Friday, 29 August 2014

IMF astounded at 'uneven' growth, new thinking needed

The IMF’s World Economic Outlook (WEO) released earlier this month revised its global growth projection down 0.3% to 3.4%. The reason: unanticipated factors. Seriously.

Once again it’s the same old story from the International Monetary Fund. At the beginning of the year it was “growth, growth, growth” all around, and then came the disappointing results. Now after every quarter analysts seem surprised the world economy didn’t perform as well as expected.

But don’t worry, apparently the world economy will grow to the elusive 4% mark by the end of the year as it transitions into a brighter 2015. Of course, that was the IMF’s prediction last quarter too, and at the end of last year. Each time the economy clocked in well below expectations.

The latest Outlook isolates four negative surprises hurting activity. In the US a “harsh winter” slowed demand and exports “declined sharply”. Chinese domestic demand moderated more than expected. Russian economic activity decelerated severely. And emerging economies suffered from weak external demand in the US and China particularly.

In other words, the slower growth had nothing to do with the system. Not one bit.

Even though the IMF analysts didn’t forecast all these “temporary” events impacting growth over the first half of 2014, they remain optimistic the rest of the year will be smooth. Apparently the numbers also suggest a “somewhat stronger growth” next year as well.

“Leading indicators point to the global recovery regaining strength in the second quarter of 2014,” the report says.

“Global growth is expected to rebound from the second quarter of 2014, as some of the drivers underlying first-quarter weakness should have only temporary effects, and others should be offset by policies, including in China,” the report says.

Downside risks remain a concern, it says. Global growth could be weaker for longer, given the lack of robust momentum in advanced economies despite very low interest rates and the easing of other brakes to the recovery.

“Nevertheless, some of the demand weakness in the first quarter appears to be more persistent, especially in investment globally, and is expected to result in lower global growth in 2014 compared with that predicted in the April 2014 WEO.”

The report’s growth predictions for the major economic blocs are interesting too, but mainly for their frankness.

“A growth rebound is underway in the United States as temporary factors wane. But with a more muted recovery in investment, the rebound is expected to provide only a partial offset to the weak first-quarter outcome,” it says. US growth is now projected at 1.7% for 2014, rising to 3% in 2015.

“In the European Union, continued financial fragmentation, impaired private and public sector balance sheets, and high unemployment in some economies will mean uneven growth,” revealing no real surprises. Growth in the euro area is expected to strengthen to 1.1% in 2014 and 1.15% in 2015.

“In Japan, with a stronger than expected performance in the first quarter, growth in 2014 is now projected to be higher at 1.6%, decelerating to 1.1% in 2015, mostly due to the planned unwinding of fiscal stimulus,” the report says.
Chinese authorities will resort to limited and targeted policy measures to support activity in the second half of the year, including tax relief for small and medium enterprises and accelerated fiscal and infrastructure spending.

“As a result, growth in 2014 is projected to be 7.4%. For next year, Chinese growth is projected to moderate to 7.1% as the economy transitions to a more sustainable growth path.”

The IMF also says that in many economies – advanced and emerging market alike – there is an urgent need for structural reforms to strengthen growth potential or make growth more sustainable. But given the lack of accurate past predictions, it’s now much more difficult to assume the report’s forecasting potential. The “temporary” setbacks all seem to have a familiar ring to them. And it’s becoming increasingly necessary to consider that those setbacks might be more systemic than fleeting.

The global financial crisis is exposing a new normal for the world system. Growth has been slow to halting since 2011 and there’s been no reliable way to tell exactly why. Back before the GFC the world was in a super-growth period overrunning GDP in many advanced economies. Slower growth across those economies since suggests the skyrocket figures won’t be seen again for a while.

As economist Ashoka Mody of Princeton University points out, shifting to a lower gear at an average growth rate south of 4% needs to be registered as a natural development in this new economic reality.

That’s not the only new reality.

While advanced economies struggle to grow quickly, emerging economies are also experiencing 6-8% growth rates per year, compounding the problem for larger economies. Their share at the global economic table will only increase, exacerbating global competition for growth.

Ultimately, the IMF’s confusion over lower-than-expected growth rates probably arises more from a misallocation of methodology and a desperate need to think differently about the causes of low growth. Rough economic rivalry, slower growth and low inflation might not be the “temporary” factors the IMF desperately wants them to be. They might be here to stay.

Ebola set to worsen, author says difficult to contain

Humans are strange animals. When it comes to mass-infections we’ll throw our hands up in panic if the sickness is sudden, unpredictable and mysterious. Much of the time that pandemic passes, although its speed and ferocity can be frightening.

On the other hand, if the infection is HIV or Lyme disease, plenty of people end up dead, but the timescale is extended and the deaths are withering, not sudden. The initial panic quickly subsides but these epidemics can be far more widespread and murderous.

Our reaction to speed is expected considering our evolutionary history. For almost all of our species’ existence, humans needed to respond accurately to threats on very short timescales. It was that or we turn into worm food.

Take Ebola for instance, because it’s in the news cycle. The virus doesn’t necessarily act as rapidly as other viruses but it moves super fast through the body and according to current statistics kills well over 60% of infected people. This mortality rate is extremely high among the flora of animal infections.

Shortly after the latest outbreak of Ebola in Western Africa a colleague suggested I read Spillover by David Quammen to better understand animal transitions of viruses, bacteria, microbes or parasites onto human populations. These infections are affectionately called “zoonoses”.

Considering how dry microbiology and virology can be (I remember going through the basics at school…yawn), this book is both informative and bizarrely entertaining. Mr Quammen, a science writer, adds only a dash of important medical and scientific terms to his narrative. He has to, because it’s important to know about an R0 (pronounced “R naught”), reservoir, hosts, incubation, BSL, vectors, and iatrogenic infections.

Sounds tough, I know, but the book has a wonderful narrative flow. The author really threw himself into the task by travelling to every hotspot harbouring the worst zoonoses.

Mr Quammen tramped the jungles of Central Africa, stalked the temples of Asia and the wandered the suburbs of middle America looking for signs of infection. He writes about them as if he’s living a mystery novel.

Ebola, for instance, is a cryptic beast because no one knows how it gets around. It just appears out of the bush one day, infects more than 2,600 individuals (killing 1,400 so far in 2014) before disappearing back into the wild like a ghost. Mr Quammen characterises dozens of other deadly infections like Hendra, Marburg, SARS, avian influenza, and AIDS all while looking for signs of the NBO or ‘Next Big One’.

