----- Original Message -----
From: Cordell, Arthur: DPP <[EMAIL PROTECTED]>
To: Futurework <[EMAIL PROTECTED]>
Sent: Monday, January 04, 1999 5:57 AM
Subject: Interesting development
>January 4/99
>
>Japan's Justice Minister blasts U.S. economic practices
>
> TOKYO (AP) - Japan's outspoken justice minister today accused the
>United States of relying on military threats to protect its economic
>market, Kyodo news agency reported.
People are sick of the Back to the Cold War:
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Global Intelligence Update
Red Alert
January 4, 1999
1999 Annual Forecast: A New and Dangerous World
SUMMARY
* Russia will begin the process of recreating old Soviet empire
in 1999. The most important question of 1999: will Ukraine
follow Belarus into federation with Russia?
* Russia and China will be moving into a closer, primarily anti-
American alliance in 1999.
* Asian economies will not recover in 1999. Japan will see
further deterioration. So will China. Singapore and South Korea
will show the strongest tendency toward recovery.
* China will try to contain discontent over economic policies by
increasing repression not only on dissidents, but the urban
unemployed and unhappy small business people. Tensions will
rise.
* Asia will attempt to protect itself from U.S. economic and
political pressures. Asian economic institutions, like an Asian
Monetary Fund, will emerge in 1999.
* The Serbs, supported by the Russians, will test the United
States in Kosovo. There is increasing danger of a simultaneous
challenge from Serbia and Iraq, straining U.S. military
capabilities dramatically.
* The main question in Europe will be Germany's reaction to the
new Russia. The Germans will try to avoid answering that
question for most of the year.
* Latin America appears ready to resume its economic expansion,
beginning late in 1999.
FORECAST
The Post-Cold War world quietly ended in 1998. A new era will
emerge in 1999. It will appear, for a time, to be not too
dissimilar to what came before it, but looks can be deceiving.
In fact, we have entered an era with a fundamentally different
global dynamic than the previous era. We should not think of the
period 1989-1998 as an era. It was an interregnum, a pause
between two eras. 1999 will see a more conventional, natural
world, in which other great powers in the world will unite to try
to block American power. In 1998 the United States worried about
Serbia, Iraq and North Korea. In 1999, the United States will be
much more concerned with Russia, China, France and Japan. The
world will not yet be a truly dangerous place, but it will begin
the long descent toward the inevitable struggle between great
powers.
Two forces are converging to create this world. The first is the
recoil of Russia from its experiment in liberalism. The other is
the descent of Asia into an ongoing and insoluble malaise that
will last for a generation and reshape the internal and external
politics of the region. In a broader sense, this means that the
Eurasian heartland is undergoing terrific stress. This will
increase tensions within the region. It will also draw Eurasian
powers together into a coalition designed to resist the
overwhelming power of the world's only superpower, the Untied
States. Put differently, if the United States is currently the
center of gravity of the international system, then other
nations, seeking increased control over their own destinies, will
join together to resist the United States. Russia will pose the
first challenge. Asia will pose the most powerful one.
Russia Begins its Quest to Recover Great Power Status
The die has been cast in Russia. We wrote in our 1998 Forecast
http://www.stratfor.com/services/giu/1998.asp: "Whether or not
Yeltsin survives politically or personally is immaterial. The
promise of 1991 has become an untenable nightmare for the mass of
Russians. The fall of Communism ushered in a massive depression
in the Russian economy while simultaneously robbing it of its
global influence." In 1998 we saw the consequences of this. The
reformers in Russia were systematically forced out of power.
Power seeped out of Yeltsin's hands. Finally, a new Prime
Minister was selected -- the former head of the KGB's
international espionage apparatus. A restoration of sorts is
well under way in Russia.
Personalities are unimportant. What is important is that in
1998, the massive failure of the reformers resulted in their
being forced from power. The West, which had invested in Russia,
realized that it would never recover those investments nor many
of the loans they made. As a result, investment and credit
ceased flowing into Russia and, therefore, Western influence
plummeted. There was no reason to appease the West if no further
money was forthcoming. The Russian love affair with the West
came to an abrupt halt. As so many times before in Russian
history, the pendulum is moving from adoration of the West to
suspicion and contempt. As before, the Westernizers who
dominated Russia for the past decade are being replaced by
Slavophiles, who will seek to root out Western influence while
they liquidate the Westernizers.
