Afshin Molavi
I recently spoke with my friend and colleague Parag Khanna. We go back a ways to our days as fellows at the New America Foundation in its old Dupont Circle offices in Washington DC in the mid 2000s. I remember walking by Parag’s small, shared office, watching him pore through books piled high on his desk ahead of his wide-ranging travels for his first major work, The Second World, a remarkable book that explored the rise of emerging powers in a new era of global competition. He was spot-on at the time, I thought, and he has written several books since then, including the recent best-seller, The Future is Asian, and has established himself as one of the world’s most foremost thinkers on globalization, geopolitics, the future of Asia, diplomacy, and the global economy.
Based in Singapore with his wife, Ayesha Khanna, and two kids, I caught up with him on Zoom recently for a wide-ranging conversation on the state of the world.
We talked globalization (he says news of its demise is greatly exaggerated), Southeast Asia (he is bullish), China (ditch the linear or Western-centric lenses, he says), India (infrastructure investment is the key story), tea (his new obsession), favorite airports and airlines (Singapore Changi, Dubai, Singapore Airlines and Emirates) and the benefits of barefoot running (“shoes are cheating”), among other things, including his Netflix and book picks, top frontier markets and his aversion to the term “emerging markets.”
Some of his thoughts below (with a few comments that caught my eye in bold):
“Globalization is a force greater than all of us.”
The news of globalization’s demise has been so exaggerated ad nauseum that I don’t pay attention to it anymore. Globalization is a force greater than all of us. It is an evolutionary process. It is not simply taking the temperature of the moment with one statistic. And it rests on connectivity.
The more connectivity we build, the more globalization we have. We may have periods where we use that connectivity capacity less, but we still have the potential. We have more connectivity today than anyone dreamed of 30 years ago.
We have more physical connectivity with transportation infrastructure. More connectivity in terms of supply chains and their global reach. More connectivity in terms of communications.
That same communications infrastructure is what enables global financial markets and the services trade to flourish. We have used it to achieve a broader, deeper, and richer, globalization.
People only speak against globalization when they’re looking at one narrow statistic. They may say “the rate of global economic growth is higher than global trade growth.” My eyes roll into the back of my head when I hear that because it is such a statistical sleight of hand! Of course the rate of economic growth is faster when we’re dealing with very large and poor countries where consumption is rising! Their GDP growth rate was 6-7% pre-pandemic; it would be ridiculous for trade in global goods to increase at the same rate. That would mean an annual tanker shortfall of thousands of ships.
My second point is that people like to measure globalization’s demise in terms of goods, but they don’t take into account services. Services account for an ever-growing share of globalization. And even within services, we cannot simply geolocate activity because it’s in a cloud.
Globalization is also when Brazilian, Kenyan, Indian, and Finnish software programmers design a computer game, which is then sold by a Japanese gaming company to people in Thailand. I want you to show me a methodology that captures this trend. It doesn’t exist. Today, 4 of the top 10 Esports companies are worth $300 or 400 million, if not more. There’s massive amounts of globalization that aren’t remotely captured by today’s methodologies.
My final point is a humane one: the fact that you and I can communicate like this. The fact that you can get on Skype with someone in China and learn Chinese, or learn how to play the violin.
We are also an ever more interdependent community linked by climatological issues. The pandemic managed to spread from an animal market in Wuhan to every corner of the planet, even Antarctica. That’s globalization. If there was ever evidence of globalization, it’s this butterfly effect of reaching the world.
This is a long winded way of saying don’t bother talking about the end of globalization. Worry about your place and your role in globalization, because if you don’t have one, you will regret it.
Tri-polar Globalization
I don’t talk about tri-polar globalization like it’s a special type or category of globalization. It’s a driver of globalization itself. The reason we have globalization at all -- if we go back 4000 years -- is because of imperial ambition. Without that, there is no globalization. Without one territory’s desire -- whether Athens, or the Romans, or the Ottomans, or the Chinese, or the Portuguese -- to expand their reach of trade and conquer new geographies, we would never have globalization.
Today, we have three economic superpowers: the US, the EU, and China. Each is equally ambitious in their desires to control financial markets, trade routes, resources, and market share of goods and services around the world. We have triple the potential volume of globalization. We have three empires simultaneously globalizing and competing with each other.
When have we seen three gigantic, $20 trillion economic zones competing relentlessly to forge investment and trade agreements all over the planet, to promote their own model and rules of goods and services? Never in history. This is yet another reason we are in a golden age of globalization. Having a sustainable and stable multipolar structure indicates a robustness that is unparalleled in human history.
