Global Issues to Watch - March 2012 by ISA - International Strategic Analysis

March 01, 2012 3:14 PM | Deleted user
India's Economy Falters (2012-02-29)
India’s economic slowdown continued in the final months of 2011, with economic growth rates in India falling to a near two-year low during the fourth quarter of last year. This slowdown was the result of both internal and external factors that are likely to remain in place during the first half of this year, preventing India’s economy from staging a major comeback over the near-term. Moreover, this slowdown has prevented India from closing the economic growth gap with China, as it had appeared likely to do just a short time ago.

Indian GDP expanded by 6.1% on an annualized basis in the fourth quarter of 2011, down from the 6.9% growth that was recorded in the third quarter and well below the economic growth rates achieved in India in previous years. A key reason for this slowdown was the poor performance by India’s manufacturing sector, which suffered from a sharp decline in export demand in late 2011. Furthermore, inflationary pressures continued to plague India’s domestic market and this has forced India’s central bank to implement a series of interest rate hikes that have dampened domestic demand levels in India.

While 2011 was a very disappointing year for the Indian economy, 2012 also holds a number of risks that could prevent India from returning to the levels of economic growth that it had achieved in the years before the global economic crisis. First, export demand is likely to continue to weaken in the coming months, with signs pointing to weaker demand in key export markets such as China and Europe. Second, inflationary pressures are forecast to remain in place as energy prices remain high and could rise even higher if oil supplies are threatened. Finally, political gridlock is preventing the Indian government from enacting the types of reforms that are needed to boost foreign investment in India and this is having negative consequences for many sectors of the Indian economy.

Nuclear Weapons in the Middle East (2012-02-29)
One of the greatest fears surrounding Iran’s efforts to develop nuclear weapons is the concern that, should Iran acquire nuclear weapons, other countries in the Middle East would rush to develop their own nuclear weapons programs. This would lead to an arms race in the Middle East at a time when the United States is shifting its military focus from that region, potentially leaving no outside power in a position to prevent a major conflict between the region’s leading powers from breaking out. Moreover, this would dramatically raise the risk that nuclear weapons, or at least know-how to develop such weapons, would become available to non-state actors that would not have the incentives not to use such weapons that state actors have.

At present, the only state in the Middle East to possess nuclear weapons is Israel, which has, by most estimates, the world’s sixth-largest nuclear arsenal. Meanwhile, nearby Pakistan, which has close ties to many Middle Eastern governments, also has a large nuclear weapons program and has expressed its willingness to work with allies such as Saudi Arabia to develop a nuclear weapons program should Iran acquire such weapons. It is clear that Saudi Arabia will likely move ahead with the development of its own nuclear weapons program should Iran acquire nuclear weapons and it is possible that Egypt could revive its own nuclear weapons program as well.

While nuclear weapons played a key role in actually preventing an all-out war between the United States and the Soviet Union during the Cold War, and while India and Pakistan have thus far refrained from using their nuclear weapons against one another, the proliferation of such weapons in the Middle East will have major consequences for regional and global security. First, countries such as Iran, Saudi Arabia, Egypt and Pakistan have governments in which rival groups constantly struggle for power and this will make controlling and securing these weapons a very uncertain process. Second, non-state actors such as al-Qaeda and the Taliban have ties with some of the groups that might end up controlling and securing these weapons, making it possible that these non-state actors might be able to acquire a weapon as well. Finally, the range of territorial and religious disputes in the Middle East is more complex than in any other region where nuclear weapons are factor today and the likelihood of a conflict between one or more nuclear powers in the region will remain high for the foreseeable future. 

Sectarian Tensions in the Middle East and Central Asia (2012-02-22)
The growing level of tension between Iran on one side and a host of Western and Arab states on the other has raised concerns that Iran might attempt to foster unrest among Shiite Muslim communities in a number of countries in the Middle East and Central Asia. These tensions have already manifested themselves in recent sectarian violence in a host of countries in the region and, given Iran’s interest in avoiding a direct military confrontation with the West, could be used as a tool by Tehran to strike back at its perceived enemies should Iran’s nuclear facilities come under attack.

As the world’s dominant Shiite Muslim country (Iran is home to more than 40% of the world’s total Shiite population), Iran has supported the efforts by Shiite communities in other countries in the Middle East and Central Asia to gain more political power. Thanks to the political transformation of neighboring Iraq over the past year, Iran now has a neighbor to the east in which the Shiite population is now also politically ascendant. Meanwhile, Shiite minorities in countries such as Pakistan (20 million Shiites), Yemen (9 million), Lebanon (1.3 million), Saudi Arabia (750,000) and Bahrain (450,000) have launched political uprisings of varying degrees of intensity in recent years as political change sweeps across the region.

