Government, energy & environment

China v The US

China is now the world’s third largest economy after the US and Japan (if you exclude the EU as not being a single country). It is likely to become the world’s largest economy sometime between 2018 and 2025. China is also, of course, an authoritarian regime, where any challenge to the authority of the ruling Communist Party is immediately dealt with – often ruthlessly. And let’s not forget that China is facing huge corruption, inequality and environmental problems too. Nevertheless, there are a few things that countries like the US could learn from China. First, China is ambitious. When the GFC hit China in late 2008, US$585 billion was pledged over two years for infrastructure projects. Contrast this to Australia where most of the financial stimulus seemed to be directed at encouraging people to buy new plasma televisions. The scale of the ambition is obviously helped by the political structure. If the government wants a new six-lane highway the government gets one. Nevertheless, some of the infrastructure projects are impressive. 13 of China’s largest cities boast all-electric bus fleets and it’s conceivable that China will one day become the world’s first all electric automotive nation.

A second lesson to be learnt from the Chinese is the importance of education. In China the literacy rate is now over 90%. In the US it’s 86%. The family is central to this and basics get taught right. Maths and science dominate the curricula. Primary school teachers in maths and science must have degrees in these subjects and there is nationwide mentoring for new teachers. It’s also the scale of application that impresses. For example, BYD Co. is a new company seeking to develop electric-car batteries. This company employs 10,000 engineers. Admittedly, the top Chinese engineering students are no smarter than US graduates but there are considerably more of them.

A third interesting thing about China is that they look after their elderly. China is, to some extent, in a race to get rich before it gets old. Social security is minimal to non-existent but the slack is taken up by the family. The model, essentially, is that adults bring up their children and then the children eventually look after their parents.This will shift as income levels rise but it’s unlikely that this cultural norm will vanish entirely. A fourth key feature of China is that people save part of their income. In the US in 2005 the savings rate dipped to zero. The rate has picked up since to between 4 and 6% due to the GFC but this is still paltry compared to China’s rate of 20%. Finally, there is China’s ability to look beyond itself in the sense that the Chinese are not building a country for themselves but rather a country for the next generation. And this is a critical point. What makes China stand out more than almost anything is not its wealth or its government but its ability to think long-term and see something bigger than itself. It is, at its core, a very forward-looking country with a purpose - a very coherent vision of what it is and where it is going.

Peak oil?

Just before the GFC hit in late 2008, three trends were in the ascendency. The first was the environment, specifically concerns that climate change was about to change life on the Planet as we know it. This threat hasn’t gone away but the GFC certainly re-framed our attention towards more certain and immediate threats. The second trend was happiness. We weren’t exactly sure what this meant, or how to get it, but we knew that we needed it. This trend, too, largely evaporated in the face of more practical aspirations. And the third trend? Peak oil. Remember that? In early 2008, it was estimated that ‘only’ 1.1 to 1.3 trillion barrels of reserves were left – enough for another 40 years using current consumption rates. Clearly the GFC directly impacted on the peak oil scenario too, with declining global demand forcing prices down.

So is peak oil coming back? No doubt it is, especially when the price hits $150 once again, but there is a compelling argument that this thought is something of a chimera or wild illusion. Let me explain. In 1899 the Kern River oil field was discovered in the US. Initial estimates suggested that a mere 10% of its reserves could be recovered due to its highly viscous nature. In 1942 the field was thought to contain only 54 million barrels of recoverable oil (278 million had already been recovered). But by 2007 the cumulative amount of oil recovered hit 2 billion barrels and there are thought to be another 627 million barrels remaining. This is not an unusual case and the reason is technology. Yes, peak oil exists in the sense that most of the “easy oil” has been recovered. But that leaves a huge amount of oil. The US Geological Survey forecasts that there are between 7 and 8 trillion barrels of deposits left and this excludes unconventional oils such as tar sands, ultra-heavy oils, oil shales and bituminous schist (whatever that is). Moreover, within current oil fields only about 35% of oil has been recovered on average. When North Sea oil was developed 30+years ago, bringing oil that lay under 100-200 metres of sea and underneath 1,000 metres of seabed was considered cutting edge. Nowadays, 3,000 metres of water and 6,000 metres of rock are considered acceptable. In short technology will develop as technology does, so by 2040 or 2050 we will have discovered more oil and, critically, we will have found new and more economical ways to extract it. The issue therefore isn’t a lack of oil. The key issue is price volatility (followed by transport and refining capacity) and our own consumption habits. In short, in 30 or 40 years time the world will still largely be run using oil, coal and gas. If we can change how we use it, there is still a future with oil in it.

