A View from the Gulf - Part 1 of 3

What do artificial intelligence, national identity, family values, and ethno-cultural tolerance have to do with each other? They provide interlocking means toward the goal of having an adequate labor supply for a coherent nation in a globalized world. How this works is perhaps nowhere clearer than in the United Arab Emirates. This three-part series will discuss the UAE based on conversations there during a recent visit. The first part will look more at the emirates in domestic terms; the second will place them in geoeconomic context; the final post will assess the implications of the emirates for the wider re-networking of globalization. The implications for investors are considerable. Understanding the re-networking of globalization is key to investing in it successfully, and for a variety of reasons the nature of this re-networking is revealed with particular clarity in the UAE.

The usual narrative one hears about UAE history stresses that the emirates once thrived on the trade in pearls. When artificial pearls were invented, the emitates’ economy collapsed. When oil and gas were discovered in 1958, the emirates got a precious second chance at developing a modern economy. Sheikh Zayed bin Sultan al Nahyan, the emir of Abu Dhabi, sought to join the Organization of Petroleum Exporting Countries (OPEC) in 1967. Sheikh Zayed, in collaboration with Sheikh Rashid bin Saeed al Maktoum, emir of Dubai, formed a federation of six emirates in 1971, which immediately became a member of OPEC. A seventh emirate, Ras al Khaimah, joined the initial six the following year. The UAE took on its current form, dominated by Abu Dhabi and Dubai with the emirate of Sharjah as the third power in the federation.

The core purpose of OPEC was to resist control by the industrialized, and often formerly imperial, powers that had the technology, expertise, and capital to develop oil and gas resources. Britain had dominated the emirates before withdrawing east of Suez in 1968, and the formative impulse of emirati federation was anti-imperial and developmental. The distinctive dynamism of the emirates is rooted in the fact that Dubai, while powerful, has few natural resources: 94% of emirati oil is in Abu Dhabi, which became the capital of the UAE. As a trading economy, Dubai led in diversifying the UAE’s development away from dependence on oil and gas. The relationship between Abu Dhabi and Dubai is often compared to that between Washington and New York, while the most frequently cited model for the UAE as a whole is Singapore.

The crucial point is that the UAE’s core political and economic driver was to grow through negotiating power with and among major industrialized countries that needed its petroleum resources to fuel their own development. To do so, it needed not only luck and skill but a labor force well beyond the capacity of a country with a population of roughly 300,000 in the 1970s. So it imported what it needed, usually on a contract basis and particularly from India, with which the emirates had long-standing commercial ties. The working conditions of this imported working class were often harrowing.

The country grew. Today the UAE’s population is over 10 million. About 10 percent are emiratis, Another 3 million are of Indian descent, a further million from elsewhere in South Asia. Emiratis grow up on Bollywood films. Mumbai is a two-hour flight away; it takes twice that time to reach Beirut. The emirates are effectively multicultural, with a decided orientation toward South Asia. This makes them different from other Persian Gulf cultures, and is a key to their prosperity, along with a commercial language and institutions taken over from imperial Britain and extended through relations with yet another former British colonial nation built on imported labor, often under very harrowing conditions indeed, the United States.

 As a minority in their own country, the emiratis kept tight control over their own political and economic power, led by a highly effective monarchical aristocracy accustomed to sharing out decision-making and commercial rewards. Intermarriage with non-emiratis was – as emiratis today tell the story – more common into the 1990s that it is now. The nature of emirati identity is a live issue, although not one that is easily aired in public discussion. Membership in emirati families brings privileges such as free land and healthcare. It also brings obligations of fealty to the monarchy, which can and does, for example, forbid travel by emiratis to states at variance with UAE policy. A variety of people can gain UAE residence permits and, increasingly, passports, but actual emirati-ness is recorded in a “family book” and conveys an identity and social power beyond citizenship.

