge, especially in developing countries, where towns and cities will have an additional 1.5bn residents to cope with by 2030.

This new think piece has been prepared as part of the British Council’s Climate and Cities programme. Download the pdf (which has full references) or read the full text below the jump.

A Tale of Two Cities
29 January 2009

A think piece for the British Council’s Climate and Cities programme

“It was the spring of hope, it was the winter of despair,
we had everything before us, we had nothing before us”

Charles Dickens

The Best of Times

The World in 2030 – Take 1

Imagine a world where governments agree a robust global deal on climate change. 

The 2009 Copenhagen agreement is the first step, setting out a broad framework for emissions control. A green ‘new deal’ helps the world tackle the global economic downturn and pushes investment in clean tech into top gear. By 2012, detailed negotiations have triggered a wave of institutional innovation, at global, regional, national and local levels.

From that date onward, a price for carbon is set and emissions are traded globally. Growing numbers of countries take on binding targets, with carbon markets providing finance to help poorer countries develop along a low carbon pathway. Forests and other sinks receive investment in return for the ecosystem services they provide. Adaptation funding is used to make countries more resilient to all the climatic threats they face.

As a result, global emissions are already ten years past their peak in 2030, and have fallen to more than 10% below today’s levels. The world is gradually converging on equal per capita emissions. By mid-century, the average American is projected to emit a tenth of the carbon they do today, and Chinese per capita emissions will have fallen by half. Meanwhile, Brazilian emissions will have risen for a time, but then fallen back to 2009 levels, and the average Haitian will still be below the global average, but receiving some cash in recompense.

There’s been some friction along the way. In 2030, the carbon market is big business, trading over $5 trillion annually, as part of a global financial system extensively remodelled after the depression. But the price has been volatile, creating systemic instability that the International Carbon Fund struggles to contain. In spite of this, the US, European Union and Japan have managed to maintain some unity within an increasingly assertive G20, while the new powers (China, India, Brazil) have assumed enhanced rights and responsibilities on the global stage.

Non-state global networks, meanwhile, have continued to grow in influence, while a new commitment to subsidiarity has strengthened the hand of provincial and local actors. The nation state has not disappeared, but it has a growing number of rivals on the international stage.

The climate, of course, is still warming. The IPCC has just published its eighth assessment report, with a headline finding that emissions will stabilize around 465ppm CO2e, leading to eventual warming of 2.6ºC above pre-industrial levels. By 2030, the world has already warmed by about 1ºC (a rise locked in by 20^th century emissions). The impact of this is obvious for all to see. The climate has become less dependable; floods, famine and drought have all increased in frequency and severity.

In general, however, communities have proved surprisingly resourceful and innovative – both in reducing emissions, and in coping with a changing climate. Top down political action has been met and matched by an effective bottom-up response. The 20^th century’s climate legacy may have presented the world with its greatest market failure, but the 21^st century seems to up to the task of designing and implementing a collective response.

Low Carbon City

In this world, what will the future city look like?

Here’s what we know:

• It will be bigger… Today, 3.3 billion people live in the world’s towns and cities. By 2030, this figure will have leapt to 5 billion. There will be eight ‘hypercities’ with more than 20 million inhabitants; another nineteen ‘megacities’ with at least 10 million citizens, and 48 or so large cities where more than 5 million people live.
•  …or smaller... Half the world’s urban dwellers live in a ‘long tail’ of towns of less than 500,000 inhabitants. These towns are too numerous to be counted, but by 2030 there will be at least 700 million more people living in them (that’s twice the population of the USA).
• …but considerably poorer. Even if economies grow strongly, 2030′s average urbanite will have a lower standard of living than he or she does today. Cities in rich countries will barely grow over the next twenty years and some will shrink. But developing countries will have 1.4 billion more urban dwellers, with the very poorest cities growing fastest of all.

But while tomorrow’s towns and cities face massive challenges, they still act as dynamos in the global economy. Even poor cities have huge economic importance, with a country’s largest city commonly accounting for 20% of its GDP. As the World Bank points out, “No country has developed without the growth of its cities. As countries become richer, economic activity becomes more densely packed into towns, cities and metropolises.” Not only do cities offer residents the chance of a better life, over time the benefit tends to spread to the surrounding countryside as well.

But tomorrow’s city must perform a tricky balancing act. It will have to grow at breakneck speed, while providing both services and economic opportunity to its people. And it must do this in a world with severely constrained access to the carbon-rich energy sources that underpinned the twentieth century’s complex urban environments.

This will require a revolution in energy use:

• At present, towns and cities account for 67% of the world’s energy consumption and 71% of energy-related CO2 emissions.
• Assume business as usual, and urban emissions will grow by 55% over the next twenty years – equivalent to double the US’s current emissions. Almost 90% of this growth will be in the developing world.
• Under this scenario, cities and towns in 2030 will be using 70% more coal, 60% more gas, and 35% more oil than they are today. Fossil fuels would make up 85% of all urban energy use, virtually unchanged from current levels.

