Rebalancing in the Global Economy Undermines International Stability

The last 20 years have witnessed a remarkable rebalancing in the global economy and a commensurate shift in international economic and political power. Fears that these structural changes could lead to major interstate conflicts were prevalent at the last two Munich Security Conferences in 2014 and 2015, at the height of the conflict in eastern Ukraine and as China and Japan engaged in a stand-off over the Senkaku/Diaoyu Islands in the East China Sea. A formal outbreak conflict was averted in both cases, even if violence persists in Ukraine and intrastate violence has proliferated across the Middle East and North Africa.

Steady rates of global economic growth over the past 20 years that drove the shifts in the relative balance of international political power also limited their disruptive effects. But, in 2016, the world has embarked upon a new phase in its economic transition. Now that the global economy appears to have entered what some have described as a secular stagnation, the world could face a security downturn as well as an economic one.

Over the past six months, Chinese leaders have struggled to manage the transition to what they have termed as ‘the new normal’.  Wild gyrations in the Chinese stock market may affect only a sliver of the Chinese economy, but point to the difficulties the Chinese leadership faces in sustaining growth and employment as the export and infrastructure investment of the past decades slows, the construction booms tapers off and indebted local governments struggle to manage a drying up in their sources of revenue. Ongoing military modernization, physical assertion of Chinese claims to sovereignty over islands and reefs in the South China Sea and the remarkable recent centralization of political power in the hands of President Xi Jinping may help China’s leadership confront as well as divert public attention from its economic turbulence. But those same developments appear to carry greater risks at a time of economic slowdown in China than when the leadership and people could expect uninterrupted growth.

In Russia, the dramatic collapse in oil prices, caused in part by the Chinese economic slowdown, poses its own risks. With the state budget based on an oil price in the region of $50 per barrel, President Vladimir Putin faces a double challenge. Having presided over lacklustre economic growth prior to the Ukraine crisis, he must now assess whether he can continue to afford military engagements in Syria and Ukraine that had exemplified for the Russian people their country’s return to greatness on the world stage. He must also distribute a shrinking financial pie among his circle of close business and political supporters. One solution in the new economic environment would be for President Putin to extricate his forces from these external commitments. But it is just as likely, if not more that, with his back to the wall, President Putin could double down on his military gambles and behave more aggressively on the international stage rather than less.

Even last year’s nuclear agreement between Iran and the permanent members of the UN Security Council, plus Germany, is having destabilizing rather than stabilizing effects in the current economic environment, in the short term at least. Saudi Arabia’s deep unease over the deal has intensified as the fall in oil prices forces King Salman to cut economic subsidies and social payments that have traditionally helped sustain public support for the government. As Iran seeks to reclaim its share of a more slowly growing global oil market and tensions with Saudi Arabia grow, finding a route to peace in Syria and Yemen may prove to be even more difficult in 2016 than 2015.

The United States and Europe, which still face their own economic challenges, are not well-placed to manage the risk that the slowing global economy generates. EU governments are in a desperate race to establish processes, structures and laws to cope with the unprecedented influx of people from the Middle East and North and East Africa. They are attempting to do so, however, at a time when levels of trust between the east and west, as well as the north and south of the EU have eroded severely as a result of the political battles waged to stabilize the eurozone and differing approaches to migration. German leadership, which had been grudgingly welcomed in 2014, now elicits greater ambivalence in the wake of Chancellor Angela Merkel’s generous, but unilateral decision to welcome refugees, alongside Germany’s hard-nosed desire to concentrate the delivery of Russian gas to Europe through its northern waters. Should the 2015 fall in commodity prices destabilize African governments which had hoped to use the resource boon to drive employment and growth, a much-feared expansion of sub-Saharan African migration to Europe could start to materialize this year, placing even greater stress on internal EU decision-making and leaving even less time to deal with the continuing chaos in Syria and Libya.

In addition, although the EU is still a relative pole of stability in an uncertain world (and hence its choice as a primary destination for refugees and migrants from its neighbourhood), its fragile recovery could easily be knocked off the rails if the slowdown in emerging economies were to hit the profit margins of leading European exporters of industrial equipment, infrastructure goods and services, and high-end consumer products, from cars to luxury apparel. Another major terrorist attack or a disorderly collapse of the EU’s Schengen area of open borders would also have economic knock-on effects that would then exacerbate the EU’s internal political acrimony. And looming over the EU is the upcoming UK referendum on whether or not to remain a member of the EU. A majority vote in favour of ‘Brexit’ would have a very serious impact on EU cohesion at a time of strengthening populist parties across Europe, a metastasizing Islamic State of Iraq and Syria (ISIS) and a still unpredictable Russia.

The United States embarks, therefore, on its presidential election year with international security at the top of the agenda and its main ally, Europe, on the back foot. Worryingly, the global economic slowdown is likely to heighten the deep frustrations felt by many in America that they are not benefiting from the international economic order that the United States had helped build. Further declines or devaluations of trading nations’ currencies could heighten that sense of frustration, whether with allies like Japan or competitors like China. Whatever the critiques by those inside and outside the US about President Obama’s recalcitrant approach to foreign policy, US public opinion is unlikely to give its next president much more room for manoeuvre.

The shift in the centre of global economic gravity from West to East that started 25 years ago reflected a natural rebalancing of the international economy to a more healthy convergence between the size of a country’s population and its overall GDP. Whatever worries there were that this rebalancing would lead to dangerous competition between its winners and losers have been overridden by the dominant sense that globalization has offered absolute gains to the vast majority who have participated in it. In this context, regional and international initiatives that would further enlarge the benefits of deeper economic integration, from the Trans-Pacific Partnership to the planned Transatlantic Trade and Investment Partnership, remain on track.

Today, however, the difficult and unpredictable transition in China from developing to middle income economy – mirrored in a number of other countries that are finding the struggle even harder, including Turkey, Brazil and South Africa – could lead to a more zero-sum environment in which borders harden and behind-the-border regulations become more discriminatory to outsiders. Policy-makers would do well to remember that, when international economic dislocation coincides with a major geopolitical transition, as happened in the 1930s, they face the most dangerous moment in international relations.

Dr Robin Niblett, Director, Chatham House.

This article was originally published in the Security Times at the Munich Security Conference 2016.

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