The present and the future flow from the past, and so, the year that we see off will always leave its imprint on the year we ring in. But rarely is a Janus view as much an imperative to anticipate the contours of the new year, as we move into 2023. A clear vision of 2022 is essential to clear the mist over 2023.
The past year has been a watershed, in multiple ways. A shooting war has broken out in Europe, between the inheritor state to a former superpower and a former constituent of the superpower that disintegrated. All the concerted arming of Ukraine by the US for the past decade or so and its offer of NATO membership should, perhaps, have primed the world for the outbreak of open hostilities on February 24, 2022, when Russia started its invasion of Ukraine, but still, it caught the world by surprise.
The national revolutions that broke up the Eastern Bloc offered surprising proof that revolutions were still possible in the modern era, where the instruments of totalitarian control are far more effective than they were in the 19th century, when revolutions were frequent and widespread across Europe. Revolutions that threw off the Communist yoke in Eastern Europe blunted the edge of surprise at the Arab Spring, when that broke out. They should prepare us for dramatic change in the regime in China as well, sooner or later.
War is possible, with all its awful potential for destruction of lives and life as previously lived by those not killed. It might not happen in 2023, but Taiwan, the Korean peninsula, and the India-China border are potential hotspots, alongside the endemic hostilities of Africa and the simmering tensions between Serbia and Kosovo.
End of unicorn obsession?
Something else changed drastically in 2022: interest rates in the tight grip of gravity. The reign of near-zero policy rates, which extended nearly one-and-a-half decades over North America and Western Europe, has come to an end. And, with it, the urge to splurge the ageing West’s savings on developing Asia’s growth potential.
With yields of 4% or more on deemed-risk-free government bonds in the US and Western Europe now a stable reality, portfolio, private equity, and venture flows to emerging markets would lose force. Of course, these would not dry up altogether. But a large part of the funds that used to cross borders with the cheeky risk appetite of people-smugglers would now look askance at the risk premium on deploying funds in emerging markets with volatile exchange rates in the hope of extracting a rate of return higher than on offer from the risk-free assets back home.
Venture funds that were happy to attach burn rates to the bundles of cash they gave startups with no revenue model — in the hope of selling out at a bloated valuation to some sucker struck by the fear of missing out on the latest funding fashion, say instant grocery delivery — would turn sober. India’s pink papers would toast fewer wunderkinds and their unicorns that always smelt magically sweet, somehow free of the bodily excretions and their smells that inevitably accompany even the noblest Arab thoroughbred in the real world.
And that would be no bad thing. The obsession with unicorns has been starving any number of deserving but non-flashy startups of capital, even as it fed some heavyweights way more capital than they could put to productive use. Hopefully, this would also erode the segmentation of the small business universe into the charmed circle of startups that could hoover up zero-cost capital and those who missed out on that nomenclature but make useful things with a ready market but struggle to raise capital at even 18% a year.
Release from fantasies
The world released itself from two fantasies in 2022: the longstanding charms of the British monarchy, and the notion that cryptocurrencies offered the world’s truly liberated a way out of dependence on fiat currency, money underwritten by that enemy of liberty, the state. Queen Elizabeth II revealed the monarchy’s all-too-mortal underbelly, while Prince Andrew and Prince Harry drew attention to the underbelly’s underbelly in their own respective ways.
Sam Bankman Fried, the so-called genius of cryptocurrencies, sank FTX by filching money his clients held in this crypto exchange. We can bid unregulated, freewheeling cryptos a heartier goodbye than the one we offer 2022.
Unemployment touched record lows in the rich world in 2022 — 3.7% in the US, Britain, and the Netherlands, 3% in Germany and 6.5% for the Euro area. Inflation has pushed workers to demand higher wages across the West, backing up their demands with strike action. Given the difficulty of finding replacement workers in an extremely tight labour market, employers would give in to these demands.
Companies would recoup higher outlays on labour through higher prices for their products and services. This would sustain inflation in 2023, which, in turn, would keep interest rates elevated, aided by the stepped-up borrowings of governments under pressure to offer citizens subsidised energy.
After all, central bankers are mandated to fight inflation and all they have are monetary tools. So, they raise rates when prices go up. It is the politician who can wield the only tool that can kill inflation caused by a wage spiral arising from labour shortage — immigration. Only a liberal policy of immigration in the rich world would end the ongoing tango between rising prices and rising interest rates. With politicians fomenting fears of loss of identity — Christendom under siege, white people under coloured thumbs — liberal immigration policies are difficult to implement, even for political leaders who see the sense in them.
So, gear up for elevated interest rates in the rich world, scarcer external capital in countries like India and a low-growth external environment, which India can put to good use, taking advantage of the low commodity prices low growth would create, if sufficient gumption is summoned to use domestic borrowings to invest in the physical and social infrastructure that would create growth now and sustain prosperity in the future.
Climate battle and nuclear power
The echoes of bold promises at the Glasgow climate summit late in 2021 had hardly faded when they were drowned in the tumult of the Ukraine war. The West chose to punish Russia, and themselves, with sanctions, rather than accept that it was reasonable for Russia to expect Ukraine to remain neutral, instead of agreeing to deploy NATO troops and missiles right across Russia’s border. These sanctions blew up all climate change considerations, as Europe scrambled to burn any fuel it could lay its hands on, in place of oil, gas and coal from Russia. Germany began to burn lignite, the dirtiest form of coal.