This is the infection, which, according to worried scientists, threatens to marry in an unholy union the worse characteristics of its parent infection, with new traits our medicines can’t yet treat. Thriller movies have been made about this event, and the World Health Organisation knows how unprepared we all are for the expected pandemic.

The worst part about the book is how shockingly ignorant science is about where many infections come from, how they work and how best to fight them. Mostly the solution a tenuous series of treatments before simply letting the infection die through its inability to spread outside the quarantine zone.

What’s happening now with Ebola is simply a microcosm of the coming NBO. Not only does no one know where Ebola comes from, there’s no effective treatment for the virus if it isn’t noticed early. And even if it is caught early, there’s only a small chance of survival.

Mr Quammen’s advice for treating Ebola victims is hauntingly frank.

“If your husband catches an ebolavirus, give him food and water and love and maybe prayers but keep your distance, wait patiently, hope for the best - and, if he dies, don’t clean out his bowls by hand. Better to step back, blow a kiss, and burn the hut.”

Again, this is seriously our only real response to bad viruses, and we know a damn sight more about this virus than the approaching Next Big One.

This intense book is difficult to put down for its high readability. Then again, learning about how quickly small life forms might crush human civilisation made me wish for a happier ending. Unfortunately, there might not be one.

ASEAN tigers reap FDI income as China teeters

Smart money is flowing into the Asia Pacific. Over the past 18 months, foreign direct investment (FDI) into the region proves it’s one of the best places on earth to see serious return on investment.

The problem, at least for China, is that the Asia Pacific is one of the best places on earth to invest. That’s not an accidental repeat. No longer is the region dominated by one or two major economies. Every nation competes for a limited amount of FDI, and that’s changing the calculus for China’s future plans.
The most recent FDI data from the World Bank, drawn from the recently compiled 2013 figures, shows the China heavyweight gathered an impressive 17.7% increase of FDI year on year. In total, China earned $US347 billion in FDI inflows in 2013. The story of a rising China is now very well known, but just as important for the region’s health – and crucial to understand the Asia Pacific’s long-term trajectory – is the quick rise of other ASEAN countries.

Malaysia too grew its FDI over the same time period by 19%. The Philippines joined the race for investment with their own 20.4% increase. Singapore, which accounts for much of ASEAN’s total FDI, increased its inflow by 4.2% and Vietnam saw a 6.3% increase.

Indonesia was one of the only major ASEAN economies to register a distinct backwards step in FDI over the period. The country – which has just tied up a controversial election – decreased its FDI by 3.6% last year.  The drop probably has more to do with Indonesia’s dilapidated and outdated infrastructure, and tendency for natural disasters such as flooding in major centres, than geography. President-elect Joko Widodo promises greater infrastructure investment, so Indonesia’s FDI may see a rise over the next few years.

As China shows signs of slower growth and lifts more of its citizens into the middle class, other Asian countries are tipped to catch the leaking FDI. In many ways, Chinese labour is becoming too expensive. Countries like Laos, Thailand, Vietnam and Indonesia are all expected to catch this investment, as wages are generally lower there.

In this light, Vietnam’s modest 6.3% FDI increase is therefore a little surprising considering its proximity to China. Some analysts expected Vietnam to register larger FDI, but the country hasn’t fully integrated into the regulatory environment or free trade benefits of ASEAN quite yet. These final movements should be completed by 2015 however, so Vietnam can expect a sharp jump in FDI next year.

In comparison to Singapore’s expected high FDI growth, Hong Kong appears to be stable but performed disappointingly lagging nearly two percentage points behind its main regional rival. Again, Hong Kong doesn’t have a free trade agreement with ASEAN which could explain its sliding performance. China does have a deal with the bloc, but the agreement doesn’t include Hong Kong.

Hong Kong has also experienced democratic trouble recently offering China perhaps less impetus to support any Hong Kong-ASEAN free trade deal (FTA). Whether China’s Central Government can bring the population of Hong Kong back under control will determine the likelihood of an imminent FTA.

In the meantime, Singapore will continue to soak up the foreign investment that Hong Kong misses. Until those crucial steps are taken in Beijing, Singapore will remain the business hub of choice for Asian investment.

As the data suggests, basing any Asian business is still more attractive from Singapore than from Hong Kong. The trends from the market seem to point to Hong Kong as little more than China-lite when it comes to organising business. While that’s not necessarily a bad thing, as Chinese wages increase the government will need to create ways to make their economy more attractive for FDI. In doing so, they could risk scuttling the “rebalancing” of their economy.

August’s data from China’s National Bureau shows the supply of credit to the Chinese economy expanded by only $53.14 billion in July (273.1 billion yuan). Compared to New Zealand’s figures, that seems high, but it’s actually the lowest it’s been in six years.

As pointed out last week, China is racing against time to evolve into an economy less reliant on the intimate bond between government-led credit expansion and housing and infrastructure construction. The World Bank data is another perspective on what’s happening in Asia. China still commands an impressive amount of foreign investment attention but the market is making noises about more attractive opportunities popping up elsewhere in the region.

Simply put, the confounding factor for China’s attempts to rebalance towards greater dependence on domestic consumption is the parallel growth of the rest of Asia. No longer is China the lone economy racing ahead as over the last decade. Vietnam is still 12 months away from emerging from its cocoon into a fully-fledged Asian tiger economy. Malaysia and the Philippines have each built a regulatory environment to harness more FDI in the future.

Indonesia and Thailand will repair and catch up too. Every example will compete directly with an economically preoccupied and tense China. There also are signs China is experiencing deeper structural and cyclical problems than it lets on, but the enormity of the economy keeps it afloat for now.

Monday, 25 August 2014

On killing journalists and the Long War against Islam

A few days ago, the journalist James Foley was beheaded by an Islamic State (IS) jihadist. The killer spoke in a South London accent but apparently had less to do with the ideals of Britain than he felt affinity with the fledgling "paradise on earth" of the Caliphate.

The worldwide media coverage of the startling event made people take notice of the battles in Syria and Iraq in a way they couldn’t from bloody images of dead Arab children or news of hundreds killed in a new bombing raid. The journalist’s death was different for us.

Most people don’t know what to make of a jihadist group choosing not just to kill the American, but doing so in such a calculated, propagandistic way. Decent people of the 21st century can’t seem to empathise with such callous disregard for human life. It’s like being on another planet. Ironically, that’s exactly where IS wants us all to be.

Some of the words the media threw about after the journalist killing show how emotionally-driven and uncomprehending our response was. Calling IS “brutal”, “horrific” or “maniacs” seems to sidestep what’s really going on. But it’s all most commentators could muster at the time.

