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

October 01, 2012 6:02 PM | Deleted user
Who Suffers as a Result of China's Slowdown (2012-10-10)
The fact that China’s economic slowdown appears to be continuing in the second half of 2012 has raised fears that countries and businesses dependent upon exports to China for their growth could be in for a severe downturn. While China’s vast domestic market is not expected to contract by a large amount, its recent run of strong growth is not forecast to continue. As a result, countries and businesses that had counted on China for much of their growth in late 2012 and in 2013 are likely to struggle, particularly as other export markets, most notably Europe, remain very weak.

China has become a leading export market for many economies around the world, particularly those that supply natural resources for China’s massive industrial sector. For example, China is the dominant export market for a host of natural resource-exporting countries such as Australia, Chile and numerous Sub-Saharan African and Asian countries. Meanwhile, soaring levels of consumer demand have allowed China to become a much more important market for higher-end exports from Asia, North America and Europe in recent years, with China accounting for much of these region’s export growth.

Should China’s current economic struggles extend to the country’s consumer and business markets, the outlook for global economic growth will suffer accordingly. At present, the world’s leading export markets are either experiencing sluggish growth (North America) or are in the midst of a serious recession (Europe). With these developed markets having suffered from five years of little or no growth, exporters have become increasingly dependent upon larger emerging markets such as China for their growth. If China’s economic slowdown continues, this avenue of growth will also be blocked and this will result in lower rates of economic growth around the world.

Chavez Re-Elected (2012-10-08)
Despite facing a unified political opposition for the first time in years, Venezuelan President Hugo Chavez was able to win re-election for a fourth term in office, defeating his center-right rival Henrique Capriles by a healthy margin. For President Chavez, this victory confirmed the support for his policies among poorer Venezuelans who have stuck with him despite the country’s economic problems. However, questions over the president’s health will remain a major issue in Venezuela and will cloud that country’s political future in the coming months and years.

President Hugo Chavez won Venezuela’s presidential election by a margin of 54.4% to 45.0% over the candidate of the unified political opposition in that country, Henrique Capriles. President Chavez was aided by a high voter turnout among poorer Venezuelans that pushed the overall voter turnout in this election to 81%. Meanwhile, the election itself turned out to be peaceful, despite an acrimonious campaign that led to a number of violent clashes in the weeks before the election. As a result, President Chavez will now begin a fourth term in office, while the rightist opposition in Venezuela will likely struggle to retain the cohesiveness that it showed during the election campaign.

Given the fact that President Chavez is suffering from an unknown form of cancer and has had to continuously travel to Cuba for treatment, his health will remain a major issue in Venezuela in the months and years to come. In fact, there had been much speculation in Venezuela in the months leading up to the election that President Chavez would be too ill to actually run for re-election. Should President Chavez’s health deteriorate before the end of his fourth term in office, Venezuelan politics could be thrown into disarray as he has dominated the country’s political scene since taking power in 1999. This, in turn, could destabilize one of the region’s most important countries and have a major impact on Venezuela’s neighbors.

Al-Qaeda's New Stronghold (2012-10-03)
One of the most alarming developments this year in the global effort to eradicate terrorist groups has been the seizure of a vast area of the West African country of Mali by a terrorist group affiliated with al-Qaeda. Since its seizure of the arid northern half of Mali earlier this year, the group al-Qaeda in the Islamic Maghreb (AQIM) has consolidated its grip on power in that region that is as large as France, sidelining the other rebel groups that it had allied itself with in order to oust the Malian government from that region. Given the fact that the AQIM is well-armed as a result of the flow of weapons from Libya over the past two years, this group could soon pose the greatest terrorist threat in the world.

Amid the chaos of the coup d’état that ousted Mali’s government in early 2012, the AQIM, together with its allies (the Islamist Ansar Dine group and Tuareg MNLA rebel group), seized control of the northern half of Mali. In the months that followed, the AQIM was able to wrest control of the region from its allies and turn the vast region into an al-Qaeda-led Islamist region. Given the fact that Mali’s government has been preoccupied with strengthening its own grip on power in southern Mali, it has been unable to do anything to win back territory from the AQIM. In fact, the AQIM has been expanding its control into more southern areas of Mali in recent months.

Given the chaos in Mali, it will take foreign intervention to oust the AQIM from the northern half of that country. Recently, the United States announced that it is considering the use of drone aircraft against the AQIM, much as it has done in Pakistan, Yemen and Somalia in recent years. However, it will also take significant ground forces to oust the AQIM from northern Mali and it is uncertain as to who would provide such forces. The logical choice would be ECOWAS (West Africa’s regional body), but it lacks the troops needed to secure such a vast territory. Moreover, it is unlikely that other African countries will be interested in committing large numbers of forces to Mali, forcing Western countries to consider some form of involvement.

The Impact of the Arab Spring on Foreign Investment (2012-10-02)
With political unrest continuing to impact many areas of the Middle East and North Africa in the wake of the Arab Spring, many foreign investors have become increasingly wary in investing in that region. As a result, foreign investment inflows into the Middle East and North Africa have fallen sharply, with only a few exceptions. As foreign investment is a necessary component of the region’s efforts to modernize and diversify its economy, this loss of foreign investment is having both an immediate and a longer-tern detrimental impact on the region’s economy.

The combination of the global economic troubles over the past few years and the political turmoil that has occurred in many countries in the Middle East and North Africa since late 2010 has resulted in foreign investment inflows into the region falling by nearly 50% from their peak in 2007-2008. The largest declines have occurred in countries such as Egypt, Libya and Tunisia where governments have been ousted over the past two years. However, more stable countries such as Saudi Arabia and the United Arab Emirates have also recorded much lower levels of foreign investment in recent years. Only those countries that have combined higher rates of economic growth with relative political stability (such as Turkey and Israel) have managed to maintain high levels of foreign investment inflows in recent years, but both of those economies have limited trade and investment ties with the rest of the region.

