Pentagon Says Nuclear Missile Is in Grasp for North Korea

U.S. Designs a Korea Response Proportional to the Provocation

A “proportional” response that involves hitting North Korean targets sounds like exactly the kind of thing that would stir up the hornet’s nest, taking things up a notch. And the hornets are likely to have nuclear missiles? Awesome.

Let me try to put that another way. North Korea has a long history of provocation – including shooting down US military planes (on Kim Il-sung’s birthday), killing US soldiers, many attempts to assassinate South Korean Presidents, and of course the recent military shelling of Yeonpyeong. Throughout these acts, North Korean leaders have acted with extreme confidence, even in directly challenging the world undeniable military superpower. At each stage, the response from the US and the South has been not to react militarily, but instead to bolster US-South Korean defensive capabilities through exercises and assets.

Will this simply be another cycle of aggression then appeasement? Koreans that I speak to argue yes, that it is a matter of Kim Jong-Un asserting power both internally and externally, and that the current rhetoric is a calculated, logical gambit with an ultimate goal of  attention, dialogue that gives Kim good photo ops and makes the West look weak, and possibly some much-needed source of aid or other resources.

However what worries me is four conditions:

1. An unstable internal situation in North Korea. Kim Jong-Un is the new, “Great Successor” in the Kim regime, relatively worldly himself given his schooling in Switzerland, yet surrounded by a generation of military leaders who have been incredibly isolated themselves and who see the cold war as the glory days of North Korean power. Given the role that the Kim cults of personality have played in reassuring the population that their sacrifices on behalf of the country are not in vain, it is reasonable to think Kim wants to prove himself to his people. To what lengths will the regime go to demonstrate power externally, and consolidate it internally around Kim Jong-Un, and how “logical” will or can they be in calculating the response? Given Kim Jong-il’s reputation as the leader who made the country a nuclear power, in what ways will the son look for a way to militarily distinguish himself?

2. A nuclear, missile-capable DPRK. The stakes are much higher today than they previously were, both in terms of the threat and the consequences of action. At what stage will the US and South Korea, perhaps with China’s tacit consent, decide to attempt a pre-emptive knock-out of DPRK’s missile and nuclear facilities? It’s been done before here, and here. And what would DPRK military officials do if they thought this was even a significant possibility?

3. Fragile North Korea-China relations. One of North Korea’s sources of strength has been its ability to rely on its traditional allies to the North – Russia and China – both diplomatically and for resources. However it is unclear how close Kim Jong-Un and the Chinese leadership are, and the recent references by President Xi Jinping indicate that China is increasingly concerned by DPRK’s words and actions.

As always, I hope (and I think it’s likely) that my concerns are unjustified. But with new relationships like this, the possibility for missteps are higher than normal. And a misstep with a nuclear power, particularly a remarkably confident one which looks back longingly to the cold war as the period where the country was most stable and prosperous, could have disastrous consequences.

Let’s hope that instead the relationship is more aptly regarded as Jon Stewart satirized on the Daily Show recently – an amusing “rebound war” sideshow that is temporarily concerning, but ultimately nothing that anyone has to worry about.

The latest escalation following North Korea’s successful missile test on Wednesday 12 December is a planned (and now impending) nuclear test, ostensibly in response to UN Security Council Resolution 2087. This is concerning beyond the simple provocation of a controlled nuclear explosion, the demonstration of available fissile material and a nose-thumbing at the UN;  the implication is that the regime is testing nuclear warheads which, combined with long-range missile technology, significantly raise the security stakes in the region.

The relevant piece from the statement by North Korea’s National Defence Commission (NDC) issued in late January reads:

We do not hide that a variety of satellites and long-range rockets which will be launched by the DPRK one after another and a nuclear test of higher level which will be carried out by it in the upcoming all-out action, a new phase of the anti-U.S. struggle that has lasted century after century, will target against the U.S., the sworn enemy of the Korean people.

Even North Korea’s “Committee for the Peaceful Reunification of Korea” responded to the resolution with fighting words.

“Sanctions” mean a war and a declaration of war against us.

We have already declared that “we would react to provocation with immediate retaliatory blows and a war of aggression with a great war of justice for national reunification.”

…

All our service personnel and people will never allow the reckless confrontation moves of the group.

Those who dare stand in the way of our just cause will never be able to escape deadly retaliatory blows.

So, yeah. Back to those scenarios about the day after a truly region-shaking encounter between North Korea and one of its many enemies…

PS. Thanks to the Peterson Institute’s “Witness to Transformation” blog for keeping me up to date on what’s happening and for supplying the links to most of this material.

Unfortunately my analysis regarding North Korea’s desire to make a statement during 2012 seems to have been correct – on 1 December 2012 North Korea announced that it is planning a missile launch for the period surrounding the South Korea presidential election. It seems likely at this stage that DPRK will go ahead with the launch, perhaps as early as Monday 10 December, with weather as the main delaying factor.

Since then, the usual efforts have been made to forestall the event itself, and some less usual ones to prepare for it. NATO, the US and others have called for North Korea to halt the launch, the US PACOM has moved two warships closer to the peninsula for monitoring and missile defence, and Japan has reportedly authorised surface to air missiles for interception in the (rather unlikely, according to the trajectory coordinates provided by Pyongyang) event that it looks like the missile is heading towards Japanese territory.

South Korea’s stance is normal and expected. On the other hand – though I admit I’m not certain of this – I don’t believe that for the April launch the US specifically talked about moving ships with “ballistic missile defence capabilities” into the area. Official PACOM news releases don’t actually mention the missile defence or intercept angle (just referring to “monitoring“, but I would think that China would be rather sensitive to the US demonstrating its missile defence capabilities in that way.

