There is much to worry about in the age of higher volatility and lesser leadership
THE PANAMA PAPERS have illustrated that political leaders anywhere are no longer invulnerable beyond their borders. Parking money abroad is no longer safe: a single data leak can lead to widespread geopolitical disruption, a prime ministerial resignation in Iceland, a judicial case in Pakistan. The precariousness of long-established ideas of geographical security confirm what other trends have suggested for some time: we have entered a period of sustained geopolitical volatility.
Assessing this volatility, its antecedents, and its effect on the global economy is something like peeling an onion: we must peel each facet layer-by-layer—only hoping that in doing so our eyes do not water and the onion does not start to stink. The layers are indicative of both broad trends and specific ones. Sometimes, the layer underneath modifies or even undermines the layer on top. Unfortunately, there are good reasons why our eyes have already started to water, and none to stop the stink.
The first, outer ‘layer’ contributing to geopolitical volatility is a series of recent disruptions to the traditional Westphalian ideas of a global system of sovereign nation states. These are troubling developments that question the very notion of national sovereignty, non-interference in ‘internal affairs’, fixed territories, and control over one’s own domestic politics. Could this mark a structural change in 21st century global affairs? Perhaps it is too early to tell, but the signs are alarming.
Today’s world leaders appear to lack the statesmanship, the breadth of vision, and the generosity of spirit of those who created the post-1945 world order
The major disruption to Westphalian sovereignty is, of course, the rise of a stronger China, fuelled by economic prowess, military might, and a renewed eagerness in the application of its hard power. The South China Sea has become the site of a host of territorial disputes that open the floodgates to attempts at capturing the region’s economic resources and strategic value.
This is not a fleeting moment, but rather a part of a wider mobilisation within the leadership ranks of China’s elite, revealing their willingness to use its hard power across the globe: in the South China Sea, in Pakistan, and across Africa. To be sure, the extent of Chinese willingness to assert hard power in the South China Sea is yet to be revealed—though Chinese willingness to flex its muscles in its backyard and even to ignore global rules by supporting hackers to attempt to gain access to critical strategic intelligence resources is an indication of its unsettling global aspirations.
However, the layer beneath undermines this one. China is the only country with a scalable global economic strategy, but it is experiencing a slowdown, making it the most important and most uncertain driver of change today. Its current growth is down to 6 per cent—after decades of double digit growth—and it seems unlikely to rise above that for the next five years. (This would hardly be bad news for most of us: China still adds a Switzerland every year to the global GDP, since its reduced growth is still about $800 billion and, according to the IMF, it is on course to be a $15 trillion economy by 2020). But nations exporting to China are already feeling the pinch of reduced demand: the collapse of the global steel industry is directly attributable to the China slowdown.
Power struggles in the Saudi royal family can disrupt global security, with potential for disruptive political tensions
To maintain control in the face of a slowing economy, China may be tempted to assert nationalism to increase domestic support, such as in territorial disputes in the South China Sea and the Senkaku-Diaoyu islands in the Sea of Japan. If these actions develop an irrational momentum, they may disrupt major sea lines of communication and a global modular supply chain that has allowed for the diffusion of wealth away from traditional manufactures and into less developed countries, threatening the new-found prosperity of emerging markets around the world.
ONE ELEMENT IN the threat to the Westphalian order is the Rise of the Strongman—Xi in China, Putin in Russia, Modi in India, Erdogan in Turkey, to name a few. While strongmen assert their own country’s sovereignty, they are sometimes less respectful of other nations’ sovereign rights. Putin’s annexation of Crimea in 2014 and his involvement in the civil unrest in Ukraine, as well as his decisive intervention in Syria, and Xi’s assertive noises in the South China Sea, are the most globally significant of their actions. Under Putin, Russia has played its cards well, emerging as a cannot-be-ignored player on the world stage again after its post-Cold War eclipse.
Another big layer of the onion (which has already prompted a few tears) is the collapse of oil prices by 70 per cent since their peak two years ago. This phenomenon is not fully explicable by the laws of economics, since demand has not dropped and supply has only marginally increased. The impact on oil companies has been dramatic: Shell’s billing, for instance, has dropped by $15 billion a month, from $42.2 billion to $26.5 billion, and the figures have similarly declined for BP and Exxon. The price of oil is now well below break-even levels for a number of exporting countries, especially Venezuela, Nigeria and Russia, negatively impacting their sovereign credit ratings and plunging them into economic uncertainty with grave risks of mounting political instability. The introduction of Iranian oil to the global market and an increase in American natural gas exports will only continue to weigh down global energy prices. Persistently low energy prices will send tremors throughout the globe. While low energy prices prop up some economies across the world, they also contribute to global volatility and wider changes in the landscape. Putin’s Russia, suffering from unprofitable oil exports, is forced to find other means to command legitimacy from its citizens.