Russian politics has searched for a center of gravity ever since
the reformists began to lose credibility. In December 1998, that
center of gravity emerged in the form of Russian chauvinism and
anti-Americanism. When the United States bombed Iraq without
even consulting the Russians, the lid suddenly came off of the
pent up anger Russians felt at their loss of great power
standing. The one thing that every significant faction in
Russian politics agree on today (save for the dwindling band of
liberals) is that the loss of great power status is intolerable.
Primakov, Zhirinovsky, the Communists and even Yeltsin agree on
little save this -- Russia must recover its great power status.
It is the only unifying principle left in Russian life.
The corollary to this is a growing Russian consensus that Russia
has been victimized both by Western investors and by the United
States. Investors are seen has having taken advantage of
Russia's eagerness to please the West, exploiting it shamelessly.
The United States has treated Russia as if it were a third world
country, subjecting it to continual humiliation. All of this
has tapped into a deep vein of Russian chauvinism and xenophobia.
In a country that has become virtually ungovernable, this
powerful nationalism is now the only means of uniting the
country. No one can govern Russia any longer except on a
powerful, nationalist platform.
The situation in Russia reminds us of the last days of Weimar
Germany. Unable to provide either prosperity or national
security, Weimar Germany was replaced by a regime that used
national security issues as a means to unite Germany and revive
the economy through military spending. Yeltsin's Russia has lost
all credibility, failing to provide either prosperity or national
security. Where Germany focused on the Rhineland, Sudetenland and
the Danzig Corridor, Russia will focus on the Baltics, Ukraine
and Central Asia. We expect to see massive increases in defense
spending, intended both to increase Russian power and stimulate
the Russian economy.
As with Germany, not all of the former fragments of the old
Soviet empire are opposed to reintegration. On December 25,
1998, exactly six years after the dismantling of the Soviet
Union, Russia signed a treaty with Belarus, essentially
establishing the foundations of reunification. That set, the
focus for 1999 will be Ukraine. If Ukraine follows Belarus back
into federation with Russia, the geopolitical essence of the
former Soviet Union will have been recreated. Then the focus
will be on the Caucuses, Central Asia and the Baltics. But first
and foremost, the burning question of 1999 will be Ukraine. We
predict that Ukraine will join Belarus in returning to
federation, in spite of belated efforts by the West to keep them
out.
After that, Russia will face a generation of reabsorbing its
former constituents. Each step of reabsorption will bring it
into greater conflict with other nations. Its move back into
Central Asia will bring it into direct conflict with the United
States, which has made huge investments in oil development in the
region. Its move south into the Caucuses will collide with Iran
and Turkey. But it is the move west that will be the most
dangerous. In 1999, Russian troops will once again find
themselves on the Polish border, a Poland now part of NATO. As
Russian pressure grows on the Baltic States, this border area
will become explosive.
But the first confrontation will come, we think, over Serbia,
where we expect Russia to increase direct aid to Serbia openly,
thereby challenging U.S. policy in Bosnia and Kosovo. Serbia,
watching U.S. fumbling over Iraq, and emboldened by Russian
support, is clearly preparing a new challenge to the United
States over Kosovo. Serbia is calculating that the United States
will not risk a major confrontation with Russia, and France may
choose to oppose a full-scale anti-Serbian intervention. The
dangers of a new confrontation with Serbia rise as Russian
nationalism intensifies. There is particular danger if Serbia
and Iraq challenge the United States simultaneously.
Asia Seeks Political Solutions to Continuing Economic Malaise
Russia will not represent a global threat, but it will challenge
U.S. power along its periphery, in a contest that will begin in
1999, but will take a generation to play out. Nevertheless, the
United States will face threats globally, owing to the evolution
of the Asian financial process. Note that we say process and not
crisis. Asia is no longer in crisis. It is now in an endemic
malaise, from which it cannot, generally speaking, recover.
Asia's economic dysfunction is no longer a crisis, but a long-
term Asian condition.
Since some are predicting recovery in 1999, let us explain why we
are so negative. The essence of the Asian crisis, as we have
said many times, is to be found in the appallingly low rate of
return on capital that Asian economies have experienced. This
low rate of return is rooted in the ability of Asian governments
to abort the business cycle through export-generated growth and
high savings rates. Because interest rates were kept
artificially low, businesses that had no business surviving
actually expanded. They grew in spite of the fact that they were
only minimally profitable, if at all. These businesses soaked up
available credit, while continuing to erode financially. In the
end, they could not even repay their loans.
Recessions are normally triggered by rising interest rates. The
rising cost of money forces marginally profitable business to
restructure or fail. This is an essential aspect of the
discipline of capitalism. Capitalism without business cycles is
a contradiction in terms. Nevertheless, Asian governments
managed to avoid this discipline for almost half a century. They
avoided business failures, lay-offs, restructuring and all the
nastiness of capitalism. The net result is a group of economies
that are breathtaking in their inefficiency.