The uncertainty now becomes around whether the launch occurs in such a way to invoke a stronger than normal response from Japan, South Korea or the US. With China-DPRK relations themselves at an uncertain stage with a new Chinese leadership and Kim Jong Un’s reported desire for greater independence, the China-Japan relationship in trouble and the timing of the South Korean election, there are many more variables for the important players to keep track of and therefore a more fragile regional balance to maintain. It will be interesting to see how it plays out.

Image from the excellent 38 North blog: http://38north.org/2012/12/sohae120612/

Having been turned onto books about North Korea by a book review in The Economist, I’ve managed to consume (a few only partially) a number of different books and accounts of the country over the past couple of weeks. And I’m definitely fascinated by the subject. Here is my reading list in case you are interested in sampling from my sample. It also serves as the bibliography to my previous post worrying about North Korea-driven geopolitical risk.

Books:

• The Impossible State: North Korea, Past and Future by Victor Cha. A wide ranging and excellent overview of North Korea, including extracts from many defector accounts, insights into the human rights situation, first hand descriptions of diplomatic events during and since the 2nd Bush administration and really interesting analysis of DPRK’s politics and economics. The first book I read on this topic and the most comprehensive I’ve come across so far. Some of the quotes from humanitarian reports are the most disturbing I have ever read.
• The Aquariums of Pyongyang: Ten Years in the North Korean Gulag by Chol-hwan Kang and Pierre Rigoulot. Very interesting first hand account of a North Korean gulag as told by a defector from a Japanese-Korean family who effectively grew up in a hard labour camp. George W Bush was a fan of the book and invited Kang to the White House. It covers mostly the 1970s and 1980s as Kang left DPRK in the 1992.
• Escape from Camp 14: One Man’s Remarkable Odyssey from North Korea to Freedom in the West by Blaine Harden. I haven’t quite finished this. It’s the story of Shin Dong-hyuk, an escapee from a political camp in central North Korea in which he was born and raised, about his life. It’s not as gripping or well-written as the Aquariums of Pyongyang and confirms a lot of the attitudes and actions children and adults experience in North Korean concentration camps.
• Nothing to Envy: Ordinary Lives in North Korea by Barbara Demick. Beautifully written and very well executed coverage of the lives of six North Koreans all of whom were from the city of Chongjin. It covers the 1990s, and is particularly insightful when one wonders how people coped with the famine that stretched from 1994 to the end of the decade, killing North Koreans in the millions. It also is wonderful contextual companion to Victor Cha’s discussion of the role of market activities in relieving pressure on state-run distribution systems while simultaneously raising the populations expectations, causing a shift in power by encouraging entrepreneurial behaviour and allowing a trickle of information that is potentially dangerous to the regime’s control.
• Under the Loving Care of the Fatherly Leader: North Korea and the Kim Dynasty by Bradley K. Martin.  I haven’t finished this one, though I’ve read more than half of the book with lots of jumping around. In 800-odd pages it covers the lives of Kim Il Sung and Kim Jong Il, drawing on official accounts (ie propaganda), stories from defectors (including transcripts of interviews, which is a fresh way of presenting perspectives after reading previous, edited accounts) and other biographic material (such as files from the Soviet Union released after its collapse). The most interesting pieces I’ve read include Chapter 12, which looks at how socioeconomic status dictates gang behaviour and relationships amongst young men in the country, and Chapter 25, in which one high ranking defector argues that the regime would be very willing to push the nuclear button.
• The Hidden People of North Korea: Everyday Life in the Hermit Kingdom by Ralph Hassig and Kongdan Oh. This one I have only flipped through, but it seems to provide a rather broad overview of North Korea based on defector accounts, discussions with North Korean officials, interviews with those living close to the northern North Korean border and other reports and documents coming out of the country.
• The Reluctant Communist: My Desertion, Court-Martial, and Forty-Year Imprisonment in North Korea by Charles Robert Jenkins. An interesting, relatively quick read on what it was like for a US  Korean War deserter to live for forty years in North Korea. It particularly highlights the inventiveness and, frankly, wealth of handy man skills one needs to get by in the country. One of the most interesting elements here is that he married one of the Japanese abductees, Hitomi Soga.
• The Cleanest Race: How North Koreans See Themselves and Why It Matters by B.R. Myers. An excellent, very insightful book on North Korean ideology. As with Martin’s book above, it draw sheavily on the stories, teachings and art of the regime as a way of understanding the country. But while Martin tends to take these at face value and look for interesting biographical insights or indications of the leaders’ personalities in these sources, Myersapplies a more sociological analysis to drill down a number of layers beneath the propoganda, developing thereby his claim that the worldview of North Korea is “an implacably xenophobic, race-based worldview derived largely from fascist Japanese myth”. Myers argues that to focus on the official “juche” ideas of self-reliance is to mistake it for anything coherent and meaningful, and therefore to miss the far more powerful race-related narrative that lies beneath it. Fascinating.

