Monday, 22 February 2016

Why A New ‘Cold War’ Is Bad For The Global Economy

In World Economy News 22/02/2016

Who wants a new Cold War?!
Last weekend’s Munich Security Conference had NATO and Russia exchanging the usual barbs. NATO says Russia wants its empire back. Russia wants to know what NATO’s new missile bases are aiming at. Prime Minister Dmitry Medvedev famously said what everyone has been chatting about in Washington now for two years, and almost gleefully, that we are in a new Cold War.
“Almost on an everyday basis we are called one of the most terrible threats either to NATO as a whole or to Europe, or to the United States,” Medvedev said at the Conference.
Without getting into who makes those claims, a new Cold War with the Russians is a bad idea for the world. Not just because it might lead to war, but because in the past it has led to dictatorships and boom and bust economies from Latin America to Asia. Given the fact that this part of the world is the only reason why global GDP isn’t 1.5%, it is best for businesses and their employees that the Cold War be put to rest and its cheerleaders pom-poms be confiscated.
According to Barclays Capital’s estimates, the advanced economies of the world will grow by 1.8% in 2016. The rest of the world, led by China and India, will grow by 4.2%. But if sanctions and suspicions and fear take over like they did after World War II, the flow of capital into those economies will shrivel up. Maybe their exports would decline if the West felt those products were from countries too friendly to Russia, thus hurting national accounts and destroying massive income gains from Brazil to China over the past 15 years. A Cold War with Russia might be good for a handful of defense contractors and their lenders, but a peaceful economy is preferred, says Jan Dehn, head of research at the Ashmore Group in London.
Ashmore has about $50 billion at work in emerging economies, from old banana republics to ex-colonial war zones in Asia. The investment firm lost around $20 billion in assets under management over a 12 month period in 2014-15 because of capital flight. Imagine what investors would do to firms like that if they felt they were investing in countries that might run against political prevailing winds.
“Coups were frequent, often bloody. And no one in their right mind invested in such countries, except for short spells during commodity price booms,” Dehn says, immediately writing a long note to clients to dissuade them from panicking about Cold War 2.0. Much of the perception about emerging market investing as a ‘commodity play’ dates back to Cold War days.
The good news is that the Cold War is not coming back. At least as far as the vast majority of those old Cold War bastion nations are concerned.
“The most obvious reason is that none of the original superpowers have the financial or political clout to re-install and control puppet governments across the 165 odd emerging market countries,” writes Dehn. Moreover, those countries are a lot richer and their population is more educated, unlikely to quickly pick a suitor. Then there is China. It’s no longer surviving on a dollar-a-day Happy Meal toy making economy. While China seems to have no military interest beyond its immediate borders, it is unlikely to tolerate the U.S. or Russia causing a stir there either. It now has the defensive means to make such a move less appetizing, even for the boldest war hawks.
While some itch for the bad-ole-days, there are signs that one remnant of the Cold War is collapsing. Populist governments in Latin America that have made heavy use of anti-American rhetoric to win and hold on to power are weak and failing to win over newcomers. Venezuela is case in point. Argentina is next. Their new government is seeking to quickly re-integrate one of Latin America’s richest nations into the world following 16 years of defaults and anti-Yankee rhetoric from the Kirchners.
Cuba is now thawing relations with the United States. There will never be Russian missiles there. Ecuador, Nicaragua and Bolivia have become far more pragmatic. Each are nationalist, but it is hard to imagine Ecuador picking sides. The entire economy is dollarized. Without the Cold War to stir up the stink, “the false political choice between right-wing and left-wing authoritarian governments….gives way to more technocratic governments that have a genuine chance of delivering sustainable economic progress,” Dehn says.
The Middle East is a different animal. It’s authoritarian economies are remnants of British and French colonialism, with false borders. Outside of this large hornets nest, the Russians want to maintain their old Cold War allies, just as the U.S. and U.K. wank to keep theirs.
There are signs that cooler heads might prevail with regards to Russian inroads in Syria’s battle against anti-Assad and jihadi terrorist groups. Over the last few days, op-eds in The Boston Globe and Bloomberg View both called on the West to work with Russia. The Washington Post printed a tag-teamed op-ed by American and Russian professors on Wednesday saying the U.S. and Russia can work together in the Middle East.
Germany’s Angela Merkel reiterated this week that she is interested on lifting economic sanctions on Russia, which have been put in place since Russia annexed Crimea and backed anti-government rebel groups in Eastern Ukraine.
Whether or not those cooler heads prevail depends on U.S. elections. One certainty remains: if the Cold War does return in earnest, it is bad for the all-important emerging economies that have been drivers of global growth. At home, such a scenario might work out for Lockheed Martin and banks that finance government debt and defense firms. But a weak emerging market outlook, plagued by Cold War friend or foe trade policies, would be bad for Apple and Caterpillar. Dehn is telling his Ashmore clients to place their bets with the latter.

Source: Forbes