ISIS threatens vast swathes of the Middle East and threatens to expand into other areas with a significant Muslim population
Meanwhile, the US rivals Saudi Arabia as the world’s biggest oil producer; since 2013 it is fully self-sufficient in oil. One consequence of this is that the Middle East is of much less strategic importance to the US than it used to be. Conflicts in the Middle East—including the threat of civil wars prompted by slowing economies and domestic tensions—may have to manage themselves. (Though the United States’ strong and persisting interest in the security of Israel and the maintenance of a secular, democratic Turkey will keep it involved to some vital degree in the region.)
But there are other worries in the Middle East: power struggles in the Saudi royal family can disrupt global security, with potential for disruptive political tensions or even, some analysts fear, a civil war. Recent events, including the war in Yemen, have raised concerns amongst many that the House of Saud may externalise its problems by participating in conflicts across the region to promote nationalism. The lifting of sanctions on Iran has sharpened Sunni-Shia tensions in the region. In Syria, the civil war continues unabated, with shifting military fortunes but no realistic prospect for a decisive military victory for any group. One possibility remains the de facto creation of a smaller Syria, within territorial boundaries that could be controlled by the Syrian government, incorporating Damascus, Homs, Tartus and Latakia, and if possible, Aleppo and Dara, if the Syrian Army can hold on to them, perhaps with some Russian support. Even if the government retains its control of Aleppo despite being physically separated from the rest of the government-controlled territory, Syria would de facto become fractured; the official Syria, headquartered in Damascus; a Kurdish area, de facto autonomous; a landlocked desert country dominated by the various Sunni groups; and a sort of half-land of the Druze minority in the South.
This in turn implies other vulnerabilities: might the Kurds be tempted to create their own state in their homeland? This would have serious implications for Turkey, whose own Kurds might be emboldened to seek separation, teaming up with their fellow Kurds in Syria and Iraq in pursuit of the irredentist dream of a Kurdish nation that was rejected by the map-makers who drew the region’s borders after the First World War. Turkey’s own commitment to Syria’s territorial integrity aims at curbing any such dreams. Right now, Iraq’s Kurds are content enough in their de facto statehood within Iraq—they have a government, a parliament, and even a flag, with the exception of a seat at the United Nations. But if Syria disintegrates, Turkey is bound to act aggressively to preserve its own territorial integrity in the face of a possible Kurdish secession.
This may seem excessively alarmist, but it is not beyond the realm of the possible. Turkey itself is not entirely calm, as aggressive politicking by the ruling AK party, to replace the country’s parliamentary system with a presidential one, has set off unrest that could further damage an already troubled Turkish business and investment climate. There are a number of vested interests that will continue to work against this dramatic scenario. It is not just Turkey that wants to keep Syria united, even in chaos. A number of states—including the US and Iran—want to preserve Iraq’s territorial integrity. They can tolerate an autonomous Iraqi Kurdistan but not an independent Kurdish state. The US sees its interest in a united, democratic and secular Turkey; Iran sees its interest in preserving a united Iraq with a Shia majority. If Kurdistan breaks off, Iraq will splinter into a Shia South and a Sunni Central Iraq. Neither the US nor Iran wants that to happen.
The FBI-Apple case in the US and the Panama Papers are examples of how technology companies are the accidental
stewards of national security
Some, though, are beginning to think the unthinkable—to redraw the Sykes-Picot map of 1916 that drew the boundaries of the present states in the region, creating a rump Syria around Damascus, a Shia state in southern Iraq, a Kurdistan and a Sunnistan from the rest of Syria and Iraq. Among the many reasons that this would be unimaginable for many is the risk that this Sunnistan would in fact be a state controlled by ISIS or Daesh, constituting a state reminiscent of Taliban-ruled Afghanistan in the heart of the Middle East.
This brings us to the next broad layer of the onion: the rise of non-state actors playing a significant role in contemporary global affairs. Militant Islamic radical groups—ISIS or Daesh, the Taliban, Al Qaeda, Lashkar-e-Toiba, Jaish-e-Mohammed, and so on—decentralised in organisation and fuelled by radical ideology, allow an unpredictable array of challenges to fester. These radicals are dispersed across the four corners of the globe, but are fuelled by a unified ideology of Islamist extremism. Extremist ideology provides a scaffold that promotes widespread impact without centralised resources or geography.