Other interesting material:

• North Korea: Witness to Transformation. This is an excellent, regularly updated North Korea blog by Marcus Noland and Stephen Haggard at the Peterson Institute. Fascinating and very up to date.
• United Nations Overview of Needs and Assistance in DPRK 2012. The UN’s overview of needs and assistance for DPRK provides a good scan of the current economic situation in the country and a fairly comprehensive overview of humanitarian issues, including food security, health, nutrition and sanitation, has a brief section on natural disasters, and provides UN agency sector response plans.
• A Completely New Blueprint’: North Korea’s Relations with China at the End of the Kim Jong-il Era by Adam Cathcart and Michael Mudden. This is a detailed and very interesting collection of documents looks at the frenetic interactions between Kim Jong Il and China in the last two months of Kim’s life (documenting 18 episodes of contact), drawing conclusions about what this tells us about North Korean politics and raising questions about how Kim Jong Un (who apparently had very little contact with China during the mourning period after his father’s death) will manage Sino-DPRK relations.
• Unofficial translation of Kim Jong Un’s speech on 15 April 2012, the 100th anniversary of Kim Il Sung’s birth

Let me first admit a few biases and caveats. For rather random reasons I’ve been reading a lot about the country over the past few weeks – so recency and availability biases are having a strong effect. I’m also not claiming any unique data or specialized knowledge in assessing North Korea – my opinions are my own and based on a review of a wide range of public sources. Nevertheless, a number of internal and external dynamics suggest to me that the recent quiescence of North Korea is not at all a stable state. In short, I’m concerned about a scenario that could unfold in the next few months where a) the DPRK makes a significant military provocation, in the form of another nuclear test or an unprovoked attack on South Korean (or even Japanese) assets, b) such a provocation escalates into a regional crisis involving military retaliation and c) the events catch people off-guard and unprepared and thus have particularly negative effects on markets and regional stability.

Now I know that making event prediction with a time attached means it is highly likely I am proved wrong (and I very much hope I am). But I work in scenarios – the point is not to be right but rather to ensure that both risks and opportunities are considered, discussed and prepared for, even if they never precipitate. So here are three reasons why you might take a few minutes to think about what would happen if North Korea unexpectedly made a move that destabilised the region:

1) Kim Jong Un, the new and unknown “great leader” (appointed following the sudden death of Kim Jong Il in December last year), has both some stripes to prove as well as a track record of military provocation. According to the North Korean press and other reports, he was involved in the October 2010 shelling of the South Korean island Yeonpyeong, and the ballistic missile test that took place in April 2009. More interestingly, he went ahead with the (failed) missile test earlier this year that seemingly contradicted the Feb 29 moratorium - this moratorium saw DPRK promise to suspend missile tests and nuclear activity in return for 240,000 tonnes of food aid from the US, but lasted only a couple of months. Depending on how the succession politics are playing outside within North Korea, it would not be unreasonable for additional aggressive actions to be deployed as evidence of the new leader’s strong hand and decisiveness. Any such attack would be characterised so as to entrench the public’s need for their new leader to defend against North Korea’s “enemies”. A show of military force would be right in line with the regime’s focus “‘military first” politics referred to by Kim Jong Un during his April 15 speech this year.

2) The timing is opportune – North Korea likes to act on symbolic days for its foes, and elections are occurring in both the US and South Korea before the end of the year. Its second nuclear test took place on the United States’s memorial day in 2009. It conducted ballistic missile tests on Independence Day in 2006, (unsuccessfully) testing a three stage missile with an intended range that would allow it to reach the continental united states. Attempting to disrupt the US election would fit this pattern, as would trying to influence the South Korean Presidential elections. Additionally, the year 2012 is an auspicious one for DPRK, being the 100th year since the birth of Kim Il Sung, and the regime has apparently for at least four years been on a mission to show that in 2012 North Korea will be “a great and prosperous nation”. Given that the attempted missile launch on April 13 this year failed, the regime may be looking for another way to show that strength.

3) The country, and regime, remains stressed for both internal and external reasons. While we now very little about what happens within the country in terms of protest and the possibility of revolution, it has been a hard year for DPRK in terms of flooding and agricultural production, as the food aid discussions have shown. Since July, there have been a spate of rumours internally about Kim Jong Un’s supposed plans for economic reform that suggest that change is afoot, but which also raises concerns about how to keep such changes from leading to popular criticism of the regime. The internal situation links to external concerns about the Arab Spring and global concerns about Iran’s nuclear ambitions. North Korea would be keen to avoid the kind of scenario that has happened in Libya or Syria (particularly the former, where relinquishing nuclear weapons was involved), and is likely to be extremely sensitive right now about how the US and others are dealing with Iran. On September 1st DPRK signed a technology agreement with Iran that might herald a more concerted effort to transfer North Korea’s superior missile technology , bringing the two countries into closer alignment. The regime may consequently feel like weighing in on current events by reminding the world of its existence and nuclear strength, thus showing solidarity with Iran while demonstrating the country’s strength and uniqueness to its own population.

If you accept these points, the question then becomes whether a North Korean provocation would be serious enough to matter beyond raising heart rates in Seoul. It’s clearly not in North Korea’s interest to deliberately kick off a major confrontation that would lead to regional conflict. Going on past behaviour it is more likely that it would attempt to use its unique situation between the US, Japan, South Korea and China to remind the world of its dangerous capabilities and regional importance, whilst not going so far as to alienate its traditional allies or force the hand of its enemies. The desired payout would be a combination of global attention, aid flows and internal popularity. So the baseline expectation would be for a troubling act that didn’t quite cross the line into outrage; that the international community would condemn the act but with the Russians and the Chinese being rather diplomatic; and Japan, the US, South Korea and others would try to use the event as an opening for diplomatic moves and conditional aid offers to convince the North Koreans to give up their nukes.

