Recommended Weekend Reads

January 5 - 7, 2024

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

US Primaries

• “The Iowa Caucuses, Explained”  The Voting Booth Podcast/American Enterprise Institute

  The Iowa Caucuses, the first-in-the-nation presidential primary vote, are unique. It is not a primary like virtually every other state conducts.  And it is run in a very community way, where people come together – sometimes even as small a group as a gathering in someone’s living room – to choose the candidate they want for the Republican and Democratic nomination – usually by simply scribbling names down on a piece of paper.  But there are even more fascinating nuances to the Iowa Caucus. In this fascinating podcast, Co-hosts John Fortier and Don Palmer are joined by Alan Ostergren, an election law attorney in Iowa, to explain how it all works.

Geoeconomics

• “The Coming AI Economic Revolution”  Michael Spence/James Manyika, Foreign Affairs

  By the beginning of the next decade, the shift to AI could become a leading driver of global prosperity. The prospective gains to the world economy derive from the rapid advances in AI—now further expanded by generative AI, or AI that can create new content, and its potential applications in just about every aspect of human and economic activity. If these innovations can be harnessed, AI could reverse the long-term declines in productivity growth that many advanced economies now face.

• “Artificial Intelligence and the Clustering of Human Capital: the Risks for Europe” European Centre for International Political Economy

  This paper argues that Europe trails the global frontier of productivity growth, and the region’s trend is sluggish.  Much prospective economic growth for Europe is likely to come from AI and its adoption by European firms, which is projected to shoot up the productivity trend.  For such AI-generated growth to work, high levels of human capital need to be available for firms, in particular, Science, Technology, Engineering, and Mathematics (STEM) graduates.  However, much of this human capital for AI is leaving Europe and the region experiences a net outflow when it comes to the skills required to make AI work.  Moreover, the spread of both human capital and AI is very uneven within Europe, with some in the West spearheading whilst others in the East are trailing.

  This paper shows that those regions in Europe that successfully have invested in human capital in the past explain more than one-third of AI adoption by their firms a decade later. Furthermore, this persistent trend is driven by the most human capital-intense firms as they explain more than 50 percent of the observed adoption of AI across Europe.  The clustering of human capital is very persistent over time and those that lag in human capital now will weigh down Europe’s ability to generate AI-related growth in the future.  This will likely have long-lasting effects for Europe as a whole, defining its capacity to catch up to the global frontier or amplifying the region’s slow-moving growth and productivity trend.  Policy makers who are serious about creating growth in the future on the back of AI should therefore invest in human capital now, or else Europe will further fall behind.

Russia

• “The Cost of the Ukraine War for Russia”   The Rand Corporation

  In this report, RAND researchers present estimates of what costs Russia is incurring as a result of its invasion of Ukraine. As of September 2022, researchers estimated military costs reached $40 billion. Full-year 2022 gross domestic product losses amounted to between $81 billion and $104 billion and full-year financial capital destruction reached $322 billion. Direct military spending may amount to almost $132 billion through 2024. Over the long term, even with a stalemated war, Russia's economy and the standard of living of its people are likely to decline. The main factor sustaining Russia's economy is the export revenue it earns from oil and gas sales. Despite these significant economic losses, RAND researchers judged these costs to be sustainable for the next several years.

• “A Roadmap to Russia’s 2024 Presidential Election”  Foreign Policy Research Institute

  With four months to go until the presidential elections in Russia, the Kremlin seems to still be firmly holding the reins of political institutions.  It has also sought to reduce its dependence on regional power brokers and officials.  So what can markets expect in the coming months as we approach a historic almost-certain relection of President Putin?

• “Over 1,000 Companies Have Curtailed Operations in Russia – But Some Remain” Yale School of Management

  In this recently updated report, the Yale School of Management details how more than 1,000 companies have publicly announced they were voluntarily curtailing operations in Russia. But not all Western companies have done so.  In this report, Yale gives a school-style letter scale of A-F for completeness of withdrawal.

The Eastern Mediterranean 

• “Turbulence in the Eastern Mediterranean: Geopolitcal, Security and Energy Dynamics” International Institute for Strategic Studies

  In recent decades, the Eastern Mediterranean basin has emerged as a strategic flashpoint. Historical grievances, regional conflicts, maritime disputes, defense-modernization drives, rivalry over energy resources and export routes, and worsening transnational threats cyclically come to a head to produce geopolitical ripple effects. The vast imbalance of power between the various players, the relevance of Mediterranean energy deposits since Russia’s war in Ukraine, and the renewed interest of major external powers have inflamed dormant fault lines and fuelled active battlefields. No single player, or set of players, appears able to dominate this space. Instead, its mix of powerful and weak states, as well as non-state armed groups of varying strength and ambitions, guarantees constant realignments, brinkmanship, and competition.

Chart of the Week 

China’s Youth Unemployment: The Missing Millions

In August 2023, Beijing’s National Statistics Bureau announced the latest young unemployment figures, which hit a record high of 21.3% percent (June).   This was an increase from 20.8% in May and 20.4% in April.  In the release, the Bureau also announced they would suspend all future releases of youth unemployment.   

Separately, in July, Caixin, one of China’s most prestigious magazines, cited a study from Peking University suggesting the real youth unemployment number could be as high as 46.5% if statistics included 16 million young people who chose not to look for work or who lived with their parents.

So what is the real number?  Whatever it actually is, it is almost assuredly much higher than reported and a true internal political risk for the Xi government.