The key is Japan. Japan led Asia into its current situation.
Japan must lead Asia out. But Japan is institutionally committed
to preventing the needed massive, shattering, agonizing
restructuring of its economy. It cannot proceed. The huge
dinosaurs of the Japanese economy must be compelled to
restructure. The only force that can compel them to do this is
rising interest rates. As Japanese credit worthiness continues
to decline, foreign investment and loans are either drying up or
available only at much higher interest rates. Internally, the
Japanese government continues to protect the dinosaurs by keeping
interest rates absurdly low. Japan understandably wants to
prevent a massive collapse of the economy. But unless the
economy is permitted to collapse, it cannot be reconstructed. In
other words, Japan can neither endure the disease it has caught
or the medicine that can cure it. It is not Japan's politicians
that have created gridlock. It is the Japanese reality.
This is the agonizing dilemma throughout Asia. Having played
with the business cycle for generations, inefficiencies have
built up to such a degree that the culling that must take place
will be cataclysmic. Socially, Asian societies are completely
unprepared to pay the price they must pay in terms of
unemployment, declining standards of living, and loss of control
to foreign investors and creditors. Politically, leaders are
trapped between the economic and social realities. They are
therefore paralyzed. The inefficiencies continue to rise, hopes
of recovery are constantly aborted by economic realities, and
social tensions rise.
In weaker Asian societies, such as Indonesia, society has already
essentially exploded and the government is trying to contain the
consequences. In some countries, like Singapore and South Korea,
owing to fortunate circumstances and skillful political action,
restructuring is actually taking place within the existing
political framework. In Japan, however, the government's
inability to bear the social consequences of depression has
paralyzed it. This is not because Japanese politicians are
stupid or weak as some have charged. The paralysis of the
Japanese state is built into the collision of the Japanese
economy with Japanese society. There can be no solution without
a radical restructuring of the Japanese political order,
replacing it with a structure that is able to impose pain on a
society unprepared to endure it.
This is precisely what China is trying to do. On the one hand,
China is permitting economic reality to ravage its economy. It
is shutting down inefficient businesses, allowing unemployment to
rise, allowing standards of living to begin falling. It is also
taking political steps to control the situation. Apart from its
very public crushing of dissent, Beijing is shifting its
political base away from the coastal regions to the interior
agricultural regions, by shifting state investment patterns. It
is not clear that China will succeed in this partial, politically
controlled house cleaning. It may well be, as we strongly
suspect, too little and too late. But the combination of
powerful political repression with some degree of restructuring
may well become an Asian model.
It is a model that can mitigate the economic problems, but cannot
solve them. Asia cannot endure the long-term reconstruction
needed to make it competitive with a rampant America. As Asia
becomes less competitive, it will find that it must protect
itself against American economic encroachment. Obviously, the
U.S. is sensitive to Asian exports surging into the United
States. But the real friction is caused by the Asian need for
U.S. investment and Asia's inability to pay the price it must to
get it.
Japan badly needs U.S. investment and credit. It cannot solve
its problems without them. But U.S. investors and lenders
require a level of transparency and a degree of control that is
incompatible with Japanese social requirements. Someone lending
billions to bail out a Japanese bank will want a large degree of
control over that bank. American owners will want to make
investments based on economic rationality rather than on the
bank's keiretsu relationships. The intrusion of American capital
would cause the very social chaos that Japanese politicians badly
want to avoid. This holds true throughout most of Asia. Asia is
unable to generate sufficient capital to solve its problems,
unable to restructure its economies to generate that capital, and
unwilling to allow an uncontrolled influx of American capital on
American terms.
Asia cannot solve its problems. It is therefore caught in a
process of mitigation, keeping things from becoming unacceptably
bad. In order to do this, Asia must seek to insulate itself from
the United States in particular and the global economy in
general. It appears to us that the Asian solution will be to
create Asian institutions to supplant the global institutions
within which Asian economies are increasingly uncompetitive. We
expect to see increased resistance to American demands for trade
liberalization along with increased utilization of Asian
solutions to problems, from using the yen as a reserve currency
to an Asian Monetary Fund to Asian based security systems. We
expect 1999 to be a year in which Asia begins creating Asian
institutions.