Trillions, Not Billions
People talk about trade being reduced by billions, but the IMF just issued a trillion dollars worth of credit to a hundred countries around the world. This global liquidity issued by central banks is held domestically, as well as by global institutions and funds. China in particular is opening up its capital account, with money flowing into its sovereign bond market, corporate bond market, and debt equity markets. Plus China has new IPOs, which is adding trillions of dollars to the Chinese portfolio capital stock.
The Eurozone likewise has issued its big stimulus package, which estimates suggest will create a $3 trillion Euro Area sovereign bond market. To compare, the US Treasury market is about four times that size. Who’s going to buy that debt? Americans, Europeans, Chinese: the whole world is going to eagerly buy this very stable, AAA-rated, minimally-positively-yielding debt. That’s globalization too.
“I don’t like the term emerging markets”
I don’t like the term “emerging markets.” It’s more useful to talk about sub-categories than the asset classes as a whole. The emerging world lumps Argentina and Turkey together with India and Thailand. I will have none of it. I only use the term “emerging markets” in quotes -- and never positively!
I don’t include China anymore because irrespective of its income status it’s a massive economy. It’s not “emerging”, it’s already a superpower, and will continue to grow. It doesn’t have the fragilities one would ascribe to “emerging markets”.
Bullish on Southeast Asia
If we had to spotlight one region, we should be bullish right now on Southeast Asia. I don’t only mean Singapore where I live, which is a mature economy and a tiny city-state. I’m referring to the “ASEAN 5”, which is usually Singapore plus Malaysia, Indonesia, Thailand, and Vietnam. Let’s throw in the Philippines and now we have five countries with a combined population of 450 million people. They are incredibly high potential countries.
They are very reform-oriented. They are bouncing back from COVID decently. Most of their debt is local currency denominated. They have inflation under control. They have strong trade surpluses. They have good fiscal posture and flexible exchange rates. Trade integration is underway and they have large, growing consumer markets.
Plus, we’ve got urbanization, digitization, and financialization happening at warp speed in these developing countries. New supply chains are coming in, either as a “China+1” strategy or a China exit strategy to look for cheaper markets. They’re all part of the RCEP, which was signed in November 2020 as the biggest trade agreement in the world, and TPP, which the US failed to join. The list goes on and on and on.
A final reason that matters for investors is these countries are all about to do a lot more privatization. Institutional investors want to see the big, hulking, inefficient, state-owned assets either float or fully sold off, or listed on stock exchanges. That’s going to happen much more quickly in the next few years because COVID put significant stress on budgets. If these governments want to keep drawing in capital, the fastest way to do that is to privatize.
These countries have a long list of assets -- airlines, banks, construction, hotels, farms -- governments know they can sell to raise capital. And that’s what they’re going to do. I have a very strong call on privatization over the next five years in these countries. The good news for them is there’s a lot of takers. The institutional investors of the world are salivating over the opportunity to invest in this privatization story. They’re looking for yield, and they know this is the region where they’ll get 5-6% growth.
On China: Ditch the Linear or the Western-Centric Lenses
There is an overly-linear understanding of China and an overly-Western-centric view of China. The overly-linear understanding posits China will grow old before it grows rich, but this is very conventional in a world that is actually non-linear. For example, it doesn’t matter if China grows old before it grows rich, if the purchasing power parity and cost of services for the elderly is so cheap. Secondly, it doesn’t matter if China’s labor force is aging if everything is automated with robots. China’s labor force is shrinking on the conventional demographic understanding of working age, but that itself is shifting because of longevity. But again, it doesn’t even matter because of the robots.
Why does China have record trade surpluses right now? It’s not just because they’ve recovered from COVID, it’s because their efficiency of output continues to grow substantially on the back of all these investments in industrial automation. That’s the whole point about non-linearity.
The other point is the Western lens which says “well, an X% debt-to-GDP ratio is absolutely intolerable, and it’s always a signal of a coming crash”. But that ignores the composition of the debt and political economy of the country. The fact is most Chinese debt is not sovereign debt at all. It’s state-owned enterprises, and the Chinese government can sterilize, liquidate, or restructure them in ways that don’t involve a ruinous or calamitous economic decline. Not to mention the country’s $3 trillion in reserves or the fact that money is pouring into the country. China recently became the top global destination of FDI, overtaking the United States.
It’s silly to apply these conventional approaches into determining when an economy is on the brink of collapse. The circumstances of China are so different. Conventional approaches don’t even work for Japan. If any economy with a 300% debt-to-GDP ratio has less of a runway than China, it’s Japan. So, we tend to get China wrong. Flat, flat wrong. They have a lot of arrows in their quiver, and I’ve only mentioned half of them so far. That’s the macro economic outlook.