To deal with the resulting tensions, the UAE has, among other measures, empowered emirati women and stressed productivity and discipline among emirati youth, particularly through subsidized education (including at top international institutions), military service, and sport. (Government ministries compete against each other in sports leagues.) Senior emirati ministers and other officials are strikingly young and very often female. The empowerment of women has the usual implications for overall fertility, and a notable aspect of government policy is a growing emphasis on pro-family measures. The three emphases of recent UAE strategic policy—AI, family, and national identity – represent an attempt to ensure and extend emiratis’ future as the core population of a country in which they are highly likely to remain a minority.

So, too, does the government’s emphasis on diversity, in several senses. Alongside a ministry for national identity is a ministry for tolerance. This only appears to be a paradox. To judge from numerous conversations with UAE officials and other emiratis as well as expatriates – an inadequate term for 90 percent of the population – the UAE leadership is keenly aware that the country can continue to thrive only through the tolerance of diverse religions and cultures. Managing a dynamic relationship between nationalism and internationalism might not be to every emirati’s taste but it is essential to survival, whether cultural, military, or economic. But especially, perhaps above all, economic: the UAE has enshrined in its basic strategy documents a commitment to private-sector-led development, and the government is trying every means to get young emiratis into private positions rather than having them follow the easier path of government service.

The next post will look at how the UAE is using this distinctive combination of national identity and market-driven economics to drive its political-economic growth.

Feeling Better and Feeling Worse, Part 4

By Dee Smith

Several of the most important “pillars” supporting U.S. influence and power are now in danger of falling apart.

As noted earlier in this series, the U.S. was effectively the guarantor of global stability from the end of World War II until around 2010-2015. And a key reason it could do this was that the U.S. had unquestioned military superiority.

Not long ago, I was speaking to a senior military officer in an important (friendly) developing nation. He recounted how, 15 or 20 years ago, it was widely discussed among his peers in various countries that “you just don’t want to tangle with the U.S.—you will come off on the bad end of it.” This is why the U.S. could essentially send an aircraft carrier off the shore of a country and change its internal situation without firing a single shot.

But the U.S. is losing its military edge, hence more and more countries are less afraid of such a tangle. Why?

One straightforward reason is that the nature of conflict continues to change, as do its tools: drones, anti-drone systems, robots, autonomous weapons, lasers, cheaper missiles, fast missiles like “hypersonics,” and so forth are transforming war at an escalating pace. Generally, these technologies mean it is becoming easier for smaller forces to engage successfully with larger ones. But it is more than that. In the classic logic of an arms race, each new advance in weaponry is met by a countering system, which means the improvement may have limited effect. There is a “flavor of the month” quality to these advances—today’s favorite may not work that well tomorrow.

Even more important are the changes in battlefield dynamics. As Mara Karlin writes in the current issue of Foreign Affairs:

What theorists call “the continuum of conflict” has changed. In an earlier era, one might have seen the terrorism and insurgency of Hamas, Hezbollah, and the Houthis as inhabiting the low end of the spectrum, the armies waging conventional warfare in Ukraine as residing in the middle, and the nuclear threats shaping Russia’s war and China’s growing arsenal as sitting at the high end. Today, however, there is no sense of mutual exclusivity; the continuum has returned but also collapsed. In Ukraine, “robot dogs” patrol the ground and autonomous drones launch missiles from the sky amid trench warfare that looks like World War I—all under the specter of nuclear weapons. In the Middle East, combatants have combined sophisticated air and missile defense systems with individual shooting attacks by armed men riding motorcycles. In the Indo-Pacific, Chinese and Philippine forces face off over a sole dilapidated ship while the skies and seas surrounding Taiwan get squeezed by threatening maneuvers from China’s air force and navy.

There are reasons to believe, as Karlin proposes, that we are entering a new era of comprehensive conflict, for which she invokes the old term “total war.”  She defines this as a situation in which “combatants draw on vast resources, mobilize their societies, prioritize warfare over all other state activities, attack a broad variety of targets, and reshape their economies and those of other countries.”