But the world we have described is one where such rapid emissions growth has been made impossible, where fossil fuel use is below current levels, and where carbon constraints on trade will have changed the relationship between a city and its hinterland.

By 2030, then, the future city will have substantially reconfigured its energy and transportation systems. It will have found a way to house, feed and clothe a growing population using materials that have drastically reduced levels of ‘embedded carbon’. And it will have set new standards for energy efficiency (low hanging fruit that have accounted for over a third of its decarbonisation).

The Worst of Times

The World in 2030 – Take 2

Now imagine a world where things don’t work out so well, where 2009 is remembered as the high water mark of global interdependence – the year that globalization began a slow and painful retreat.

Copenhagen produces a deal, but it’s simply Kyoto II – delivering short term targets, with patchy coverage. The treaty is hard to ratify, poorly implemented, and has negligible impact on global emissions. Developed countries continue to relocate their energy intensive industries to countries without targets. They produce a little less carbon, but – once imports are taken into account – consume even more than before. Subsequent talks tighten the regime a little, but by 2030 it’s clear that there’s little chance of stabilization below 650ppm.

At the same time, there is a broader loss of confidence in international cooperation. A deep and persistent global depression triggers increasingly nationalist and protectionist responses the world over. The result is a demographic disaster. Rich countries struggle to cope with their retiring baby boomers, while poor countries produce growing numbers of workers, but have decreasing numbers of jobs to offer them. The news is not universally bad, but most countries in most years see their economies perform at levels well below their theoretical potential.

To make matters worse, a nasty scarcity dynamic creeps up on policymakers while their attention is focused elsewhere. Energy, food, water, land and, to a lesser extent, emissions, become increasingly constrained, as the world’s population rises towards 8 billion. Oil production peaks (partly as a result of chronic underinvestment), and alternative energy sources continue to underperform. Food prices are driven up by increased demand, competition for land, water scarcity and the rising cost of energy. Conflict over water becomes increasingly common – both between and within states.

The consequences of this are toxic. On the one hand, economic growth tends to trigger, and then be limited by, a series of resource price shocks. On the other, successive waves of resource nationalism do little to enhance prospects for global co-operation. Tit-for-tat is now the dominant force at the heart of the international system, as nations and regions jostle and compete for the resources the world has left.

By 2030, climate change is beginning to accelerate all of these problems. Rich countries have been hit, but poor countries have suffered worst. In the coming decades climate change may push the number of displaced people in the world up to one billion. With conflict on the rise, a remodelled UN Security Council is spending a growing proportion of its time on climate security.

But the worst of the impacts are yet to come. Within another fifty years, 600 million more people are likely to be acutely malnourished; 1.8 billion people will suffer from water shortages; 200 million will experience coastal flooding; each year and up to 400 million more people will be at risk from malaria.

In 2030, then, this future is an increasingly bleak one for hundreds of millions and perhaps billions of people. And for their children and grandchildren, things are by now certain to get much worse.

The Feral City

So what are the prospects of the future city in this darker world?

The underlying demographic drivers, of course, will not have changed. Urban areas will see the same surge in population (or perhaps an even greater one, given that poverty tends to keep birth rates high). But with the global economy stagnating, people will no longer be pulled into cities by economic opportunity. Instead, they’ll be pushed out of the countryside by disaster, war and famine.

Worse still, new arrivals will often be moving to the wrong places. 13% of the world’s urban population lives in coastal areas that are less than 10 metres above sea level. Today, there are over 3,000 cities and many more smaller towns close to the waterfront – a figure that will have risen substantially by 2030. As sea levels rise by a metre or so, Buenos Aires, Rio de Janeiro, Los Angeles, New York, Lagos, Cairo, Karachi, Mumbai, Kolkata, Dhaka, Shanghai, Osaka-Kobe, Tokyo and thousands of smaller towns and cities will all come under threat.

By 2030, many, if not all, urban areas will have experienced a gradual intensification of their current vulnerabilities. Natural disasters reveal how fragile modern cities can be. Katrina shut down New Orleans, causing $80 billion damage, and costing 1,836 lives. But by 2030, there’s a good chance that the US will have experienced its first $500 billion hurricane. The winds won’t need to be any stronger – poor planning and pressure to build in vulnerable areas will have inexorably driven up the level of risk.

Nor does the breakdown of a city have to be so dramatic. In Europe, the heat wave of 2003 killed 35,000 people, most of them old and living in urban apartments. Families had abandoned the city centres for the beach, while hospitals were short staffed. No-one realised that the region’s worst peacetime disaster was underway. By 2030, the world can expect to see a doubling of heat related deaths.

But the threat from climate will be at its most acute in the chaotic, sprawling, endless cities of the developing world. Today, 800 million urban dwellers live in slums, and most of them lack proper water, sanitation and housing. By 2030, without rapid economic growth, that number will have grown by 50% or more.

These cities will be beset by a growing ‘dirty’ environmental burden. At present, 800,000 people die each year from urban air pollution and many more suffer from ill health. Indoor air pollution is prevalent in slums and shanty towns, where many women cook using wood fuel and dung, often in poorly ventilated rooms. Uncollected waste and sewage is another pressing problem, and causes at least as many additional deaths. Slums also tend to be built in the most hazardous places, with little or no drainage, where the risk from flooding is high.

