Global Viewpoint: An Economic Tour de Force.

What political and social forces are wreaking havoc or spurring growth today--and where are they likely to take the world's economies? Marvin Zonis conducts an economic world tour in an expansion of CE's monthly Market Horizons column.

Roiling in Russia: Possessing both nuclear weapons and global ambitions and fueled by powerful illusions of superpower status, Russia is the most important country in terms of world peace in the 21st Century. Russia's center is falling, afflicted with a profound sense of humiliation and isolation coupled with a faltering economy and a declining and demoralized population. Power is shifting rapidly from Moscow to the regions and the governors of the republics are becoming mote autonomous. The ruthless assault on Chechnya is an attempt to reverse the decline of Moscow. As a result, Grozny will be flattened and thousands killed, and Chechen guerillas will rake to the mountains, from where they will wage a terror campaign against Russian control. The provincial governors who seek to free themselves from Moscow's control have learned from Chechnya. They will avoid any show of independence and instead seek de facto control over their own resources and people.

Meanwhile, Russian foreign policy will become ever more aggressively anti-Western as the regime uses the rhetoric of nationalism to build domestic support-- especially as the 2000 presidential election draws near. Prime Minister Vladimir Putin--a man ill-prepared to govern a democratic Russia after spending his lifetime in the Soviet and Russian secret services--is likely to succeed Yeltsin. He and the generals are the architects of the Chechen assault and a Putin-led Russia will have the security services at its core. Foreign investment will be absent and economic growth slow, at best, in 2000.

One Door Opens in Japan: Japan's economy saw growth in 1999, largely because massive government spending drove the fiscal deficit above 10 percent of GDP and the stock of government debt above 120 percent of the GDP. But the underlying weakness of the Japanese economy is all too evident. Property prices continue to plummit and consumer spending on food, clothing, and durable goods fell in six of the last eight quarters. What's more, government tax receipts declined 10 percent overall compared to last year. Japan's government is pursuing a two-track policy-encouraging the opening of the Japanese economy while attempting to minimize the hardships of the disruptions.

Many in Japan refer to this period as the "third great opening," after those that followed Admiral Perry and General MacArthur. This one is genuine. Foreign investment is booming and restructuring is taking hold. But the government's fiscal stimulus packages are hindering the process. The most recent package-weighing in at a staggering 17 trillion yen-serves basically to preserve the existing structure by protecting firms from the reality of the need for restructuring. Nowhere is this more obvious than in the government's credit guarantee program, in which almost one million companies (out of a total of 1.6 million functioning companies in Japan) received credit guarantees.

Contradictory Japanese government policies will keep the Japanese economy at zero growth in 2000, with diminished prospects for more fiscal stimulus. As of April 2000, the Government postal savings system will begin seeing massive outflows of deposits made in the '80s, reducing the pool of capital the government uses to float debt. Afterward, Japan is likely to enter into a recession as the economy goes through another, deeper period of restructuring, increasing unemployment, and decreasing retail sales. Aware of this, the government will likely call elections at the beginning of 2000 to take advantage of what will be the best of times for the foreseeable future. After that, both the yen and the economy will suffer a decline.

Hong Kong Goes Disney: Hong Kong is betting on a future as a tourist and entertainment center for southern China and Asia. Government authorities hope to arrest the continuing long, slow decline of Hong Kong by constructing a $3.5 billion Disney theme park. The government, which is supplying the land and the connecting infrastructure--and loaning Disney up to 90 percent of their costs- will own 57 percent of the joint venture. Disney will have a 43 percent stake. By using public funds for what is essentially a real estate development deal, Hong Kong is deepening its economy's dependence on real estate. The success of the project rides largely on the prospect of China lifting restrictions on the number of Chinese citizens allowed to visit, which will contribute to a greater fusion of Hong Kong and China proper. But entertainment centers, as evidenced by Las Vegas, Macao, and Monaco, bring other problems--and rarely spur sustainable high value economic growth.