There are many elements to this evolution, but the return of maritime warfare is notable among them. In the post-9/11 “war on terror” period, most attacks, even by naval ships, were towards targets on the ground. But the naval military environment has quickly reemerged as a key area of conflict: in the Ukraine war, in the Houthi attacks against shipping in the Red Sea, in Chinese squabbles with its neighbors over territorial rights, and so forth. (Inter alia, the Houthi attacks are an excellent example of the rise of effective non-state—although often state-supported—actors in conflicts.)

Put simply, the U.S. has not invested enough in its navy, which by some measures is now smaller than China’s (although not in tonnage), to continue to deter other major powers at sea globally.

The pace of change and the scope of the demands that all this places on the U.S. military continue to escalate. The U.S. is responding to this need with upgrades, more rapid deployment of materiel (including to allies), and new or revived alliances, such as AUKUS and the Quad.

But all of this requires a great deal of money, and the U.S. military remains underfunded. Consider the Arctic, which is warming fast and may be partially ice-free year-round as early as 2030. It has enormous deposits of oil and gas, many already claimed—outside international territorial norms—by Russia. The thawing Arctic is also going to become a major global shipping route, offering enormous savings of time and money over traditional routes between the Pacific and Europe. In other words, the Arctic is already on its way to becoming an area of serious geopolitical conflict.

To address this important region, the U.S. has 5 operational icebreakers, but only 2 are heavy icebreakers (and none are nuclear-powered). Three more are planned.

Russia has 46 icebreakers—5 nuclear-powered—plus 14 on the way, 11 of which are under construction.

The U.S. spent so much treasure on ill-conceived wars in the Middle East that it not only diverted funding from much-needed military improvements and upgrades for many years, but it also provoked a reaction within the country.

As observed earlier, it would be hard to over-emphasize how tired the bulk of the U.S. population is of foreign wars, foreign commitments, foreign entanglements, foreign aid—they don’t believe any of it works to help them. The days of the American electorate accepting that they benefit when the U.S. defends other nations are gone. Instead, many Americans believe it just enriches the ruling elites of such countries, who, they think, play the U.S. like fools. Americans are done paying for this type of foreign policy.

And the question of money leads to consideration of another crumbling pillar of global American (and Western) influence: the post-Cold War primacy of the U.S. financial and governance model.

Feeling Better and Feeling Worse, Part 3

By Dee Smith

After WWII, the US originated and enforced an international order based on rules. It worked in terms of avoiding nuclear war. However, many Americans are ready to ditch it because they do not see that it worked in terms of making their lives better.

They are also ready to unwind globalization.

This is very significant, because the whole world is now linked through globalization, so American unwinding will affect everyone. As globalization is unwound—through rising trade barriers, tariffs, and other protectionist measures—people in more and more countries are likely to turn against it as not being beneficial to them. De-globalization can become a self-reinforcing cycle. Even if globalization merely changes its shape, it will be much altered.

Perhaps even more significant, much of the US population wants the US to quit being “policeman of the world” and guarantor of the security of the international order.

Ten years ago, the admiral of the U.S. Pacific Fleet observed to me that the U.S. military and their families were already exhausted. And what has the succeeding 10 years brought?

Americans see that more than $8 trillion was expended in Middle East wars, and ask: for what? Iraq is a mess, Iran is stronger, Afghanistan is back under Taliban control (the result of a deal negotiated by the Trump I administration and implemented by the Biden administration), Israel and its neighbors are at war, and the Middle East is a seething cauldron.

The failure of 20 years of war—pursued by both U.S. political parties—further eroded trust in U.S. leadership and in the global position of America. Russia put its plan to attack and take Ukraine into effect after it saw the chaotic U.S. withdrawal from Afghanistan (on the heels of not much American reaction against previous Russian action in Georgia and Crimea).

