Citicorp Vice Chairman Hamid Biglari
Water Will Be the New Source of Conflict
In this exclusive interview, Citi's executive in charge of emerging markets offers a cautious forecast for the global economy, and considers five transformational concepts that are set to reshape our world.
Water Will Be the New Source of ConflictBy Yi-Shan Chen
From CommonWealth Magazine (vol. 513 )
On December 5, Citigroup's new CEO Michael Corbat announced that Citi, the banking conglomerate with branches in more countries than any other in the world, would lay off around 4 percent of its total workforce, cutting US$1 billion in annual expenditures. In the future Citibank branches will be concentrated in the fastest-growing 150 cities worldwide.
What logic does the new Citi strategy reflect? What turns does Citigroup expect the global economy to take in the next five years?
Hamid Biglari, vice chairman and head of emerging markets at Citicorp (the strategic operating arm of Citigroup) and one of the United States' most successful Iranian-American businessmen, oversees Citi's operations in over 100 markets. In January 2013 he will be in Taiwan to take part in the CommonWealth Economic Forum, offering his assessment of major global economic trends for the coming year.
At the end of November, he sat down with CommonWealth Magazine for an interview at Citi headquarters in New York. Frankly admitting Citi's conservative outlook for the next two years, he anticipated increased volatility in emerging markets and predicted that Europe may take a full decade to solve its current financial woes.
Biglari shared five "transformational concepts" that are set to alter the global paradigm, namely: an energy revolution, a new industrial revolution, massive online education, mobile technology and Big Data, and the need for efficient use of water.
While conservative in the short term, Biglari believes new revolutions in energy and industry will kickstart a resurgence in the American economy.
By 2020, the United States will no longer rely on Middle Eastern oil. The wars of the 20th century, fought over access to petroleum, will be replaced by a struggle for water.
Following are highlights from the interview.
Q: Could you please share your view on what 2013 holds in store for the world economy?
A: In my view, we are in the middle stage of a global rebalancing that started in 2008 and will probably not reach a new equilibrium before 2017. For 2013, we expect to see global GDP grow at about 2.6 percent, slightly better than the 2.5 percent we have seen in 2012. We then expect to see 3.1 percent global growth in 2014. We grow more positive after that in that we expect the modest growth in the next few years to set the stage for an economic resurgence in the 2015-2017 period, where global growth will reach new equilibrium levels of 3.5 to 4 percent.
Q: Citi's view is more conservative than the OECD, IMF and World Bank. What makes you so pessimistic for 2013?
A: It is true that our expectations are more conservative than either the World Bank or IMF. Our conservatism comes from how we balance growth drivers and their associated uncertainties. As we see it, there are three main drivers for global economic growth over the next several years: China, the US, and the rest of the emerging markets.
In the last five year - since 2008 – China has accounted for around half of all global growth. Looking forward, we expect its growth rate is going to come down from the double-digit levels of the last four years to an average level of 7 percent in next four or five years. Even at that level, China will still account for one-third of world GDP growth.
In terms of the US, we are cautiously optimistic that it will address its long-term fiscal issues in 2013. For that and other structural reasons, we believe the US economy will have a major resurgence by 2015 -2017.
The third driver of global growth is from emerging countries, where the increasing middle class, growing urbanization and infrastructural investment which we have already witnessed will likely continue. Those are the three contributors of global growth.
Balancing those drivers are four major uncertainties. It will come as no surprise that these uncertainties are associated with China, the US, Eurozone and the emerging economies. But what is perhaps more interesting is that the relative importance of these uncertainties will change from the near-term to the medium-term.
The largest near-term uncertainty is the Eurozone. The prospects for Eurozone over the next decade are, simply put, very challenging. The near-term risk is Greece and whether it can remain part of the Eurozone. The medium-term risk involves Spain and Italy. Finally, the long-term risk is whether Eurozone countries can implement some version of a fiscal union to stay together.
One structural change Europeans will need to consider is the creation of a pan-European banking system. What you would then have are European banks, which will require each country to give up some of its sovereignty, something which they will be very reluctant to accept. So in every phase, these are very hard issues to solve. That is why we believe the problems of Europe are long-term and may take a decade, if at all, to resolve.
The Case for Optimism
If you turn next to the US, its challenges are near-term but I believe it has much better prospects in the medium term. We are cautiously optimistic that in 2013, a grand political bargain will take the country's long-term fiscal uncertainty off the table, including tax reform, and put the country on a path of fiscal sustainability.