What I observe with Chinese companies is that the further they get from China, the more they act like a Western company. They know the cavalry and money are not coming to bail them out, which is why they’ve abandoned Venezuela and Angola. At the end of the day, oil and gas companies need to be profitable, and Chinese companies know Beijing is not all powerful.
“The most important story in India is infrastructure.”
I try to be agnostic about Modi because there’s pros and cons to every leader. Initially I was very bullish about him because he called himself a “tea-stall technocrat” and I’m very technocratically inclined. No matter how illiberal he is, the last government didn’t help the farmers as much as they should have, and now he’s trying to do painful farm reforms. I don’t think he’s necessarily doing them right, but that is an example of inherited policy failures. He’s not to blame for the bloated subsidies to the agricultural sector that need to be fixed. Of course it was in the interests of Congress to keep doling out farm subsidies and inefficiently allocate agriculture. They got away with it because it was their vote bank. That doesn’t mean it was the right policy. It was a horrible policy. But who now has to fix it? Modi.
There are ugly things baked into the Indian system, and they may happen under his watch, but he can’t be blamed for all of them. Another long standing problem is a banking system that is a complete disaster. He has to clean it up, and just like privatization or opening to foreign investment or signing trade agreements, there’s winners and losers domestically.
The most important story in India is infrastructure. He’s spent more on infrastructure in the last 8 years than India has spent in 70 years. That’s a big deal. It’s so good that it outweighs every bad thing about him. I’m a utilitarian; I want to see maximum welfare for 1.4 billion people. There is next to zero improvement in welfare without infrastructure investment. Modi is good in that sense. Do I wish that we could take the positive things he’s trying to do without the side order of Hindu chauvinism, illiberalism, petty tyranny, and corruption? Of course! There were a lot of things people liked about Erdogan, minus Erdogan! Unfortunately all these things are bundled into one person. This is why I believe in systems, not people.
Due to COVID, the economy is seeing one of the biggest setbacks in terms of the number of years projected to return to 2019 levels of GDP. That’s really unfortunate. They can short circuit that decline the way some East Asian countries have done, such as through: rapid digitization, or taking advantage of foreign investment into Reliance and other companies. They are also taking advantage of anti-Chinese sentiments to create new jobs in manufacturing and other critical industries and doing more domestic on-shore production like “Made in India.”
There’s absolutely a ten prong strategy available to rapidly recover and take the country in a better direction, instead of doing one step forward, one step backwards. Modi controls more than enough of the government and has enough popularity. But like many other leaders, he has fallen into this trap of imperial hubris. He’s ill-advised and doesn’t have an ear to the ground on many issues.
I think another silver bullet is doing demonetization again, but doing it right. Move towards a sovereign digital rupee. What India did wrong last time was demonetization without every single Indian having the payment interface and app on their phones. Now most of the country has the app, so they can go back and do demonetization again. It would really increase the money supply, efficiency, transparency, and liquidity of transactions across the country, while reducing the grey market.
There’s a bunch of things I envision India potentially doing in the years ahead. It’s ard to give a ten year outlook on India because we don’t know if they’ll take a good path or screw it up. We have to worry about currency, geopolitics, climate change, water tables: a lot of areas beyond India’s control. I can’t give a confident 10 year outlook. With India we can only look 2-3 years ahead.
Frontier Markets: Kazakhstan, Uzbekistan, Vietnam, Philippines and Pakistan’s “Infinite Demand.”
I’m looking for countries who are taking advantage of COVID to think about how they will reinvent themselves very quickly. I’m bullish on Kazakhstan and Uzbekistan. I’ve always been very bullish on Vietnam, now more than ever. The Philippines is going to recover pretty strong and is very multidirectional in terms of trade agreements. So those are my bright spots: Vietnam, the Philippines, Kazakhstan, and Uzbekistan.
Pakistan is volatile, it’s a frontier market. I do believe it has enormous potential. When we’re inside the country, we’re immediately blown away by what my wife’s cousin, the novelist Mohsin Hamid, calls “infinite demand”. His wife has a posh Italian bakery in Lahore where people line up around the corner to get the equivalent of a $3 panini. The number of urban people who can now afford this little panini has become effectively never ending in the sense that every table is always full there. I’m generally bullish on countries that are young, urbanizing, and stable -- and Pakistan is much more stable on the inside than it looks from the outside.
Covid Fall-Out: Regionalism, Radical Digitization, and New Directions in Migration
First lesson: COVID is accelerating the trend towards regionalism surrounding the three economic poles. Pre-pandemic, we had more openness within North America, Europe, and Asia. In the last year, in the middle of a pandemic, Asia signed the RCEP, Europe effectively graduated from a monetary union to a backdoor fiscal union, and the US, Mexico, and Canada signed the USMCA. This was not an accident at all. This is proof that when you have a disruption in global supply chains, we look to our neighbors to squeeze more complementarities and comparative advantage out of our immediate geography.