However my sense is that the potential for escalation is greater today that it was previously. One driver of this links global dynamics and regional dynamics that mean parties that traditionally acquiesce to DPRK intimidation could decide to call North Korea’s bluff. There is no longer a “sunshine policy” in Seoul which would repay bad behaviour with kindness, and the US does not want to set a bad example for Iran or others with proliferation right now. A second driver is the trend by DPRK towards more aggressive military acts. Recent acts by North Korea have been far more serious and direct – for example the (alleged?) sinking of the Cheonan in March 2010 which killed 46 sailors and the Yeonpyeong artillary attack which killed four people on November 2010. Since North Korea probably hasn’t had a chance to build another three-stage missile to test, and its new launch sits may be waterlogged, it might opt next time for a less technologically symbolic, but more directly-damaging display of power.

These two drivers should be put in the context of international concerns that North Korea is developing ever-more threatening nuclear capabilities, which simultaneously raises the stakes for the international community to draw a line while emboldening North Korean aggression. Unlike Iran, the DPRK already has shown via two nuclear tests that it possesses the ability to make a bomb, and it likely has nuclear warheads. It already has SCUD-type missiles (the Rodong-1) with a range that includes Japan. And despite the failed test earlier this year, North Korea is undoubtedly getting closer to being able to deliver a warhead to cities further afield, possibly even the continental US. Missile tests conducted in April 2009 had much greater success than previous attempts, flying a long range, three-stage missile towards Hawaii over the Japanese island of Honshu. In his book “The Impossible State: North Korea, Past and Future“, Victor Cha, a former National Security Advisor for the Bush Administration argues that the advancing capabilities of North Korea’s missile programs could make it only the third country (after China and Russia) to be able to launch nuclear missiles on major US cities as soon as within four years. These facts make North Korea more confident, as it must feel that possessing such capabilities deters serious responses from other countries. But it also acts as a ratchet for conflict risk – bolder moves by DPRK might invoke bolder responses from South Korea and others which could quickly get out of hand, particularly in circumstances where lines of communication and relationships are uncertain and personalities unknown and third parties (ie Iran) are watching closely to gauge the strategies of different players. In this context, if a provocation looked serious enough to the US and Japan, it may shift the priority level of North Korea rapidly up in global geopolitical circles and lead to actual military action, with corresponding risks for South Korean and Japanese cities, and heightened stress for China and Russia.

To run this scenario further is to fear that a major misstep by the regime now, combined with internal pressures created by a poor, hungry, unhealthy and what looks like an increasingly frustrated population (according to defector accounts), could cause the North Korean regime and corresponding social system to collapse, leading to reunification in a “hard landing” scenario. Per capita GDP in DPRK is under $1000 per person – less than a twentieth of those in South Korea. Given such income disparities and the dramatic differences in infrastructure and productive capacity, estimates of the costs of reunification range from the hundreds of billions to trillions of dollars – with a significant portion of this simply being humanitarian aid to help the millions in North Korea who are suffering from a lack of basic nutrition, health and other essential services, and the hundreds of thousands reputedly in labor camps and prisons in truly horrific conditions.

An unexpected collapse of the DPRK would be incredibly difficult for the region. Besides the direct cost to South Korea and the international community of a sudden reunification, there are of course broader geopolitical concerns. China has demonstrated that it has a stake in keeping the Kim regime intact – which means that if the regime falls, they may see the need to provide alternative stabilizing measures to ensure that refugees don’t flood across the border (and possibly, as Victor Cha has argued, to retain access to North Korea’s mineral resources). And yet, according to Cha, there is no official talk on how North Korea’s neighbours would together handle a sudden collapse of the country. Questions such as “Would the Chinese government send troops to maintain order in North Korea in the event of a regime collapse?” are troubling for everyone in the region.

Why might I be wrong in terms of timing or importance of an aggressive act? A few indicators that may weigh against my arguments above include:

A) Work by Kim Insoo and Lee Min Yong indicates an inverse relationship between security threats and agreements around food aid – so the recent discussions about aid may indicate some more breathing space.

B) Sino-DPRK relations, while suffering after the death of Kim Jong Il (who had been interacting extensively with the Chinese in the last few months before his death), still seem close enough for significant influence to be a factor in any provocation. I’m assuming China don’t want North Korea rocking the boat- (they apparently brokered the moratorium in February), so this may also push down on the probability of a military or diplomatic crisis initiatives by Kim Jong Un or his army in the short term.

C) The aforementioned chatter about land reform in North Korea, despite firm policies being absent from the latest parliamentary session, may suggest moves by the regime to improve popularity through efforts to raise standards of living rather than by shifting people’s attention to external enemies. Kim Jong Un may wait to see if this strategy provides him with the desired stability before reverting to external military tactics.

D) Any act resembling a third nuclear test would necessarily consume a significant amount of North Korea’s plutonium or enriched uranium. As Axel Berkofsky points out, the regime may want to “keep its powder dry” rather than expending processed materials, potentially ruling out a nuclear provocation.

These points notwithstanding, I’m worried about the possibility of serious North Korean military action and the risk of escalation into a regional crisis without adequate planning. As with other risks in the region, it’s the uncertainty around what would happen AFTER the initial geopolitical event that is the true source of concern. I very much hope I’m wrong, but I’m worried enough to urge a quick consideration of the issue at a time precisely when there already seems to be so many other geopolitical threats on the horizon.

For those interested in the reading I’ve been doing that serves as the source of much of this material (apologies for not footnoting every point of fact or source of inspiration), I’ve provided a bibliography in a separate post. I welcome your thoughts, comments and corrections!