But beheading is nothing new to the global, franchised jihadist movement. They’ve been practising this particular death signature for more than ten years, and it’s their favourite way to scare anybody with the stomach to watch. Even hearing about it turns most people green (some with envy, but that’s another story). The jihadists said they would release the journalist if the United States stopped its (albeit) limited bombing against their forces in northern Iraq. Spanish and French hostages had already been released by the group, so it wasn’t out of the question that Mr Foley and colleagues would also be freed.

On the other hand, it can’t have escaped everybody’s notice that the last thing IS ever wanted was for the United States government to concede their bombing campaign in northern Iraq. Releasing Mr Foley was likely never going to happen even if the Americans turned all their drones around at once.

The jihadist’s game is much bigger than killing a simple hostage here or destroying certain religious sects there. They want to bring death to America and everybody else in any way they can. The journalist was just the closest representative of the Great Satan they could find. They will look harder and farther afield in the future, that much can be guaranteed. IS won’t be happy with a snivelling pseudo-state in the badlands of the Middle East. They have their eyes set on raising the black flag of al-Qeada over the White House, Whitehall and the Beehive. If the United States wants to stay halfway across the world, out of arms reach, then the jihadists will simply grow longer arms.

After all, it’s not about taking and bargaining for hostages in some grand game to send a message. The defiled corpse and severed head is the message. And yet when the media or leaders of Western nations see what jihadist groups like IS are doing, it’s all a bit hard to swallow.

‘How,” they ask, “can human beings believe other people are inferior and worthy only of death?” “IS are surely brutal and maniacal, that explains their actions,” they think to themselves. “They’re out of their heads and not thinking straight.’ Yet maybe, just maybe, when people like IS say they want to kill or convert everyone on the planet and that doing so will send them faster to heaven, they actually believe it and perhaps we should listen to their words.

Right now it’s Islam Awareness Week in New Zealand. At least, technically speaking it is. Dame Susan Devoy opened the week on Saturday with a rousing speech. But with what’s going on almost everywhere around the world (even in China), I’m not sure Islam needs a single week for us to be made aware of it. It’s doing quite well on it’s own, thank you very much.

New Zealand might be far away from most of the killings and explosions of the Muslim world, but if the death-loving ideology underpinning groups like IS can ever be countered everybody needs to be on the same page. That includes all moderate Muslims too.

Islam Awareness Week set up an “Ask a Muslim” tent in Auckland’s Aotea Square over the weekend. I thought it was an excellent opportunity to ask them what they thought of IS. So I did:

“We condemn them and everything they are doing. They are bringing shame to Islam and we cannot agree with them,” one man said. “What they say, you have to see, is not real Islam. Islam is peace, those people want war,” another exclaimed. But the thing is, I can’t help but think this is exactly the way IS fighters would respond if I asked them in reverse about those men in Aotea Square. I’m not going to Iraq to find out though, but I have my suspicions.

As a non-superstitious person, how exactly am I to tell the difference? At least IS tells the world loud and clear via a snuff film what they think. I don’t hear a peep out of their fellow “moderate” believers. Unless I asked the Islamic men in Auckland about IS, I wouldn’t have known their position. And in that case, silence sounds a lot like support.
Jihadist groups feverously crucifying children and beheading journalists with glee cannot be explained by using words like “brutal” in isolation. If we want to try and explain what we’re seeing, we need to understand that they truly do believe what they say they believe. For thirteen years since the 9/11 attacks in America, Western countries have played whack a mole with groups very similar to IS. They pop up in the vacuum of nation-states from Morocco through the Caucasus to Indonesia. And each time our response is the same.

We speak to the jihadists in one of their languages: violence. It’s not the only language they have, but it’s one they respond to. Missiles and troops are sent to kill or capture their fighters across the world, and just when the fighting dies down does it spring back somewhere else altogether more hateful and vicious than the last.

US Secretary of Defence Chuck Hagel is right saying over the weekend that IS are “beyond anything we’ve seen”. But he’s not going to avoid another group taking its place in the future if his response to the group is once again limited to concerted missile strikes.

IS will not be able to establish anything like a viable state, no matter how hard they try. The so-called Caliphate was doomed from the start because functioning states are exactly the kind of target Western nations excel at destroying. But if the last thirteen years are any indication of our campaign “successes”, Western nations have proven horrible at destroying the kind of fire that burns in the hearts of people like IS. That is exactly the fire that needs either dousing or controlling. Missiles won’t achieve this goal.

Western nations are going to be fighting jihadist groups like IS for the rest of our lives and beyond if we continue to refuse to listen to what they are saying. A dangerous ideology is much more difficult to counter if we don’t think anyone truly believes it.

When jihadists say they believe in killing the infidel wherever they find them, jihadists actually mean it. When they believe they will go to heaven if they blow themselves up, they actually mean it. If they wish to establish a Caliphate and destroy the foundations of Western society no matter how long it takes, they mean it.

And when some American, German, Australian, British, Dutch, French, Tunisian, Saudi Arabian, Malaysian, Indonesian and maybe New Zealand Muslims say they too want these things, we have to understand that these few people truly believe what they say.

These jihadists must be stopped, that much is clear. But again we will be fighting these people forever if we cannot seriously formulate a plan to counter the ideology that breeds such thinking. I believe those men in Aotea Square when they say IS have perverted their religion. But I need to see more proof that true Islam can coexist with Western society than only a few men assuring me so in private.

Western countries have made a mess of the Muslim world, that can’t be denied. But the way many Muslims act throughout the world is not entirely the result of our actions. If we’re going to take this threat seriously after all this time, we need to tackle the ideology at its core. That means imploring with Muslims who say Islam is peaceful to stand up and take control of their religion from groups like IS.

Unfortunately for the multicultural melting pot tendencies of developed countries, this may require some soul searching too. It’s certainly not as bad in New Zealand as elsewhere, but if 15% of French people in a recent poll support IS, there’s clearly something going on.

Call that percentage an outlier if you want, but it is becoming more obvious that the issue of jihadist ideology runs far deeper than a few thousand fighting men in the desert half a world away and deep in the Iron Age. Missiles will kill the people on the battlefield, but they won’t change the beliefs of your neighbours or workmates. It’s well past time for everyone who thinks IS are wrong to tell them so. Otherwise, severed heads will be the message read loud and clear.

Tuesday, 19 August 2014

Re-examining China’s dubious growth figures

New Zealand’s Minister of Trade Tim Groser says he’s not “China sceptical”. Mr Groser has repeatedly said during his time at the helm that while China needs to be watched closely, there’s no empirical reason to worry it might fall over.

