DECADE FORECAST: 2010-2020

Jan. 21, 2010

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Decade Forecast: 2010-2020

STRATFOR produces a rolling decade forecast every five years. The purpose of these forecasts is to identify the major trends we expect to see during the next 10 years. This forecast can therefore only be understood in terms of prior forecasts and their standing today. Without benchmarking, the current forecast lacks context and therefore depth. Thus, this forecast begins with extensive excerpts from previous forecasts. The structure might be odd, but it is essential. In the Decade Forecast issued in 2000, we wrote: As the year 2000 approaches, two overwhelming forces are shaping the international system. The first is the process of coalition building in which weaker powers seek to gain leverage against the overwhelming power of the United States by joining together in loose coalitions with complex motives. The second process, economic de-synchronization, erodes the power authority of the international organizations used by the United States and its coalition during the Cold War and the interregnum. More importantly, de-synchronization creates a generalized friction throughout the world, as the economic interests of regions and nations diverge. The search for geopolitical equilibrium and global de-synchronization combine to create an international system that is both increasingly restless and resistant to the United States. Indeed, de-synchronization decreases the power of the United States substantially. A decade forecast is intended to capture the basic dynamics, not necessarily specific events. We certainly did not forecast the U.S.-jihadist war, for example. But we did forecast adequately the general principle. We forecast two general processes: first, that international tension would increase and focus on the United States, limiting its power; and second, that the global economy, rather than integrating, would confront significant problems that would de-synchronize it. Different nations and regions would confront these problems in divergent ways that conflicted with each other, and international systems for managing the economy would fail to function. Both of these were radical forecasts in 2000. Looking back on the decade from the standpoint of 2010, we are satisfied that our forecast was faithful to the fundamental trend of the decade. In 2005, we forecast that over the next 10 years: the jihadist issue will not go away but will subside over the next decade. Other currently barely visible issues are likely to dominate the international scene. Perhaps our most dramatic forecast is that China will suffer a meltdown like Japan and East and Southeast Asia before it. The staggering proportion of bad debt, enormous even in relation to official dollar reserves, represents a defining crisis for China. China will not disappear by any means, any more than Japan or South Korea has. However, extrapolating from the last 30 years is unreasonable. At the same time that we see China shifting into a dramatically different mode, Russia is in the process of transforming itself once again. After 20 years of following the Gorbachev-YeltsinPutin line, which sacrificed geopolitical interests in return for strong economic relations with the

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West, the pendulum is swinging sharply away from that. The Russians no longer see the West as the economic solution but as a deepening geopolitical threat. There is one curve that will not reverse itself. The long wave that has lifted the United States since 1880, perpetually increasing its economic, military and political power in the world remains intact. The coming demographic crisis that will hit the rest of the world will not hit the United States nearly as hard. As a result, the United States will continue its domination and the world will increasingly resist that domination. Our core forecast is that the United States will remain an overwhelming but not omnipotent force in the world and that there will be coalitions forming and re-forming, looking for the means of controlling the United States. We continue to maintain the essential forecasts made in 2005. The U.S.-jihadist war is in the process of winding down. It will not go away, but where in 2005 it defined the dynamic of the global system, it is no longer doing so. China has not yet faced its Japan-style crisis but we continue to forecast that it will and before 2015. Russia has already shifted its policy from economic accommodation with the West to geopolitical confrontation. And the United States, buffeted on all sides by coalitions forming around political and economic issues, remains the dominant power in the international system. There were many things we failed to anticipate in our forecasts, but we remain comfortable that we captured the essentials. Our 2000 forecasts core dynamic has come to pass and continues to drive the global system, a system very different from the one in place in 2000. Our 2005 forecast derived from the dynamic we laid out in 2000. Of the specifics there, our Russian and American forecasts have taken place, our forecast on the U.S.-jihadist war is in the process of being fulfilled, and we stand behind our China forecast with five years to run.

