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Which nation will be next global superpower?

As mentioned the other day, we are asking some big ticket long-term questions at SIBOS this year, such as:

  • When will we know that financial systems work?
  • How will we know when financial risk is not an issue anymore?
  • What will America and Europe be doing when the economic power balance has shifted to Asia?
  • Can we confidently create a way of investing for the long-term instead of our net present value short term view of today?
  • Can we foretell a future where a human right includes "to not be poor", and what happens to work, life and war if there is no poverty?
  • If money is just a way of exchanging value, and it's all now digitised, can we create digital money without the need for real money? How do virtual exchanges and virtual currencies change the commercial infrastructure?
  • Could we create a world where financial transactions are sponsored, for example by Google ads, so that they are free? If so, what is the role of a bank and how will it make money, if all financial transactions are free?

This is all part of the focus upon the work of the Long Now Foundation and Long Finance group, of which I’m a part.

Long
Now looks out at what will change over the next ten millennia, whilst the Long Finance looks out at a
financial lifetime and how to build a financial system that could last
100 years.

In this series of discussions, I thought I would tackle one of the big questions we are considering: What will America and Europe be doing when the economic power balance has shifted to Asia?

Regarding the shift to the East, this is not a Long question, as the shift has already happened, if you listen to some folks.But does it matter?If America is no longer the great superpower but just a power, does it matter?If Europe has zero competitiveness due to its fragemented structures, does it matter?And what about Latin America and Brazil, don’t they matter?And Russia?And the Middle East?The answer to all of the above is that of course it matters.Any shift of economic or military power matters.For example, we could pose a different view to the above if we really want to be Long, and ask: what happens when the balance of economic power is determined by Africa?When we think of our land masses and populations, the real matters are determined by commodities, capabilities, processes and capital.So let’s look at these areas, and then consider who has the balance of power and who will get it.When we think of commodities, we think of oil, metals, cocoa, gold and similar.Those who have an abundance of scarce commodities that have value are naturally going to be richer than those who have none but need them. The Middle East has lived on their oil riches for long and will do so for the near future but, in the Long Now, some will fail.This is because the oil riches are a finite resource, and will eventually be drilled to extinction.The illustration of this issue is no better exemplified by Yemen, where poverty is rife having squandered away millions in oil revenues years ago, and being unable to create any substitute.This is unlike the Emirates, who ballooned into a prosperous construction, tourism and trading centre, built upon sand.So when we talk about commodities we are talking about a finite property, which is why there is scarcity and value. From a Long Now viewpoint, it must beg the question: what are you investing your finite billions in today for the infinite post-commodity years later?The answer is that these nations should be investing in education, knowledge, brains and science, as these capabilities build a sustainable future.The capability battle is one that Britain used well to build an empire a century ago, and that America used well to create prosperity through the twentieth century. It’s also what other nations, such as Singapore and India have realised in building their empires of today.It’s all about looking at things that humans can create that are of value and, by building leadership in this area, it means that your nation can stay ahead of the world when it comes to technological, scientific or commercial scarcity.Britain had that scarcity during Queen Victoria’s reign, with a technological leadership based upon naval and military strength. This allowed one small nation to colonise many other nations. By doing so, the strength of the nation increased by being able to access commodities of those nations, and gain commercial value, capital and further technological strengths which became a virtuous circle.This leadership faded as the industrial revolution led to America, with its vast swathes of land and resources, to take over as the manufacturing engine of the world.In America, that leadership came from building cars and computers, creating value through innovation, and through using knowledge to gain power over capital, commodities and resources.Today, this is the piece that is shifting to the East. China’s leadership is based upon people, processes, resources and investment in capabilities for building cheaper, faster and better. China’s a nation that saw the weakness in the model of the world – the cost of manufacturing – and exploited it to gain growth. Now, having gained that edge, they are investing in all the other things to generate wealth from science and knowledge, and to maintain and sustain future growth.

This is why China has a space mission, as does India.

These are indicators of building capability leadership through scientific and technological research.

