Global Issues to Watch - May-June 2013 by ISA - International Strategic Analysis

May 08, 2013 1:02 PM | Deleted user
Arms Race in Syria (2013-05-29)
While the civil war in Syria has grown steadily more deadly in recent months, the potential for the level of violence to escalate even further has risen now that more countries are planning to ship arms to the two sides battling for control of that country. On one hand, President Bashar al-Assad’s government has been receiving a steady flow of arms from backers such as Iran and Hezbollah and is now about to receive sophisticated anti-aircraft missiles from Russia. Meanwhile, rebel groups have received significant amounts of arms from Saudi Arabia and Qatar, and the European Union has just lifted its arms embargo on the rebels.

For the Syrian government, the steady flow of arms from its allies, not to mention its own large stockpiles of weapons, has allowed it to recover from setbacks in 2012 to retake some of the territories that it had lost to the rebels. Moreover, the government has strengthened its grip on what it sees as its core territory stretching from Damascus in the south to the Alawite heartland in the northwest. In the meantime, shipments of advanced missiles from Russia and Iran will allow the Syrian government to deter direct foreign intervention in the conflict while being able to threaten any of its neighbors such as Turkey or Israel, where there have been clashes along their borders with Syria in recent months.

For the rebels, the European Union’s decision to drop its arms embargo on them is a very welcome sign as there have been many reports which suggested that the rebels’ main backers, Saudi Arabia and Qatar had cut back on arms shipments to the rebels in recent months. However, while the rebels may be able to gain access to more advanced weaponry, there is a growing sense that the rebels are anything but a cohesive group. Furthermore, as Syria’s civil war has dragged on, more radical rebel groups, including some with ties to al-Qaeda, have grown in strength and importance. As a result, a new influx of arms to the rebels could have last repercussions for the security of the entire region.

Latin America's Ambitious New Trade Bloc (2013-05-28)
Free trade agreements in Latin America have often failed to live up to their hype, but the new Pacific Alliance may be the region’s trade bloc that transforms trade and investment in Latin America. With a combined population of nearly 220 million people and a total GDP of almost $2 trillion, the Pacific Alliance has the potential to become a serious trade bloc with a global reach. Moreover, each member of the Pacific Alliance has a wealth of natural resources that will continue to attract foreign investors to these countries in the years to come.

At present, the Pacific Alliance consists of four Latin American countries (Mexico, Colombia, Peru and Chile) that have two things in common. First, all four countries have coastlines on the Pacific Ocean that have enabled them to develop stronger trade ties with the dynamic economies of Asia. Second, all four countries have governments that have opened their economies to trade and investment, enabling them to record some of the highest rates of economic growth in the region. These commonalities have allowed the four member states to set an ambitious agenda for the Pacific Alliance.

The potential for the Pacific Alliance to transform Latin American trade and investment can be seen in the list of countries that have recently expressed their interest in joining this newest trade bloc. On one hand, the Pacific Alliance is likely to reach trade deals with the United States and Canada in the years ahead, significantly boosting its members trade and investment growth potential. Furthermore, the dynamism of the Pacific Alliance stands in stark contrast to the failures of the region’s other main trade blocs, particularly the increasing leftist Mercosur bloc. Finally, the Pacific Alliance has the potential to transform the political landscape in Latin America by potentially entrenching the deep right-left split in the region’s politics, a development that could see a divergence in economic growth across the region.

Will the Arab Spring Spread to Algeria? (2013-05-22)
So far, Algeria has yet to experience the political upheaval that has transformed much of the Middle East and North Africa during the Arab Spring that has taken hold across the region over the past two-and-a-half years. However, questions about the health of long-time President Abdelaziz Bouteflika are raising the possibility of a leadership change in that country in the near future that could result in a struggle for power and a destabilization of the country. Given Algeria’s strategic location, unrest in that country would likely have a major impact upon much of North and West Africa, as well as the Mediterranean region.