The world may face the prospect of a volatile President Trump whose unpredictability would cast a shadow that looms large over the geopolitical climate
ISIS, the most prominent globally, threatens vast swathes of the Middle East and threatens to expand beyond into other areas with a significant Muslim population, as it has done by multiplying its efforts in war-torn Syria and Iraq. But perhaps ISIS’s most dangerous weapon is its ability to inspire and support a looser network of scattered operations in places like Paris and Brussels and ‘lone wolf’ copycats anywhere. The pirates of North Africa, separatists in many parts of the world and extremists of all faiths and ideologies, are also using new and innovative ways to challenge the authority of the state. The emergence of these groups is a significant challenge to the world economy as they disrupt political systems, reduce economic productivity, divert funds from the development needs of economies, and promote ideologies incompatible with modern principles of economics. For instance, Afghanistan’s weak central government remains increasingly vulnerable to the depredations of a revived Taliban, which enjoys tacit and sometimes overt support from Pakistan.
To this day, international law has difficulty handling such non-state groups. During his recent visit to Brussels, Prime Minister Modi lamented that the UN is unable to agree on a comprehensive convention to combat the rising dangers of terrorism, or even to agree on a definition of terrorism they can all work together to combat.
The rise of non-state actors is driven by another structural change: the role of technology in shaping contemporary affairs. We are witness to the dizzying rise of technology valuations as testimony to the extent to which they are changing our world. Who would have imagined a few years ago that a simple app, WhatsApp, would be bought for $22 billion by another internet company, Facebook? The iPhone 6 has 32,000 times the processing power of the NASA computers that sent Apollo 11 to the moon. A digital platform like Airbnb, which helps you rent rooms in people’s homes as opposed to hotels, has a valuation of $25 billion, while the entire Marriott chain is valued at $22 billion and the Starwood chain at merely $13 billion.
Challenges to Westphalian sovereignty and the rise of unpredictable non-state actors fuelled by technological
advancements are clearly the dominant trends in 21st century global affairs
Disruption is the name of the game, and its implications are alarming: digitalisation will not only displace low-wage workers, but also high-paying jobs in the financial and legal industries. Artificial Intelligence systems, for instance, will replace financial analysts, paralegals and copy editors in the developed world (and also displace those in the developing world who are currently providing offshore services in these areas). But alongside the rise of such technology companies, come the benefits of an open global market made accessible by such technology companies. While America’s Amazon or China’s Alibaba are heralded as the global leaders in e-commerce, we must not forget that India’s Flipkart—started by two IIT-Delhi graduates from Chandigarh—has the commanding stake in India’s fast growing e-commerce market, outsizing Amazon by a factor of three.
But digital technology is valuable to terrorists, hackers and other criminals too. Advances in digital technology have facilitated the expansion and accessibility of the black market, as we saw with the rise of the ‘Silk Road’ and the rest of the dark web. The dark web has been a powerful means through which those of ill-intention can gather weapons, fake passports, drugs, and the like.
Even mainstream websites can fuel such activities. Extremist groups use social media to recruit those with fringe beliefs that cannot be brought together under the umbrella of a single, concentrated organisation. Social media technologies have facilitated recruitment into and coordination with non-state actors like ISIS. But technology also gives power to non-state actors such as private companies or ‘hacktivists’. These groups are not burdened by the institutional constraints inherent to democratic nations that moderate the behaviour of such nation-states. And yet, they are inextricably linked to global security, thereby adding a new layer of unpredictability. Hackers have revealed sensitive intelligence to the wider public. The case in the United States—FBI versus Apple—and the more recent Panama Papers are good examples of how technology companies are, to some extent, the accidental stewards of national security. Just this month, WhatsApp announced the end-to-end encryption of its messages, which can no longer be intercepted by anyone, not even WhatsApp itself (which will not store these messages on its servers and so cannot be subpoenaed to surrender them). This may be a boon to those of us who value the privacy of our communication, but it will be of inestimably greater value to terrorists and criminals of every sort, for whom WhatsApp will now become the favoured means of communication, making the task of intelligence agencies and others tracking these groups that much harder.