India saw a different weakness in the world’s model – the cost of service – and their strategy was therefore to invest in knowledge, and specifically to use their brainpower to gain economic growth. The use of English language and investment in technology skills, restructured the world’s knowledge chains in the same way as China re-engineered the world’s supply chains.It is these investments in human capabilities that led to other nations, who had the commodity resources to support the wealth of manufacturing and services growth in China and India, to also enter a growth phase, particularly Brazil and Russia.Now, Brazil has invested in human capabilities to sustain their growth, whilst Russia is still a fragile economy due to a lesser focus on building such a sustainable future.So that outlines two cycles of economic power shifts: commodities and capabilities.The thing that now makes the difference is that, if you start with an abundance of resources and use the investment capability of such resources to create capabilities, which nations get the Long Win, as in they become a superpower.This is all down to processes.The two go hand-in-hand, and are easily reflected by Germany and Japan.Since the 1970s, we all say that Germany and Japan are the world’s leading nations in terms of their excellence in making cars and electronics.This is because Germany and Japan had a huge squeeze on capital after the War, and therefore had to create efficiency and effectiveness in processes. Luckily they could do that, thanks to a clean spread of land and knowledge that had a focus upon creating processes that maximised the efficiency and effectiveness of manufacturing.Just look at the work of W. Edwards Deming in post-War Japan to see how Just-in-Time manufacturing re-engineered the world.So where does this lead us to, in thinking of the Long Now future world?Who will be the future superpower?Not Europe, if the region continues in its current form.This is because Europe has a problem with managing the four dimensions of commodities, capabilities, processes and capital, mainly because Europe is a grouping of 27 individual nations rather than a singular whole. This is why Europe is bad at dealing with these, although some nations within Europe excel, as in Germany. This is why Europe is grappling with the question right now as to whether the Union can survive long-term if one or two nations are good at building a sustainable model of wealth, whilst having to give it all away to support the nations that aren’t.China and America are different as they are a nation and not a region. Admittedly, they are not a singular whole either – China and America are a formation of many individual states, like Europe – but they do have centralised governance for strategic planning and control, as well as a common language and currency. Again, I know some will be tutting at this point, saying that Mandarin and Cantonese are different languages and almost half of America speaks Spanish, but it is fundamentally different. This is because these nations do have a cohesive structure for planning, investment and management of commodities, capabilities, processes and capital, whereas Europe does not. Europe may in the future but, right now, it does not.Equally, many claim that Europe fails due to disparate and historical legacy infrastructures, whilst America succeeds by starting as a new Nation, with a new currency and agenda. China’s a new nation, in terms of infrastructure, and again can exploit and leverage that capability.So when we look at the capabilities criteria, China and America are the two large nations that both fit. Russia, Brazil, India and Africa would be the other contenders.We can leave Africa off the list for the moment, as they suffer the same paranoia and fragmentation as Europe. Similarly with Russia, for they need some serious investment in people and capability if they are ever to maximise their resources and opportunities.So, America, China, Brazil and India are the four Long Finance nations on the radar.They are all single nations with central planning structures and a relatively new Nation mentality, which means that they are not bogged down by legacy infrastructures from an economic viewpoint.They all have strong capabilities and access to resources, so we don’t need to think of these as an issue.Therefore, for the next century, the superpower from these four will be based upon processes.And here’s where it gets radical.America has been very good on process, and India is very good on process.Everything is in signed off in triplicate, checked, double-checked and authorised.The thing is that this procedural approach to processes is not adept for the new millennia process, where the fast beat the slow.Today’s globalised world works in seconds, not years, and the heavy-duty processes and rigid disciplines of the twentieth century will fail in the twenty first.So, for these reasons, America and India may be hindered culturally in the Long Finance twenty-first century, which leaves Brazil and China.You probably think it’s China, don’t you?China will be the Big Superpower of the twenty-first century.Well, maybe not.Maybe Brazil holds the balance of power for the Long Finance world.The reason for this conclusion is that China will be contracting in power in 2050-2060, due to their single child policy.The lack of new blood and an aging population could drag China’s economic tiger into a toothless and clawless sloth in the Long View.Meanwhile, Brazil has the commodities, capabilities, processes and capital to be the world’s largest economic force in the next century.If that’s the case, North America will feed off South America, and will be the subservient economy to Brazil. It will be a reverse relationship to the structure of the twentieth century, where you had the poor South and rich North.Similarly, Africa will have been raised from poverty, and India and China will still be forces of power, but not necessarily THE force of power.Europe will still be fragmented, with member states fighting for capital and control just as they are today, and Russia will still be tipped as the next big economy and, if the government does invest more strategically in commercial capabilities and processes, it just might make it.Meanwhile, I’m moving to Australia as, in the picture I’ve just painted, the world has turned upside down. All the wealth and control that was in the Northern Hemisphere has moved to the South, and so the natural juxtaposition of London will to live in Sydney.Interesting.Instead of coming from a land down-under, I’ll come from a land up-over … G’day mates.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Edward Harkins