The second reason for optimism is that the housing crisis is turning. We have already seen it hit the bottom last year. We expect fairly dramatic recovery in the housing market over the next 3-4 years.
The third reason for our long-term optimism is a belief that the US could experience an energy revolution in the second half of this decade, which would then result in North America becoming energy-independent. This will be a major global event.
The fourth reason for optimism is that both the US banking system and corporate segment are quite sound. If you put all these factors together, you can see why we believe the US can surprise on the upside in the next few years and become the second major driver of growth in the world economy.
Going back to uncertainties, the third uncertainty is China. China is going through its own rebalancing. Over the last decade, China's growth was heavily investment-led. Over the next decade, China will need to rebalance its economy in several ways. The first is a reform of the financial sector. No major economy can become mature without an efficient financial system to intermediate the transfer of capital from savers to borrowers.
Q: What kinds of financial reforms?
A: Deeper capital markets, a convertible currency, a level playing field and open competition in banking, interest rate deregulation, and some deregulation to introduce innovation and new products, particularly investment products in different phases of life including retirement.
A second major economic reform will be rebalancing economic growth from investment to consumption. At about 36 percent, consumption is too small a share of China's GDP. It is not because consumption hasn't grown, but because investment has grown so much faster.
The third reform required is pricing reform. Many prices are still regulated, not determined by market forces. The fourth change required is social reform, including reforming the pension system to allow more protection in older age and possibly a change in the one-child policy to rebalance China's demography from having an insufficient working population. Also, if people think they will be taken care of in old age, they will consume more, which will help the rebalancing of the economy away from excess investment.
The fifth reform required is privatization. Chinese leaders have themselves commented on the many inefficiencies they see in the country's SOEs. The sixth change is governance reform. Many Chinese leaders have also commented on corruption and the need to address it. These are the major reforms China will need to undertake to become a global economic power. We believe the world needs China's new leaders to succeed. If China has a misstep, the entire world would be negatively affected.
The Emerging Market Wild Card
The fourth and final uncertainty is related to emerging markets. When advanced economies go through deleveraging, the emerging economies will need to take the other side of this global adjustment process, which means that their trade accounts will move from surplus to deficit. This is a phenomenon we have already begun to see in the past couple of years. We would expect to see currency appreciation in some of the Asian markets. This is where the risks come in, because policy-makers are not enthusiastic about either currency appreciation or trade deficits, and we may see ad hoc market and currency interventions. History tells us that interventions against market forces are seldom successful and seldom result in positive outcomes. So it would not be surprising to once again witness large volatilities in some emerging countries.
Q: What do you mean by an energy revolution?
A: There are six reasons we think an energy revolution could unfold in North America over the next five years.
The first is shale gas. Shale gas discoveries have dramatically changed the outlook for energy resources in the US. The second is tight oil, which is extracting oil from tight rock formations that have hitherto been impossible without new technology. The third reason is that deep water oil extraction technology is improving significantly and expected to increase extraction from Gulf of Mexico. The fourth reason is the emergence of biofuels. The fifth is the improvement in battery technology and further evolution of electric vehicles. We believe that over the next decade, electric vehicles will be increasingly used.
The sixth and final reason, as important as shale gas, is demographic change in the US. As the US population ages, people use cars less and the demand for oil comes down. We believe that the net impact of these six factors is to make North America energy independent by 2020. If this expectation is borne out, the equilibrium price of oil would then go down, with significant geopolitical consequences.
There is one crucial assumption embedded in the first of these reasons, and that is that the environmental impact of shale oil extraction can be solved. Pollution is a major area for concern. Many experts believe that technology could overcome these issues. If they are right, these factors would profoundly impact the US by the end of this decade. North America could become an oil exporter instead of importer, and that would result in a resurgence in the US economy, because linked with this could be another industrial revolution, which is a different dynamic underway.
Q: Are these two revolutions independent or correlated?
A: They are independent, but reducing energy costs would improve the industrial competitiveness of the US.
That second trend, digital manufacturing, comes from the convergence of new technologies, such as advanced robotics, 3D printing, innovative new software, and a whole range of web-based solutions. This convergence is just one side of the story. The other side is the revolution in supply chain management. Because it will no longer be necessary to manufacture parts in low-labor locations, 3D printing will allow manufacturing to be done closer to the customer.
That would dramatically change the topology of the global economy. As the demand for oil goes down, the importance of the Middle East in geopolitics could materially diminish by the end of this decade. Russia can also be significantly affected. Currently, Russia's economy is basically undiversified, heavily reliant on oil and gas. If oil prices meaningfully go down by the end of this decade, it would put a lot of pressure on Russia's economy unless it materially diversifies over the next five years. That would have a very profound impact, since currently Russia needs an almost $120 oil price level just to balance its budget. All these changes would also have big implications for manufacturing-intensive countries like Taiwan, which require it to rethink its industrial strategy.
