The global economy confronts four geopolitical risks

1aafa197eccdcc127f6cc41924a3262b.squareBy CAMBRIDGE – The end of the year is a good time to consider the risks that lie ahead of us. There are of course important economic risks, including the mispricing of assets caused by a decade of ultra-low interest rates, the shifts in demand caused by the Chinese economy’s changing structure, and European economies’ persistent weakness. But the main longer-term risks are geopolitical, stemming from four sources: Russia, China, the Middle East, and cyberspace.

Although the Soviet Union no longer exists, Russia remains a formidable nuclear power, with the ability to project force anywhere in the world. Russia is also economically weak because of its dependence on oil revenue at a time when prices are down dramatically. President Vladimir Putin has already warned Russians that they face austerity, because the government will no longer be able to afford the transfer benefits that it provided in recent years.

The geopolitical danger arises from Putin’s growing reliance on military action abroad – in Ukraine and now in Syria – to maintain his popularity at home, using the domestic media (now almost entirely under Kremlin control) to extol Russia’s global importance. Russia also uses its gas exports to Western Europe and Turkey as an economic weapon, although Turkey’s recent decision to source gas from Israel shows the limits of this strategy. As Putin responds to this and other challenges, Russia will remain a source of substantial uncertainty for the rest of the world.

China is still a poor country, with per capita GDP at roughly a quarter of the US level (on the basis of purchasing power parity). But, because its population is four times larger, its total GDP is equal to America’s (in PPP terms). And it is total GDP that determines a country’s ability to spend on military power, to provide a strategically significant market for other countries’ exports, and to offer aid to other parts of the world. China is doing all of these things on a scale commensurate with its GDP. Looking ahead, even with the more moderate growth rates projected for the future, China’s GDP will grow more rapidly than that of the US or Europe.

China is now expanding its strategic reach. It is asserting maritime claims in the East and South China Seas that conflict with claims by other countries in the region (including Japan, the Philippines, and Vietnam). In particular, China is relying on the so-called “nine-dash line” (originally created by Taiwan in 1947) to justify its claim to most of the South China Sea, where it has created artificial islands and asserted sovereignty over their surrounding waters. The US characterizes China’s policy as “anti-access area denial”: an effort to keep the US Navy far from the Chinese mainland and therefore from the coasts of America’s allies in the region.

China also is expanding its geopolitical influence through initiatives like the Asian Infrastructure Investment Bank, aid programs in Africa, and its “One Belt, One Road” plan to establish maritime and territorial links through the Indian Ocean and Central Asia, extending all the way to Europe. The current Chinese political leadership wants a peaceful and cooperative relationship with the US and other Western countries. But, looking to the future, the challenge for the US and its allies will be to deter future generations of Chinese leaders from adopting policies that threaten the West.

In the Middle East, much of the world’s focus has been on the threat posed by ISIS to civilian populations everywhere – including Europe and the United States. But the bigger issue in the region is the conflict between Shia and Sunni Muslims, a divide that has persisted for more than a thousand years. For most of that time, and in most places, the Shia have faced discrimination – and often lethal violence – at the hands of Sunnis.

Thus, Saudi Arabia and other Sunni-ruled Gulf states view Iran, the region’s Shia power, as their strategic nemesis. Saudi Arabia, in particular, fears that Iran wants to settle old scores and attempt to shift custodianship of Islam’s holy sites in Mecca and Medina to Shia control. A conflict between Saudi Arabia and Iran would also be a fight over the vast oil riches of the Arabia Peninsula and the enormous financial wealth of small Sunni states like Kuwait and Qatar.

The final source of risk, cyberspace, may soon overshadow all the rest, because borders and armies cannot limit it. The threats include denial-of-service attacks on banks and other institutions; unauthorized access to personal records from banks, insurance companies, and government agencies; and industrial espionage. Indeed, widespread theft of technology from US companies led to a recent agreement between China and the US that neither government will assist in stealing technology to benefit its country’s firms.

These are important issues, but not nearly as serious as the threat that malware poses to critical infrastructure – electricity grids, air traffic systems, oil pipelines, water supplies, financial platforms, and so on. Recent cases of malware use have been attributed to China, Iran, Russia, and North Korea. But states need not be involved at all: Individuals and non-state actors could deploy malware simply by hiring the needed talent in the international underground marketplace.

Cyber weapons are relatively cheap (and thus widely accessible) and capable of reaching anywhere in the world. They are the future weapons of choice for attacking or blackmailing an adversary. And we still lack the ability to block such attacks or to identify unambiguously their sources.

These four sources of risk constitute an unusually serious set of geopolitical challenges. By highlighting them, I don’t mean to downplay the importance of other issues – US monetary policy, weak commodity prices, debt crises, and the like – that are likely to affect the global economy in the year ahead. What’s special about the threats emanating from Russia, China, the Middle East, and cyberspace is that they will persist and threaten our economic future for years to come.

(This article was originally published in The Project Syndicate on Dec 28, 2015. The author is a professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984.)

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