The Sino-Russian Alliance Redefines the World
Asia's efforts to work around its fundamentally insoluble
economic malaise will lead to increased friction with the United
States on all levels. Most important immediately, we see the
reemergence of a Moscow-Beijing axis designed to block unilateral
American actions in Eurasia. Furthermore, this relationship will
both insulate Russia and China from U.S. political and military
pressure, and create politico-military counter-pressure on the
United States designed to elicit greater economic cooperation.
1999 will be the year in which this alliance will take full
shape.
There will be outriders to this alignment. Japan is increasingly
at odds with the United States over economic policy. It also
seems to be developing an independent assessment of the North
Korean threat. As U.S. pressure on Japan to liberalize its
markets increases, Japan's search for alternatives will increase
as well. Its search for economic alternatives is already well
under way. But in order to create economic alternatives to the
U.S. sponsored global systems, Japan will need political
traction. Japan will not join in the Russo-Chinese alliance, but
it will use it to attempt to extract concessions from the United
States.
There will be other outriders. France is already clearly
cooperating with China and Russia. This was visible in the Iraq
affair. The question is what pressure it will put on the new
Europe. We were clearly wrong when we expected the Euro to fail.
The Euro is here and seems likely to work in the short run.
However, with French foreign policy increasingly anti-American,
the question is whether the rest of Europe will follow. To be
more precise, the question is whether the Germans will follow the
French lead.
Germany is now deeply torn. The political instincts of the new
government, forged in the 1960s, reflect a profound uneasiness
with the United States and its leadership. French policy is
attractive. However, fear of Russia is also a visceral feeling
in Germany, and mismanagement there could quickly destabilize the
government. With Russian troops on the Polish frontier, the old
German nightmare, the Polish question, is about to arise. Happy
to have the buffer, but reluctant to forward deploy in Poland
(and unlikely to be welcomed by the Poles), the Germans need the
United States to counterbalance the Russians. At the same time,
a solid arrangement with the Russians is also attractive.
Germany is now in the process of defining an identity and a
policy for the 21st century. It is simply unclear to anyone,
including the Germans, what this identity will be. 1999 will not
be the year this is settled.
The United States Rolls Blithely On
Then there is the United States. We continue to expect the U.S.
economy to expand. There will undoubtedly be a cyclical downturn
at some point, but it will not be historically significant and it
may not come for a while. We have heard a great deal from those
who expect the U.S. economy to implode because of Asia. Asia
will undoubtedly have some effect. But the Asian crisis has been
in full swing from over a year and the U.S. economy has been only
marginally affected. We just don't see indications that the
expansion is about to end. We have been bullish on the U.S.
economy since 1995 and we continue to see this as a massive,
long-term movement driven by the restructuring of the 1980s.
We expect others, particularly Latin America, to benefit from
this historical American expansion. In spite of the problems in
Brazil and Venezuela, we feel that the worst has already been
seen and the probability of an upturn later this year is
extremely strong. We continue to feel that Latin America will
see the strongest growth of any region in the first decade of the
21st Century. The 1998 downturn, while unexpected, represented
the rapid cycling of capital markets in an immature economy, not
the wheezing senility of Asia. Just as Latin America
deteriorated with surprising vigor, it will, we think, recover.
By late 1999, we expect to see a major Latin American rebound
underway.
As rosy as the economic picture is in the Western Hemisphere, the
foreign policies of the United States are increasingly
unsettling. U.S. policy in Iraq has essentially collapsed. U.S.
policy in Serbia, where we expect another crisis shortly, is now
going to be challenged by the Russians, making the U.S. mission
much more dangerous and much less soluble. North Korea will
similarly become unmanageable. The Wye Accords between Israel
and the Palestinians are coming apart at the seams. Whether Bill
Clinton survives his crisis is at this point, 1999, fairly
irrelevant. What is relevant is that the United States has not
created a foreign policy identity for itself, and has not planned
for a world increasingly resistant to its policies.
That is the key to 1999. We are in a world increasingly
resistant to the one superpower. There is no second superpower,
but there are several great powers. These great powers are in
the process of cobbling together an alliance that, taken
together, may not fully counterbalance the United States, but
will serve to limit American freedom of action. Behind the
shield of this alliance, built around China and Russia, we expect
to see increasing Asian economic integration, designed to limit
the effects of the global economy on their insulated societies.
We also expect to see increasing regional Russian imperialism,
increasing Chinese repression, increasing attempts by others to
use the Russo-Chinese alliance for their own ends and therefore,
a new and dangerous world. 1999 is the first of many years of
increasing tension and conflict involving not only minor players,
but also the world's great powers. It is the beginning of what
will prove to be a tense first decade in the 21st century.
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