Last month, 76-year-old Algerian President Abdelaziz Bouteflika was reported to have suffered a stroke and has been recovering from this stroke in a hospital in France ever since. His absence from the public eye has led to rumors in Algeria that the president’s health is much worse than is being admitted by the Algerian government and that he may not be able to return to power. As President Bouteflika had been expected to run for a fourth-term in office in next year’s presidential election in Algeria, his health woes are leading to increased speculation as to who could succeed him as president. However, Algerian political power is carefully balanced between the country’s armed forces and intelligence services, with President Bouteflika managing this delicate balance.

The risks of a political crisis in Algeria are many and involve not only Algeria, but its neighboring regions as well. Internally, a political vacuum at the top could result in a battle for power between Algeria’s rival power centers. Moreover, it could allow the Islamist insurgency that plagued the country in the 1990s to resurface, severely destabilizing the country. Externally, unrest in Algeria could destabilize neighboring Libya and Tunisia, while fueling tensions with Morocco, a country that Algeria has had tense relations with in the past. Finally, unrest in Algeria could allow militant groups to establish bases of power in the vast Sahara Desert in southern Algeria, a development that would have consequences for much of North and West Africa. As such, Algeria and its neighbors will watch the health of President Bouteflika very carefully in the coming weeks.

Japan Soars at the Expense of its Rivals (2013-05-20)
Japanese economic growth soared in recent months, in no small part as a result of the economic stimulus programs enacted by Prime Minister Shinzo Abe’s government since it gained power in late 2012. For Japan, this government-led effort to boost economic growth has been the reason for the dramatic improvement in Japan’s export competitiveness in recent months. However, Japan’s improved export competitiveness has had a major negative impact on other export-oriented economies, not only in Asia but also around the world.

Japan’s economy expanded by 3.5% on an annualized basis in the first quarter of 2013, a performance that exceeded the expectations of Japan’s new government. This followed the introduction of new economic stimulus measures that included major spending programs by the government that were designed to boost domestic spending. Moreover, the government introduced new policies designed to remove Japan from its deflationary trap by allowing the Japanese yen to weaken considerably. This weakened yen has allowed Japanese export competitiveness to improve significantly against most of its trading rivals and this enabled Japan to record strong export growth in early 2013, particularly to the United States.

While this change in economic policy in Japan has benefited Japan’s domestic economy, it has had a noticeably negative impact on many of Japan’s leading exporting rivals around the world. In Asia, export-oriented economies such as South Korea and Taiwan have seen economic growth rates slow sharply in recent months, due in large part to competition from Japanese exporters. Moreover, Japan’s newfound exporting prowess has had a negative impact on high-end exporters around the world, including in Europe, where fragile economies can ill-afford to deal with a more competitive Japan. As such, Japan’s actions could lead to a new battle for export competitiveness that could, in turn, lead to a full-blown currency war in the months ahead, something that could derail the tepid economic recovery currently underway in most areas of the world.

Europe's Recession Deepens (2013-05-15)
More bad economic news emerged from Europe when it was revealed that the region’s recession had worsened in the first quarter of 2013. For the European Union as a whole, GDP contracted by 0.7% on an annualized basis in the first quarter of this year. The news was even worse for the 17-member Eurozone, which saw its GDP shrink by 1.0% in the first three months of the year. For a region whose economic output is smaller today than it was in 2008, this is depressing news, particularly as the economic performances of the world’s leading economies have been much better than Europe’s of late.

While southern Europe has attracted most of the attention for Europe’s recent economic woes, northern Europe’s economies are also struggling. Germany, which had been the one larger European economy to escape to worst effects of Europe’s economic crisis, recorded a GDP contraction of 0.3% on an annualized basis in the first quarter of this year. Meanwhile, the second largest economy in the Eurozone, France, continued to struggle as its economy once again fell into a recession and appears set for a long period of stagnation. As for the British economy, it managed to record positive economic growth at 0.6% in the first quarter, but this continued a long run of anemic growth rates in the UK.

