Global Issues to Watch - January 2013 by ISA - International Strategic Analysis

January 02, 2013 10:17 AM | Deleted user
Deadlock in Israel (2013-01-23)
Thanks to an unexpected surge by a new center-left political party, Israel’s parliamentary elections resulted in an even split between that country’s right-wing and center-left blocs. This split will make it difficult for current Israeli Prime Minister Benjamin Netanyahu to form a new coalition government, as he will have to now negotiate with his current religious hardline allies as well as parties on the center-left. As a result, the deep divisions within Israel over the status of the country’s fast-growing ultra-Orthodox Jewish population and the peace process with the Palestinians will be exposed.

Polls taken before Israel’s parliamentary elections suggested that Prime Minister Netanyahu’s Likud-Yisrael Beitenu alliance would win the largest share of the vote, which it did. However, this right-wing alliance saw its number of seats in the 120-seat parliament fall from 42 to 31. Meanwhile, the newly-formed center-left Yesh Atid party performed surprisingly well, finishing in second place with 19 seats. While the spilt between the right-wing and the center-left blocs was 60-60, 18 of the seats on the center-left are for Israeli Arabs and it is highly unlikely that they will be asked to join a new government, allowing the right-wing to lead the efforts to form a new government.

This deadlock in Israel will have a major impact on three major issues in Israel. First, the Yesh Atid party has made in clear that it will not join any new government unless the law that allows ultra-Orthodox Jewish seminary students to defer their military service is changed, a move that is staunchly opposed by Prime Minister Netanyahu’s hardline allies. Second, the center-left has insisted that the peace process with the Palestinians must be revived, something that the prime minister appears not interested in pursuing. Finally, the center-left’s better-than-expected performance was due in large part to the growing problem of wealth inequality and the rising cost of living in Israel, and this will force any future government to pay more attention to economic issues.

Positive Signs from the Chinese Economy (2013-01-21)
With Chinese economic growth levels rebounding from a 13-year low in the latter part of 2012, there is growing optimism that China can once again become a leading engine of global economic growth. In particular, there are hopes that China begins to realize its potential as one of the world’s leading markets for exporters from around the world as purchasing power levels in China continue to rise. While the outlook for the Chinese economy is generally positive, it is highly unlikely that China’s economy will return to the soaring levels of growth that it reached before the recent downturn.

The Chinese economy grew by 7.9% on an annualized basis in the fourth quarter of 2012, up from the 7.4% growth rate that was recorded in the previous quarter. This growth was largely driven by the Chinese government, which boosted spending on infrastructure projects late last year and which launched a series of incentives designed to increase consumer and business spending inside China. Moreover, Chinese exporters are benefitting from the recovery underway in North America and the higher rates of growth in some key Asian export markets, which have helped to offset the current weakness in export markets in Europe.

As wealth levels in China continue to rise and as the country’s work force begins to decline, China will not be able to match the incredible high rates of economic growth that it did in the years before the recent downturn. Instead, economic growth rates are forecast to hover between 7% and 9% in the years ahead, which is still a very respectable level for an economy at China’s state of development. Moreover, this growth will be increasingly driven by rising levels of domestic spending in China, as export growth is forecast to slow as production and labor costs rise in China and as other countries’ export competitiveness improves vis-à-vis China. For global exporters, this means that China will remain a leading growth market in the years ahead, although growth rates will not match earlier levels.

A Crucial Period in the Middle East and North Africa (2013-01-16)
The Middle East and North Africa is facing another critical period as the fallout from the Arab Spring continues to destabilize the region. So far, the Arab Spring has produced four deadly civil wars (Yemen, Libya, Syria and Mali) and the level of instability in a number of other countries in the region has risen to dangerous levels. Moreover, Israel’s relations with the Palestinians show no sign of improving, while the political situation in the most populous country in the region, Egypt, remains highly fluid.

Of the four civil wars that have been generated by the Arab Spring over the past two years, only one (Libya) has come to an end, and that country continues to face serious instability. In Yemen, the government is continuing to struggle to assert its authority over the entire country due to separatist movements in the north and south of the country and the presence of large al-Qaeda affiliated groups in the southern part of Yemen. In Syria, the civil war continues, having already claimed more than 60,000 lives and having displaced more than 2.7 million people. Finally, the ongoing civil war in the West African country of Mali is also a direct result of the Arab Spring, as it was arms flowing from Libya that allowed Islamist and Tuareg rebels to seize the northern half of that country.

