Second Quarter Forecast
April 6, 1999
Our 1999 Annual Forecast issued on January 4, 1999 was entitled
"A New and Dangerous World." We certainly continue to stand by
that title. One of the predictions we made in that Annual
Forecast was that "The Serbs, supported by Russia, will test the
United States in Kosovo. There is increasing danger of a
simultaneous challenge from Serbia and Iraq, straining U.S.
military capabilities dramatically." We are also content with
that forecast, but it was far from our most significant. At the
end of all of this, we remain convinced that the war over Kosovo,
even if it lasts another year, will be regarded historically as
of little consequence except as a symptom of a much deeper set of
issues in the international system.
To see what we mean by these issues, we would like to begin our
analysis by calling your attention to a cluster of other
predictions we made in our Annual Forecast:
* Russia will begin the process of recreating the old Soviet
Empire in 1999. The most important question of 1999: will
Ukraine follow Belarus into federation with Russia?
* Russia and China will be moving into a closer, primarily anti-
American alliance in 1999.
* China will try to contain discontent over economic policies by
increasing repression not only on dissidents, but also on the
urban unemployed and unhappy small business people. Tensions
will rise.
As we see it, there are two forces at work here. First, both
Russia and China are in economic decline relative to the United
States and Europe. This is a long-term trend rather than a
passing cycle. That means that the flow of investment and credit
from the United States and Europe has, in the case of Russia,
disappeared, and in the case of China, contracted. This tendency
is not likely to be reversed for quite a while. Anticipated
inflows of Western capital controlled both Russian and Chinese
international behavior since the mid-1980s. Political and
military tension generally discourages loans and investments, and
therefore Russia and China were both motivated to moderate their
international behavior. Second, countries experiencing or
expecting economic growth are not focused on international
politico-military competition. On the other hand, during periods
of economic decline, when foreign investment dries up, the
motivation to avoid conflict declines, and the interest in
conflict increases.
Consider Russia. Its economy is a shambles and nobody but the
IMF will give it a dime, and even the IMF is hesitating. Russia
has no carrot in front of it to motivate cooperation, but it has
several reasons to be confrontational. First, confrontation is a
means for extracting economic concessions. Second, in a country
torn apart by struggles over a contracting economic pie,
confrontation creates a psychological climate of solidarity
against enemies that helps stabilize the political system.
Finally, in nations seeking to revive their economies, defense
spending is a superb Keynesian tool, but one which needs the
justification of tension.
But there are deeper reasons as well. We have heard a great deal
about interdependence. This is normally used to mean that
nations that are dependent on each other tend to cooperate. That
is true only sometimes, and mostly in the case where there is a
growing economy masking underlying differences. When China was
prosperous, American preaching on human rights was tolerable.
With China's economy in decline, China must exercise tight social
controls in order to keep the lid on. Under these circumstances,
the U.S. preaching about human rights is intolerable, because
China's internal room for maneuver is substantially narrower than
it was before.
This brings us to the second point that we previously mentioned.
There is a tremendous imbalance in the international system. The
United States is overwhelmingly powerful politically, militarily
and economically. It has tremendous room not only for maneuver
but also for experiment and error. The risks to the United
States in the current Yugoslav war, for example, are minimal.
The risks for Serbia and for the rest of Europe are substantially
greater. Because of America's room for maneuver and error, it
can take risks that place others in intolerable positions without
seriously exposing itself. That is very much what has happened
since the end of the Cold War.
Thus, where China and Russia have lost their motivation to
cooperate with the United States, they have simultaneously
developed an interest in resisting the United States. This is
the most important fact of 1999 and it will be the dominant
reality of the Second Quarter. One of the reasons that Milosevic
was prepared to challenge NATO in 1999 where previously he had
backed down, was his sense that he was no longer isolated. The
sense of political support, coupled with some expectation that
Russia would at least be prepared to provide material in an
extended conflict, shifted his estimate of the situation
substantially. It was not the only factor, but it was certainly
a major factor. Similarly, Saddam Hussein's estimate of his
ability to endure another allied air campaign shifted
dramatically when he began receiving active Russian cooperation.