As the U.S. pulls back, players like China and Russia—and smaller “middle” powers like Iran—will take advantage of American absence and become more aggressive. This is the single greatest potential source of immediate and near-term major conflict.

Parties in the U.S. also want to undo being banker to the world: Americans increasingly don’t see why defending the dollar as a global reserve currency is important to their lives.

There is even a detectable desire to back off American global moral leadership —democracy promotion, anti-corruption, keeping various countries “in line” by creating policy conditions that have to be followed if you want U.S. money (which many Americans believe should not be meted out anyway). The U.S. is being out-competed by the Chinese, who provide (lend) money and don’t make autocrats give up coercive techniques or corruption—in fact, they sometimes aid these.

The modern West—the U.S.-centered set of ideas, concepts, rules, and alliances, based conceptually on democracy, free trade, and engendering rising living standards around the world—is at significant risk of being discarded by Americans themselves.

Within, the U.S. is unraveling as a country with a set of shared ideals. Americans are largely tired of being a “beacon” and a refuge. They don’t believe, themselves, that it has worked. They don’t want the openness towards immigration that is expressed by Emma Lazarus’s famous poem on Statue of Liberty:

Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.

The erosion of internal American cohesion and resolve, and loss of self-esteem and self-confidence, together with the palpable fear of the future, has created a backlash against immigration of enormous breadth and power. For a nation built by immigrants, this shift in fundamental American attitudes is striking.

Isolationist sentiment is not just American. Josep Borrell Fontelles, High Representative for Foreign Affairs and Security Policy of the European Union, recently said:

The European Project [the EU] was built against the idea of power. Europeans . . . were fighting against [each] other for centuries. We . . . finally we decided to stop doing it and make peace. And the European project was founded on the idea of peace, exchange, cooperation, interdependency, vanishing borders, sharing the same currency. But today, this situation has become untenable.

Why is this? Because we have realized that economic interdependency in which our project was based is being captured by political and geostrategic rivalries.

We used to believe that trade will be in itself a source of security . . . trading among people will prevent them from making war . . . But then every interdependency became a weapon, and it obliged us to think differently.

Many Europeans want true borders again between their countries. They do not want the Schengen system of open travel and migration within the EU.

What went largely unrealized in setting up aspects of the globalized system was that, once it reaches a certain scale, immigration changes the culture and demographic composition of a nation in a way that no one bargained for or expected. People are not equipped to handle this, particularly given the inequality in outcomes of economic globalization and financialization, and the disorientation and fear from technological development.

But immigration is about to become much more pronounced, as climate change works its inexorable effects in making regions less and less habitable. Today, there are about 120 million forcibly displaced persons worldwide, doubling from around 60 million 10 years ago.

There will be many, many more. Global forced displacement is projected by IEP, an international think-tank, to rise to 1.2 billion in 25 years, as far from now as the year 2000 is in the past. Think of more than the entire population of North America and South America on the move! This is almost incomprehensible in its scope and effects. Combined with rising anti-immigration sentiment worldwide, it brings to mind the ancient paradox of what happens when an irresistible force meets an immovable object.

Feeling Better and Feeling Worse, Part 2

By Dee Smith

If I told you that my analytical take is that the U.S. is poised on a change so profound that it may become almost unrecognizable, you would probably assume I was referring to the incoming second presidency of Donald Trump.

I am not.

The second election of Donald Trump is a manifestation of a much more profound set of changes that the U.S.—and much of the rest of the world—is undergoing.

Let’s back up a bit.

It is worth remembering how the world we have been living in came to be.

After the devastation of World War II—following on the devastation of World War I and the subsequent global depression—the U.S. led an effort over a period of decades to invent a new world order. In some ways it was an illusion, in some ways it was defined ex post facto, and it was certainly self-serving, but it did bring some real change, particularly because the U.S. had the power to create, impose, and defend it.