First, I don’t think many people writing an application or going to a job interview realize that the person on the other side of the desk can be almost as nervous, stressed and under pressure as the applicant – maybe not in that exact moment, but about the whole hiring decision in general. If as a manager you make a bad hire, you cost your company a huge amount of money and time, you risk your own reputation and job, and your own workload gets only bigger while you try and sort it out. This means that there are incentives for interviewers to be risk averse and to hire someone they are sure as possible can get the job done well. Therefore, as an applicant it might be a useful strategy to do what you can do be a compelling candidate without triggering alarm bells that might make the hiring manager or HR person any more nervous than they already are. (As an aside, I believe this is a key reason for why candidates with personal recommendations get so often put to the top of the pile – their perceived risk is far lower when someone known is willing to vouch for them.)

To this end it might be useful for applicants to put themselves in the interviewer’s shoes and ask themselves “what would make it easy for this person to hire me?”. Since it’s hard to know this without actually talking to people in the company (that kind of intel is never in the job description), good questions to ask a potential boss or colleague might be along the lines of ”what parts of this job do you think it’s most important that I excel at in order to get the job done efficiently and effectively (subtext: how I can I make your life easier)?” and “what kind of person have you seen perform the best in this kind of role previously (subtext: which characteristics might you lean or be biased towards based on previous good or bad experience)?”. You want to do research and ask questions that help you a) know what is viewed as a good fit so you can present accordingly, and b) signal subtly that you appreciate that this is a big decision for the interviewer and you are confident that by choosing you they won’t make their life harder.

Second, not all positions are alike: a colleague recently pointed out to me that one important distinction is between positions that are “perform” hires, and those that are “develop” hires. Even if the hiring manager isn’t thinking in those terms, I reckon it’s very useful to know which bucket the position falls into before the interview and prepare accordingly.

For a “perform” position you’re being hired to execute on something that needs doing (often urgently), and the best candidate is someone with a solid track record doing exactly that. A lot of temporary positions fall into this pile, so do many senior positions, and it pays here to focus on tangible stories of past experience and success. Making life easy for a boss means being able to rapidly adapt to the idiosyncrasies of the organization while transferring your existing skills to the problem at hand. Your value will come from being able to be seen as competent quickly and to ease the burden on the team. It may help a lot if you can start immediately!

However you might also be applying for a “develop” position where the majority of what you need to do well comes from being familiar with detailed organizational processes, intricate politics or proprietary technologies, or where you’re simply expected to do a fair amount of training or other form of “getting up to speed” before being seen as competent at the job. In this case it’s your potential that you need to signal as one of your key attributes, ensuring the interviewer knows that you’re aware that learning, flexibility and commitment are important. Your value will come from being a pleasant, quick learner who is willing to stick around and make good on the time and training the organization will invest in you. (NB: Beware of jobs where the interviewer signals immediate “perform” expectations in a complex “develop” environment – you might be signing up for a tough ride in the first six months or so!)

Both of these tips require you to think of the motivation behind the position in the first place and the decision-making processes that will guide the hiring manager, which is easier said than done. However any advance information you can get on either of these elements before applying will in my experience help a lot. At least if it happens to be me on the other side of the table or skype connection…

I can see why EIU thought I’d like it – it dovetails very nicely with the Forum’s Global Risks 2011, supporting our Global Risks Survey data with slightly more recent data. As with our work, EIU asked respondents (among other things) to assess the likelihood and impact of range of global uncertainties, then married that with expert interviews. Apart from taking 1 year rather than a 10 year outlook, what’s different in the EIU approach is that these are termed “scenarios” and, from what I can gather from the helpful appendix showing the results, were posed in two sets – the first set being clearly negative “scenarios” (e.g. Break-up of the Eurozone), and a second being rather more positive “scenarios” (e.g. Housing industry in the US rebounds).  Thus, their impact axis, rather than being purely negative in cost terms (as the Forum’s is), goes from “Very positive” to “Very negative”. While the pedant scenario planner in me would rather think of these as fairly thinly described events rather than true scenarios, the use of positive events is a neat twist on the impact-likelihood matrix. As the most interesting chart doesn’t seem to be in html form on the EIU website, I’ve uploaded it here:

While I appreciate the survey and display innovation (and should add that the supporting analysis is solid) I wanted to put down a few reflections about the results which contributed to some the discussions here in Riyadh.

At first glance, the results shown in the chart above give the impression that investors are pessimistic or bearish, as it appears that the positive scenarios are, as a set, both less likely and less positive than the negative scenarios are likely and negative respectively. Only one positive scenario (The Internet and social media are a catalyst behind rapid political and economic change around the world) making it into “likely” territory, as opposed to five negative scenarios, four of which are “highly negative” for investors.

What can explain this? Of course it could be that people simply see negative scenarios as more likely and of greater impact than positive scenarios at this point in time, as various economic, social and political pressures create greater-than-normal systemic fragility and/or negativity in investors minds. However, it’s also possible that this distribution results from biases within the positive scenario set that was chosen – driven in turn by the fact that it is simply more difficult to come up with positive scenarios that sound reasonable than it is equivalent negative ones.

For example, while I personally love the cluster of global-governance related events in the top left (the result supports our analysis in Global Risks 2011 of the current state of multilateral decision-making), having a large proportion of positive scenarios as events that require coordinated action over longer time periods (such as Agreement of global accord to replace the Kyoto protocol on climate change), while having negative scenarios that are more general and distributed could be skewing the outlook somewhat. Could the survey have corrected for this by including intermediate steps along the way to a global accord, perhaps, which could be more reasonable in the time frame of the survey, yet still have positive impacts through market signalling?

