Geopolitical consequences of the global financial and economic crisis
We have multiple crises affecting international politics and the global economy. There is an ongoing political turmoil in North Africa and West Asia, a region we refer to as WANA. At the other end of the world, Japan has suffered an unprecedented and devastating earthquake, compounded by a gigantic tsunami. And as if that was not enough, we have a full-blown crisis at the Fukushima nuclear power plant. These two crises are geographically distant but intersect compellingly in a densely interconnected global economy, in particular, its energy component. Both oil, as the fuel of global growth today and nuclear, the energy source for the future, have been impacted.
The impact of high oil prices resulting from prolonged political and economic disruption in the Gulf, may lead to inflationary pressures in the US economy and cause a setback to its still fragile recovery. Each major spike in oil prices in the past has been followed by a prolonged recession in Western economies. If this happens now then, thanks to the 2008 crisis, neither the US nor most of the Western economies have any weapons left in their monetary or fiscal armory to deal with a fresh crisis. The fears of a double dip recession could come frighteningly true.
The Eurozone remains unstable with sovereign defaults still lurking round the corner for Greece, Ireland, Portugal and Spain. There is growing political opposition to a fully effective bailout mechanism among creditor countries, in particular Germany. While differences have been papered over, the underlying structural weakness of the European Monetary System remains. There is a common currency and a European Central Bank, but no coordinated fiscal policy. This is unlikely to change and, therefore, the Euro will continue to remain under threat.
Germany has emerged as the strongest economy in Europe and is undoubtedly the continent’s prime engine of growth. It is no longer willing to play second fiddle to the other European powers like France and the UK and is displaying a greater degree of independence from the United States. It has developed an unusually close energy partnership with Russia and its fastest growing export markets are outside the European Union, most prominently in China. This is leading to a perceptible change in the balance of power and influence with the European Union and a loosening of the erstwhile strong political, economic and security links across the Atlantic.
What about China? There is no doubt that at the beginning of 2011, China was looking the indisputable winner, emerging relatively unscathed from the global financial and economic crisis. While there have been concerns about over-heating and inflationary pressures, China appears to have managed its economy with skill and finesse. With this increase in economic capabilities has come political influence and the resources to expand and upgrade its military, in particular naval assets.
In sustaining a high rate of GDP growth, the Chinese economy has accumulated significant imbalances that could result in an asset-bubble and a painful collapse thereafter. The growth drivers continue to be high investment and high exports, both of which are very susceptible to changes in the external economic environment. China is heavily dependent upon oil from the Gulf region and this dependence has been growing year by year.
China has also been affected by the Fukushima nuclear disaster. Its ambitious nuclear expansion plans have been put hold pending a comprehensive review. Considering the fact that China has been planning to use nuclear energy to enhance its energy security and reduce its dependence on imported energy, the decision to review proposed nuclear power plants is unusual, but may reflect a greater sensitivity to domestic and international public opinion than one had realised.
What is the outlook for Japan? At the beginning of the year, Japan appeared headed for a modest economic recovery, but was still unable to engage in any significant reform as a result of continued political instability and frequent changes in political leadership. Japan’s long-term prospects appeared to be bleak, given its aging and declining population and its unwillingness to consider any significant immigration. The latest crises could impact Japan in two contrary directions. They may reinforce the passivity and lack of dynamism that has characterised the “prolonged slumber” that Japan appeared to have fallen into after the real estate bubble burst in 1990. Or the crises may shake Japan into forging a new political consensus, willingness to accept thoroughgoing reforms and put the Japanese economy on a higher growth trajectory, driven by innovation and efficiency. Having served in Japan, my sense is that the people of this remarkable country have the reserves of innate strength, resilience and commitment to excellence which are necessary ingredients for its much anticipated renewal. There will be many cheerleaders for Japan’s strong revival.
Despite the complexity we confront in WANA, it would be worthwhile to interpret, however tentatively, the swift and often dramatic chain of events unfolding in the region. In my view, the bigger story in the region is not Libya, but the Saudi armed intervention in Bahrain, which has the potential to trigger a region-wide Shia-Sunni divide. It is unlikely that Shia Iran will stand aside while this unfolds and a Shia dominated Iraq may well be drawn in as well. In Libya, popular protests are overlaid with inter-tribal loyalties and conflict. Western armed intervention is unlikely to resolve these domestic fissures even if Gaddhafi departs from the scene. It was United States’ military pre-eminence in the region and its network of authoritarian allies which held the pieces together, while the current wave of unrest is fragmenting the alliance network. WANA is becoming what geopolitical scientists refer to as a “shatterbelt”, radiating tensions in all directions.
Bringing these different strands together, what is the big picture which emerges?