This international world order was based on the idea that a set of governing rules would be put in place that would not only shape global order but would try to prevent the kind of conflict that had been so catastrophic in the first half of the 20th century.

The U.S. invited, and sometimes compelled, other nations to join, under US leadership. A kind of alternative system was offered by the Soviet Union, but even the USSR ultimately cooperated with the rules-based global order—the “liberal international order” (or LIO) as it came to be called (“liberal” here does not denote the political left).

The U.S. led and supported the creation of multilateral institutions, like the World Bank, and the United Nations and its multitude of sub-divisions (such as the COP meetings on climate). A primary role of these institutions in theory was to prevent conflict by providing a forum to address disputes, under the watchful eyes of the powers that triumphed in World War II—represented by the UN Security Council.

The U.S.—and this is critical—was the guarantor of this global peace and order, as well as the enforcer of the rules (and the rules were largely America’s). It had not only the influence but also the military might to prevail in many situations.

This system was seen by a large consensus of left and right in the U.S. to be profoundly beneficial to the country. The U.S. dollar became the reserve currency of the world, allowing the United States to sell its debt and finance its operations to an almost unlimited extent.

Eventually, the so-called “neo-liberal” economic order, based on the ideas of economists like Milton Friedman, and put in place particularly by Ronald Reagan and Margaret Thatcher, led to lowered trade barriers and massive globalization. Production went to the lowest-cost producers, resulting in cheap flat-screen TVs and the like. As mentioned above, it was obviously a self-serving system, but it did arguably pull a billion people out of extreme poverty (and of course, they could then become consumers of the products of U.S. corporations—although in an increasing number of cases, not products actually made in the U.S.).

That whole vision is now being abandoned by a majority of Americans, across the political spectrum. This was underway before Trump took office the first time (and led to his victory then), it continued during the Biden administration, and would have continued if Harris had won the election in November. Trump will simply accelerate it.

It is being abandoned not least for the straightforward reason that it is seen by a large and increasing number of Americans as not having worked, in the specific sense that it has not made their lives better.

This is particularly true for blue-collar workers, who feel that they have been “left behind” by developments in the modern world (including globalization and technology), and also feel their jobs have been increasingly taken by immigrants.

Last year, a self-produced song entitled “Rich Men North of Richmond” was put out by a singer called Oliver Anthony. It made a huge impact and debuted as No. 1 on the Billboard list—the first time anyone has done so with no prior chart history.  

“Rich Men North of Richmond” (Washington, D.C., is, of course, north of Richmond) is very telling and has serious implications, and is worth listening to for its political and social import.

The song touches on government power, inflation, taxes, low wages, food insecurity, welfare abuse, and child trafficking—as well as the general sense of dismay.

Here’s how the song begins:

I've been sellin' my soul, workin' all day / Overtime hours for bullshit pay / So I can sit out here and waste my life away / Drag back home and drown my troubles away.

And here is how it ends:

Well, God, if you're 5-foot-3 and you're 300 pounds / Taxes ought not to pay for your bags of fudge rounds / Young men are puttin' themselves six feet in the ground / 'Cause all this damn country does is keep on kickin' them down.

Anthony is a young, white male—and his song hits home for many. He was apparently very upset about the song’s invocation during last summer’s Republican National Convention: he means it as a condemnation of both parties, a sort of “pox on all your houses” approach.

The scope of the turn against the incumbent order in the U.S. (and not just in the U.S.) is breathtaking, especially when considered as a whole.

There is a massive reaction in the U.S. against the entire range of LIO ideas described above, which is a non-partisan. Martin Wolf, who writes for the Financial Times, has accurately described it as “an undoing project”. It is essential to understand the details, the causes, and the effects.

Feeling Better and Feeling Worse: Part 1

By Dee Smith

My attempts to analyze what is transpiring in as objective and unbiased way as possible apparently come across to some as a counsel of despair. That is certainly not what I intend.