However, a paper released recently by the New York-based business research group The Conference Board suggests estimates of China’s GDP growth have always been inflated. The frightening thing about the report is that this problem could be much more profound than anyone thought.

According to the paper, authored by Harry Wu, China’s unadjusted GDP could be inflated by an eye-watering 36%. In other words, if China’s nominal GDP was measured at $US8.2 trillion in 2012, then the new estimate means China is $US700 billion smaller than Japan.

That’s worrying by itself, but another key finding reveals a “strong upward bias” in official GDP estimates. Removing that bias allots China a significantly lower aggregate growth rate over decades. For instance, using the correction, the new estimate for China’s growth rate from 1978-2012 is actually 7.2% per annum. That’s almost a full 3% lower than the 9.8% official estimate for the same time period. 

During 2008-2012, China’s GDP might have fallen to on average 6.5% per annum, rather than the official figures of 9.3%. In 2008 alone, the official figures say growth was 9.1%, but they might only have touched 4.1%.

The measurement suggests China is more susceptible to external shocks than Beijing has previously made out. On top of this, the inaccuracies of the official GDP reports are “non-systematic”. In other words, political influences might be smudging the figures.

In what is probably the driest academic understatement of the year, the research group says that, if they’re correct, this news is “anything but trivial”. Of course, it should be pointed out that an American research group measured these figures. The new figures are not coming from China or from a more conciliatory nation elsewhere.

But that’s not exactly the takeaway from the paper. Questions have been raised before about the reliability of China’s GDP figures. And relying on totality numbers like gross domestic product probably isn’t the best way to accurately measure China.

But then, how should China be measured? That’s a real problem. When the enormous amounts of raw materials consumed by China are factored, the country simply has to be growing at phenomenal rates.

It already imports more crude oil than the United States, consumes half the world’s coal, and builds sprawling cities with simply gigantic quantities of iron ore. One statistic even found China using more concrete in the past four years than the United States did during the entire 20th Century. This is despite the fact that China is still almost one-third the size of the United States.

The old GDP figures (without the correction) account for the raw materials, but if the re-estimation is correct, then the question needs to be asked where most of the goods have gone? Perhaps China’s reputation for waste and inefficiency isn’t too far wrong.

China’s President Xi Jinping is reforming his country’s economy, tightening the runaway construction and industrial capacity. Now he might have more of an obstacle to overcome than anyone imagined and one that will take much longer to fix.

That’s why the China problem is so urgent and why the true figures really do matter. Chinese success relies on moving towards a more sustainable economic model. If Beijing can’t know what the real GDP figures are, then how can it quantify the problem it’s facing? Then again if the economic inaccuracies are a result not of the economic system but political influences, then maybe Beijing knows more about the Chinese economy than they let on. One would hope that is the case.

Equally, China’s economy might be larger than the official figures suggest, we just don’t know. China uses resources differently to Japan or the United States, so on one level it makes sense that resource consumption would be higher than its GDP might reflect.

However, even though China’s GDP figures are inaccurate and aren’t a helpful gauge of their economy, the inefficiency of the system is a dangerous limiter in a booming economy. China’s very existence pivots on the ability of the current regime to forcibly evolve the economy into a more sustainable structure. Time and speed are crucial for Beijing, so an indication this might take much longer will not be reassuring.

Any China forecast must to keep all this in mind. It’s getting harder to unveil true growth figures in China because the usual tools aren’t working like they do in more open countries. More than any time in the past, we’re now only getting a partial picture of Chinese reality. 

Excuse me, but we urgently need to talk about social media and power

In a big way, like an advancing sand dune, the gradual evolution of media shifting power onto the street seems to have missed most of us.

New media like social media and blogs has subsumed itself into our society and everyone seems happy with how it looks and what they can now do. It’s a brave new world. One minute we were all reading newspapers, the next we all implicitly set blogs and social media on the same pedestal and no one batted an eye. We just kept walking.

Maybe it has something to do with the way the Internet was structured at the beginning. In one respect, an entire generation grew up assuming that everything on the Internet is supposed to be free. Free content, free communication, free speech - that's how it was and it was never going to change.

Of course, at its inception this was a huge benefit to the spread of information, in fact it was really the only way to do it. If publishers had ever tried charging visitors to read all those primitive websites back in the 1990s the Internet may never have blossomed into the force it is today.

But because everything was free, when the established media wanted to join the fun by putting their stories online, they too had to drop the price tag. In the eyes of a kid growing up during this time (and bear in mind that an 18 year old was born in 1996), if all the established media operating online could be read for free right alongside a swanky-looking blog, how were they to know the difference?

How is that kid supposed to know that blogs are actually the new invention, it’s the online newspaper that’s been around for centuries? In their mind, there's no difference because the spent dollar value is the same. 

During this period most people cried crocodile tears over the approaching “death” of broadsheet and tabloid newspapers, but the merits of what was to come next wasn’t deeply considered.

It’s unlikely that blogs probably will never completely replace traditional media organisations, but their percolation into our consciousness is advanced enough to blur the lines between it and established media making them almost indistinguishable from personal opinion for the average Internet surfer.

On top of all this, there's now so much news on the Internet that it's a real effort for people to find what they need to know quickly and efficiently. That's a real problem. It may not have been perfect – and it's a damn sight better than it used to be  – but at least the traditional media constrained the static long enough to parse a signal. Bloggers and social networks are now causing so much white noise that the signal is harder and harder for everyone to hear. What happens when we miss it? How will we know when we miss the signal? 

This is probably all a byproduct of the present information age. There was always going to be a tipping point where the amount of possible information reached too great a level for society to metabolise effectively.

Actually, that's a good analogy for what's going on. The way societies consume information in this new age is very much like how an organism functions. If there's too little information, we're starved and can't make good decisions. Too much and we're paralysed. We end up regurgitating muddled and mixed messages back into the system, further limiting the ability to make informed decisions.

For centuries people fought and died so power could be dragged out from the ivory towers and into our hands. But now that it's out, now that information does not need to grind through traditional filters, is this the new world we expected? 

In my mind, it's kind of like the problems with the Occupy Wall Street movement that emerged out of the dark days of the GFC a little while ago. It's all very well that people want the status quo to change, but no one ever articulated what it would be replaced with.

There was no Martin Luther King jr or Lenin leading the Occupy Wall Street movement and so it collapsed under the weight of its own incoherence. We may be seeing the same thing happen with media. Society is running excitedly into this new, flatter world as it evolves around us. Most people simply shrug their shoulders as if it's inevitable and nothing can be done.