For Iran, these Shiite communities provide an excellent opportunity to strike at its rivals in the region should Iran come under attack from Western, Israeli or even Arab states. On the Arabian Peninsula, Iran can provide more support for Shiite communities in Saudi Arabia, Yemen or Bahrain to strike against its leading rival in the region, Saudi Arabia. In Lebanon, Iran’s Hezbollah allies can launch new attacks against Israel, striking the country most concerned about Iran’s nuclear program. Finally, Iran can add to the chaos in Pakistan and Afghanistan through those country’s Shiite minorities, causing significant headaches for the United States in its efforts to defeat the Taliban and bring stability to Central Asia.

A Stay of Execution for Greece (2012-02-21)
As expected, Eurozone finance ministers approved a deal with the Greek government that will allow Greece to receive a second massive bailout worth $173 billion (130 billion euros) in exchange for a series of new austerity measures and economic reforms. This deal has allowed Greece to avoid an immediate default on its debts and has brought a temporary sense of relief among other Eurozone members amid the ongoing debt crisis. However, Greece (and many other Eurozone countries) face massive economic challenges in the coming months and years that will cause massive hardships for the region.

This latest bailout for Greece will allow that country’s government to continue to function and prevent a total collapse of the Greek economy in the coming months. However, this bailout comes with a terrible cost for Greece, as it will force the Greek government to enact further painful austerity measures at a time when the country’s economy has already contracted by 16% since the start of the crisis. Moreover, much of the losses incurred by the haircut imposed on lenders to Greece (up to 70%) will be incurred by Greek banks, further weakening the country’s already-shattered financial sector. Finally, reduced levels of government spending could result in Greece remaining in a recession for as long as a decade, with the country’s economy contracting by as much as one-third.

Meanwhile, this newly found confidence in Europe is simply the calm before the storm as the region faces huge challenges, both over the near-term and the long-term. In the coming months, Italy will face massive debt repayments that will challenge the Eurozone’s third-largest economy’s ability to raise funds on international markets. In addition, Portugal is facing many of the same risks as Greece and investors are increasingly concerned that Portugal will also need a second large bailout to finance its debts. 

Over the longer-term, much of the Eurozone faces the prospect of a prolonged period of economic stagnation as domestic markets remain weak and austerity measures severely reduce economic spending. Moreover, the eventual unraveling of Europe’s social welfare systems that is an inevitable consequence of this crisis will produce major social upheaval in many countries in the region. Furthermore, without massive immigration, Europe’s working-age (and shopping –age) population is set to decline rapidly in the years ahead, further reducing growth. As such, it is clear that the Eurozone’s debt crisis is far from over and the region’s leaders need to do more to improve the region’s competitiveness over the long haul.

Six Key Elections in Four Weeks (2012-02-15)
Over the next four weeks, there were be 12 national elections taking place around the world, with six of them having the potential to lead to major unrest in the countries in which these elections are taking place. Three of these critical elections will take place in the Middle East, the scene of so much political upheaval over the past 15 months. In addition, three other elections will take place in countries that have experienced rising political tensions in recent months, with Russia’s upcoming presidential election having the potential to lead to major unrest in that important country.

In the rapidly changing Middle East, there will be three national elections in the coming weeks that will have a major impact on that region’s stability. In Egypt, the ongoing elections for the upper house of the parliament are likely to confirm the ascendancy of Islamist political movements to power in that country, a development that could lead to a clash between the Islamists and the country’s armed forces. In Yemen, presidential elections will take place later this month, despite calls for the election to be postponed from almost all factions in that volatile country. Finally, Iran will hold parliamentary elections in early March that will pit the various factions within that country’s conservative movement against one another, amid growing tensions between Iran and a host of rivals, including the United States, Saudi Arabia and Israel.

Outside of the restless Middle East, three other important national elections will take place in the next few weeks, each of which could lead to major unrest in those countries. The most important of these is the upcoming presidential election in Russia that will be a referendum on the return to the presidency by Vladimir Putin, who was badly shaken by his party’s loss of support in December 2011’s parliamentary elections. Elsewhere, Senegal will hold a presidential election with the 85-year-old President Abdoulaye Wade seeking another term in office amid growing opposition to his rule. Finally, the young country of East Timor will hold its third presidential election next month and this could lead to a new round of violence in that small country.