The Arab Spring has also had a profound impact on two of the most important countries in the region, Egypt and Israel. In Egypt, the Islamist President Mohamed Morsi has expanded his powers since taking office last year and is in the process of creating an Islamist state there. This, coupled with the civil war in Syria and the unrest in Lebanon and Jordan, is alarming Israel, for the relatively stable relations that it had with its neighbors in recent decades are under threat by the changes wrought by the Arab Spring. This will be foremost on the minds of Israeli voters when they go to the polls next week amid seemingly increasing support for hardline political movements in that country.

Europe: Economic Recovery or Political Instability (2013-01-15)
From a financial standpoint, the crisis in the Eurozone appears to be easing as fears of a collapse of the euro or of countries being forced out of the Eurozone have receded for the time being. Nevertheless, much of the Eurozone remains in a recession, and even Germany is seeing its pace of economic growth slow dramatically. Moreover, unemployment rates in many Eurozone countries remain dangerously high and there is a real possibility that this, coupled with the overall downturn of the region’s economy, could lead to severe political unrest in some Eurozone countries.

Businesses and investors around the world are slightly optimistic that the worst of Europe’s financial crisis has passed and that a recovery, albeit one that is very sluggish, could begin to emerge in 2013. This has fueled the appetite for risk, a development that is actually harming the Eurozone by raising the level of the euro. Should the euro continue to rise, Eurozone exports could falter at a time when key export markets in North America and Asia are recovering. This, in turn, could prolong the recession in the Eurozone and prevent the sort of recovery that is needed to reduce Europe’s rising unemployment rates.

This recession and the unemployment crisis that has accompanied it are threatening to further weaken job markets across the Eurozone, a development that could fuel significant political unrest in those countries where the unemployment rates are the highest. 2012 saw massive protests across much of southern Europe and if the situation in those countries does not improve, 2013 could see even larger protests. These could develop into actual threats against existing governments (such as in Greece) or into separatist movements that could threaten the unity of some Eurozone countries (such as Spain or Belgium). If governments do not do more to promote economic growth and job creation in the Eurozone, political risk levels there will rise accordingly.

Iran's Crippled Economy (2013-01-09)
With the announcement by the Iranian government that Iran’s oil exports had fallen by 40% over the past year, it is becoming clear that the international sanctions that were put in place against Iran in recent years are having a major impact on that country’s economy. Not only are oil exports falling sharply, but it is becoming increasingly difficult for Iran to do business outside of its borders and this is leading to major shortages within Iran. With the United States government unlikely to back military action against Iran in the coming months, it will be these economic sanctions that remain the international community’s leading method of pressuring Iran to abandon its nuclear program.

Until recently, the Iranian government had vehemently denied that international economic sanctions were having a major impact on the Iranian economy. However, evidence has begun to mount that these sanctions are in fact having a massive impact on Iran and are costing the Iranian government much of its popular support. For example, Iran’s currency has weakened dramatically in recent months and this has fueled severe inflationary pressures inside Iran. Furthermore, pressure from the United States has convinced many of Iran’s leading markets for oil and gas exports to seek alternative sources of these natural resources and this has led to the sharp decline in oil and gas exports over the past year.

Given the fact that the Iranian government will almost certainly continue with its nuclear program over the near-term, international sanctions against Iran will remain in place for the foreseeable future and could be tightened further. This will lead to the continued collapse of the Iranian economy as shortages worsen, potentially fueling hyperinflation. Moreover, oil and gas exports will continue to fall as Iran’s leading export markets continue to find new sources of oil and gas. As the economy collapses, Iran’s political stability is likely to be diminished as popular anger against the Iranian government mounts. This could lead to a major uprising against the hardliners that rule the country, or it could convince the Iranian government to launch a war against one or more of its neighbors in a bid to distract the Iranian people from their economic situation.

The Coming War in Mali (2013-01-08)
With Islamist militants in control of the northern half of the vast West African country of Mali, and with a number of foreign countries preparing to create a military force to retake northern Mali, the coming war in that country will be crucial for the security and stability of West and North Africa. If these Islamist groups are able to consolidate and expand their hold on northern Mali, they will be able to provide a haven for terrorist groups affiliated with al-Qaeda that could use this remote region as a base for their operations in Africa and further afield. Given the remoteness of the region and harshness of the terrain, ousting these Islamist rebels is likely to prove difficult.