Q: There is a lot of discussion about China's slowdown. People believe 7 percent growth is not enough to provide fiscal revenue, which may result in political uncertainty and banking issues. Also, people are concerned about the shadow banking system. How serious are these issues for China?
A: Let me respond more generally. The broad question you are posing is whether China has enough tools at its disposal to manage its period of adjustment as its growth rate goes down from high levels. There are two broad types of policy tools: monetary policy and fiscal policy. China's interest rate is about 6 percent, which is very different from zero in US, so it has substantial room for monetary easing if it so chooses. That is one dimension. The second dimension is that China's debt-to-GDP ratio is low by global standards. That means that if their leaders feel the need, they could stimulate the economy, such as accelerating the Five-Year Plan with more infrastructure investments. They can implement a number of the reforms I mentioned earlier which would boost the economy.
The core question for China goes back to whether all the reforms required can be implemented effectively in a short enough time frame to keep the economy on a steady path or whether it will be a choppy path. If we examine the history of Japan and Korea, we see that they went through a very choppy path when they were in their middle-income stage. That is why economists call this stage the middle-income "trap." When countries grow from low- to middle-income levels, there are not many complications. Low wages are sufficient to attract foreign investments. It is more challenging when countries make the transition from middle to high income. China is about the stage to make this transition. This requires skill. China has demonstrated its skill over the past thirty years, and that should give us some confidence that they will manage the next transition well. My general point is that people looking at China going from double-digit rates of growth to 6-7 percent portray it as a disaster. It is not a disaster. It is natural. Trees don't grow to the sky! Six- to eight-percent growth levels for China over the next decade are absolutely a sustainable pace. It is an opportunity for the fifth generation of leadership to make its mark. The economic fate of the world hinges on their success.
Q: Could you share five ideas that could change the world?
A: I already shared two such transformational concepts – the North American energy revolution and industrial revolution. The third idea I would say is massively interactive online education. Perhaps the single biggest problem in the world today is the growing social inequality between those who have the skills to participate in the economy and those who do not. The most important reason for the absence of economic participation skills is inadequacy of education. One phenomenon that could revolutionize education is massively interactive online education, which creates a level playing field to bring high-quality education to people everywhere. Organizations like Coursera, which brings top-quality professors from schools like Princeton and Stanford, are experimenting with lectures to 30 or 40 thousand students at a time around the world. That promise could provide access from the best professors to any individual around the world who has access to the Internet. That could result in a profound change in human productivity.
The fourth world-changing concept is mobile technology and Big Data: Moore's Law still has another decade to go. We will see the cost of bandwidth going to zero, and content can be distributed at close to zero cost. This has enormous implications. For example, a large part of the world population that currently has no access to banking could become bankable through mobile devices. Large segments of India or sub-Saharan Africa would suddenly gain access to efficient financial transactions. This would profoundly change the life of these people. For example, it would allow them to immediately know the market price of the agricultural product they produce, which would prevent middle-men from extracting economic rent from them, and improve the efficiency of the agricultural supply chain.
The fifth profound change we will see is the availability and access to water. It may not be an exaggeration to say that water could become the new oil and will have profound implications for the world. 97.5 percent of the world's water resides in oceans, which is salty and hence not usable. Of the other 2.5 percent, 1.75 percent is frozen in the polar ice-caps. So all living things on land depend on 0.75 percent of the world's water supply, which includes surface and underground water, lakes and rivers and so on. Think about this. Water is a very rare resource, but right now we use it for free. Many world countries are running out of water, but moving water is very expensive. Because the weight of a cubic meter of water is one ton, water is essentially a local resource. A handful of countries – Canada, Brazil, Colombia, the U.S., Russia, Congo, essentially countries close to the poles and the equator – control 80 percent of the world's usable water. And 70 percent of that water is used in agriculture. So if we start to charge for water because it is a scarce resource, it would have an immediate impact on food prices. Needless to say, this will have huge consequences and can be a source of potential conflicts. Maybe we will see it in the next decade, not this decade. But we need to think about it in this decade, because the world is not efficient in using water. The only country that efficiently uses water is Israel, where 80 percent of water is reused. The next country after Israel is Spain, where about 35 percent water is reused. Efficiency in terms of using water is a very important issue to come to grips with.