It is a good thing – that's undoubtedly the case – and no one would advocate going back to the days of full information control. But too few people are sitting down to ask the crucial questions about what it means for our society when power changes hands like this.

The revolution we all wished for may not have arrived on the backs of armoured tanks or through riven prison gates, but it is still a revolution nonetheless and we need to be thinking about what it means. 

Unfortunately, as information power spreads onto the street, there is an emerging tendency to shun expert analysis. I'd never advocate our leaders marginalising public opinion, but marginalising experts is just as bad and yet somehow championed by social media and by many bloggers.

Some things in life really can't be argued, there are distinct facts which we've spent countless hours and money trying to understand. It does everyone a disservice to pretend that this new media of social networking and blogging means that everyone's opinion matter. The best thing about our society is that everyone can have an opinion, but it's crucial to remember that not all opinions are equal.

Some people really should be listened to on some topics and others really shouldn't. There has to be a balance here, between traditional media structure and opinion, and I'm not sure we've all agreed where that balance is yet. Clearly there's a lot more thinking to be done. Perhaps we're not hearing all about the good ideas because of all that drowning noise outlined earlier. But equally, perhaps not enough smart people are thinking about it.

I don't mean to malign the finance and banking industries, but over the past 20 years, it was the smarter kids who saw how much money they could make by working there. They spent their formative education years preparing for a future in those industries.

Many might have applied their brains instead to science, engineering or other parts of society desperately needing their ideas. But they didn't, and now we have to cope with the results. There's still time to think about all this, but we need more brains and clear thought.

Thursday, 14 August 2014

What Nicky Hager's book really exposes

Let's assume that the whole Nicky Hager Dirty Politics story – 100% of it – is true. From the DDOS attack to the leaks, Whale Oil, National - everything.

The takeaway, so far at least, is that National's press secretary used bloggers to release his information. The secretary knew the established media would have to jump through too many hoops for them to get that information published in a timely fashion.

The information might even be verified by journalists and discarded, or edited and changed. Not to mention all the legalities and ethics surrounding reporting. It was clearly too hard and cumbersome to take the normal route. It wasn't worth the risk.

But moving that information through bloggers neatly skirts all that nonsense. Bloggers aren't under any obligations to fact-check their sources and they can't really be touched by traditional media law.

In the blogging world there's no such thing as defamation, and there's no such thing as a filter. Most people know the difference between blogs and news media, but the average punter probably doesn't. And in all seriousness, the line is probably being blurred too much anyway. 

I remember being told at university after a course in media ethics that the class was now part of the 5% of citizens with such knowledge. We all consume news, but how many of us truly know how it is formed? Not many according to the professor.

That's why many in the established media were so dismissive of Cameron Slater winning a journalism award earlier this year. If he wants to play with the big boys, then he's going to have to be subject to the rules. He can't have it both ways.

Then again, what if those rules have changed? Should the established media be playing to his rules? It's simply not clear anymore. The whole scenario with Nicky Hager's book is a microcosm of what's happening to the information world.

We were told at university that communications and media used to controlled by "gatekeepers". A select handful of journalists and press officers who structured the narrative and released information largely when it suited either party, preferably both.

That's why reporting on government scandals is so impressive, because it disregards the agreed structure and moves outside the narrative. Now, with social media and blogs, the power of information dissemination has been pushed down to the average iPhone user or keyboard cowboy. Everyone is running to catch up, trying to deal with this new world order - for want of a better phrase.

Governments around the world have collapsed after less dangerous accusations than Mr Hager's because of those government official's pathetic inability to control the spread of unverified information at the street level.

Normal people without the keys to the narrative traveling on the bus after work have the power to change a story almost at will. For many aspects of our society this is certainly a healthy development, but there's a clear downside as well.

If nothing in the story needs to be vetted by experts or people close to the events - as journalists are supposed to do - then what's stopping the average uninformed person from sharing a blog post to all their friends? And what's stopping them from inventing something and packaging it as truth?

Bloggers come in various shapes, some respect the process of verification of sources and information, but others just want the clicks or pageviews. Still others blatantly fabricate stories for personal or ideological reasons. And some have no filters whatsoever and release information to satisfy anarchic and other political worldviews. The same could be said of the media, but at least with them there were some measured controls.

How can a reader or Internet surfer tell the difference? How can they know the motivation or accuracy of the information?

It wasn't much easier in the past when the system required journalist integrity and coordination with the truth tellers - people had to trust that reporters were reporting the truth (with a lower-case 't' of course). But things have changed so much in the last few years that our very language on this is different.

What does 'news' actually mean anymore? It can't be assumed that what we read is close to the truth. Government press secretaries understand that their information doesn't need to jump through hoops anymore to alter the political atmosphere. Mr Hager's revelations might be complete lies, or they could be entirely accurate, but it doesn't matter. In the calculation of government spin doctors, just getting the words read by people is enough to plant a seed of doubt.

Mr Hager's new book is actually an emerging result of information and power being pushed down by disruptive technologies. The question that matters is how we deal with this new reality and how our critical and important institutions can cope.

The best thing about democracies is not the personalities but our institutions and mindset. We are adaptable, or at least we should be. If our institutions cannot deal with new technologies, then it is our institutions that need upgrading. Because genies don't go back in bottles.

Information, and its control, was an important pillar in Western democracy for centuries. Perhaps the old structure of established media and verified journalism needs to evolve. Then again, perhaps it has. Maybe the Whale Oils of the world are the natural evolution of power being pushed down through society.

Are we happy with that? 

Reflections on WWI and how Asia opened to the world

In light of the closer formal trade ties announced this week between the European Union and New Zealand, as well as the centenary of the opening of hostilities in the First World War, these two events can tell us much about the future of EU/NZ relations. The guns of August 1914 marked a cataclysmic end to European peace, but the Great War can be seen as the beginning of positive national projects around the world.

All the questions over whether the 21st century might fall into a similar war have really been done to death. Any war is possible, but experts ask whether one is probable. Some analyses are drawing a disturbing parallel between today and a hundred years ago, but the world has changed in important ways. 

Those changes are the most important part of the terrible events last century. What projects and reality the war upended it equally set alternatives in motion of which we are still dealing with today.

European Union Delegation to New Zealand charge de affairs Michalis Rokas says the First World War centenary is a chance for Europe to remember the fighting and think about the importance of the union.

“We’re thinking about the war not just as a moment of reflection, but as the moment when the European Union was first conceived. In a very real sense, the union would not exist today without the war. It is extremely significant for us,” he says.

