-Caveat Lector- WJPBR Email News List [EMAIL PROTECTED] Peace at any cost is a prelude to war! STRATFOR.COM Global Intelligence Update December 13, 1999 Stratfor's 1995-2005 Forecast: A Mid-term Evaluation Summary: Stratfor is now entering its end of the year cycle. This year is obviously different, since it is also the end of the decade - and the millennium. We've decided to pass on forecasts for the millennium or century. The risk is mitigated by the fact that we won't be around to take the heat for incorrect forecasts. Nevertheless, our process doesn't go out that far. We have decided to issue a new decade forecast to supersede the one created in 1995. The new decade global forecast will be released Dec. 19, in our weekly mailing. More detailed regional forecasts will be simultaneously posted to our web site. We will release our 2000 annual forecast Jan. 3, 2000. We have decided to begin our annual forecasting process this year with a retrospective evaluation of our last decade forecast, which covered 1995-2005. Since we are at mid-course on that forecast, it is important to evaluate which elements have been fulfilled, which we still expect will be fulfilled and which we were wrong about. The original forecast can be found at [ http://www.stratfor.com/services/giu/decade.asp ]. We will assume that our readers have had access to it in reading this evaluation. Analysis: Our decade forecast began by asserting that we were in the grip of two contradictory trends. On one hand, we said that we were in a period of unprecedented economic prosperity and growth. On the other hand, we foresaw increasing international tension. We feel comfortable that this fundamental trend has been in place for the past five years, will continue into the next decade and will intensify, as we will discuss in the new decade forecast next week. The assumptions, made in 1995, that global prosperity and conflict are incompatible have proven generally untrue. There are two reasons for this. First, prosperity and growth can generate conflict quite as easily as they can defuse it. For example, World War I occurred during a period of tremendous prosperity. Second, as we point out later in our decade forecast, a general global prosperity does not mean universal prosperity. One of the trends we forecast was a growing disparity between the U.S. economy and that of Asia and Russia. That has happened and will increasingly tend to destabilize the system. In our specific economic forecasts we said: "The United States is by far in the best financial and demographic position to capitalize on this tendency [massive economic growth]." Obviously, we were correct on this forecast and continue to be extremely bullish on the U.S. economy. As we will see next week, we do not foresee major economic problems until after 2005, although we certainly do expect a short recession before then. "The European Union's enjoyment of this period will be limited somewhat by Germany's ongoing digestive problems - absorbing the old East Germany - and an inability to create a Monetary Union." Here we were both clearly right and very wrong. Germany has certainly had serious economic problems that have limited Europe's economic dynamism. On the other hand, we were clearly in error on our Euro forecast. It was in fact created. It is worth pausing to consider why we made that error. Monetary policy is the key to economic policy. It is also the place where politics and economics meet directly. The European Union contains a large number of economies, all at different points in their business cycle. The creation of a single monetary policy must, by definition, help some countries while it hurts others. A one-size- fits-all policy doesn't work. In the United States, diverging economic interests helped drive the South to secede from the Union. Its ability to secede was not decided economically or politically, but militarily. Since there was no central military power in Europe to force nations into the Euro, or to keep them there once policies harming particular national interests were in place, it followed that resistance to the new currency would be substantial. We therefore predicted that the Euro wouldn't get off the ground. But we didn't calculate two things into the equation. The first was the level of commitment to the Euro from the European financial community and national leaders. Failing to create a monetary union would have been politically destabilizing. Second, we failed to appreciate that in a condition of general prosperity, in which the smaller, more vulnerable economies would do particularly well, the pain of a single European monetary policy would not be felt intensely. Therefore, the Euro was created. Obviously, it has had mixed reviews on a number of levels. Its real test will come during the next downturn of Europe's business cycle, when the divergences will become more intense along with the pain. We were clearly wrong on the creation of the Euro, but we remain very skeptical about its long-term viability. "Japan will share least in the new prosperity. The follies of the 1980s, when Japanese corporations sacrificed market share in order to maintain cash flow and pay enormous debt service, will continue to haunt Japan." We were obviously accurate in this forecast and view it as still in place for at least the next few years. "We strongly feel that the last decade's surge in East Asian economies will be peaking during the 1996-97 cycle." We were clearly correct on this assessment. There is some debate on how badly China was hurt in the crash. It is our view that China's damage is much more substantial than official figures indicate. Our forecast did contain one error: we were focused on East Asia and did not recognize until the summer of 1996 that Southeast Asia would also be pulled down economically. "We find the economic prospects for the Indian Ocean basin particularly interesting. India's own growth possibilities, coupled with growth in South Africa, Malaysia, Singapore and Indonesia hold open the possibility of a powerful growth surge in the region." Obviously, our inclusion of Indonesia in this group was an error. As well, the Indian Ocean basin has not yet surged, although there are interesting signs of strength. Clearly our prediction here has not, after five years, come to fruition. We will consider next week whether the region holds any promise in the next five or ten years. "The worst is over for the Third World. Increased global prosperity has placed a floor under mineral and agricultural prices." Here we were both wrong and right. Both agricultural and mineral prices moved toward new, historic lows from 1995-99. However, there are increasing signs that the long-term bottom we were expecting did occur over the past year and that prices will trend upwards for the next five. If so, then our forecast that the worst is over for the Third World will be fulfilled, albeit