The Decade Ahead

Economically, the next 10 years will mark the beginning of a massive reversal in the dominant trends of the past 500 years. For the entirety of that era, steadily rising populations have set the stage for the economic models used in every part of the world: Larger populations mean larger workforces, larger capital supplies and ultimately larger markets. The entire fabric of human economic relations has been based on the precondition of continually enlarging populations. The 2010-2020 decade will be the turning point in this rule as populations cease rising and rapidly age. This shift is most pronounced in the developed world with Japan and Europe the most dramatically affected but it exists in the developing world as well. Turkey, Mexico, China and India are actually aging faster than Europe. The effects are myriad, but can be separated into two general categories: financial and immigration. Financial: Retirement systems were established generally in the first half of the 20th century, setting 65 as the retirement age. At that time, life expectancy for males was 62 years. As life expectancy moves toward 80 years in advanced industrial society, the financials of retirement, never intended to support an average of 15 years of non-productive life, will create severe financial dislocations for both individuals and societies. The retirement age cannot remain 65. Trying to cope with this imbalance will consume much political capability in the countries affected which is to say most countries of importance. Immigration: States will have no choice but to compensate for labor shortages by increasing immigration from countries where the demographic decline is less progressed. It should be noted that the mid-tier countries that have traditionally supplied labor have been growing and aging dramatically. In addition, some of these mid-tier countries are now growing so rapidly that the attractiveness of emigration will decline. At the same time, not all advanced industrial countries are aging at the same rate. The United States, due to general social heterogeneity and prior migration, will not experience the same declines as Europe.

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Consequently, new patterns of relations as well as new patterns of immigration will emerge, as poorer and younger states become the new sources of migrants. Middle East The forecasts we made in 2000 and 2005 remain our driving model. We see the U.S.-jihadist war subsiding. This does not mean that Islamist militancy will be eliminated. Attempts at attacks will continue, and some will succeed. However, the two major wars in the region will have dramatically subsided if not concluded by 2020. We also see the Iranian situation having been brought under control. Whether this will be by military action and isolation of Iran or by a political arrangement with the current or a successor regime is unclear but irrelevant to the broader geopolitical issue. Iran will be contained as it simply does not have the underlying power to be a major player in the region beyond its immediate horizons. Iraq, Afghanistan and Iran will remain issues by 2020, but not defining issues in the region. Two other countries will be more important. Turkey is emerging as a self-confident regional leader, with a strong military and economy. We expect that trend to continue, and see Turkey emerging as the dominant regional power. The growth of Turkish power and influence in the next decade is one reason we feel confident in the decline of the U.S.-jihadist war and the transformation of the Iran issue. The dynamic in the region between the Mediterranean and Iran and even in the Caucasus and Central Asia will be redefined by Turkeys re-emergence. Of course, Turkey will feel tremendous internal tensions during this process, as is the case for any emerging power. For Turkey, the relationship between the Ataturkian tradition and the Islamic tradition is the deep fault line. It could falsify this forecast by plunging the country into chaos. While that is possible, we feel that the crisis will be managed over the next decade, albeit with much pain and stress. By 2020, Egypt will be changing from the type of country it has been since the 1970s for the past generation it has lacked the capacity to influence developments beyond its borders. Like Turkey, Egypt is caught between secularism and Islam, and that tension could continue paralyzing it. However, as Turkey rises, Ankara will need a large source of cheap labor and markets for exports. The result will be a coattails effect for Egypt. With this synergetic fortification we expect not only an end to Egyptian quiescence, but increased friction between Egypt and all other regional players. In particular, Israel will be searching for the means to maintain its balance between the powerful Turkey and the reemerging Egypt. This will shape all of its foreign and domestic policies. The United States, eager to withdraw from the region and content to see a Turkish-Egyptian-Israeli balance of power emerge, will try to make sure that each player is sufficiently strong to play its role in creating while retaining its independence within a regional equilibrium. Beneath this, radical Islamist movements will continue to emerge not to the interest of Turkey, Egypt or Israel, none of whom will want that complicating factor. Washington will be ceding responsibility and power in the region and withdrawing, managing the situation with weapons sales and economic incentives and penalties. For the first time since the end of World War I, the region will be developing a self-contained regional balance of power. Europe Europe will continue focusing inward because of demographic issues and the difficulties involved in constructing European institutions, both of which will cause intra-state tensions. It is Europe (and Japan, to be discussed later) that will experience the demographic process described above first and most intensely. Most notably, the Europeans are already experiencing significant problems with immigrant populations primarily North African Muslims, along with Turks that have not assimilated into their societies but remain indispensible for the functioning of their economies. Over the decade, these immigrants will continue to be economically essential and socially impossible to absorb. As more Turks remain home, Europe will have to resort to sources of labor that are even more difficult to assimilate.