First, at the beginning of 2011, the world was witnessing a multi-speed economic recovery. In the industrialised world, the United States registered a relatively stronger recovery than Europe but it was the emerging economies of Asia, in particular, China and India, which regained accelerated rates of growth thereby becoming the engines of global recovery. There is a sense that the latest crises will further accentuate that trend. However, it is likely that if the multiple crises cross a certain threshold, the entire global economy could go into a cumulative contraction, and all bets will be off.
Second, the other aspect of the energy crisis is what is happening to the nuclear industry worldwide. The immediate impact is on countries which have a high proportion of their electricity generation dependent upon nuclear power. This will add to the price pressure on both oil and natural gas. Nuclear energy will remain a significant source of clean energy going into the future because there are simply no other credible alternatives for the foreseeable future. However, there will be a slow-down.
Third, given the emergence of energy as a pivot around which geopolitical changes will tend to play themselves out, it is energy producers who will stand to gain the most from the current crises. The oil producing countries of the Gulf stand to gain but only if they are not overwhelmed by the spreading political turmoil. Russia is likely to be a net gainer. Other energy producers will also gain both political and economic leverage and this includes Brazil and Indonesia. We will probably witness an even more frenzied scramble for energy resources in Africa. One analyst has warned that we may be on the threshold of a “geopolitical Cold War centred around energy security”.
Fourth, the redistribution of economic and political power has not yet fallen into a neat and predictable pattern. The diffusion of power is ongoing and its nature is fragmented and lumpy. This is already having the effect of loosening existing alliances and more informal groupings. A certain fluidity is in evidence all round. The United States is reluctant to act in WANA and prefers to let France and United Kingdom take the lead. Germany, an important NATO ally, demurs. In Asia, on the other hand, we are witnessing the gradual crystallisation of a loose, countervailing coalition that seeks to hedge against a more powerful and assertive China. The emerging powers, India, Brazil and South Africa, are now coordinating their political postures on key issues and this was in evidence during the early phase of the Libyan crisis.
Fifth, this somewhat confused geopolitical backdrop is likely to deal a setback to efforts to evolve equitable and effective global regimes to deal with global and cross-cutting challenges such as piracy, international terrorism, non-proliferation, climate change, global pandemics and issues related to food, water and energy security. There may be more limited solutions, region-wise or among countries with convergent interests, such as India-Brazil-South Africa (IBSA). The role of the G-20 may increase and its agenda may expand beyond the management of the global economic order. The pressure for reform of the UN Security Council may increase as its dysfunctionality becomes even more exposed in a world beset with simultaneous and multiple crises.
In a broad sense, what could India’s strategy be to deal with this environment of heightened uncertainty and rapid and unexpected change?
One, “Engage with all major powers, but align with none”. We need to become adept at forming and working through coalitions that are issue based and sometimes event-specific. Dealing with uncertainty demands flexibility of response. It also demands contingency planning, the working out of alternative scenarios and Indian responses that are appropriate to each.
Two, India still remains a relatively stable political entity in an arc of instability stretching from the edge of Europe to the Western edge of the Pacific. In an atmosphere of pervasive uncertainty, this attribute of stability is a strong asset that can be leveraged to India’s advantage. It can serve to attract investment, it can keep projecting India as a reliable and predictable partner. An international situation which is in flux creates the space for an emerging power like India to consolidate the geopolitical gains it has already made and expand its strategic space vis-à-vis other powers. This requires a degree of strategic boldness which is not always characteristic of the Indian temperament.
Three, for India, the geopolitical focus will be Asia and, in particular, the Asia-Pacific region. The emerging strategic order in the region is in the words of one analyst, “profoundly maritime” and “geopolitically speaking the maritime balance would appear to be the key to further stability in Asia”. With its significant and steadily growing naval capabilities and its geographical location, straddling the Western and Eastern reaches of the Indian Ocean, India is very well placed to be a decisive element in this maritime balance. A reordering of our security priorities in favour of our naval capabilities is essential if we are to consolidate and expand our role in region. This will also enable us to help create the kind of countervailing presence that is necessary in order to ensure that Asia remains as multi-polar as the world that is emerging.
Four, there is a need for a long-term and effective neighbourhood policy. The Indian sub-continent is a single, interconnected and cohesive geo-political and geo-economic unit, though it is divided politically. It constitutes India’s strategic realm. The challenge for Indian diplomacy will be to gradually transcend the region’s political divisions and enable a shared security and strategic perspective to emerge. Regional economic integration and promotion of cross-border physical and digital connectivity must become an urgent priority, because it may help foster the shared security perspective that I have referred to. Without progress in this direction, India’s larger role regionally and globally will encounter a constant constraint nearer home.