In early 2012, Islamist groups led by the Ansar Dine group allied themselves with local Tuareg rebels to seize control of northern Mali. Subsequently, the Islamists marginalized the Tuaregs to gain control over all of the cities and towns in that vast region. Meanwhile, the Islamists were aided by a series of coups in Mali that greatly weakened the government and the armed forces of that country. As a result, the Islamists were free to consolidate their control over northern Mali and there was little or no fighting between the two sides for nearly one year. However, Islamist rebels have recently launched attacks on government-held cities and towns in central Mali and could threaten the country’s main population centers in the southern part of Mali in the near future.

Fearful of the impact that the Islamist rebels could have on the region, several members of the West African bloc ECOWAS agreed to form a military force that would join with Mali’s armed forces to retake northern Mali beginning later this year. Moreover, this force is likely to be aided by the United States and France, both of whom are concerned about the Islamist rebels’ ties with terrorist groups as well as their ability to destabilize much of West and North Africa. It now appears as if the Islamist rebels will attempt to seize more territory before this foreign military force can be assembled, and if they succeed, it will be even more difficult to oust them from Mali. As such, this makes this little-known conflict one of the key flashpoints of 2013.

What the Fiscal Cliff Deal Means for the Global Economy (2013-01-02)
With no time remaining, the United States Congress reached deal, albeit a temporary one, to avert the “fiscal cliff” that consisted of major tax hikes and government spending cuts. In this deal, taxes on the wealthiest Americans will be raised, as will payroll, estate, capital gains and dividend taxes. However, while some short-term government spending will be cut, this deal did nothing to reduce the longer-term spending that threatens to add to long-term US debt levels. Moreover, the short-term nature of this deal means that a new round of negotiations will have to take place in the near future over raising the US debt ceiling, a deal that could prove very difficult to reach.

There were fears that, should a budget deal not be reached by the New Year, the impending tax hikes and spending cuts could reduce GDP growth in the United States by as much as 2% per year over the near-term. Fortunately, the deal that was reached should not have as much of an impact on the US economy as no deal would have, and this will allow the US economic recovery to continue in 2013, with GDP growth approaching 3% this year. However, the fact that the deal that was reached is only a temporarily solution will result in investment and hiring levels being held back from their full potential and this will prevent the US economy from achieving even higher levels of economic growth.

For the world economy, this deal, even if it is a temporary solution, will be a welcome development. First and foremost, this deal should allow for export demand in the United States to continue to accelerate, permitting the US to regain its position as a key pillar of global economic growth in 2013. This is particularly vital for any European bounce back in 2013 as domestic demand in Europe will remain weak and the US remains a leading market for many European exporters. Likewise, East Asia’s export-driven economies will also welcome this deal as they have slowed significantly over the past year. With the US set to record healthy economic growth in 2013, the global economy could be on the brink of significantly higher economic growth rates in the years ahead.

US-Chinese Relations in 2013 (2013-01-01)
More than ever, the bi-lateral relationship between the United States and China will be the leading factor in determining global peace and security in 2013. The United States remains the world’s dominant military power, possessing more power than the next-most-powerful countries combined. Meanwhile, China’s military build-up has resulted in it becoming the unquestioned number two in terms of overall military power. As the US shifts more of its military power to Asia, these two powerful militaries will increasingly face off with one another and how these two countries manage this relationship will go a long way to determine global stability and security in 2013 and beyond.

The United States’ overall military power remains far in excess of that of any other country in the world, giving the US the ability to intervene militarily in almost any area of the world. In recent years, the Obama Administration has rightfully identified Asia as the region that will have the greatest impact on US security in the 21st century and is transferring military resources from Europe and the Middle East to Asia. This shift is occurring as China is rapidly expanding its own military resources by becoming the world’s number two in terms of military spending. With Chinese military spending forecast to continue rising at a rapid pace, China will gradually close the military power gap with the US, while becoming far more powerful than most other significant global military forces.

China’s various territorial disputes in the waters off of East Asia are likely to intensify in 2013 and this will raise tensions between China and some of the United States’ leading allies in Asia. Moreover, China’s presence in South Asia, Central Asia and the Middle East is on the rise, potentially threatening US interests in these regions. With new leaders taking power in China, there is little chance that China will back down in these territorial disputes or slow its expansion into regions it considers vital to its interests. This could lead to a new Cold War in Asia, pitting the world’s two dominant military powers in a host of disputes across Asia and raising the global political risk levels significantly.

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Reprinted from ISA Report published January 2, 2013 (updated January 23, 2013), International Strategic Analysis, http://www.isa-world.com/main.php  
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