THE NEXT LAYER in global geopolitics is the risk of a closed Europe. Divisions in Europe, fuelled by the inflow of migrants and the onslaught of recession, are reaching a critical point. Europe’s ‘open borders policy’ is specifically facing pressure. Greece has started shipping asylum-seekers back to Turkey. Xenophobia and racism are on the rise as Europeans blame ‘outsiders’ for the decline in their quality of life and their easy assumptions of future prosperity. The rise of Marie Le Pen in France and Alexis Tsipras in Greece can be explained by these trends. The electoral erosion of liberal democracy is apparent in the increasing vote-share of both rightwing and leftwing populist or radical parties across Europe. The closing of Europe and a return to isolationism—antithetical to the spirit of the EU itself—will be catastrophic for the global economy as Europe represents one of the two largest markets for consumer goods manufactured by emerging economies. Attempts to expel non-permanent immigrants could disrupt economies that heavily rely on remittances from Europe. Already, unemployment rates are as high as 40 per cent in parts of Southern Europe and the Middle East. If they become worse, the ensuing unrest and political instability would be fraught with alarming dangers.
The next (overlapping) layer of the onion reveals the ailing trans-Atlantic partnership. Weaker and less relevant, it no longer plays a decisive role in addressing Europe’s priorities. Russia’s intervention in Ukraine and the conflict in Syria have highlighted the limitations and divisions of the US-European alliance. We are only two months away from a referendum in the UK that could lead to the unravelling of the EU. Brexit would set off ripples throughout the global economy.
In seven months, the world may also face the prospect of a volatile President Trump whose unpredictability—the hallmark of his campaign—would cast a shadow that looms large over the geopolitical climate. Just a year ago, we were all contemplating with a yawn the prospect of another Clinton- Bush election: who would have thought that the domestic political climate in the United States would turn out to be another source of geopolitical volatility? Donald Trump is almost certainly going to win the Republican nomination barring a backroom deal by the Republican Party elders. Trump still faces massively negative ratings in a general election—a favourability rating of negative 40 per cent, by some estimates. But the reality is of a presidential candidate of one of the two major parties who doesn’t believe in NATO, thinks US allies elsewhere are enjoying a free ride, wants to bar his country to Muslims and deport all illegal immigrants. He is, moreover, likely to run against a capable but flawed candidate in Hillary Clinton. What could be a bigger threat to global stability than the prospect of the victory of such a figure? And even if it doesn’t happen, the rise of Trump and even of his principal Republican alternative, Ted Cruz, has revealed the tremendous frustration and discontent on the part of Americans with the globalisation that has altered the familiar assumptions of their lives.
AS THE ONION peels apart, it also exposes some hidden questions to which we don’t yet know the answers. For instance, what are the implications of the rise of technologists and their influence in world politics? The political rise of these actors will have unknown consequences beyond the rise of cyber crime, cyber espionage and cyber terrorism. Technology is changing people’s lives in more and more unpredictable ways. More social disruption is inevitable: self-driving cars, robotic service personnel, and other innovations will keep replacing and displacing people. A 2013 report out of the Oxford Martin School at the University of Oxford estimated that up to 47 per cent of jobs are under threat of displacement by technology in the next 20 years. Will it cause a pushback from governments and citizens, resulting in market and policy volatility? (The backlash against Uber in many countries, for instance, and the regulatory challenges it poses, is already apparent). The networked world is becoming increasingly volatile. Industrial disruption could follow as emerging economies rely on traditional industries and social structures but do not account for the serious risk of significant economic dislocation due to technological innovation. Some industries previously outsourced are being brought back to the West to take advantage of increased automation in production.
Globally, Westphalian political systems are proving inadequate. Anchored in the nation state, the influence of political actors ends at territorial borders that are largely irrelevant to the global system. Can national political leaders possibly succeed in coping with the universal and uncontrollable phenomenon of globalisation and digitalisation? This year, there may be few opportunities for voters in emerging markets to voice their opinions at the ballot box. As slower growth and stagnant living standards increase popular discontent, governance and stability will suffer, hurting these emerging markets further.