Second lesson: radical global digitization and its acceleration. There’s no going back. We have more internet cables, more 5G deployment, and more distribution of connectivity technologies. We’re five years away from every human -- or family at minimum -- having a mobile phone. Soon they will all have a 4G or 5G phone. We have more Low Earth Orbit satellites providing connectivity too.
Third lesson: the movement of people will take new directions post pandemic. Starting today, we can really watch in a controlled way what patterns of human migration will unfold. These will be driven strongly by how countries performed during COVID, how good of a place it will be to be to spend our time in, now that we can potentially work remotely, and things like competitive tax policies, residency policies, and visa policies.
All of this is occurring with 100% global transparency, and I think that’s incredibly special. We have had epochs of mass migration in history, such as after World War I and World War II, or the Transatlantic slave trade or the British Empire. But we’ve never had a single moment where everyone is sitting still, and then the gates open again. That’s absolutely unique.
This is the theme of my next book MOVE.
“I miss travel, I love even the mundane aspects of travel.”
No question about it, I miss travel. I love even the mundane aspects of travel because those are my creature comforts and blind habits. Knowing exactly where to walk in Changi Airport in Singapore blindfolded is part of my life. Way more important is the sensory and aesthetic experience when you land. Feeling that dirty or fresh air wherever I go, catching up with people, seeing the differences since my last visit, running mental exercises about whether I was right or wrong about a place.
No amount of reading can substitute those experiences. I miss it, but it’s temporary, and I’m incredibly lucky I’ve already been pretty much everywhere.
Favorite Airlines: Singapore Airlines and Emirates Airline
I’m very partial to Singapore Airlines and Emirates. They are both great airlines. My wife and I like to say the Singapore experience begins in the Singapore Airlines lounge of whatever country we’re in. Whenever we step into that lounge, whether in New York or London or wherever, we actually feel like we’re physically in Singapore. It feels like an embassy. It reminds us precisely of how the country is. Then we get on the plane, eat the local food, and it even smells like Singapore. I adore this extraterritoriality of the Singapore Airlines experience. The seamless transition between the two is my comfort zone.
Singapore Airport is “Perfect,” Dubai Airport is “Melting Pot”
In terms of airports, I usually say: there’s Changi, and then there’s everything else. That’s an established fact. Changi is so perfect and pleasurable that you can switch off your brain.
But I also enjoy Dubai airport a lot because it’s one of the great melting pots of the world. It’s quite a sensory experience observing everyone’s faces. When I’m at the Dubai airport, my antennas perk up. I feel like I am working because I am seeing the world under one roof. It feels like I’m doing research when I walk through Dubai airport.
Otherwise, I would commend many US airports. Due to private equity buying them, infrastructure has greatly improved in the last 10 years. They’ve cleaned their act and it’s not a miserable experience anymore.
Drinking Tea and Barefoot Running (“Shoes Are Cheating”)
Over the past eighteen months or so, I began becoming very interested in tea. Less than two years ago, I stopped putting milk in tea, which is the quintessential Indian thing to do. I had been doing that from age 17 to 42. But 18 months ago, I realized, “I don’t know what actual tea tastes like!” So now I’m a tea connoisseur, a sommelier. I collect teas, I order teas, I smell the leaves and mix them. It’s incredible! I finally enjoy tasting all manner of teas from around the world. I’ve built up a stockpile of various teas.
I’m definitely a tea guy, I’ve never had coffee in my life. I’ve literally only tasted it by accident. I’m truly Indian! When in India, I absolutely savor the milky chai. Now I appreciate it only once in a while.
I’m building my energy for the next round of travel, and one way I do it is by running. Now I do it a different way, I run barefoot. All over the country. Concrete, grass, everywhere. It’s so healthy, it strengthens your back and the rest of your muscles. Shoes are cheating.
What to Watch and Read - “Tehran” and “Giri/Haji” and Metropolis
I’m not a serial Netflix watcher. I’m a curated binge watcher. When enough people with credibility say a show is a life altering experience, I’ll watch it at 1.5x speed.
My first recommendation is Tehran. It’s a Mossad plot, but the way it plays out is amazing and clever, and it ends in a way that is surprising. There’s a fairness that would not insult partisans of either side. My second recommendation is Giri/Haji, the Japanese underworld thriller. It’s superlatively excellent.
I read a lot of heavy texts related to my work, so I won’t subject your readers to my reading list but I would put in a plug for Metropolis, the new book by Ben Wilson, a young British scholar. It’s a history of cities. It’s really nicely done.
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