Perhaps. But, to be fair, the report doesn’t make any claims about optimism or pessimism from the distribution of results in this chart. (In fact, the report is largely based on answers to questions not linked to this chart, with answers to other questions indicating a generally positive, if cautious, outlook globally.) And while part of me feels that there’s been a missed opportunity for the survey makers to think up a range of other possible positive events that would represent intermediate points of generalized opportunity, when I try myself, besides news of specific technological breakthroughs (cure for most types of cancer, amazingly efficient solar technology), I realize it’s far from simple to create such stepping stone scenarios. But the fascinating question for me in all these exercises is “what have we left out?”. For an entirely negative set, sometimes it’s a relief to stop thinking about quasi-black (charcoal?) swans. But I’m very much drawn to taking this question further in the case of white (double rainbow?) swans. Most scenario thinkers will agree that positive scenarios are the hardest to write, as they tend to smack of implausibility. And of course I realize that criticizing EIU’s choice of scenarios puts me in a glass house – our risk set is also open to criticism for not being MECE and levelled across categories too.

Second, I detect some interesting inconsistencies in the results that could be the result of packaging the survey questions into a “negative” group and a “positive” group (if that is indeed how the questions were asked – see pp32 to 32 of the pdf), with the divide creating artificial space between otherwise correlated scenarios. For example, the scenario The Internet and social media are a catalyst behind rapid political and economic change around the world is seen as likely and having a positive impact on investor’s portfolios. Yet, Further political turmoil in the Middle East, while similarly (although more) likely, is seen as having a highly negative impact on portfolios. Given the one year outlook and recent events in the MENA region (which have been, accurately or not, firmly linked to the Internet and social media, as Egyptian, Libyan, Tunisian and Syrian attempts to control these have shown), I would have thought that respondents would have seen these two scenarios as positively correlated, dragging down the perceived beneficial impact of the Internet and social media. An alternate explanation could be that respondents overwhelmingly associate these technologies with good things, though personally I would have predicted more negative associations with “rapid political and economic change”. Perhaps it is simply that the words “Internet” and “change” are far more positively viewed by respondents than “turmoil” and “Middle East”, and the result would hold even if if the scenarios were not sandwiched among other positive and negative scenarios respectively.

There is also an interesting tension between the perceived optimism of respondents regarding the Internet’s (typically leaderless and decentralized) power to have a positive impact via rapid political and economic change within a year’s time, and the perception that concerted efforts by multilateral institutions are very unlikely to achieve an equivalent impact over the same time period. This result is unlikely to be explained by the survey design. People simply must have more faith in the power of the iPad2 than the G2. Hmm.

In fact, it is the tension in this diagram and these results that makes it interesting, which brings me back to being in Saudi and why I’m writing this at all, having spent far longer than I normally would going through a report of this type.

Reflecting on these issues on the flight to Riyadh last night proved very useful. Early on in today’s workshop on Saudi Arabia’s evolving business environment, one of the participants made the point that it was important to look at investor perceptions of both the Middle East and Saudi to understand potential capital flows. Thanks to the Forum’s global risks matrices and systems diagrams (with their links to geopolitical risk) and the above chart, we had a lively and productive discussion about what distinguishes Saudi Arabia from the rest of the region. I won’t go into the ensuing debate, but I was very glad that I had spent some time thinking about how we perceive global risks and opportunities related to the region. And as most of the world’s organizations try to come to grips with these topics in a time of turbulence, I’m pleased that the Forum, EIU and many others are innovating in terms of how we identify and assess uncertainty using a combination of perception data, expert input and quantitative analysis. It’s possible to find flaws in every approach to assessing risk, but any approach that drives strategic conversations and dynamic debates is valuable.

Filed under: Random Musing ]]> http://nicholasjdavis.wordpress.com/2011/06/13/perception-perception-2/feed/ 2 Nicholas Davis EIU chart http://nicholasjdavis.wordpress.com/2011/06/08/the-benefits-of-percolation-aka-omg-greece-aka-vale-eurozone/ http://nicholasjdavis.wordpress.com/2011/06/08/the-benefits-of-percolation-aka-omg-greece-aka-vale-eurozone/#comments Wed, 08 Jun 2011 11:51:53 +0000 Nicholas Davis http://nicholasjdavis.wordpress.com/?p=783 ]]> Note: I wrote this last weekend and didn’t post it as I wasn’t quite happy with it. Since then, according to some side mentions in the German press, it does indeed look like the ECB will agree to debt restructuring in the Eurozone periphery countries (despite ongoing official speeches to the contrary). Apologies for the length – too busy to write a shorter blog post...

One way in which I’m justifying the fact that it’s been 77 days since I last wrote a blog post is the argument that it is valuable to leave the brain fallow for a while. I’m a big fan of “percolation” – raising an issue or question, then letting a day or so pass before returning to a detailed analysis of the issue. So I like to think that what’s been happening these past few months is a crucial period of percolation prior to some awesome, insightful blog posting.

Of course that might be true if I hadn’t been destroying brain cells through excessive travel, lack of sleep and a fair amount of whisky consumption. Worth it though – since I last posted I’ve been to two fascinating conferences in Estonia and Oxford, spent almost 3 weeks in Australia attending my little sister’s wedding and meeting great people in Adelaide, Brisbane and Sydney (not to mention attending a lot of late night phone conferences), and kicked off an exciting new project titled The Political and Economic Implications of Resource Scarcity. And I’ve enjoyed a fair amount of Springbank and Ardbeg, my two favourite whiskies along the way.

However of all the big things percolating in my brain over the last few months, the biggest is what’s going on around me here in Europe at the moment. Not sexist E. Coli, but rather Europe’s sovereign debt crisis that I’m worried is about to get less theoretical and more real in the form of a European banking crisis.