Large amounts of capital are being locked up in infrastructure to liquefy natural gas, produce containers to carry them at ultra-low temperatures across oceans in specialised tankers, and new terminals to unload this LNG and convert it back into gas. This would prolong the use of gas as an energy source. While gas is cleaner than coal, it is only about 50% cleaner, for the same amount of energy produced.
The Ukraine war has forced a reckoning on nuclear power. The Germans have been forced to abandon their prissy dislike of the stuff. More and more policymakers around the world begin to understand why someone like Bill Gates has been supporting nuclear power as the cleanest way out of the climate crisis. Small modular reactors, whose components are mass-produced in factories and assembled where the plant has to come up, will replace costly, site-specific, custom-built, and therefore, more costly traditional reactors.
Yet, climate action was muddled in 2022. Instead of focusing energies on carbon dioxide removal from the air, the only hope of containing temperatures below 1.5 C above pre-industrial levels, a new obsession with loss and damage threatens to divert climate funds to corrupt politicians to squander in the name of building resilience.
A US government lab, the National Ignition Facility, managed to produce ‘gain’ — an excess of energy output over the input — in a brief moment of nuclear fusion using inert lasers. But the gain was exaggerated, in not factoring in the full energy used up in generating those lasers. This gave rise to false hopes of mastering nuclear fusion to produce endless amounts of clean power. But the International Thermonuclear Experimental Reactor (ITER) project got a boost in 2022, with its facility in the South of France getting a giant magnet from Russia, in the midst of the West’s boycott of things Russian. This is likely to produce nuclear fusion energy sooner or later, even if not in 2023.
A win-win for the US
The Ukraine war has been a major win for the US. Its old foe, Russia, bleeds. The human cost of this enterprise is borne by Ukraine — no American troops are at risk. Europe struggles under an energy crisis, subsidy burdens, and steep import bills for energy. The US supplies them with LNG and coal, having lifted a longstanding ban on the export of crude drilled from American soil.
The US sits smug on flourishing hydrocarbon exports and the domestic building of a subsidised decarbonization industry, with funds from its Interest Rate Reduction Act. US arms manufacturers fight delirium as they make their way to the bank, buckling under the weight of funds from recently expanded defence budgets in Europe and Asia.
Qatar hosted the World Cup quite successfully in 2022. With the first African and Arab team, in the form of Morocco, making it to a World Cup semi-final match, there has been a surprising outbreak of bonhomie among Arab nations, and this is likely to strengthen their ability to cartelise hydrocarbons and resist western attempts to arm-twist them individually.
Israel has put a radical Arab hater in a powerful position in its new government led by Netanyahu, but is making progress on improving ties with the Arab world, so much so that the focus is now on demining the border between Israel and Lebanon. A plane flew in football fans from Tel Aviv to Qatar, breaking a previous taboo.
This, incidentally, makes India’s good relations with both Israel and the Arab world less contentious in domestic politics.
2022: A year of uprisings
Closer to home, China began diluting its Zero-Covid strategy soon after Xi Jinping moved one step closer to his goal of Mao-hood, being anointed leader for life at China’s 20th Party Congress. Covid lockdowns forced the long-suffering Chinese public to rebel in the open, some calling for Xi Jinping’s removal. This new, unexpected peal of spring thunder augurs well for the dawn of democracy over that land, at some point in the future. The lifting of restrictions has freed the Covid 19 virus to rampage across China and its under-vaccinated masses. This has jacked up case numbers, giving rise to fears of fresh mutations that could be lethal across the world in 2023.
The year that has gone by saw remarkable political movements to advance liberty led by women: one in Iran, where resentment against oppressive cultural policing by the Islamic theocracy has boiled over into protests against the regime that has now lasted more than three months.
In the US, after the Supreme Court overturned the Roe vs Wade ruling that had granted women a nationwide right to abortion, women turned out in large numbers to vote in the midterm elections, and turned a predicted rout for the Democrats into something far less daunting, with most Trump-backed, election-denying candidates being defeated, the Democrats retaining a majority in the Senate and the Republican majority in the House hanging by a thread.
If the women-led protests sustain and democracy advances in Iran, that would set an example for Afghan women, where the Taliban has banished them from public places, including schools and colleges. Then, perhaps, it might persuade Indian Muslim women also to see the hijab not just as a marker of their religion but also as a marker of male control of women’s sexuality, without which also they could live lives of devout dignity. Till these women give up the veil on their own, any attempt to forcibly remove the hijab would be majoritarian bullying, as has been happening in Karnataka.
We enter a new year of recovery from war, pestilence, and their aftereffects. It holds out new opportunities based on technological advancements in telecom connectivity, in combating climate change and a new kind of energy-efficient urbanisation. Whether a government that obsesses over retaining political power through divide and rule will be able to make good on those opportunities is open to question, however.
This article was also published at The Federal as A Janus view: How the watershed events of 2022 will shape 2023 on January 1, 2023
Also read Indian Economy: The Year That Was, and the Challenges Ahead by Nilanjan Banik on IMPRI Insights