Still, China's WTO accession agreement and the launch of the Disney park project will finally pull Hong Kong out of recession in 2000. More than 80 percent of Hong Kong companies have export-oriented production facilities in China. Hong Kong also handles roughly four-fifths of the exports and imports of Guadong province. As the WTO triggers greater trade flow between China and the rest of the world, Hong Kong companies will benefit. But, as Hong Kong subsequently loses its role as China's conduit to the world, the WTO will also bring its long-term decline. China Trades Places: As a former U.S. Ambassador to China, James Lilley once put it, "If you can't deal with contradictions, don't deal with China." The trade deal signed by Chinese Prime Minister Zhu Rong Ji promises greater access to China's markets. China's military officials promise greater military might and its political leaders promise to preserve their power.

But it's by no means certain that China will ever make good on its WTO pledges. Premier Zhu seems committed to reforms as a way to boost foreign investment in China. He also seeks a way to force state-run industries toward greater efficiency. Both can occur before China actually has to make the painful changes required by its new agreements. In fact, by the time those changes are necessary, Premier Zhu is likely to be gone from office, and President Jiang Zemin steps down in March of 2003. In short, just as China reaches the difficult part of its pledges-carrying them out-a new set of leaders will have taken control.

These contradictions are manageable by the Communist Party. On the military front there's less uncertainty. China clearly understands, as did Stalin, that economic prosperity is essential for military modernization. China is committed to building a blue water navy and an air force with long-range nuclear missile capacity. The country is likely to continue forward with modest economic growth, without devaluing its currency, experiencing serious internal political turmoil, or suffering external military acts. But hard times lie ahead as the contradictions sharpen.

Indonesia Eyes Independence: As a factor that will shape Asia's future, Indonesia's fate is second only to the U.S. economy. If Indonesia continues to disintegrate, the spillover effect will bring turmoil to Malaysia, the Philippines, and other states. Its new president, Abdur Rahman Wahid, is the kind of Muslim activist that American policy makers dream of--a tolerant pluralist who has high praise of the U.S. and its policies and has visited Israel as an official guest of its government. But the options available to him are limited. He will begin by reorienting government economic policy--copying Mahathir in Malaysia--toward supporting the indigenous majority Muslim population, which means a move away from large and technologically based enterprises to small business and agriculture. The Chinese will be the big economic losers. Wahid will offer more autonomy to the peoples of remote islands seeking independence. While he has promised a referendum to the people of Adeh, when he made it clear that independence would not be one of their options, 10,000 people rioted. He will also face hurdles in his attempt to bring the pillars of the old regime to justice. Clearly, the danger for Indonesia is that none of his programs may work--translating to more turmoil in 2000.

Europhoria Paranoia: As the euro weakens, europhoria--the excitement generated by the realization of a coherent Europe with a single currency--took a hit. While part of the problem is the uncertainty inevitable with any new currency, that uncertainty is being deepened by concerns over the role of the European Central Bank. The Bank bases its decisions on data supplied by member states--data that can be highly uneven in their reliability. In addition, the ECB itself has not been transparent on its internal operations and decision making. Greater transparency would provide greater confidence in ECB monetary policy and in the euro. As a result, the rate hikes recently imposed by the ECB have been met with suspicion and concern everywhere but in Ireland, which is enjoying an economic boom that should see 8 percent growth this year.

The rate hikes, coupled with unemployment hovering above 10 percent in core EU countries, suggest labor reform is the most feasible policy for national politicians. In 2000, the ebullient and immensely talented EU President Romano Prodi will choose to focus on reform of the EU. On one hand, it's more and more clear that the EU itself needs to be transformed if it's to function effectively with more member states. On the other, the difficulties of incorporating new and poorer members have become clearer to all. Prodi's ambitious plans for EU expansion to the east will be sidetracked. What to do about Polish agriculture will weigh heavily throughout the year, as will the challenge of Shengen agreement, which provides a common external frontier for all signatories and eliminated internal border and immigration controls. While Poland would like to sign, Germany is not sure it wants to extend the rights of free entry to 35 million Poles.

But while the euro will be weak and the EU will be focused on internal reform, European economies will grow even more robust than in 1999. Restructuring in Germany, especially at the level of the firm rather than at the level of the national economy, will accelerate. Mergers within countries will increase, but so will cross-border mergers, of which Vodafone and Mannesmann are only a precursor of more to come. Europeans will, finally, turn aggressively toward the Internet. Germany, France, and Italy have all been laggards. But in 2000, they will begin to make substantial progress--in spire of Germany's refusal to allow the Philipp Holzmann AG company to go bankrupt.