It seems that both markets and politics are finally catching up with the underlying economics of Greece and Ireland’s debt situations: namely, that both are technically insolvent with almost zero chance of paying back the money they’ve been lent, even given the large bailout packages they’ve already received and the austerity measures they’ve been forced to adopt. For the background story to Greece, see Michael Lewis’s Vanity Fair article “Beware of Greeks bearing bonds”, and for the same on Ireland (both told amazingly well by the way), see his companion article “When Irish eyes are crying“. Highly recommended articles.

Right now, thanks to investor jitteriness, the cost of debt to these countries is so high that they can’t even “ponzi” their way out by paying old debts with new borrowing. That means that as their various debts become due they will simply be unable pay them without help, leading to a default on the debt and some big problems – namely the flight of capital from those economies and the negative impact on European banks that are holding these countries’ debt, which will in turn need recapitalization. So, everyone agrees, help is needed. That help could come in two forms – by agreeing with the people they owe that they’ll pay less, or slower than originally agreed (a “restructuring” of the debt), or by receiving ongoing handouts from non-private investors such as the ECB, effectively meaning that taxpayers in the rest of the Eurozone take those debts on.

The problem has been that neither of these options have been taken seriously until now – the Germans and European Central Bank have been resisting any suggestion of restructuring (claiming, at least until recent talks, that restructured debt would no longer count as collateral against official support in the forms of current and future loans needed for liquidity), while politicians and populations in the rest of Europe see open-ended support and continued bail-outs as both politically undesirable (the conservative Germans paying for the profligacy of the Greeks!?) and potentially impossible anyway (while Greece could be saved, under current structures and trends, there is just not enough money in the combined bail-out mechanisms to cover Greece, Ireland, Portugal and Spain, to say nothing of Italy).

As Martin Wolf said on Tuesday, the Eurozone is now in a situation of intolerable choices - it seems politically impossible to create the financial integration and ongoing fiscal support that the region would need to cope with the debts in periphery countries (though Trichet is now hinting at Euro authorities taking over running the Greek economy!), yet it is economically almost unimaginable to see how an exit from the Eurozone by any country (Germany on the strong side, the PIIGS on the weak side) wouldn’t result in complete chaos. My fear is that it is politically “easier” from a domestic point of view to push for exit (which might be achieved unilaterally, for populist reasons, by a single country), than it is to corral support among member states and create even greater integration, particularly after what has happened so far.

I’m now convinced (though would be very happy to be proved wrong) that the central scenario and strategy espoused by the ECB and others of fiscal austerity, economic restructuring and sales of public assets combined with continuing (but limited) financial support from the EFSF, EFSM and IMF is almost completely implausible, even given the measures being discussed now to create new bail-out packages. According to an excellent report by Bruegel it is nigh on impossible for the Greeks to pay down their debt. Bruegel calculates that to reduce Greek debt to a more sustainable 60% of GDP by 2034, under an “optimistic” growth scenario the Greeks would need to run a primary surplus of 8.4% of GDP for the next 20-odd years. Under a “cautious” scenario the surplus required is 14.5% of GDP. To put that in context, the Bruegel report points out that “over the last 50 years, no OECD country (except Norway, thanks to oil surpluses) has sustained a primary surplus above six percent of GDP”. And until recently Greece has been running massive fiscal deficits – EIU data says that in 2007 Greece’s deficit was 6.4%, growing to 9.4% in 2008 and a massive 15.4% in 2009. With estimates of continued deficits of 9.7 and  8.1 over the next two years, you can see how hard it will be for Greece to pay back its creditors.

So, I’m calling that we will see some form of restructuring of Greek debt soon (not called restructuring, but “re-profiling” perhaps), combined with even more draconian measures on the ground, including fire-sales of state-owned assets and wage cuts. We might even see the Greek’s agreeing to some loss of sovereignty in the form of central management of their banking sector and public finances by the EU.

However even with I’m not sure that this will work. At the end of the day, what is needed is that the PIIGS economies create a situation where their citizens wake up and are productive in supplying goods and services to one another and the rest of the world in such a way that there is a surplus for their governments to tax in order to pay back their massive debts. And, as I’ve argued above, with the threat of ongoing public unrest, the psychological pain (and deflationary impact) of cuts to wages and living standards, and opportunities for populist grand-standing, the pressure in my mind is towards a Eurozone breakup in some form rather than the deeper financial integration that would be required to make it work. Scary stuff.

The fact that it doesn’t try to make sense of events after the fact, but instead provides a collection of articles “as they happened” (so to speak), is actually quite helpful. For example, some of the articles focus on the “will they / won’t they” questions about regime change in Egypt and Tunisia before Ben Ali or Mubarak stepped down – such musings may seem irrelevant now but the thinking behind them still applies to countries such as Saudi, Jordan and Morocco.

Reading the articles, and the fact that I also need to work on our Mediterranean scenarios tonight, got me thinking again about the range of post-revolutionary scenarios for North Africa and the MENA region and the link to generational succession.

The three scenarios most commonly discussed seem to go something along the lines of:

Scenario 1: The blooming of “true” Arab democracy.

Seemingly against the odds, the person on the Arab street (presumably aided in some way by a Facebook account) is finally able to participate fairly, fully and directly in the governance of her country. This participation is peaceful and productive as the advent of a fair process in a climate of optimism is legitimized and held to be more dear than the specific outcome – hence new constitutions are ratified that maximise political and social freedoms, and new elections are hailed as free and fair. Consensus is defined as “I may disagree, but I can live with it and will support it”. The people “own” the results. The resulting coalitions of interest groups who form government(s) are tolerant and celebrate each other’s strengths, bound together (both nationally and regionally) by a common vision of maximizing prosperity for all while refusing to be tempted to trade their hard-won freedoms for the promise of “stability” (often artificially threatened and created). As a result, while decision-making and the economic and political environment is initially messy, reforms proceed in such a way that they eventually lead to a far fairer distribution of wealth, new employment opportunities and a flourishing of entrepreneurial activity among younger generations. Over time this translates into far higher standards of living and competitiveness for the entire region.