But I get paid to face and analyze facts, as far as facts can be discerned. Before and after the U.S. elections, I appeared on several webinars, podcasts and in-person talks. These were to various groups with attendees ranging across the political spectrum. I observed that most Republicans clearly believed that “if only Trump is elected things will be much better” (and they now believe they will), and Democrats similarly believed “if only Harris is elected things will be much better.” The desire for relief was palpable.

Unfortunately, it is not that simple. Let me explain why.

The amount of agency any of us has is much less than we believe—even if you are president of the United States. I mean this is a very specific way: the ability to produce the outcomes you intend and expect.

Many of the problems we face are deep and structural, which is bad enough, but the real rub is that the hyper-complex social, political, geopolitical, economic and environmental situation in which the problems exist is unpredictable as a fundamental property of its nature.

First of all, it can be extraordinarily difficult to instigate actual change. Some time ago, I was doing a project directly for the CEO of a Fortune 100 company. In a meeting, he expressed his intense frustration that “getting this company to do anything — to change anything — is like turning the Queen Mary . . . and I’m the CEO!”

Large systems, whether companies or countries, become highly resistant to efforts to nudge them to change. For example, for all his attempts to do so, over a decade and multiple terms in office, Victor Orban has actually changed the trajectory of Hungary as a country very little.

People who take a disruptive approach can initiate change better than those working within the guardrails of a system. Trump is such a disruptor, so he will be able to instigate many changes. But the nature of the world we live in means that neither he nor anyone else can actually predict and control the effects of such change for long.

And sometimes intended changes are just impossible within a certain situation. For example, both Trump and Harris promised to revive the American industrial working class. But this is almost certainly doomed to failure. Within a decade or two, automation, robotics, 3D printing and other technologies will produce nearly all factory goods. Automation — not offshoring — already accounts for more than 80 percent of job losses in the past 2 decades. Promising a job-rich manufacturing renaissance is meaningless and unfulfillable.

Rigorous analysis of how complex systems behave is one of the triumphs of 20th century science. The study of complexity has explained why, when change occurs, it is often abrupt and unpredictable. Complex systems are full of hidden links. The 2008 financial crisis offered many examples. Even small changes can produce enormous effects downstream. Many actions have unintended consequences: unanticipated knock-on effects (2nd-order, 3rd-order, etc.). Complex systems are full of tipping points. If you add grains of sand to a sandpile, it builds up until the pile reaches criticality — and then experiences a small avalanche. Such systems also exhibit cascading phenomena and non-intuitive inverse relationships.

We have created the most complex human civilization ever. The insuperable interconnectedness and complexity of the world have raised such unintended consequences and related effects to an immense level.

The 18th-century European Enlightenment formalized a belief system proposing that the world was generally linear, logical and predictively manipulable — that certain inputs would reliably produce certain outputs. That is of course what modern science and technology are based on. If you isolate phenomena — a smooth ball rolling down a smooth incline, or a closed electrical circuit — that view is generally true. But in the real world, the balls are seldom smooth, nor are the inclines.  

A good example is in the practice of “pro-forma” financial analysis. The rise of spreadsheets like Excel has led people to believe that they represent the real world and can predict real-world outcomes. But they are abstractions and seldom forecast what actually transpires, because there are too many variables and exogenous elements. The use of such spreadsheets and the illusion of comprehensibility and predictability they engendered were deeply involved in causing the 2008 financial crisis.

There is a term that originated in the cyber security world called “security theater.”  It involves putting in place measures that look like they will increase security but actually offer little protection, if any. They are there simply to make people feel better and to offer legal protection to the entities that deploy them.

Much of politics is analogous. As a species, we seem to most want from our leaders promises that make us feel better. That the promises are impossible to keep seems to matter little or not at all. But, as those promises are broken, we become very angry, and, if we are living in a democracy, “kick the bums out” only to vote more in to make and break more promises. Over and over and over.

Where does all that leave us? How do we move forward?