Geopolitical Hot spots & Shifts or the end of an Era…

Find out why the world is at inflection point and how the key attributes of companies’ boards are being reshaped

by Evelyne Legaux on 19-12-2023

 

This article takes a look at some aspects of the political landscape & geostrategic tensions in key geographies across the planet. It also brings out fundamental shifts currently at play in the international order, all the while calling out practical implications for businesses.

Since the end of World War II, humanity has never had to face so many complex challenges & emerging risks or threats that have the potential to disrupt societies & businesses, than today. The international order, centred on the relationship between the US & the Soviet Union back then, subsequently shifted to US domination during the Cold War era, then became most unstable & unpredictable over recent years.

The world is at an inflection point today, and needs leaders who understand it & are determined to address the severity, scale & urgency of the global situation.

 

So, let’s tour the planet & stopover at some of the hot spots

• Middle-East

The recent explosion of violence in Israel & the Gaza Strip on the backdrop of heightened political tensions, contains the germs of both a wider conflict in the region and varying degrees of unrest across the rest of the world, that should not be underestimated. While the regional powers appear unwilling to escalate the conflict this far, the real questions are: for how long more? and what does that mean for the normalisations of relations with Israel that were in progress prior to the October 7^th attack?

But the key question here is: what next? One can only hope that the recent & on-going atrocities will eventually lead to a genuine political solution guaranteeing long-term peace & stability in the region. History has proven time & time again that violence or military conflicts lead nowhere. So, clearly there has to be a parallel diplomatic pathway that offers a true perspective and brings back hope to both peoples.

For this to happen though, courage, different thinking & genuine leadership are of the essence… Who believes in a two-state solution on both sides today? Will a PM under high pressure for having sold the security agenda to his people for years on one side, and a weakened Authority that now needs to compose with a competing political force on the other side, be able to deliver a vision for the future? or even simply accept as a starting point, that this is the way forward?

From a business perspective, until a sustained peace agreement can be reached by both parties, the region will remain a high political risk area.

• Ukraine

Twenty-one months into the conflict, there is still no solution or end in sight. The longer it lasts the higher the risk of Kiev’s allies slowing down or reducing their support, whether military, diplomatic, financial or else. In actual facts, a lot hangs in the outcome of the November 2024 presidential election in the US. Until then, the parties have no interest in compromising in favour of a political solution.

While inflation triggered by the conflict is gradually getting back under control in Europe, a raging war on its doorstep has the ongoing potential to create further disruption, unsettlement & uncertainty for businesses, let alone severe economic consequences in the emerging world.

• China

In the wake of a long-lasting Zero-Covid policy combined with lower external demand, the country appears to be far away from its +5% GDP target & on a long-term trend of slow economic growth. FDIs are also reducing for the first time, the move being primarily driven from Hong-Kong, Macao & Taiwan.

China is also facing the prospect of a declining population & shrinking labour force, as a result of the former one-child policy followed by couples’ current inability to afford to have several children &/or to purchase a bigger home, which in turn drives property prices down.

The ongoing downturn in the construction & real estate sector may cause property developers’ default, thus forcing the Authorities & Central Bank to rescue them to avoid a proper crisis. In the longer run though, the challenge is to engineer & deliver lasting prosperity for the people, or else run the risk of widespread social unrest.

Businesses trading with China should keep top of mind the growing trade, technology & national security geostrategic competition with the present US Administration, on the backdrop of looming elections in both the US & Taiwan in 2024.

• EU

With membership talks now underway with Ukraine & Moldova, candidate status given to Georgia and accession negotiations open with Albania & others in the Balkans, the EU is going through a historical moment. Truth is given the present geopolitical tensions, enlargement is a necessity for its security, however it also comes with a massive challenge: while its 440 million population is set to increase to 500 million as a result, to be able to function with 30+ States, the EU crucially needs to reform its institutions & decision-making processes, and redefine its priorities.

With regards to wider geopolitics & the relations with China, different views are being expressed & the EU is struggling to show unity at times, a challenge that can only grow as the bloc expands.

On the economic front, a key concern for businesses is that the EU has been losing competitiveness over the past 20 years or so… Another point for them to watch is the EU’s Carbon Border Adjustment Mechanism (CBAM) that is being gradually phased in until 2027, and will drive new reporting requirements for the energy & manufacturing sectors, thus likely increasing compliance costs.

• UK

While Brexit is estimated to have been bad for the economy (-2% to -3% on the national output), the question is: how bad really? and for how long? Irrespective of Brexit, the economy is suffering from many years of under-investment in infrastructure & very low productivity levels.

Political instability over the past few years, with ramifications into policy-making, is seen as another fallout from Brexit, that has been acting as a deterrent for investors. With the EU still representing 30% of UK trade, the country must find a systemic way to deal with the EU’s evolving regulatory requirements.

