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Notes by EMA: The Real Deal on Geopolitical Risk

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This message by EMA was delivered during the annual Convention of the Institute of Internal Auditors (Philippine Chapter) in Puerto Princesa, Palawan with the Theme: Internal Audit: A Trusted Partner in Driving the Enterprise Forward.

The IIAP is a professional organization dedicated to the advancement of the internal audit profession in the country. To date, it has a network of over 2,600 members from over 500 companies sharing a common vision of a global profession towards effective governance, risk management and control.
 
EMA’s talk on The Real Deal on Geopolitical Risks brings to fore that in today’s interconnected global marketplace, a geopolitical event anywhere in the world can affect local operations.

THE REAL DEAL ON GEOPOLITICAL RISK

October 2017

Enrique Aboitiz Mendieta

Good Afternoon Ladies and Gentlemen of the Audit Profession.

The role of audit has been evolving from being a pain in the ass to an indispensible partner in the management of anything – size, complexity, complicatedness, and the speed of change has driven this evolution. For the Philippine economy, Geopolitics has impact and will have greater impact as we open up.

What is geopolitics?

Geography and international politics.

That is what we are discussing today with some additional commentary from me on our geopolitical position as the Philippine economy. I stress economy because thinking as a nation has not gotten us or anyone anywhere but into trouble. The very vast majority of a people living in a country care about only one thing – a better life for them and for their children. The rest is the noise that politicians of all nations, for their own interests, create to take our eye off the ball. The quality of the more important politicians in the world from Trump to Putin is about the worst we have ever seen. How much they matter is about the least we have ever seen amidst more noise than ever. They matter less and less as individuals. Now, geography and demographics matter more and more economically and climatically.

The first and most important Geographic Feature of an economy is the ability to create capital. The greatest capital-producing nation in the world is without doubt the United States because of its geography. Yemen and Ethiopia cannot create capital again because of their geography. The U.S.’s interconnecting rivers, its safe harbors on its coast lines, its two oceans, its partner in the north and its weak semi-partner in the south. From this ability to create capital comes geopolitical power. We think Russia to be a large country – in reality it is a very small one and a weak one. Most of the country is useless: its demographics are terrible, and its economy is dependent on oil and natural resources that add less and less value in a digital and technological world. It’s Russia’s geography that makes it weak. It is expensive and difficult to protect and it is just too far north. It has one questionable warm-water port in the Mediterranean.

I think that the geopolitical risks of war are over and they are over for one reason – there is no longer any profit in war. There is no longer anything to gain. On the contrary, there is a lot to lose due to the economic interconnection of the world. Everyone is buying from everyone. Everyone is travelling to everywhere. Everyone is watching each other’s movies, each other’s lives on Youtube and everyone wants an iPhone. China will soon have 200 million people travelling around the entire world – With whom are they going to pick a real fight – and I don’t mean verbal fencing and political reality shows.

U.S.-China War risks must be close to zero. They are the greatest partnership in the world since Churchill and Franklin D. Roosevelt. They do not understand each other but they will – neither did the Japanese and the Americans, and now they do. You do not go to war with your largest customer or your largest supplier. There will be 200 million Chinese traveling the world. There are hundreds of billions of Chinese investment dollars entering the world markets from real estate in London, to vineyards in Bordeaux. Millions of Chinese will be working and retiring in their new Disneyland -Europe.

The South China and the North Asia Seas…I am of the opinion that at some point in time, the Americans and the Chinese will work out a deal for North Asia and the South China Seas. There is no way the Chinese will allow anyone to control their southern flank like there is no way the Americans would allow anyone to control the Caribbean. South Korea and Japan are American allies, so North Asia will go to the Americans and the South China Sea, in some manner that looks good or is palatable, will go to the Chinese who want it for access to the Indian Peninsula. The Indians will not allow that. Bretton Woods gave the world total world trade lane protection with the U.S. Navy controlling the Seven Seas. Will that end? It has to. Both the Chinese and the Indians will build their navies but all with the same intent – to protect trade.

The world functions on three resources: 1. Energy 2. Natural Resources 3. Data, Information, Intelligence and Wisdom, in that order. The resource is wisdom and not data.

