The benefits of staying stable

The benefits of staying stable

Submitted by alvin on Thu, 2016-07-21 16:19 The Bermuda Triangle. An area as big as Maharashtra, Rajasthan, and Madhya Pradesh combined. An area, according to believers, so unstable that people, planes, and ships are reported to have disappeared in that region. A place where logic and science seem to be absent; a place where the unknown comes into play. This is the uncertainty the world is facing today in economic and political terms. There are three major ‘Bermuda Triangles’ in the world, with a potential fourth in the making. These are Europe, the Middle East, and the Spratly Islands. The USA could be a potential fourth.  Imagine, we are talking about 60�f the world’s population and around 75�f its wealth creators. When there is this kind of instability for such a large segment, the repercussions are enormous. But Bermuda Triangles? Really? Perhaps a trifle overdramatic? This is where we are wrong. There have been similar instances in the past which have been indicative. As Winston Churchill repeated what a philosopher once famously said, “Those who fail to learn from history are condemned to repeat it.” And our lessons are right here in front of us. Let us start with Europe, which is a no-brainer. The political instability is there for all to see from Brexit to the refugee crises. However, the economic implications are totally different. Europe is facing a massive problem of trade diversion. It didn’t matter until the break up of the Eastern block. Then, suddenly, a host of new East European nations have joined the European Union. But unlike the previous Western European nations, they have not had 50 years of unbridled prosperity to cushion them against the refugee crisis and reduced economic growth. Eastern Europeans did not become part of the Union to lose their prosperity to migrants. The region can be expected to become highly insular and instability will continue and even increase. The worst ‘Bermuda Triangle’ is the Middle East. The instability there is so bad that there is no solution in sight. What is worse is that it is exporting this instability to the rest of the world. This is how the first and second World Wars began. Enormous instability in the Balkans resulted in the assassination of Franz Ferdinand, the Austrian emperor’s son and the start of the World War I. An even larger instability in Germany led to the rise of Hitler. Unfortunately, with the majority of the world’s oil reserves located in the Middle East, we cannot ignore this region of instability as everyone in the world is affected. The new ‘Bermuda Triangle’ is perhaps the most surprising. This is the Spratly Islands. When the World Court ruled against Chinese sovereignty in the Spratly islands, it created a major tsunami! Sixty percent of Japan’s and Taiwan’s crude oil, and 80pc of China’s go through this area. Trillions of dollars of commodities go through this region, making its instability a major problem for the world. And China refuses to back down on this. The USA is another potential area of instability. Even if Donald Trump is not elected president, the tone and reactions of the US electorate, particularly the bitter division of the Republicans and the Democrats, will ensure a more insular superpower unable to commit enough resources to solve the problems created by the regions of instability. And in this grim scenario, surrounded by instability on the west and increasing instability in East Asia, India stands stable. It’s not that India is doing anything amazing. On the contrary, India is not addressing its fundamental problems, and it has various issues which are holding it back from a faster path to prosperity. But against the other regions of instability mentioned above, India stands to gain. It is a terrible thing to gain from others misfortune, but realpolitik means that others’ misfortune is India’s gain. Brexit will mean that the UK is free to reactivate a number of trade agreements they had to repudiate with India and other Commonwealth nations when they joined the European Union. And India’s very reputation as a reasonable democratic nation means that from the Middle East to the Far East, the money will come here. It is a basic economic principle that investment and funds flow form areas of instability to areas of stability. Investments from the Middle East will increase. And if the Spratly conflict escalates, then there could be an enormous fund flow from the Far East. And India apart from the US and, ironically, the UK, will be one of the largest beneficiaries. Not the ideal humanitarian situation. But the basic principle of economics is maximum gain at minimum risk. All India needs to do is to remain stable. As that seems likely, we stand to gain. The best solution? Total reduction of instability in all regions. Is it likely? No. So the faster we accept the reality the better for all of us. Author: Dr Joseph Rasquinha, a Bengalurean, received his PhD in Economics from St. Andrews University, Scotland. An economic analyst, he is currently the CEO of Blueleaf Software, Bengaluru.