As for the business world, unless the politicians in charge demonstrate that they can deliver & create stability, investors may continue to perceive the UK as a political risk.

 

Flourishing populism & autocracy…

Taking a global look at the world today, a worrying trend lies in our fundamental Western democratic values losing ground or even being purposely rejected. Such a trend goes hand in hand with the rising of populism & the praising of autocratic regimes across the globe.

Europe unfortunately is no exception to that, with far-right or far-left political parties recently accessing power or winning elections (Hungary, Italy, Slovakia or the Netherlands). Longer term, this is no less than a matter of survival for democracy as a political system, therefore a definite cause for concern…

The question here is Why? and why Now?

Has the Western world gone too far on the road to stability, interdependency & peace that is often depicted as weakness or vulnerability, thus needing some sort of re-balancing in the opposite direction? Or, is it that the Western world has failed to support emerging & developing countries in successfully following suit, thus triggering widespread economic poverty, renewed military coups or conflicts & mass-displacements of population that ultimately triggers unrest & rejection in the West itself?

 

A new emerging multilateralism…

Another fundamental question in need of a clear & urgent answer is this: with a Security Council inherited from WWII, is the UN still the relevant multilateral forum to address the complexity & global challenges of today’s world? At best, the UN needs to be reformed and, at worst, it has clearly failed to avert many conflicts & make the world a safer place.

A concomitant shift currently noticeable across the planet is the growing geopolitical role played by the Global South in multilateral institutions. Recent testimonies to this are the African Union (AU) becoming a permanent member of the G20 and the BRICS extending membership to include six new countries: Saudi Arabia, Argentina, Egypt, Ethiopia, Iran and the UAE.

Likewise, truly global challenges such as climate change, loss of bio-diversity or more South-specific issues such as food insecurity, are becoming more & prominent on the G20’s agenda & declarations. In terms of international financing, while developed countries continue to promote the role of the World Bank & IMF, emerging & developing countries are likely to increasingly access financing through the BRICS’s New Development Bank, the COP28 Loss & Damage Fund or else alternative China-led institutions in the near future. It is worth noting here that China has already become the number one bilateral official creditor for low-income countries, a role that will expand as more countries turn towards China for liquidity support. With regards to the World Bank & IMF, they have become more sensitive to the risk of austerity measures triggering social unrest, and tend to put more focus on reforms as opposed to public spending cuts.

As for businesses, this new emerging multilateralism will likely make geographical diversification even more compelling in terms of global supply chains & resilience, with some of the BRICS geopolitical ‘swing-states’ playing a stronger role. Business leaders should also keep an eye on new opportunities arising from internationally funded economic development & energy transition projects in particular.

But there is more…

 

Is protectionism coming back through the window?

While the green transition has been held back for years by US bureaucracy, the 2022 Inflation Reduction Act suddenly gave it a powerful boost, by making clean energy cheaper than any polluting alternatives. As for the re-shoring of energy production, it also reinforces the US national security. So, why would people not want clean domestic energy?

Meanwhile in France for instance, the Government is preparing a decree based on environmental & jobs creation criteria, that will make the purchasing of an EV produced outside Europe de-facto more expensive. So, why would people not want a European EV?

More generally, over the past 15 years or so, customs tariffs have been practically replaced or circumvented with an array of public aids, norms or tax credits in many countries.

Interestingly, politicians & manufacturers alike keep putting forward the ‘common sense’ argument & the ‘re-shoring’ terminology, to justify a move that, in reality, is driven by a genuine change in economic philosophy… Reality is that people like it!

The protectionist temptation keeps coming back each time a new crisis hits, but the word ‘protectionism’ itself remains taboo, because associated with the regressive idea of a fallback position and widely used by political extremes. Policy-makers therefore refrain from using it, and would rather talk about ‘defence of national interests’ or even ‘economic sovereignty’ instead.

Whether we like it or not, truth is the idea of protectionism is making a significant come back in the Western public debate…

 

What does this all mean for companies & their boards?

The world has radically changed from globalisation, simplicity, stability & peace to fragmentation, complexity, uncertainty & threats. Back in the 1990’s, the world was marching towards democracy & joining multilateral trade agreements - although at varying paces - with the blessing of post-war international institutions. Some voices would even have said that the world was getting somewhat boring…

And all of a sudden, back in 2014, the world started to change in the wake of the Russian invasion of Crimea, with the pace of change subsequently accelerating

Surely, this cannot be ignored by Executive leaders & boards… Geopolitics has invited itself to the top of boards’ agendas, thus creating a compelling need for members to demonstrate awareness & understanding of the new threats facing companies, as well as expertise in risk management strategies and an ability to think differently.

Sadly though, geopolitical tensions across the planet have become a major distraction from the biggest threats of all: climate change, loss of biodiversity & soil depletion…

 

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