The first, energy, is undergoing a transition. Fracking and low oil prices are a transition to cheap renewable energy. The second, natural resources, will be used less and less per economic unit of growth due to recycling and replacement. An A350 and a Boeing 787 will use less aluminum and rivets than ever, just as less steel is used in cars and you can go on. The third, information, with technology is just exploding. The transfer of information to wisdom has yet to be seen.

Electric cars and increased efficiency of fracking will keep the price of oil low for the next decade giving renewables time to move in. Low, predictable long-term energy costs mean two things: economic growth for all worldwide and low-cost water for all worldwide. Low-cost water means food in areas where it could not grow before. There is plenty of water, but it is salty and it needs energy to convert to usable water.

Britain is an island of coal. It’s not a coincidence that the industrial revolution started there and not in Ireland, an island of peat. Democracy, a liberal society and the rule of law surely played its part.

We are an isolated and insulated economy because of our geography and our history. The Spanish came over here to save our souls but they isolated us economically. We were not a Potosi with silver. We were a cost center for the Spanish Crown, but they saved our souls, so they sent priests who plucked more than just our sins. Our economic value was our status as the trading post between China and Europe. The Chinese needed Potosi silver to mint coins, and Europe needed Eastern spices and fineries. We were defined by our geography and insulated by our religion. A western culture right at the edge of the main eastern culture – Insulated and isolated.

Our post-Marcos Constitution was an opportunity to open up -we did the opposite. We brought about to guide us a constitution that isolated and insulated us further. With Globalization, our strengths became apparent and helped reverse our isolation to some extent, yet keeping us insulated.

Our strengths, what are they? We speak English, we have a decent level of education and we are a naturally friendly people. Our overseas workers have become first to hire and last to fire. Our sweet Filipinas took over the call center industry from the Indians in under a decade. Our future is in tourism, which leverages of the same strengths.

Our governments and administrations for the past 40 years can be described clearly as having no sense of urgency and no sense of accountability. However, they got out of the way through privatization and remained at a small at 15% or so of GDP. Our future lies in developing a third leg, which is tourism. Tourism is inclusive – it funds all kinds of businesses from whorehouses to churches. If we truly stop funding CARP, we have a chance at improving our agriculture. When we build better infrastructure we will take some of the PC 16 manufacturing. Geography can be battled and adjust for as the Japanese did.

I see a risk in education. Government education costs more than double private and is of poor quality. Education must be an equalizer not a de-equalizer as it is becoming today. Now it counts less and less as people can learn on their own cheaply from the internet. 5G will mean 100 Mb speed for all wireless in 20 years. However, paying more for government education for the less fortunate of our society hinders their chances to rise in the future. Inequality is a serious destabilizer. This is happening worldwide. Inequality has to be the enemy of meritocracy.

I see a risk in climate – The risks will come to bearing in the future if climate changes the resource situation. That is too far for me to see. I do know, however, that the history of man shows us that he adapts before he reaches the cliffs of demise. Everyone thought that there would be nukes flying around after WW2. Many thought communism would spread. Man is much more similar in his desires than we think, and that which we share in common is much stronger a binder than what divides. When you remove politics, very little divides us. We all want a better life for our children. We wall want to work for a living. We all want dignity. We all want clean air. We all want to live longer. We are seeing change – the rise of the electric car population is much faster than we thought.

The immediate apparent geopolitical risks like North Korea, Syria, Venezuela and Russia face us today. However, we are never hit with the obvious. We are hit with the unknown.

There was concern about overpopulation. We are seeing that, worldwide, it is tapering down because of the way man’s behavior changes when he urbanizes, moves to small apartments, and both husband and wife work – they have to schedule when they play with each other or are too tired when they get home from a two-hour commute.

Now this brings what is probably our most serious risk of all and that is some small little bug that travels at the speed of light and that wipes us out has it probably has so many times. Insects can live without man but man cannot live without insects.

Now this is the end of part one of this session. Part two is when you argue with me to show me where I am wrong or where my views should be changed. Arrogance I think is the unwillingness to change your mind when new information comes along, and humility is the willingness to change your mind. Experience is when you know very well that, at best, you are 3/4 right.

I did not come here for you to learn. I came here for me to learn from you, so please, without risk of offending me nor any political correctness, I open the floor.

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