    Hmmm… I maybe differ from your view of China and India as being large centralised, highly controlled ( and therefore stable?)entities. China and India have acute and deeply imbedded systemic fissures and tensions within their vast territories – that are actually the post-imperial remains of earlier empires.
    The phenomenal and commendable growth and transformation they have achieved in recent decades contain the seeds of destruction – a veritable paradigm change waiting to burst forth. If either China or India falters significantly from its current arc of hyper-growth there very probably will be a social cataclysm of epoch-destroying proportions.
    That the Chinese dictatorship is all too aware of this precarious position I do not doubt. But I suspect that they are at just as much of loss as to how to address this position as I am.
    As for the Indians – I see no evidence of awareness on their part – only hubris and downright silly posturing.

  • Macedonian

    The next power will be China, if we take the history into account.
    I think that the power always moves WEST (any such too general rule has exceptions, but they are minor). Here is my view:
    400BC – The strongest power was Persia (Iran). Then the strongest power were in the following order: Macedonia, Rome, The holy Roman Empire (Germany), Spain, England, United States. Pacific is big one, but it is also limited, and WEST of it is China. India is next.
    I didn’t have time to analize before Persia (history is my hobby, not main proffesion).

  • Sarah Elizabeth

    It’s hard to tell, based on history, the future trajectory of China’s growing economy. What’s interesting now is how China is embracing their new role as the second largest economy in the world. China alternately pounds its chest and belittles its own progress. Could this be to eschew global responsibilities that other economic giants have? Jeffrey Wasserstrom has some interesting insight as to China’s actions after swooping past Japan’s economy last month. You might find his article interesting, too. Check it out here: http://www.project-syndicate.org/commentary/wasserstrom3/English

  • RE: “America has been very good on process, and India is very good on process.”
    Not a bad observation Chris. It lands squarely on something I have been seeing as an issue but had not singled out the root cause, and this is it. China and Brazil are ‘managed’ systems and economies, and there is no debate – stuff just happens. Which is better?
    Anyhow, this post covers so much, and stuff I think about all the time. It might just warrant its own post for me to answer semi intelligently. Some good stuff in the meandering here.

  • Chris Skinner

    Thanks for the comments folks and a brief response.
    @Edward, Macedonian and Sarah Elizabeth
    China is the obvious near-term superpower, as mentioned, but the tensions between the Indo-China relationship will explode over time, as previously discussed here on the blog: http://thefinanser.co.uk/fsclub/2010/05/whens-the-next-financial-crisis-take-place-and-what-will-cause-it.html
    As a result, and also due to China’s single child policy, the future path is even more tipped towards Brazil.
    @Colin @Thebankwatch
    Great to hear from you – been a while – and love the fact that you concur with a point I’ve found frequently frustrating, e.g. the form filling, paper processing, checks upon checks management of process in India and the USA.
    As you say, there’s a lot covered here which probably warrants further depth of thinking … however, as I got to over 1,000 words on this one, thought I’d see th reactions before posting more.
    Thanks again everyone
    Chris

