Geopolitics-A Primer for 2024

posted by Karim Pakravan on January 5, 2024 - 12:19pm

The year 2023 was the year of geopolitics,  with the world facing the continuation of current crisis (the war in Ukraine, US-China tensions over Taiwan, and the challenge posed by populist forces to Western democracies), and a new and unexpected one—a new and bloody Israel-Hamas war. These events provide the template for global risks in 2024, with the media and analysts stating that geopolitics will be driving economic and financial trends in 2024. But my 30-years-plus experience in country risk and global economic analysis have taught me that geopolitics are not a one-off factor, but that they are at the constant background of the global economy.  Moreover, while analysts usually underscore geopolitics in times of crisis and stress, it also explains trends and developments in times of peace and prosperity. Overall, geopolitics are inescapable factors in our interconnected and globalized world, in good times and bad times, underscoring both risks and opportunities

How can we bring geopolitics in our economic and financial analysis?  In former Secretary of Defense Rumsfeld’s immortal words, there are known knowns, known unknowns and unknown unknowns.  While we can ascribe probabilities and scenarios to the first two situations, we can at best prepare for the contingencies that would arise from the last one.  Three other observations about geopolitics. First, geopolitical situations are layered and complex. Second, the law of unexpected consequences fully applies--reaction outcomes are unpredictable, with events driving policies in unexpected directions. Third, geopolitics are also national politics, as geopolitical outcomes are the result of choices of the national actors involved.

An often-neglected starting point in analyzing the impact of geopolitical factors is history.  Most analysts start off with a limited knowledge of the historical background of the problem, and end up with partial and often wrong conclusions and policy determinations.  The history of a country or a region and an understanding of the long-term dynamics are essential to understand the reaction functions and the underlying trends. History and culture define the problems and underlie the motivations and reactions of the major players.

The multi-dimensional crisis in the Middle East is a case in point.  A key factor is the continued tension between the United State and Iran, which needs to be put in the context of the historical ups and downs between the two countries. However, this cannot be fully understood without considering Iran’s long and proud history and its contemporary role as a regional hegemon, as well as the history of  US-Iran relations.  First, regardless of the nature of the regime, whether the late Shah’s imperial rule or the Islamic Republic, Iran considers itself the natural regional hegemon.  Second, regional geopolitics are driven in large part by the Iran-Saudi rivalry.  

Similarly,  we cannot look at the potential Western military responses to the Houthi attacks on shipping in the Red Sea without taking into account the Iran-Saudi proxy war in Yemen, the on-going Saudi-Houthi peace negotiations and the vulnerability of the Arab oil producers of the region to Houthi attacks. Once again, history matters.

With these considerations in mind, how can governments and business develop risk  management tools to deal with geopolitical risks?  When dealing with the known unknowns, two questions need to be answered. First, identifying the sources of geopolitical risk.  Second, evaluating whether or not the risks matter, both in a macro and micro sense, and to what extent.  As mentioned earlier, these techniques have to be applied both to risks and opportunities. 

Furthermore, while scenario-building is useful, it is often too simplistic. To start with, we have seen repeated intelligence failures by the most sophisticated intelligence agencies in the world—(9/11, Saddam Hussein and WMDs, and most recently, the failure of Israeli intelligence services to predict and preempt the Hamas attack on Israel on October 7.  So, if these agencies with their vast resources cannot provide a cogent analysis, how can we expect the private sector to do so? Typically, analysts try to develop best case-most likely case-worst case scenarios, but experience shows that what really matters are the worst case one should drive policies.  When dealing with the unknown unknowns, the keys are flexibility in response and contingency planning.

The 2024 horizon is expected to be a turbulent one. In addition to our aforementioned catalog of geopolitical risks, we are facing a busy electoral cycle, with 50 elections to be held—including the all-important US presidential one, and the potential for an expanded conflict in the Middle East.

Quite a few known unknowns and unknown unknowns indeed!