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Turning the World Upside Down

June 11, 2008


My work with Development-in-a-Box™, as well as my frequent trips overseas, has given me an appreciation for the developing world that one can only gain by personal experience. New York Times columnist Roger Cohen, who also travels extensively, believes it is time to see the world as the topsy turvy place that globalization has made it [“The World Is Upside Down,” 2 June 2008]. He writes:

“For a while the world was flat. Now it’s upside down. To understand it, invert your thinking. See the developed world as depending on the developing world, rather than the other way round. Understand that two-thirds of global economic growth last year came from emerging countries, whose economies will expand about 6.7 percent in 2008, against 1.3 percent for the United States, Japan and euro zone states.”

The “world was flat” reference, of course, is a friendly dig at co-New York Times’ columnist Tom Friedman’s book The World is Flat. I suspect that Friedman still believes the world is relatively flat and that Cohen’s argument only makes the point that it is getting flatter. Cohen argues that the steep rise in oil and other commodity prices adversely affects both rich and poor nations; but, it also means that one of the greatest re-distribution of wealth in history is taking place.

“The sharp rise in prices for energy, commodities, metals and minerals produced mainly in the developing world explains part of this shift. That has created the balance of payments surpluses fueling dollar-dripping sovereign wealth funds in the gulf and East Asia. They amuse themselves picking up a stake in BP here, a chunk of Morgan Stanley there, and why not a sliver of Total.”

Writing from Brazil, Cohen compares western economies with dinosaurs of the past — once great beasts that ruled the land only to be wiped out as the environment changed.

“We of the developed-world Paleolithic species are fair game for the upstarts now, our predator role exhausted. The U.S. and Europe may one day need all the charity they can get. To place this inversion in focus, it helps to be in Brazil, where winter (so to speak) arrives with the Northern Hemisphere summer, and economic optimism, as exuberant as the vegetation, increases at the same brisk clip as U.S. foreclosures. Huge offshore oil finds, a sugarcane ethanol boom, vast reserves of unused arable land, mineral wealth and abundant fresh water contribute to Brazilian buoyancy. But natural resources are only part of the story. As in China and India, an expanding internal market is bolstering growth. So is increasing corporate sophistication and global ambition.”

Last November I wrote a post that discussed Brazil’s new-found oil reserves [Brazil’s Oil Discovery]. Cohen indicates that the state-owned oil company that controls those reserves is only one of the Brazilian companies with a bright future.

“At the annual National Forum, a gathering of business leaders, I felt like a first-world pipsqueak as leaders of the national energy company Petrobras (bigger than BP, Shell and Total) and Companhia Vale do Rio Doce, or C.V.R.D. (the world’s second largest mining company), reeled off head-turning statistics. Petrobras, which has spearheaded Brazil’s push to self-sufficiency from heavy dependence on imported oil 30 years ago, will more than double oil production to 4.2 million barrels a day in 2015 from 1.9 million barrels today. ‘With the latest discoveries, the South Atlantic will become a huge oil producer,’ predicted Jose Sergio Gabrielli de Azvedo, its chief executive.”

Cohen uses CVRD as an example of other emerging market companies that possess a combination of wealth and ambition. Countries, not just companies, have new-found wealth and ambition. He uses a new term for those countries — Newly Acquisitive Countries.

“Roger Agnelli of C.V.R.D. waved away the United States (‘It’s full of debt’) to focus on the company’s ambitions in Asia. It was imperative to be there, he said, because that’s where growth, capital and ambition are. China, he noted, will account for 55 percent of iron ore consumption, 31.6 percent of nickel, and 42 percent of aluminum by 2012. Case closed. Like many other big emerging-market corporations, C.V.R.D. has been on a buying spree. It’s not just sovereign wealth funds that are acquiring first-world companies these days. It’s the new giants of the NAN (Newly Acquisitive Nations). Emerging-market mergers and acquisitions are up 17 percent this year to $218 billion, while for the rest of the world they’re down 43 percent to $991 billion, according to Thomson Reuters.”

To make his point about how the world economic landscape is changing and nations are evolving, Cohen looks at how much foreign direct investment is being made by emerging market countries.

“The 2007 Unctad World Investment Report said developing-world direct foreign investment totaled $193 billion in 2006, compared with a 1990s annual average of $54 billion. The U.S. 2006 figure was $216.6 billion. C.V.R.D. bought Canada’s Inco, a nickel miner, for $17 billion in 2006. It came close to acquiring the Anglo-Swiss miner Xstrata for $90 billion this year. Just last week, India’s Vedanta Resources reached a $2.6 billion deal to buy U.S. copper miner Asarco. That deal is being challenged by Grupo Mexico, creating a Latin-American-Asian fight for a U.S. company. If you have trouble getting your mind around that, try standing on your head. That’s also a good position from which to view India’s Tata Motors agreeing to buy Land Rover and Jaguar from Ford for $2.3 billion, or Tata Steel’s acquisition last year of the Anglo-Dutch Corus Group steel company for $12 billion. Globalization is now a two-way street; in fact it’s an Indian street with traffic weaving in all directions.”

For those who have kept a watchful eye on globalization, this topsy turvy situation comes as no surprise. The signs have been pointing to an upside down world for some time. My colleague Tom Barnett has spent years explaining that one of the principal contributions that the U.S. has been making during this evolution is exporting security. While many would argue that the wheels came off that cart when the U.S. invaded Iraq, the fact is that only the U.S. remains in a position to underwrite security. Cohen thinks that, too, needs to change with the times.

“‘In an inverted world, not only have developing economies become dominant forces in global exports in the space of a few years, but their companies are becoming major players in the global economy, challenging the incumbents that dominated the international scene in the 20th century,’ said Claudio Frischtak, a Brazilian economist and consultant. A shift in economic power is under way to which the developed world has not yet adjusted. Of course the G-8 and the permanent membership of the U.N. Security Council need to be expanded to reflect this change. The 21st century can’t be handled with 20th-century institutions. That’s obvious. Less obvious is how the United States, which underwrites global security at vast expense, begins to share this burden, so that the new multi-polarity of wealth is reflected in a multipolarity of security commitments. Headstands are in order for the next U.S. president.”

Basically, Cohen is arguing that with wealth comes responsibility. A tour d’horizon of countries into which wealth is flowing, however, doesn’t exactly inspire one with confidence that they are willing or prepared to assume the responsibilities of keeping the global order moving forward. As the torch of influence passes to a new group, the old elite must help tutor the new elite about their global obligations. If they don’t, the newly influential nations could make a muck of things similar to what happened in former colonial nations that were never adequately prepared for the responsibilities of independence by their colonial masters. That tutoring must begin soon because the pace of change is only quickening.

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