Why the future of California is the future of the planet

According to some observers, usually those based on the East-Coast of America, California is a failed state. It is dysfunctional. Its budget is bust. Its schools are failing. It has gridlocked traffic, failing infrastructure and over crowded prisons.
It’s short of water too. All of this is true. But looking at things differently, California is actually the model for the future, not only of America, but also for the global economy. Economically, demographically, culturally and technologically, California is on the cutting edge. California is the most globalised state in the US. It is the most Asian, and the greenest. At US $1.8 trillion, it is also the world’s seventh-largest economy, with 38 million residents. It is also, famously, an incubator of new ideas. Indeed, California fetishizes game-changing ideas. It also embraces failure to the extent that no CV is serious unless it includes one or two busted start-ups. California represents change and disruption of the status quo. It is the creative state. A state of early adopters and dreamers and one of the few places on earth, currently, where very big ideas come into contact with very large sums of money.

Take energy as an example. Following the 1973 oil crisis California was instrumental in defining a forward-looking energy policy. It also proved that regulation could make markets. Today, the average Californian uses around 40% less electricity than the average American. Indeed, per capita, energy use in California has remained flat in recent years, whilst in the rest of the US it has soared by 50%. This has saved the state an estimated $56 billion and 24 new gas-fired power plants. 40% of all US solar installations are in California and so too is more than 50% of venture capital (43% of it in the San Francisco area alone). The state is at the cutting edge of high-tech, biotech and clean technology. Krazy Kalifornia is, in other words, a trendsetter for many of the key trends for the 21st century. In California anything is possible. It is the shape of things to come. It is the next economy. It represents a greener, more metropolitan, more Asian and more connected world, albeit one with staggering debts where certain things don’t work.

The new political reality

At recent summit meetings in London and Washington, G20 leaders publicly pledged their allegiance to, amongst other things, free trade and continued globalisation. But privately things were somewhat different. Protectionist impulses soon surfaced and by September President Obama was pandering to local US unions by slapping a 35% import tariff on Chinese tyres. According to a World Bank report, 17 out of the 20 G20 nations have now either developed measures to limit foreign imports or they are otherwise adopting measures to favour local goods and services. This is especially true in the area of financial services, where regulation is collapsing back into local geographic boundaries and countries are adopting rules to encourage local lending (the financial equivalent of “buy local”). Is this the beginning of the end for globalisation? It’s still far too early too tell but investment flows into developing regions are certainly falling fast. According to another World Bank study, private capital flows into developing regions fell by 40% during 2008 and could fall by another 75% in 2009. Personally, I don’t see such protectionist sentiments changing anytime soon. The reason for this is primarily resources shortages, but it’s also linked to China emerging as the largest economy on earth. In short, the US is in favour of free trade when the US is in the driving seat, but once the baton gets passed to China protectionist, xenophobibic and jingoistic urges will emerge.

Using moral reasoning to reduce gang violence

In the late 1980s and early 1990s the US city of Boston suffered a crack cocaine epidemic that led to an upsurge in gang-related youth homicide. At the time, individual arrests and long criminal sentences were the favoured solution, but a Harvard academic by the name of David Kennedy had a different solution. His idea was to turn the group dynamics against each gang member. The methodology was simple enough. Call in each gang member to a community meeting using the threat of parole if people refused to show up. The proceedings were businesslike and civil. The gang members were told, in no uncertain terms, that what they were doing was harming the community and that the violence should stop immediately.

Members were also told that their gang code and rules were nonsense. For example, it was widely believed that gang members would stand by other gang members at all times. But this idea was dismantled simply by looking at what actually happened when individual gang members committed a crime and were sent to prison. One by one the tenants of the street were dismantled. To support the argument that gang actions were harming the community in which gang members lived, victims’ relatives and ex-offenders then spoke about their experiences. Especially effective were the mothers of offenders and victims. This was because, despite all the hate and rage, everyone had respect for their mother. Gang members were then told that if they wished to leave a gang they would be given help with education, health, housing and so on. The result, in the US, was that in the three months between the first and second ‘call-ins’ there was a 71% drop in youth homicide. Obviously it is still early days but anecdotal evidence does seem to suggest that moral reasoning and community pressure do in fact work.