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A deep tension will emerge in Europe between the elite who will see foreign pools of labor in terms of the value they bring to the economy, and whose daily contact with the immigrants will be minimal and the broader population. The general citizenry will experience the cultural tensions with the immigrants and see the large pool of labor flowing into the country suppressing wages. This dynamic will be particularly sharp in the core states of France, Germany and Italy. Different economic and social issues and distinct dynamics will also create deep divisions within societies and between states, particularly the countries on the periphery of the Franco-German bloc. Western Europe, which has had a relatively stable social and economic structure since the 1950s, will face problems that could very well lead to new nationalist movements. This will force clashes with peripheral Western European states with similar demographics but starkly different economies such as Greece, Spain, Portugal and Ireland. The former Soviet satellites will find themselves in a more complex situation. Many are wrestling with the same labor issues as Western Europe although most have another decade before their demographic problems bite as deeply as they will in Western Europe in the 2010s but are not facing immigrant issues of the same scope as those in Western Europe. Nor are they constrained by Western Europes complex social and economic systems. We expect to see rapid economic development in this region. The repressed creativity of the Soviet period, plus the period of adjustment in the past 20 years, has created societies that are more flexible and potentially dynamic even given demographic issues than the rest of Europe. The diversity of systems and demographics that is Europe will put the European Unions institutions under severe strain. We suspect the institutions will survive. We doubt that they will work very effectively. The main political tendency will be away from multinational solutions to a greater nationalism driven by divergent and diverging economic, social and cultural forces. The elites that have crafted the European Union will find themselves under increasing pressure from the broader population. The tension between economic interests and cultural stability will define Europe. Consequently, inter-European relations will be increasingly unpredictable and unstable. Former Soviet Union The Russians will be struggling with internal matters, from ethnic tensions to demographic decline. Yet Russias demographic problems have yet to hugely affect its ability to project power. In fact, in some ways, Russia can manage better with a small population than other countries can, as it can create a (somewhat) healthier balance between production and consumption. Russia has already made the retirement adjustment, moving its retirement age past the average age of male mortality. Russia has always been a multiethnic empire, giving it experience in managing non-Russian populations. Russias economy is also more involved in non-labor intensive industries such as commodity production, reducing the need for young workers (regardless of their origin). So while Russias demographics are by nearly any measure far worse than Europes, the truly damning effects of its demographic characteristics are not likely to crash Russia until the 2020s. Russia will spend the 2010s seeking to secure itself before the demographic decline really hits. It will do this by trying to move from raw commodity exports to process commodity exports, moving up the value chain to fortify its economy while its demographics still allow it. Russia will also seek to reintegrate the former Soviet republics into some coherent entity in order to delay its demographic problems, expand its market and above all reabsorb some territorial buffers. Russia sees itself as under the gun, and therefore is in a hurry. This will cause it to appear more aggressive and dangerous than it is in the long run. However, in the 2010s, Russias actions will cause substantial anxiety in its neighbors, both in terms of national security and its rapidly shifting economic policies. The states most concerned and affected will be the former satellite states of Central Europe. Russias primary concern remains the North European Plain, the traditional invasion route into Russia. This focus will magnify as Europe becomes more unpredictable politically. Russian pressure on Central

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Europe will not be overwhelming military pressure, but Central European psyches are finely tuned to threats. We believe this constant and growing pressure will stimulate Central European economic, social and military development. East Asia Chinas economy, like the economies of Japan and other East Asian states before it, will reduce its rate of growth dramatically in order to calibrate growth with the rate of return on capital and to bring its financial system into balance. To do this, it will have to deal with the resulting social and political tensions. In fact, China faces a quadruple bind. First, Chinas current economic model is not sustainable. That model favors employment over all other concerns, and can only be maintained by running on thin margins. Eventually, manufacturing margins turn negative as they did in Japan in 1991 and Indonesia in 1998. Second, the Chinese model is only possible so long as Western populations continue to consume Chinese goods in increasing volumes. European demographics alone will make that impossible in the next decade. Third, the Chinese model requires cheap labor as well as cheap capital to produce cheap goods. The bottom has fallen out of the Chinese birthrate; by 2020 the average Chinese will be nearly as old as the average American, but will have achieved nowhere near the level of education to add as much value. The result will be a labor shortage in both qualitative and quantitative terms. Finally, internal tensions will break the current system. More than 1 billion Chinese live in households whose income is below $2,000 a year (with 600 million below $1,000 a year). The government knows this and is trying to shift resources to the vast interior comprising the bulk of China. But this region is so populous and so poor and so vulnerable to minor shifts in Chinas economic fortunes that China simply lacks the resources to cope. Japan is the worlds second-largest economy. It has spent the time since 1990 in a holding pattern, focusing on full employment and social stability instead of growth. That process is drawing to an end and in a manner that both reflects Chinas present situation and heralds Chinas future will have to be dealt with in the 2010s. Japan will face an existential crisis in the next decade, deciding who it is and what kind of nation it is going to be. The culture of avoiding risk foreign and domestic can only be sustained when there are no threats. The threat to domestic well-being has grown. Its economic heft gives it options, of course, but not within the paradigm in which it operated in the past. Its demographic problem is particularly painful, and Japan has no tradition of allowing massive immigration. When it has needed labor it has established colonies in Korea and China. As China shifts its economic pattern, it will need outside investment badly. Japan will still have it to give, and will need labor badly. How this relationship evolves will define Asia in the 2010s. South Asia India has always been a country of endless unrealized potential, and it will remain so in the 2010s. Its diversity in terms of regulations and tensions, its lack of infrastructure and its talented population will give rise to pockets of surprising dynamism. The country will grow, but in a wildly unpredictable and uneven manner; the fantastic expectations will not materialize. Because the Himalayas protect India from China, New Delhis primary strategic interest is Pakistan. We expect Pakistan to muddle through. It is just important enough that outside powers will prevent its collapse, but it does not have the internal resources needed for stability. Latin America Latin America will continue to develop in the 2010s. Two countries in particular are important. Brazil, the worlds 11th-largest economy, is a major regional driver and will become more so as Argentina