What solutions does the world have? Military action is of limited utility and is constrained by the diminishing appetite of world powers for the costs and risks involved. Sanctions become the favoured tool. While they work in some cases (Iran), they are less effective in others (Russia). Putin’s aggression led to a host of coordinated sanctions by the United States and the EU, including sanctions on Russian energy companies—but these were enabled by low oil prices globally. Yet they seem to have had little or no impact on Putin’s actions. Sanctions on Iran did not enjoy universal global support and negatively impacted countries like India, dependent on Iranian oil. This is just one reflection of a broad weakening of global governance, with nations held together by fewer and fewer shared ideals and values, and showing willingness to dissent from or even violate the established rules of the post-war global order. In this way, the 21st century has become a centrifuge, sparking a divided and divisive world order. The lack of imagination and statesmanship by those currently at the high table will be matched by the impatience of those seeking a place at it, as has been reflected by frustration at the United Nations General Assembly during the ongoing elections for Secretary General.
The BRICS are emerging at a time when the future of the international system that arose in the immediate aftermath of World War II is increasingly being called into question. After two World Wars, numerous civil wars, colonial oppression, and the horrors of the Holocaust and Hiroshima, the far-sighted statesmen of the mid-1940s decided that liberal internationalism, based on the UN charter and allied institutions, was the only way to prevent more carnage. Indeed, for seven decades, that system has largely achieved its goals. It has broadly ensured world peace and prevented a Third World War, although at the cost of shifting many conflicts to the global periphery. And it did not benefit only the developed world; it also ensured decolonisation, promoted development, and found ways to accommodate the voices of newly emerging countries.
But it’s clear that existing arrangements are no longer adequate. China and India are seeking global influence commensurate with their economic weight; Brazil and South Africa are emerging as continental powerhouses, and hydrocarbon- fuelled Russia is chafing at its status on the margins of the Western system. (Brazil has suffered a temporary setback with economic deceleration and a political scandal featuring the impeachment of its recently re-elected president, but its underlying claims to global attention remain.) Not surprisingly, many think that the current system is ready for a makeover.
The existing world powers, however, will not cede their influence so easily. It is absurd that China’s voting power in the World Bank and the International Monetary Fund was the same as Belgium’s till last month. But the G-20’s effort to create parity in these institutions between the advanced economies and the emerging and transition countries had ground to a halt. Although US leaders technically agreed to IMF voting reforms at the Pittsburgh meeting of the G-20 in 2008, the US Congress did not ratify them till a modest change finally happened this year, nearly eight years later.
It is important to note that countries like China and India— unlike, say, Germany and Japan a century ago—are not seeking to overturn the world order. All they want is a place at the high table. Barring that, they have little choice but to build their own. As countries acquire economic and military power, they start exercising their geopolitical muscle. The challenge for advocates of world order is to accommodate emerging powers within a framework of universal and stable rules and global structures that ensure everyone a fair deal, appropriate for their size, capabilities, and contributions to the international system.
Today’s world leaders appear to lack the statesmanship, the breadth of vision, and the generosity of spirit of those who created the post-1945 world order. By clinging stubbornly to the system they dominate and barring the door to new entrants, they have left those outside little choice. Countries like China have shown, through the BRICS’s New Development Bank, that in the absence of a level playing field within the existing system, they are prepared to construct their own. What the BRICS countries have in common is their exclusion from the places they believe they deserve in the current world order. That may not look like enough of a basis for a credible new international system. But, with their economies on course to overtake those of the G-7 before 2050, looks can be deceiving. What that might mean for the world order established in 1945 is anybody’s guess.
I haven’t mentioned a host of additional global problems— failure to mitigate climate change, weapons of mass destruction, water crisis, involuntary migration and refugee crises, and the threat of pandemics, as well as further energy price fluctuations. If we still had any illusions that the post-Cold War world inaugurated an era of peace, the elder George Bush’s famous ‘New World Order’ has collapsed into a newer world disorder. Around the world, 180,000 people were killed in 42 wars in 2014, and a further 33,000 by terrorist attacks that year. The exact 2015 figures are not yet available, but are probably higher. Already some estimates say that the current calendar year, barely four months old, has already recorded 300 terrorist incidents across the globe.
Challenges to Westphalian sovereignty and the rise of unpredictable non-state actors fuelled by technological advancements are clearly the dominant trends in 21st century global affairs. The number of ungoverned and ungovernable spaces in the world keeps growing, defeating existing global systems. The developed world shows signs of moving towards closed borders, closed markets, and a politically-driven escape from empathy.
Yet, still, the world economy is growing—from $77 trillion in 2014 to $79 trillion in 2015. But that represents a 50 per cent cut in the normal pattern: the world should normally have grown by three trillion dollars, not two.
The onion stands peeled to its core, and we smell that there is much to worry us. I hope world leaders—and we, the citizens who are impacted by their policies—are listening through their tears.