Mr Rokas describes how the bitter enemies in both wars – Germany and France – managed to forge the foundation of the European Union by “showing the audacity to reconcile” and sow the way forward.

“I am Greek,” says Mr Rokas. “Since the end of the two World Wars, Greece has not seen an invasion or been threatened. This was unprecedented in millennia of our history; we’re talking about one of the oldest states in the world. The centenary reminds us of the benefits of reconciliation.”

A centenary is like any anniversary: it has only an artificial meaning for those most concerned. There is no underlying, fundamental reason why 1914 should offer any special implication for 2014 as, say, 1962, 1814 or 1999 could.

The build up to the First World War was like a runaway train, but the markets didn’t spot it rumbling down the tracks until it was too late. Today, the fighting in the Middle East, skirmishing in Ukraine and posturing in the South and East China Seas all seem to mimic the tensions of the early 20th century. But the results of that war reshaped the world to give New Zealand access to the fruits it enjoys today. Belligerent tensions aside, the interdependence of the world forces nations together as well as apart.

New Zealand and the EU this week concluded a political agreement called the Partnership Agreement on Relations and Cooperation (PARC) which could set the path for a free trade deal in the future. From New Zealand’s perspective political frameworks are not so necessary for dealing with other countries, but for a supranational organisation like the EU it is easier to operate with this is in place as it commits the countries to cooperate across a range of different areas.

And despite our deep ties to Europe New Zealand has been focused on its Asian neighbours predominantly for trade. Had the Great War not occurred New Zealand may still be beholden to Europe for everything to do with trade. The fighting opened Asia up to the world as much as it opened up Europe. University of Auckland professor Nicholas Tarling says the war had an enormous impact on the relationship between Asia and Europe.

Europe in 1900
“Asian nations thought self-determination was on its way after WWI. If Europeans could treat each other as nation states, then why couldn’t Asia?” He remarks.

Whether self-determination was coming for them was unknown at the time but the weakness of the British and German empires after the war benefited the Asian colonies.

“Europe was in no position to come to Asia’s support – especially China’s – and Japan took advantage of this by dominating its neighbours. This would have profound consequences later in the century,” Mr Tarling told the New Zealand Asia Institute.

“Asians thought the war would bring at least partial emancipation. In some cases, notably in British colonies, more freedom was promised and granted,” he says.

Most importantly for New Zealand’s future trade, the concept of the nation state spread towards Asia. The European Union was created out of the ashes of the war and so was the concept of Asian nations.

“Hopefully this year’s centenary commemorations around the world sends the message to other parties involved in conflict,” says Mr Rokas.

“If Germany, France and Britain could reconcile, then why can’t Israel and the Palestinians or Japan and China do the same?” He asks.

As Islamic State moves, keep an eye on Iran

After spending extraordinary amounts of blood and treasure the United States has returned its concentration on Iraq once more. US President Barack Obama is now the fourth president in a row to militarily intervene in Iraq. This time no US forces will invade - aside from hundreds of ‘advisers’ and limited airstrikes. The current US campaign could last for months and perhaps longer.

Commander of Iran's Quds Force 
Qassem Suleimani
Mr Obama is assisting the Iraqi government by providing airstrikes and intelligence against the rampaging Islamic State (IS) militants in the country’s north. These jihadists are an unholy merger of al-Qaeda, the Khmer Rouge and Nazi ideology and threaten the integrity of Iraq and other Middle East countries. The US feels some responsibility for what goes on in Iraq, considering the country is essentially the product of a decade-long nation-building project.

But the problems in Iraq are not the sole result of American foreign policy. Former Secretary of State – and potential 2016 Presidential candidate – Hillary Clinton said in a recent interview that the IS problem is a result of Mr Obama’s inaction in Syria’s internecine conflict. That’s not entirely accurate.

Plenty of other states in the region and beyond have legitimate reasons to care about Iraq and its future. And plenty of other events over the years aside from the US-led invasion have incubated the emergence of IS.

Take Iran for instance. The Persian country is dominated by Shiite Muslims and sits in the highlands of Mesopotamia on the borders of Central Asia. Its geography dictates that the lands of Iraq must be at least politically neutral to Iran for the Persian country to feel secure. Iran has worked tirelessly over the centuries to ensure that the lowlands to their west are influenced by whatever Tehran wishes. Since the ouster of Saddam Hussein in 2003 in Iraq, the Iranians pushed this strategic imperative by emplacing a Shiite-friendly regime in Baghdad.

Iraqi Prime Minister Nouri al-Maliki took the role and was widely criticised for having almost no prior political experience. This was dangerous in Washington’s eyes but didn’t matter in Tehran’s view because Mr al-Maliki was their guy.

Mr al-Maliki proceeded to rule Iraq on behalf of the Shiite Muslims while marginalising Sunni Muslims and Kurds. He also purged the Iraqi military of competent officers, replacing them with loyal but inexperienced lackeys. All of this was overseen by Iran. Earlier this year, when IS operating from Syria overran northern Iraqi cities the Iraq military collapsed and fell back to Baghdad leaving the northern reaches of the country completely undefended.

Lost in the journalistic maelstrom was that a couple thousand IS fighters was never the full explanation for their quick military gains. The Sunni majority in Northern Iraq, frustrated with political rejection, sided with IS militants to confront Iraqi troops telling them to leave. Again, Iran watched all this and curiously did nothing to clean up the mess they had created while the world instead pleaded with America to begin an open-ended bombing campaign against IS militants.

The hesitation of the Iranian theocracy to intervene on behalf of the Baghdad government is perplexing. Perhaps Tehran is happy with IS fighting the Kurds for the time being, but if the unstable regime in Baghdad falls, then IS would surely take advantage of the political vacuum. It would make more sense for Iran to confront IS before it becomes too powerful. Crushing IS with conventional Iranian ground troops would also help establish Iran as the dominant political force in Iraq.

Perhaps Iran learned the American’s experience enough to avoid a ground campaign in Iraq for fear of getting bogged down, or maybe they’re worried IS could defeat them on the battlefield. But they need to be in control, and right now they aren’t. And yet the Iranians wait. Mr Obama knows that intervening anywhere in Iraq will always benefit one sect or tribe over another. His airstrikes are not completely clean, they will hurt IS, sure, but they will boost Baghdad – and by extension Iran.

Ultimately Iran has more at stake in Iraq than the United States and their intelligence services are crawling all over the country. The decisive blow against IS must come from Iran if they are to maintain influence over the region. The reality is that Iraq no longer resembles the lines on our maps. It is three separate pseudo-states of Kurdistan, Sunnistan and Shiastan. Iran knows how to play the long game so it almost definitely has a plan which must outweigh the short term dangers of letting IS consolidate. But Iran may be running out of time.