As the level of political risk in most areas of the Middle East and North Africa is forecast to remain very high in the coming years, many foreign investors are likely to continue to shun the region, particularly investors from outside of the region. This sharp fall in the level of foreign investment will have a major impact on the region’s economic outlook over the near-term and will contribute to low levels of economic growth across the region in 2012 and 2013. A greater concern is the impact that this lack of foreign investment will have on the long-term economic growth potential of the region, as foreign investment has been a key driver in both job creation and economic diversification in the Middle East and North Africa. As such, this sharp downturn in foreign investment has the potential to add to the region’s political turmoil, both now and in the coming years.

Popular Will Threatens Europe's Future (2012-09-26)
While European political leaders have finally begun to take some of the steps necessary to pull that region back from the brink of an economic collapse, the popular will in many European countries threatens to worsen the region’s already-serious economic crisis. Simply, large numbers of European voters are opposed to the austerity measures and other steps needed to rescue the Eurozone economy and are using their numbers to thwart the efforts of European governments to restore the region to a more sound economic footing. As such, Europe’s longer-term economic decline is likely to continue.

The massive protests and strikes that have gripped many of the Eurozone economies in recent months have been aimed at preventing the region’s governments from enacting the austerity measures needed to improve the longer-term economic outlook for Eurozone economies. Already, labor unions and other special-interest groups have had some success in forcing governments to water down some of their proposed measures, as highlighted by the Portuguese government’s recent withdrawal of a proposed increase in that country’s social security tax. Furthermore, governments that have enacted austerity measures have seen their popularity plummet, forcing them to either withdraw some of these measures or face being voted out of office in the next election.

For much of the Eurozone, these austerity measures are a necessary step in improving the region’s deteriorating economic competitiveness. With shrinking domestic markets and working-age populations being combined with ultra-generous pension and healthcare systems, Eurozone economies are becoming more dependent upon exports for their economic growth at a time when their export competitiveness is deteriorating sharply. As a result, those governments that back down on their planned austerity measures are likely dooming their countries to a prolonged period of economic decline that will further reduce government revenues. In turn, these declining government revenues will result in even more severe austerity measures being forced on these countries in the longer-term.

East Asian Flashpoints (2012-09-25)
In terms of their potential impact on the global economy and many of the world’s leading powers, the maritime disputes in the waters of East Asia may be the most important flashpoints in the world. Not only is China the key player in these disputes, but other major Asian powers such as Japan, Indonesia and South Korea are involved as well. Furthermore, as the region’s leading naval power, the United States is also entwined in these disputes. Should China press forward with its territorial claims in East Asia, a conflict between the world’s two dominant powers cannot be ruled out.

With the exception of the dispute between Japan and South Korea over the Takeshima/Dokdo islands (which has deeply divided those two countries in recent months), all of the other major maritime disputes in East Asia involve China. As a rising power that believes its rightful position is as the dominant power in East Asia, China is unlikely to back down on its claims to both the Senkaku/Diaoyu islands that are also claimed by Japan and Taiwan and to almost all of the South China Sea (with areas claimed by the Philippines, Malaysia, Indonesia, Vietnam and others). Moreover, China is prodding each of its rivals in these disputes to test their resolve to defend their own claims, as well as testing the United States’ resolve to back its allies in these disputes.

It is this growing assertiveness by China in the waters of East Asia that most alarms many of its East Asian neighbors and their US ally. Moreover, China is moving to back its territorial claims by enhancing its air and naval power, with China recently launching its first aircraft carrier as a sign of its military ambitions. Should China’s economic slowdown worsen, or should the new generation of Chinese leaders feel the need to burnish their nationalist credentials, there is a significant risk that China could become even more aggressive in asserting its territorial claims in the region. With many sides increasing their naval presence in the region, the potential for a spark to set off a conflict will increase. As these disputes are in the heart of the world’s fastest-growing economic region, the potential impact is global in scope as rising tensions could spark both a global political and economic crisis.

A New Wave of Unrest in the Muslim World (2012-09-19)
The recent wave of protests that have spread across the Middle East, North Africa and other regions with large Muslim populations has unleashed a new round of unrest in these highly volatile areas. That these protests were sparked by a crude anti-Islam film that was produced in the United States has resulted in the US being the focus of the protestors anger and has led to attacks on US embassies, consulates and other Western targets in these regions. Moreover, the political changes wrought by the Arab Spring mean that these protests could have a much larger impact on US relations with the Muslim world than they would have under these countries’ previous regimes.

Following the production in the United States of a film insulting the Islamic religion, large-scale protests have erupted in many Muslim-populated countries. The most violent of these protests have been led by Salafists and other more radical groups and have led to attacks on a number of US and other Western embassies and consulates in the Middle East, North Africa and Asia. These attacks on US and Western embassies and consulates have led to a number of deaths (including that of the US ambassador to Libya) and have forced the US and many of its allies to withdraw their diplomatic staff from these regions at a time of great political change.

This latest round of unrest threatens to severely damage the United States’ relations with many of the new governments in the Middle East, North Africa and Asia. For the recently elected governments in countries such as Egypt, Libya and Tunisia, these protests are often being led by Islamists that support these governments, making it difficult for them to crack down on the protestors. Meanwhile, already high-levels of anti-US sentiment have been inflamed by this film in countries such as Pakistan, Afghanistan and Yemen, potentially hampering the cooperation between the US and these government in their joint efforts to defeat terrorist organizations based in each those countries.

Reprinted from ISA Report published October 1, 2012 (updated September 10, 2012), International Strategic Analysis,  
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