What would indicate we are moving in this direction? The proliferation and use of websites like Egypt’s Dostour2011 (use the Google translate bar to read it unless you can read arabic!) to engage previously un-consulted segments of the population on crucial elements of government policy and the post-revolutionary structure. Increases in entrepreneurial activity by youth.

What would indicate we are moving away from this scenario? For Egypt, a failure to fairly rapidly adopt a new constitution. Prolonged internal instability, violence on the streets, a drawn-out war in Libya, the co-option of key institutions by old elites who play only lip-service to the youth.

What are the major implications for the rest of the world in this scenario? New investment opportunities for foreigners, but in an environment where new relationships must be formed. A resurgence of regionalism in the Arab world that will change power dynamics in foreign policy and commerce, particularly for Europe.

Scenario 2: A messy and destabilizing transition that leads to regional conflict.

A combination of in-fighting between post-revolutionary factions, the reluctance of incumbent/overthrown sources of power to relinquish control, and the actions of a range of powerful destabilizing forces (including external powers) leads societies into prolonged periods of social, political and economic chaos. As “legitimate” protest is threatened, quashed or squeezed out by lack of progress and more sinister elements who are willing to use violence as a tool, Al Qaeda, Islamism and extremist social and political views play an increasing role in the political discourse. The internal instability leads to the “hollowing out” of the region. Old elites and new faces cycle in and out of power as stability is sought with increasing desperation but is not found. Instability within countries spills over to create instability between states. Ultimately, the people on the street are even worse off than before the revolution, and the entire world suffers from a region wracked by uncertainty and conflict.

What would indicate we are moving in this direction? Long delays in constituting new governance models, the spread of violent stand-off tactics by governments facing popular protest (e.g. the Libyan model of government resistance is replicated elsewhere), the Libyan war spills over into other countries, a very messy situation in Saudi Arabia etc

What would indicate we are moving away from this scenario? A surprisingly quick transition to open, transparent democratic systems in Tunisia and Egypt. Reforms promised in other countries are undertaken with alacrity. Economic outcomes for people on the street improve thanks to strong growth and investment.

What are the major implications for the rest of the world in this scenario? Sky-high oil prices threaten global growth, migration flows to Europe create social stresses and further instability around the Med, security concerns create ever-greater transaction costs to business and the movement of people and goods.

Scenario 3: Plus ca change – regime capture by the old elites.

Despite the hopeful media reporting and the promise of change by government representatives and community leaders, the region experiences revolution only in name, as slight variations on the old elites take power in essentially the same institutions. Reforms are promised and short-term solutions implemented, but emergency laws return in order to “keep the peace”. While protests recur for a time, an exhausted public eventually accept once again that it is easier to trade freedom for stability, and simply hope that the new set of old leaders (made up of members of the previous ruling families, military structures etc) will be better able to manage the economy in a way that benefits them personally.

What would indicate we are moving in this direction? The continual delay of elections in Egypt and Tunisia on security grounds. A new series of coups by military or religious leaders.

What would indicate we are moving away from this scenario? An entirely new set of faces elected in a free and fair process (and which remain there for more than a few months). Public statements (or better, new constitutions) which explicitly provide separate roles for the military, religious bodies, monarchies etc, and leave no questions over what could constitute political capture by a body other than a fairly-elected representative.

What are the major implications for the rest of the world in this scenario? Lower oil prices, but the threat of a future revolution. 

More challenging scenarios:

Since these three scenarios are not mutually exclusive (we could go through 3 before eventually getting to 1, or, as many people argue, go through 2 and end up in 3), nor do they take much imagination to conceive, they are not as useful as they could be. What other more challenging scenarios might be useful to think about?

Here’s one, inspired in part by Evgeny Morozov’s speech to the RSA last year (you can watch the slightly more engaging RSAnimate version here on YouTube), and his recent book, The Net Delusion.

Scenario 4: A new age of cyber repression:

On the back of unprecedented political engagement, and with the support of Western powers, a new coalition of young, vibrant and independent leaders emerge across the region. They take particular care to emphasize their disconnect with previous regimes, their willingness to engage with all segments of society, and their commitment to distributing the wealth of the nation in a more equal way than previously was the case.

Unfortunately while they possess sincere fervour, an understanding of technology and a desire to capitalize social change, they underestimate the challenge of delivering on their promises. As time passes, cracks begin to appear and the murmurings of protest re-emerge amongst the public, driven in part by legacy issues from previous regimes, in part by frustration at the inexperience of new leaders and the unintended consequences of their hasty policies.

The reaction by the new leaders is to bunker down and to use their knowledge of social networking to buy more time. They start to spend more and more time on marketing activities designed to stabilize public support, and less and less time on solving the underlying issues. Eventually, it becomes clear that a series of new authoritarian states have emerged, intent on heading off dissent. Only this time, they are intimately familiar with the technologies that helped destabilize previous regimes, and are able to use the internet to project power much more effectively than the fragmented opposition groups can. It turns out that a highly educated and technologically sophisticated generation of leaders is far better at controlling dissent than their forbears. And yet, given that the underlying issues of unemployment, corruption and limited resources remain, how long until another popular movement has nothing left to lose and takes to the streets?

Naturally this is all just rambling, but perhaps useful to consider. What other scenarios for the region should we be considering?