Without economic growth and better planning, these problems will steadily worsen, making the future city a dangerous and unpleasant place to live. The result will be an inevitable wave of crime, social unrest and, at worst, conflict. Some cities will be simply unable to cope, and will fail in the face of an insupportable social, environmental and economic burden.

These will be tomorrow’s feral cities. No longer a driver of growth and increasing prosperity, but “a vast collection of blighted buildings, an immense petri dish of both ancient and new diseases, a territory where the rule of law has long been replaced by near anarchy in which the only security available is that which is attained through brute power.”

The City of the Imagination

Signals from the Future

Climate change presents cities with an immense challenge.

Assume the best of times (a rapid, co-ordinated effort to stabilize the climate) and they must undergo revolutionary transformation in little more than a generation. Very few city leaders grasp the scale, depth and speed of the changes that will be required.

Assume the worst of times (uncontrolled emissions growth, with three, four or five degrees of warming on the way) and cities will lose their place on the cutting edge of an advancing civilization. All will struggle to adapt. Some are certain to fail.

Which path we take depends on signals from the future. The tipping point is a psychological one, with actions taken today being influenced by what people believe the future holds:

• If politicians, investors and citizens expect a rapid transition to a low carbon world, then their incentive is to act now – locking in leadership in emergent industries, while avoiding decisions that make meeting future targets more painful and expensive than they need to be.
• If however, they think the change is going to come slowly, or not at all, then their incentive is to delay action and free ride where possible. Countries then have a strong incentive to block global agreements. The logic is circular: why should a state take on targets now that it is so poorly positioned to meet them?

A strong signal from the future, then, promotes a self-fulfilling cycle of action, co-operation, and binding international enforcement. With weak signals, the logic turns vicious, leading to intense and equally self-fulfilling zero sum competition.

That’s why today’s policy disconnect is so corrosive. Citizens are highly sceptical that their leaders will ever make, implement and enforce a robust global deal. That belief, while understandable, further erodes the political conditions needed to make a deal possible.

So what role can cities play in breaking this double bind? As the world’s creative hubs, they bear much of the burden of developing fresh approaches and innovative solutions. The example they set (or fail to set), the way their citizens think about and tackle the climate problem, and the advocacy of their leaders will have a huge influence on the future direction of their countries. Without leadership from cities, climate stabilization will not happen quickly, or at all.

A New Cosmopolitanism

In the coming years, the need for greater innovation will be great. Cities must:

• Revolutionise their economies, squeezing four or five times as much value out of every tonne of greenhouse gas they emit, and pioneering new ways to meet global consumer demand.
• Rebuild their infrastructure, investing in new energy and transportation systems, and buildings that are massively more frugal in their use of resources.
• Develop the political, regulatory, and financial institutions needed to track, control and price national emissions with sufficient transparency and accuracy to satisfy international standards.

The scale of what’s required goes far beyond developing a few new technologies. Innovation will need to reach deep into both formal and informal economies, with the latter certain to remain critical in developing country cities throughout much, if not all, of the twentieth first century.

But the challenge is more than just an economic one. For the climate to be stabilized, cities must be at the head of a profound cultural, social and psychological transformation, one that touches all aspects of their citizens’ lives, changes the way people think and behave, and creates a world that is different in many unanticipated ways from the one we live in today.

And this shift must happen across most (and probably all) major cities. Climate change, as Scott Barrett has argued, depends on the aggregate efforts of all rowers in the boat. Pioneers will find their effort is wasted, unless they share their experience widely, and in particular with the sprawling megacities of the developing world.

Climate, meanwhile, will be only one of many challenges that cities face. As we have seen, urban centres of all sizes will continue to grow at a staggering rate, with population, power and influence shifting steadily from the developed to the developing world. Resources will be tight, while global systems are likely to struggle under the demands that are placed on them. Even optimists expect the road to 2030 to be a rocky and uneven one.

Cities must therefore also invest in resilience – the capacity of a system to “absorb disturbance and reorganise while undergoing change.” Many of today’s urban centres are brittle and over-centralized, and have worryingly few reserves. It’s as if citizens believe their city is immune to the impact of climate change, and that the brunt of the impact will be felt somewhere else (by the poor, in the countryside, in other countries etc.).

Cities are perceived by their population as immune to the impact of a changing climate, with the worst consequences thought to lie somewhere poorer and more rural.

Increasing resilience is thus not simply about being ready for the occasional natural disaster, but about a broader effort to build a coherent, long-term and inclusive response to a range of risks. That means mobilising urban networks and communities, and building a new understanding of risk all the way from a city’s government to its grassroots.

Resilience may have to substitute for innovation, if global co-operation on climate breaks down. But the two will be stronger if they go hand in hand, with resilient cities better able to respond in creative and dynamic ways to the climate challenge. Taken together then, they provide a recipe for a new cosmopolitanism – one that brings the energy of cities to bear on the most complex problem the world has ever faced.

For references, see the PDF