Like Japan, Germany continues to seek to prevent losers from losing. The pain of massive economic restructuring and social change, these countries believe, should nor be paid by the losers, but by society. Of course, these anti-free market moves slow the pace of the necessary changes. Europhoria, then, is inappropriate. Simple optimism about Europe is not.

Latin American Mambo: A prediction--just as Latin America gets it right, when even arch leftists have given up Marx in favor of free market and democracy has taken firm root, military spending will boom in the northern states. This time its thanks to the war on drugs. Ecuador, Peru, Venezuela, and Brazil have all deployed troops to the Colombian border to "contain" both the drug trade and the narco-guerillas. Their military knows an opportune moment to bid for greater defense budgets and U.S. aid. Columbia is ahead in the aid game, hoping for $1.5 billion from the U.S. in 2000. Panama is another prime candidate. With no national army, Panama's border is likely to be attacked by Colombian guerrillas and right-wing paramilitaries.

Paraguay has been rocked by political disturbances since the assassination of its vice president in March. A military coup is likely. Paraguay's partners in the Mercosur trade bloc may then oust the country from Mercosur, which requires that member governments be democratically elected.

Politically and economically, Venezuela's future is highly uncertain. The new constitution, rushed through by President Chavez in a matter of months, improves civil rights and punishes corruption, but also sets the stage for the president to dissolve congress, undermine central bank autonomy, and remove a congressional veto over military promotions. Chavez's supporters will likely win many of the opposition seats in the forthcoming election he has called, effectively turning congress into a rubber stamp agent for the President.

Buoyed by high oil prices, President Chavez has been successful at avoiding any economic reforms. The new constitution, in fact, forbids the privatization of PCVSA, the national energy company, and promises a national health care system to all Venezuelans. But strikes and protests will still become more common.

Even so, democracy is becoming more firmly entrenched and civil society is burgeoning in Latin America--at least in Argentina, Brazil, Mexico, Panama, and Chile. Mexico will continue to move away from its crony-based political system and toward a more transparent, institution-based economy. In 1999, the Mexican government allowed its largest steel maker, Ahmsa, to collapse under a $2.4 billion debt burden--the first time the government stood by and watched as a politically well-connected firm failed. A floating currency and huge foreign currency reserves ensure that Mexicans and foreign investors will not suffer another currency devaluation.

Meanwhile, Brazil continues to lure foreign direct investment. From the privatization of Telebras alone, the country earned five times as much as India has from all its privatization efforts since 1991. Brazil will likely continue to suck up billions in 2000 and see substantial economic growth. Its problem remains the fundamental weakness of the political center vis a vis the provincial governors and other powerful interest groups, which will diminish the ability of the federal government to cut subsidies. Fiscal deficits are the ruin of Brazil and will continue to be.

Global Viewpoint: The coming year will see an acceleration of the world being made over in the image of the U.S. While the fact that more capital, goods, services, and people cross national boundaries than ever before is seen as globalization, it can also be viewed as Americanization. The U.S. has been driving globalization and is one of its major beneficiaries. What's more, these cross border movements come hand-in-hand with the diffusion of U.S. culture. Through mediums like movies, television, education, travel, and business, U.S. values and cultural practices are transforming cultures and standards everywhere. In the face of such change, backlashes are inevitable-some of which are sure to target U.S. businesses, which have been stunningly successful in seizing the opportunities of the global economy. Even as globalization/Americanization sweeps the world, vast reaches of the globe will become more impoverished, more unstable, and more dangerous. Yet the U.S. people and government have proven unwilling to meet that challenge of helping countries seeking to generate economic growth through market economies and the forging of political democracies. Given that U.S. prosperity has become ever more dependent on the prosperity of the rest of the world, this behavior is not only puzzling; it's self-defeating.

Marvin Zonis heads Marvin Zonis & Associates (www.mza-inc.com), a political risk consulting firm, and is a professor at the Graduate School of Business at the University of Chicago, where he teaches international political economy, leadership, and business strategy in the era of e-commerce.