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collapses. But aside from extending its influence southward, the South American geography of deserts, jungles and mountains prevents Brazil from reaching beyond its immediate neighborhood. It will be a regional power even a dominant regional power but it will not exert strength beyond that scale. Mexico, the worlds 13th-largest economy, is often ignored because of conflicts involving its drug cartels and the government. However, organized crime manages over time to come to stable understandings, normally after massive gangland wars. Means are created to maximize revenue and minimize threats to leaders. Since inexpensive agricultural products like cocaine command vastly higher prices in places like Los Angeles than where it is produced, a well-organized criminal system in Mexico will continue to supply it. This will cause massive inflows of money into Mexico that will further fuel its development. The United States From the American point of view, the 2010s will continue the long-term increase in economic and military power that began more than a century ago. The United States remains the overwhelming but not omnipotent military power in the world, and produces 25 percent of the worlds wealth each year. The United States is in the fourth economic crisis since World War II: the municipal bond crisis of the 1970s, the Third World Debt Crisis and the Savings and Loan Crisis of the 1980s, and now the investment banking crisis. Each represented excessive risk-taking in the financial community followed by a federal bailout based on monetizing privately held assets through printing money and taxing. Each resulted in recessions, and each ended in due course. The magnitude of the problem of the early 2010s is debatable, but we see no reason to believe that this crisis will not work itself out as did the other three. The United States will withdraw for a while from its more aggressive operations in the world, moving to a model of regional balances of power which Washington maintains and manipulates when necessary. This will not manifest as introspection, but rather as a rebalancing of U.S. attention and force posture. The greatest international issue for the United States will no longer be the Islamic world or even Russia, although both will have to be dealt with. The issue will be Mexico, and it is an issue with several parts. First, Mexico is a rapidly growing but unstable power on the U.S. border. Second, Mexicos cartels are gaining power and influence in the United States. Third, the United States will be trapped by a culture that is uneasy with a massive Mexican immigrant population and an economy that cannot manage without it. But in terms of demographics, as in many other categories, the United States stands apart. Yes, America is aging, but at a much slower rate than Japan, China, Germany, France, Mexico, Turkey or India. The United States is also very good at assimilating immigrants from Mexico or elsewhere while Europe (to say nothing of Japan) is not. Therefore, the United States biggest demographicrelated problem in the 2010s will be financial: retiring baby boomers will generate a capital crunch that will have to be dealt with by not allowing them to retire, cutting retirement benefits sharply or both. This is a serious concern, but one the United States shares with the rest of the developed world.

Conclusion
We believe our 2000 and 2005 forecasts remain the framework for thinking about the next 10 years. For most of the world, our forecast remains intact. There are two areas where we have shifted our forecast. First, we see Europe in much deeper trouble than before, particularly driven by its demographic and immigration issues. Second, we see the U.S.-Mexican border not so much as a flash point, but as a new focus of the worlds only global power, and something that will compete with the

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rest of the world for Washingtons attention. That limitation on the United States will allow regional powers to start reorganizing their areas of influence. We do not see the 2010s as a period of decisive change. Rather it is a period in which basic processes stay in place, while the emerging demographic process surfaces as a major driver in the system. The United States will remain at the heart of world power; a country with 25 percent of the worlds economy and forces like the U.S. military cannot be ignored. But as the demographic problem begins to take hold, the countries most affected by it will have to turn their attention inward.

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