In southern Europe, the results were even worse as that region’s economic crisis continued. Italy was one of the few economies in the EU where GDP did not shrink by a larger amount in early 2013 than in late 2012, but its economy still shrank by 2.3% in the first three months of this year. In Spain, GDP shrank by 2.0% and is expected to continue to shrink at an accelerating pace in the coming months as domestic demand has collapsed. Meanwhile, Portugal’s economy shrank by 3.9%, raising the possibility that it will need another bailout from international lenders. In Greece, the economic collapse continued as GDP shrank by 5.3% in the first quarter of this year, although there is some hope that the pace of the economic contraction in Greece will slow this year. Finally, Cyprus’ economy shrank by 4.1% in the first quarter, but this will represent a much better performance than will be seen from that economy over the rest of this year as a banking crisis has devastated the Cypriot economy.

The International Implications of Pakistan’s Elections (2013-05-14)
Despite the unrest and uncertainty that preceded them, Pakistan’s parliamentary elections resulted in the outcome that was expected. As most polls predicted, former two-time Prime Minister Nawaz Sharif and his Pakistan Muslim League (PML-N) won a clear victory, putting them in a position to head a new coalition government with Mr. Sharif once again serving as prime minister. Given Pakistan’s fragile nature and its strategic location between India and the Middle East, this election and its result will have major implications for global security.

Pakistan’s most important international relationship is with its long-time rival India and a government led by Mr. Sharif is expected to push ahead with existing efforts to normalize relations between Pakistan and India. On the economic front, a Sharif-led government is likely to finalize a bi-lateral trade deal with India that could significantly boost Pakistan’s economic prospects at a time when the Pakistani economy is in need of significant help. In terms of security in South Asia, Mr. Sharif avoided going to war with India over the Kargil crisis in 1999 (a move that cost him his job) and he has expressed his desire to improve security relations with Pakistan’s giant neighbor.

In terms of improving stability and security inside Pakistan, things are less clear. Ominously, the Pakistani Taliban and other militant groups are staunchly opposed to a government led by Mr. Sharif and are likely to continue their campaign of terror across Pakistan. However, it remains to be seen if a Sharif-led government would order the armed forces to carry out a major offensive against the militants, as Mr. Sharif’s relationship with Pakistan’s armed forces is quite strained. This is causing much concern in the United States as it fears that Pakistan’s new government will not do enough to weaken militant groups operating on Pakistani territory. As is always the case, the job of running Pakistan will remain one of the most difficult in the world.

Where to Invest in Sub-Saharan Africa (2013-05-08)
While much of the world has realized lower rates of economic growth in recent years, one region, Sub-Saharan Africa, has seen economic growth accelerate. In fact, many economists now see Sub-Saharan Africa as the region that will realize the highest levels of growth in trade and investment in the coming years. Nevertheless, some countries in the region will perform much better than others thanks to their natural resource wealth and their relatively high levels of political stability.

Over the near-term, countries with newly discovered reserves of oil and gas will drive the Sub-Saharan African economic surge. Among the countries that are in the midst of a flood of foreign investment into their oil and gas industries are Mozambique, Tanzania, Uganda, Namibia and Ghana, none of which was a major oil and gas producer in the past. Moreover, each of these five countries had been recording solid rates of economic growth before they found oil and gas thanks to relatively sound economic policies and improved levels of political stability. If they can use their oil and gas revenues wisely, each of these five countries should head the region’s economic growth table in the coming years.

In recent decades, most of Sub-Saharan Africa’s economic growth has been generated by the exploitation of the region’s natural resources and little has been done to diversify the region’s economy. However, reforms underway in some areas of the region are leading to a renewed hope that economic diversification is underway in Sub-Saharan Africa. For example, the East African Community (Kenya, Tanzania, Uganda, Rwanda and Burundi) has taken major steps towards the unification of East Africa’s economy, a development that could dramatically boost trade and investment in that region. Meanwhile, investment in East Africa’s infrastructure is also rising sharply, promising to ease trade and investment across that entire region.

Reprinted from ISA Report published May 8, 2013 (updated June 2, 2013), International Strategic Analysis,  
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