late in the decade forecast. Among our political forecasts: "The United States will, we think, revert to a blue-water strategy, maintain its naval power to the edge of Eurasia, but as far as possible, avoid engagement on the mainland beyond attempting to maintain the balance of power through political and economic means. Behind that naval war, the United States will experience unprecedented levels of prosperity, returning to a psychology redolent of the interwar and pre-World War I period." The U.S. intervention in the former Yugoslavia not withstanding, the growing indifference of the American public to events in the Eastern Hemisphere does indicate that the psychological sensibility is increasingly in place. U.S. risk taking - as opposed to low-risk presence - has clearly declined. There is also a clear split between the public's psychology and the policy-making elite's views that limits risk taking. We regard the Kosovo war as an endpoint to U.S. policy, rather than as a harbinger of future actions. Areas of instability: "The Russian borderlands where Russia will seek to reassert itself, meeting resistance at various points from Germany, the Islamic countries and China, each of whom will, for their own reasons, support breakaway elements." Russia is clearly reasserting itself in its borderlands, particularly in the Caucasus. Russia has begun, but not intensified, a program for reasserting its authority in the Baltics and Ukraine. Germany has clearly been extremely cautious in resisting the mild Russian probes to this point. We continue to stand by the forecast that Germany and Russia will, despite Germany's wishes, experience tension over the future of the European portions of the former Soviet Union, particularly if the United States is unprepared to act on its own. One area in which we were clearly in error was the assumption that the Chinese would resist Russian attempts to reassert authority in Central Asia. Quite the contrary, China is encouraging Russian assertiveness to increase its own security against Islamic forces, and out of a desire to see a stronger Russia for partnership against the United States. Thus, Russia is reasserting itself in Central Asia, but with Chinese encouragement rather than opposition. "China itself where we expect growing instability, including the strong possibility of fragmentation and civil war, between the interior and coastal regions." This was clearly our most dubious forecast. The ability of the Chinese government to contain political tensions has proven much more formidable than we expected. There has obviously been substantial political strife and Beijing has shown serious insecurity, as the Falun Gong crackdown indicates. Yet the Party, security and military apparatus have managed to maintain order. Nevertheless, we are not prepared to abandon this forecast at this point. We see China as much more fragile than most observers and will argue, next week, that the ability of the regime to survive its failures may be substantially less than currently appears to be the case. "Western Europe where non-military political competition between the UK, France and Germany will result from their different perspectives on the role of the EU in stabilizing Europe's and Germany's eastern frontiers." We did not have beef and mad-cow disease in mind when we made this forecast, but it does symbolize some of the relationship's underlying tensions. The main tension has not yet emerged, primarily because the Russian threat has not yet emerged fully in Europe. When it does, as we expect, it will not create a new Cold War. Rather it will be a much lower level of ongoing friction. This will mean that the United States will not insert itself in Poland or Hungary. It will be left to the Europeans themselves to define a policy. Germany's interests will differ greatly from the United Kingdom's. We think this will become visible in the next five years. "East Asia, where Japan's growing politico-military power, coupled with economic stringency, will prompt more aggressive policies, and will become the scene of increasing U.S.-Japanese competition." Japan, with one of the largest military budgets in the world today, is clearly a major politico-military power, albeit not yet a particularly aggressive one. Nevertheless, growing discussion about an Asian Monetary Fund and other regional institutions with Japan in a leading role clearly point toward Japan becoming a major force in Asia. Regionalism without a military component, as we saw in East Timor, doesn't really work. As the region's largest economic power and major regional naval power, Japan is the logical regional power. Now, a major domestic political upheaval will be needed for Japan to adopt a more aggressive foreign policy. However, given the inability of the Japanese government to solve the country's economic problems, the ongoing de-legitimization of the current political elite will, we believe, result in substantial political realignment during the next five years. We wrote in our conclusion: "The key to understanding the next decade will be to understand that the international system is in massive disequilibrium. One power - the United States - has an overwhelming economic and political advantage. Ordinarily, it would be in the interest of such a power to impose a Pax on the world. However, because of geography - the location and size of the United States - the costs of imposing such a pax substantially outweigh the benefit." This remains very much the driving geopolitical reality of the world and will continue to dominate the next decade. Given what other people were saying in 1995, we think we've done pretty well. We certainly were right on most of the economic issues, save the Euro, and we are still fairly confident about its future vulnerability. The United States has experienced an unprecedented boom. Asia peaked. Many of our economic forecasts materialized in the first five years of our ten-year forecast. On the political side, we were generally correct in U.S. behavior, except for the anomaly of Kosovo. Russia has certainly become more assertive along its borders. We were weakest, we think, in our predictions on Chinese politics. We called the economic turn fairly well, but clearly underestimated China's ability to maintain political order in the face of severe economic problems. In a sense, the same is true of Japan. Both countries have been able to endure economic problems that ought to have created massive, uncontainable political disruptions. Yet in both countries, the disruptions were contained. The issue is whether destabilization has been avoided or whether it has simply not yet occurred. That, among other themes, will be dealt with next week in our new decade forecast. (c) 1999, Stratfor, Inc. http://www.stratfor.com/ **COPYRIGHT NOTICE** In accordance with Title 17 U. S. C. 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