The Political Risks of the Global Recession
March 2009
While the world's investors, lenders, and
pundits are fixated on the cascade of collapsing economies around the world,
a series of political time bombs threaten to transform the global landscape.
by Daniel
Wagner
Country Risk Solutions
The speed with which any of these political detonations may explode is
gathering pace, but with the world's governments so preoccupied with the
economic elements of the global recession, they are unable to respond with
rapidity, conviction, or unity. This is likely to hasten their progression.
Iran
The United Nations has announced that Iran now has the capacity to
produce a nuclear weapon. The moment has thus passed when an attack on
Iran's nuclear facilities may have delayed it from joining the nuclear club.
Now the questions to be addressed are how many additional bombs the Iranians
may be capable of producing and when, which other governments in the Middle
East and elsewhere will now pursue programs to become nuclear powers, the
impact this will have on the global arms race, and which rogue states or
terrorist groups may become capable of acquiring nuclear weapons or
material.
Pakistan
Pakistan is disintegrating as a sovereign state. The border dividing
Pakistan and Afghanistan effectively no longer exists and has been replaced
by a porous border in which Taliban and Al Qaeda fighters move with impunity
between the two countries. The recent cession of control of the Swat region
of Pakistan to the Taliban is evidence that Pakistan's delicate balance
between democracy and theocracy is gradually being won by the theocrats.
What was once an unthinkable scenario—that a nuclear Pakistan might one day
fall under the control of a radical Islamist government—is unfolding.
Afghanistan
The Karzai government in Afghanistan can today only say that it is in
effective control of Kabul. As a result of a failure to win hearts and minds
of the Afghani people, the money spent and lives lost in an attempt to
create a secure Afghanistan since 2001 have been in vain. History has proven
that no amount of money or soldiers devoted to such a task will be
successful. Afghanistan is being ceded back to the Taliban and there is
little that can be done about it. The Russians learned the lesson the United
States and its allies are about to learn.
North Korea
In spite of the tremendous effort made by the George W. Bush
Administration to bring North Korea into the family of nations, the
six-party talks failed, and Kim Jong il has returned to his bellicose
behavior. This comes at a time when South Korea's economy is at its weakest
point since the Asia Crisis. The Sunshine Policy is dead and the Barack
Obama Administration is essentially starting where the Bush Administration
did 8 years ago, with little prospect for success.
Israel and Palestine
The Israeli/Palestinian morass continues unabated. Neither Hamas nor the
new Netanyahu Government have much of an incentive to renew peace
negotiations. Such negotiations would undoubtedly prove to be futile, in any
event, as has proven to be the case historically. The radicalization of
political forces on both sides prevents any realistic hope of a final
settlement from gaining traction.
Latin America
The tide of 21st century socialism rumbles through much of Latin America,
with many of the region's citizens now believing the democratic movements
that promised to improve their lives have instead left them behind. Leftist
movements are either already in power or have gained appeal in an increasing
number of countries. Given the pace with which economic hardship is gripping
Latin America, leftist movements are likely to regain their historic appeal.
Russia and China
Indeed, elements of the Cold War are being reborn, 20 years after the
fall of the Soviet Union. Russia is once again flexing its muscles amongst
its neighbors, while China wields growing influence in some of the most
remote and objectionable resource-rich developing countries. The battle for
ideological supremacy now occurs with developing countries claiming their
rightful place at the table. Discussion of when China will overtake the
United States economically seems entirely irrelevant; China has already
overtaken the United States in terms of political influence globally and
will only grow stronger with time. Given the carnage in the U.S. economy,
China's long march toward economic supremacy cannot be far behind.
All this comes at a time of increasing economic nationalism on a global
scale that threatens to derail the prospect of a global economic recovery in
2009. Given what is known today, that the depths of this global recession
may only be reached this year or next, and given the undeniable linkages
between the world's economies, an L-shaped recession followed by a U-shaped
recovery seems likelier—over a period of several years. This will have a
cumulative impact on governments' ability to respond meaningfully to the
plethora of political risks that confront us.
Political Risk Prognosis
With every day that now passes, the world edges closer to a nuclear
confrontation, but no longer involving the five Great Powers. Rather, the
chance that Israel, Iran, North Korea, India, or Pakistan will be involved
is increasing, as is the possibility that one day in the not too distant
future half a dozen other developing countries may have such capability. The
risk of a cataclysmic political event occurring in the next 12-24 months has
rarely been greater.
Policymakers' ability to do something about it has been compromised over
the past 6 months. Policy unity has become an ever distant prospect, but the
need for collective action is compelling. That is the seldom spoken side of
the global economic crisis, which has somehow gotten lost among all the
media coverage of bank nationalizations and Ponzi schemes.
Political risk is rising, and will continue to rise, throughout the
course of this severe global recession. The risks of operating a business
anywhere in the world is similarly rising—including in North America and
Europe. The unpredictability associated with this economic dislocation
naturally affects the political realm. Business owners must take a defensive
posture in such an environment, review their risk management contingency
plans, and update them on an ongoing basis until some normalcy returns to
the marketplace. When might that be? The best guess now is that 2011 is the
earliest we are likely to see anything resembling normalcy in international
business operations.
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