Meanwhile, an IS advance threatens Israel, Jordan and Egypt as its ideology grips the region like a virus. Iran will be the key in Iraq. Keep an eye on them rather than US airstrikes. 

Wednesday, 6 August 2014

Sands shift under Israel and Hamas as conflict winds down

After a month-long barrage of missiles and rockets flew over the Gaza border, the bulk of Israel Defence Force (IDF) ground troops have left Palestinian territory.

The ground incursion aimed to find, fix and finish as many tunnels along the border as possible and stop rocket and mortar fire. According to IDF reports, more than 30 tunnels were destroyed and an estimated 70% of Hamas’ rocket inventory has either been fired or annihilated.
The UN claims more than 1,800 Palestinians were killed and over 60 Israelis. Multiple cease-fires were quickly violated, but now the two sides are discussing some form of truce. Considering Israel’s superior defensive capabilities, Hamas needs the truce more.

Neither the Palestinians nor the Israelis have the ability to crush the other, and every political solution offered has not worked. The situation always reverts to a who-punched-who-first, but it’s turtles all the way down and that’s never a good way to solve any crisis.

Israel refers to operations like Protective Edge as “mowing the grass”. Their end-game is always to remove Hamas’ fighting capability but keep it in power to avoid a power vacuum. Hamas wants to stay in power too, and retain their ability to rearm for future conflicts.

But the recent campaign in Israel smelt different to previous ones. This time it felt more like a proxy battle. This makes sense looking at the whole affair in a regional context. It is no longer simply fight between Israel and the Palestinians.

It is a struggle between Qatar and Saudi Arabia. The oil-rich states of the Gulf usually leverage anti-Israel sentiment but they’re finding their mutual interests diverge as the power dynamics change in the Middle East.

It is also a clash between Iran and the Gulf States. This is the explosive divide separating Persian from Arab and Shiite from Sunni Muslim playing out all over the Middle East. Iran supports Hamas, as does Turkey and Qatar (where Hamas houses its headquarters).

This dynamic in particular reveals just how far the Middle East has changed. Saudi Arabia, Egypt and Jordan are for the first time quietly rooting for Israel to remove the Muslim Brotherhood-associated Hamas once and for all. A new power alignment is materialising in the Middle East. The conflict has evolved into a battle between the Muslim Brotherhood and its Arab opponents.

Egypt, Saudi Arabia and Jordan are petrified of the Muslim Brotherhood’s growing influence. The group has already pushed its politics further than the Gulf States want, and they know the Muslim Brotherhood could one day attract support from Iran as another useful tool to undermine Sunni Arab power.

In Egypt, General-cum-President Abdel Fattah al-Sisi’s military-backed regime removed the Muslim Brotherhood government after it became too radical for the military’s liking. The Saudi monarchy keeps a heavy boot on the group, which has a presence in the kingdom.

As a result, the political costs of Israeli action against Hamas are lower than usual. Perhaps the Arab Spring stirred the dust enough to convince Israel’s traditional enemies that more pressing threats need addressing. Israel is by no means a friend to Arab nations, but they are proving useful.

Saudi Arabia can’t strike Iran or Qatar without hurting itself, so they encourage the Israelis to hammer Hamas instead. In Riyadh’s calculation, so long as it’s Israeli troops dying on the streets of Gaza, it isn’t Saudi troops. Each rocket emplacement or cache destroyed weakens Hamas and by extension Qatar and Iran. Egypt’s blockade of southern Gaza is also assisting the IDF campaign.

Cairo is conducting its own house-cleaning by clamping down on Muslim Brotherhood groups in the country. Egyptian forces have destroyed smuggling tunnels into Gaza and the country’s media has been vocal in supporting the Israeli campaign.

Hamas is not blind to the changing power alignment, but it is falling behind. The Egyptian blockade is strangling the group, Qatar is a long way from Gaza, and Iran oscillates between support and outright antagonism. Besides, Iran has more important (and competent) allies in Syria to defend right now.

All this puts Hamas in an increasingly isolated position. Israel took advantage of Hamas’ weakness and temporary geopolitical backing by launching Operation Protective Edge a month ago. Israel will now be gauging how deep the tacit support from Arab countries really goes. Top diplomatic officials will discuss how the current conflict ends, but the reality in the Middle East is impressively different. No one’s been here before.

As an addendum – because that’s all they were in this round – the Americans are seen as disengaged and fumbling. Their shambles of a cease-fire proposal hurt US prestige in the region. Iran smells blood in the water and will push for greater hegemony over Iraq, Syria and the Palestinian territories. Saudi Arabia won’t like that.

The only unchanging aspect in the Middle East is that alliances shift unexpectedly. Israel will ponder the Arabian tale of the scorpion and the frog as it tiptoes through the coming act. It knows all too well what happens when geopolitical reality is replaced with naïve idealism.

In Iraq, Kurds push for more territory

Kurdish President Massoud Barzani says he ordered Peshmerga forces to move from their defensive postures and strike at Islamic State (IS) militants to regain lost territory August 5…A Kurdish source said security forces struck in Sinjar district and killed dozens of militants, with the expectation that Peshmerga will retake the entire district within hours…Iraqi warplanes launched air strikes in the district…The Iraqi army collapsed a month ago as IS advanced south from Syria, it has been consolidating Baghdad ever since…however, the Kurds have never been closer to having a country of their own…when IS took Mosul and Tikrit earlier in the year, the Kurds moved into Kirkuk very soon afterwards noticing a perfect opportunity…the Peshmerga forces aren't much more than a well-armed militia without armour or air power but are the only fighting group IS has been afraid to engage…the Kurds will be looking to gain more territory to eventually bargain with Baghdad, this will depend on how strong Baghdad emerges after the current strife…another goal is pushing IS back from the Kurdish border to create a standoff zone for greater protection…IS number perhaps about 3000 fighters spread over a huge area and are vulnerable to a highly motivated force like the Peshmerga.

Friday, 1 August 2014

Tyler Cowen's future puts everyone at the extremes

If you think there’s a problem with income inequality now, you’re not going to like Tyler Cowen’s future in his latest book Average is Over.

Broadly speaking, he says the coming decades will be characterised primarily by the split between those who can bend technology to their will and those who cannot.

He notices how change is happening so rapidly most people can’t keep up. Those who do ­­– those who can – stand to reap the benefits. Those who cannot perform to the measurements of this new “meritocracy” will experience stagnated or dropping wages.

