Expert Commentary

The Political Risks of the Global Recession

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.


Political Risk
March 2009

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 The border dividing Pakistan and Afghanistan effectively no longer exists and has been replaced by a porous border in which Taliban and Al Qaeda fighters move with impunity between the two countries.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.

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.

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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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