Japan's Economic Woes (2012-02-15)
Japan’s economy performed much worse than had been expected in the final months of 2011 and there are now fears that the recovery that had been expected in Japan in 2012 may not be forthcoming. As a result, the Japanese government is likely to take steps to attempt to boost economic growth in Japan, both for this year and for the longer-term. However, many of the same factors that have held back the Japanese economy over the past two decades remain in place.

The Japanese economy contracted by 2.3% on an annualized basis during the final three months of 2011, a much worse performance than had been expected. This contraction was the result of disruptions to Japan’s supply chain caused by the flooding in Thailand as well as the growing weakness in many of Japan’s key export markets, particularly Europe. This brought an end to what was a very difficult 2011 for the world’s third-largest economy as it suffered from the impact of March 2011’s earthquake and tsunami disaster, the Fukushima nuclear crisis and the effects of the debt crisis in Europe.

In response to these latest economic difficulties, the Bank of Japan announced that it would expand its asset purchase program by $130 billion in a bid to stimulate the economy. However, Japan will face the same problems in 2012 that it has faced for the past two decades, including a shrinking domestic market, higher levels of competition from foreign manufacturers and persistent deflationary pressures. While a stronger United States economy will provide for some export growth, other key export markets will remain weak in 2012, holding back overall export levels. Finally, Japan’s dysfunctional political system will mean that needed economic reforms are likely to be delayed further, making it more difficult for Japan to generate economic growth in the coming years.

No End in Sight in Syria (2012-02-08)
A combination of internal and external factors makes it almost certain that the ongoing conflict inside Syria is unlikely to be resolved in the near future. In fact, the situation is likely to deteriorate further as President Bashar al-Assad and Syria’s armed forces desperately cling to power, while a growing anti-government movement continues to spread to more areas of that country. As a result, Syria is headed for a full-blown civil war that could devastate the country and could force outside countries to intervene without the consent of the United Nations.

While the conflict in Libya was a relatively easy one for foreign powers to become involved in, the ongoing upheaval in Syria is a much different situation. With a population that is both diverse and geographically mixed, it is difficult for the anti-government forces to secure control over congruous territories in Syria, making it much harder for foreign powers to secure a base of operations in Syria. Likewise, a no-fly zone such as the one enforced over Libya would be much less effective in Syria as the government has not used air power in its efforts to crush anti-government forces. Finally, whereas Libya’s population centers were almost all located along the coast, Syria’s are more widely dispersed amid much different types of terrain.

With Russia and China blocking the United Nations’ authorization of any type of use of force against the Syrian government, the only option for international intervention will have to be unilateral action. Should Turkey and most Arab states agree to use force to stop the Syrian government’s crackdown on anti-government forces, this would open the door for intervention by the United States and some of its European allies. However, dislodging President Assad from power is likely to prove much more difficult than the removal of Muammar Gaddafi and this outside intervention could lead to a broader destabilization in the region. 

Indonesia as the World’s Next Giant Emerging Market (2012-02-08)
With its level of political stability having improved significantly in recent years and with its economy growing at its fastest pace in 15 years, Indonesia and its 245 million inhabitants appear poised to become the world’s next giant emerging market in the eyes of exporters and investors. With a fast growing internal market and a strategic location, Indonesia has the ability to attract significantly more trade and investment than it has done so far. Nevertheless, long-term risk levels remain high and could deter some investors from committing to Indonesia.

Indonesia’s economy grew by 6.5% in 2011, one of the best performances of any economy around the world. Moreover, this strong growth followed a string of improved economic performances in recent years as Indonesia did better than most developed economies during the economic upheaval of the past few years. This strong growth was due in no small part to the emergence of a sizeable middle class in Indonesia that has benefitted from higher levels of political stability and solid economic policies by recent Indonesian governments. As a result, Indonesia has closed the economic growth gap with the only two emerging markets that are larger than it, China and India.

Despite the recent economic success and higher degree of political stability, many investors remain wary of the longer-term risks involved in doing business in Indonesia. For one, Indonesia’s diverse and scattered population means that investing outside of the main island of Java remains fraught with risk as Jakarta struggles to maintain tight control of the more than 10,000 islands that make up Indonesia. Second, Indonesia’s infrastructure is in need of a major overhaul if economic growth rates are to rise further. Finally, Indonesia faces stiff competition from rivals in East Asia and beyond and therefore must do even more to attract trade and investment during these uncertain economy times.

Reprinted from ISA Report published March 1, 2012, International Strategic Analysis, 
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