The effects of this evolution are only just beginning to be felt. The days of a “middle-class” with “middle” jobs are over, Mr Cowen says. In fact, as the book’s title suggests, average everything is over. The developed world is moving into an age of extremes.

Already people with computer skills – even marginal computer literacy – are outperforming the rest of us. Being able to tell a computer to do something is an arcane skill akin to magic for many CEOs, and they’ll pay handsomely for anyone who can do it.

Now imagine a future where every machine doubles in capacity and complexity more often than the Olympic Games comes around. A world like this is going to need people who can keep up, and that pool will inversely shrink.

But it’s simply not clear that machines will force us into a new class inequality any time soon. Mr Cowen finds some – admittedly convincing – data and extrapolates it out uncovering a path no one is really preparing for.

Yet all over the developed world high youth unemployment looks like the proverbial canary down the mineshaft for Mr Cowen’s predictions.

He might not be entirely accurate about the future, and who can be, but he is worryingly clear about our past and present. After all, when was the last time you heard about an invention so radical (the internet and hair–straighteners aside) which truly heralded a seismic shift for human lives?

The motorcar changed everything, as did the railroad, aircraft, antibiotics, and high-yield wheat. But these are all aging technologies.

Mr Cowen says this is the inevitable result of science picking all the “low hanging fruit”. Setting the foundations of technology is the simple task. But cracking the next step seems to prove more difficult each time.

Facebook is a perfect example. The social media website was once touted as a “work of genius”. Creator Mark Zuckerberg learnt complex computer coding in a handful of years and spent another few years studying undergraduate psychology.

He went on to invent an Internet phenomenon. It reached enormous success but probably not because Mr Zuckerberg is a genius. The billion-dollar idea is actually one of those low-hanging fruits.

The key is not the youth of the Harvard graduate himself, but the youth of the Internet. Most people his age are only slightly older than the Internet. So if they can’t make the inevitable “big leaps forward” then no one’s going to.

Mr Cowen’s book points out that aside from the Internet, the West hasn’t created a radical invention in a long time. This lack of serious revolutionary invention is threatening to knock the Western world off its top perch.

If the West doesn’t do it, other countries will put their best minds to the job instead. The balance hasn’t changed appreciably yet, but he warns the shift gets nearer every year.

Average is Over should sit on everyone’s bookshelf (or Kindle shelf?) for years to come. It’s over to us to decide how the future looks, but we’re going to need to start thinking soon.

Could new BRICS bank rival IMF for top spot?

Earlier this month the five nations of the BRICS (Brazil, Russia, India, China and South Africa) came together in Brazil to finalise plans for a New Development Bank (NDB).

At one point in the not-too-distant past, the BRICS was considered more an investment gimmick created by Goldman Sachs to sell more financial goods in some of the world’s fastest-growing countries than a true alliance. That was then, this is now. 

The grouping agreed the bank will start lending in 2016 with an initial capital base of $US50 billion. Each member is to contribute $US10 billion to the fund, with plans to increase capitalisation to $US100 billion over the next five years. If UN estimates are correct low and middle-income countries will require more than $1 trillion each year in infrastructure investment, the NDB might offer a new route to secure funds.

As another layer to the new safety net, the BRICS members created a separate Contingency Reserve Arrangement (CRA) to provide liquidity protection for member states. This fund will hold an estimated $US100 billion, making it one of the smaller funds in a long list of development banks. Liquidity of this size would be unlikely to last very long in a global financial crisis, but it would assuage the worst effects of a regional or domestic crisis inside BRICS countries.

This new bank is part of the ongoing process by which non-Western developing countries are building mechanisms for loans with fewer conditions than those issued by multilateral Western institutions. New Zealand Initiative director Oliver Hartwich says this isn’t the first time an alternative financial structure has been attempted.

“The Euro was established with the same ambition in mind to rival the US reserve currency and you can see where that’s ended. And if the Europeans with their economic firepower and perhaps more homogenous countries can’t get it to work, why would we be more optimistic about the BRICS?” Mr Hartwich says.

Russia, regardless of the current headlines, is a declining power. South Africa is riven with internal struggles and relies on a mining industry with decreasing profit margins. China and India are geopolitical rivals. None of the members align significantly on any important issue.

“Why would [the NDB] work any better with these countries involved? Is it really a long-term strategic sustainable partnership? Are these partners reliable enough for such an undertaking?” Mr Hartwich asks.

The alliance isn’t ignoring global economic reality, it’s responding to it. South-south trade is now generating more than $US2.2 trillion more than north-south trade. China is Africa’s largest investor, Brazil has more embassies in Africa than the UK does, and India is a massive contributor to African foreign aid. But their geopolitical perpendicularity will make concessions about which projects to fund tougher to decide.

Perhaps the only bond linking the BRICS together is a desire to get out from under the hegemonic umbrella of the United States. Even in the UN assembly, where all the BRICS members can vote equally, they often cast their opinions in line with each other. Even if the vote is simply silence. Most of the BRICS countries want to gain some protection from an admittedly arbitrary American-led system such as the US Federal Reserve choosing to taper its quantitative easing. They’d also like a safety net in case any one of them is pushed out of Western institutions.

The NDB will soften a hard landing from potential future financial crises within the BRICS system. The last few years have been extremely worrisome for the West and developing countries fear the foreign direct investment spigot might be turned off.

“The BRICS proposal seems to be about the unease about traditional financial institutions in the world economy being too close to the old West. Developing economies are looking quite frustrated at the state of the IMF being so heavily involved in the European debt crisis for instance,” says Mr Hartwich.

He says creating the bank and safety net is both a political gesture of a deep dissatisfaction of the status-quo financial mechanisms and a step towards an independent alternative. The official statement from their meeting in Brazil said “international governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness.”

The BRICS is sure to remain inside the Western-led financial order, because that is where the money is. Rather than break up the world system, they are instead trying to shape the dynamics to be more in their favour. Since the IMF and World Bank won’t change their ways to appease the BRICS, they are going it alone. However, US think tank Brookings Institute suggests the bank isn’t a belligerent counter to the current world order.

From the BRICS’ perspective, they had little reason to cooperate when their economies were growing. Competition pulled them apart. But as that growth levels off a certain necessity has given the alliance new life.

Decades, not years, will determine whether the BRICS Development Bank and Contingency Reserve Arrangement ever rival Western-led institutions. Then again, in the very long run - by which time it is predicted China’s economy will overtake the US economy - the BRICS bank may turn out to be the stronger of the two options after all.