  • Paul Peters

    Am a bit surprised.. the framework of criteria only seems to focus on magnitude and more or less linear extrapolation. For example, Brazil’s birth bubble happened from 30 to 20 years ago, and the current birth rate is 1.2% which is effectively close a single child policy. So, Brazils population may grow to double it’s current size, but will continue shrinking from there on.
    But Family Planning (eugenics for the historically inclined) is not unique for China alone. It’s being done on a global basis since the first meetings of the Club of Rome. And oddly enough the article referred to is about China rethinking their policy, which may be a natural thing to do as there is a natural tendency anyway when a society matures, becomes more healthy and prosperous that birth rates go down. Societal group dynamics and biology are mixed phenomena.
    Also, what is the effectiveness of processes? I have had a company in Italy, and i think that more or less says enough..
    Compared to a country like France which has 5000 laws, Italy has 70.000-90.000 laws, which makes it an unmoveable ball of entangled rules, and adhering to these rules means paying some 65% in taxes or other forms of subsidizing a business jurisdiscial system which employs more lawyers than the UK, France and Germany together..
    It’s about the utilitarien degrees of freedom that is facilitated by the processes, and this i guess is where well-oiled processes go more hand in hand with commodities and capabilities. Germany and Japan had big advantages here, they both received a long term and major cash-injection from the USA after their defeat. Both Germany and Japan also had an additional benefit, and that is that much of the post-war middle-management layer were for the most non-commissioned officers, molded on beforehand to work in a bureaucratic system of work processes.
    But it deserves some extra attention that they also have very efficient production processes, with many interchangeable parts, due to the war machinery. Standardization and normalization is very important in such an industry because it gives redundance and thus resilience in the production process itself. When ordering a particular fiber, or some screws, or some sort of metal, the qualities are as expected. And with these commoditized building blocks one is then capable of building more and more differentiating products.
    And it is these with these differentiations that an economy blossoms, although it also makes it more local. And as shown with many high-tech products it is path-dependence which is most important here, who gets there first.. and that leaves to compare a yearly $180 billion R&D funding from the different US governmental departments together, compared to the EU’s Framework Program which is about $8.5 billion. Does Europe need really need so much less investment in the future?
    And what is the exposure when interacting amongst one another. Quantity has a quality of its own, but is potential power the same as power in motion ? The USA has been acting like a superpower ever since the OpiumWars, but what if China, Japan do it in their own way by buying up large foreign companies, like is happening now. Or buy a stake in the US government, because the two together own more than a 25% of the US treasury securities which are used to fund the federal debt.
    Then again, Japan’s former prime-minister, Hatoyama, got forced out of office due to conflicts over a US military base which he had promised would be closed. And that raises the question, who owns who?
    So, does it really make sense to divide the world in powers or superpowers, or does it make more sense at focussing on unifying capabilities amongst these powers? Although i do guess, considering the current number of EU countries without a government that we may be seeing the early demise of nations and countries as a valid governance model, but possibly a modality which is based on a European Union of city-state/province/regions which more reflects that actual geo-graphical distribution of people and activity.
    Very nice food for thought, thanks for a great post.

  • Looks like everyone missed the obvious answer.
    The next super power will of course be Belgium.
    It has the commodities. Beer and chocolate are top quality and timeless.
    It has the capabilities. We had cheque truncation in the 70’s you know. We were pioneering electronic purse cards before the Euro was a reality. And we’re headquartering SWIFT now.
    It has the processes. Ten weeks later I’m still waiting for the inventory of the flat I’m renting and am still trying to figure out how to claim my doctor’s bill from my medical insurance. Nevertheless, there are a lot of back doors and if you know the right people you can get things done, much like in China and India.
    And it has the capital, that is of course if anything is left after the money gathered through 55% taxation rates (excluding local taxes) has been spent on a zillion local, departmental, regional and national governments.
    So, Belgium it is. If it still exists of course.