Later this week, Chinese Premier Zhu Rongji will arrive in
Washington. Madeleine Albright's visit earlier this year to
China was a disaster, with both sides essentially trading
insults. This visit has also begun with the Chinese blasting the
American position on human rights. Given the mood in Washington
concerning China, Clinton will not be able to appear too
conciliatory, regardless of his inclinations. Since China wants
what Clinton is not in a position to deliver -- American
investment and loans -- and since China itself is concerned about
the long-term intentions of the United States, the visit will be
at best pleasantly irrelevant and at worst another hostile
confrontation.
The inevitable result of this is the creation of a new Sino-
Russian alliance designed to block the United States. We
understand that there are many issues dividing Russia and China,
but none are as great as the issues that divided the United
States and China in 1972 and that proved no bar to cooperation
then. We cannot be certain how far this alliance will progress
in the Second Quarter of 1999, but we are convinced that it will
move on apace and will be a dominant theme of the international
system in the next few months.
Along with that realignment, we will see Russia increasingly
asserting itself in the former Soviet Union. We continue to
foresee a major crisis in Russo-Ukrainian relations, with
Ukraine, in the face of Russia's growing tension with the West,
increasingly under pressure to work in tandem with Russia and
Belarus. We also expect to see Russian pressure increasing on
the Baltic States. In addition, a major Russian focus will be on
the Caucuses, where, from the Russian standpoint, the situation
has become intolerable. Russia is not quite ready to tackle the
Central Asian problem, but that will come shortly as well.
The simultaneous deterioration in Russo-American and Sino-
American relations is not accidental. The same forces driving
the United States away from each are driving the two together.
At the same time, it will not be the United States that is most
immediately effected by the emerging constellation. Rather, the
most important consequences will be for Germany and Japan.
Germany stands directly across the Polish plain from re-emergent
Russia. NATO's expansion has been geographically irrational and
unsustainable. NATO will have to address that problem in the
near term. At the very least, NATO will now have to expand to
include at least Slovakia and will have to make a critical
strategic decision on the Baltics. These decisions cannot be
postponed for years, as NATO planners would like. Growing
tension with Russia will force NATO to deal with these issues
immediately. The driver on this issue will not be the United
States, which will be far less trusted in Europe after Kosovo,
but Germany. As Russia emerges, Germany will have to make
strategic decisions in ways it has been unable to do for half a
century. The Slovakian and Baltic decision will place Germany in
an unexpected and not wholly welcomed position as geopolitical
decision-maker. Without those decisions, Poland cannot be
defended and that is Germany's problem.
The same is true for Japan. As U.S.-Chinese relations
deteriorate, Japan will have to define not only its relationship
to the United States, but also its relationship to itself, its
constitution and its self-image. Japan is clearly moving toward
the acceptance of a geopolitical and politico-military role in
relation to North Korea, which, each time it tests a new missile,
threatens Japan. Japan is rapidly evolving into a normal nation-
state with its own strategic and military interests. It will not
reach that stage this quarter or perhaps even this year, but
caught between a new East-West tension, it will reach that stage
soon.
In the immediate future, the critical issue is the manner in
which Russian and Chinese antagonism toward the U.S. will
recondition regional crises. A tense and fragmenting Indonesia
is a very different place when the U.S. and China are working
together than when they are political competitors. Iran behaves
differently when it can play the U.S. off against Russia than
when the two are working together. As the Russian and Chinese
antagonism to the U.S. matures, lesser states will return to an
old patterns of behavior, seeking patrons among the great powers
and playing them off against each other. We have already seen
what that can lead to in Serbia. Imagine Castro with a close
friend in Moscow again. If U.S.-Russian relations deteriorate,
Cuba becomes a strategic asset to Russia regardless of ideology.
At the very least, it becomes a bargaining chip. Castro, like
many other leaders of lesser countries, would dearly like to have
value to a great power somewhere. Everyone becomes more valuable
when great powers are competing.
This is not to say that the Cold War is being reborn. First,
ideology is not the key this time around. Second, Russia is not
now a global power and will spend a generation rebuilding its
former empire, assuming it ever manages to do so. Finally,
China's internal tensions and geographical location limits its
ability to project power decisively. America will remain the
preeminent power, as idiosyncratic and unpredictable as ever.
But what is certain is that the next quarter will continue the
process of ushering in a new and dangerous world. Each regional
problem will now take on global implications, bringing us to a
"globalism" in a way very different than what was meant by the
economists in 1991.
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