Wednesday, January 06, 2016

Risks to the world economy are mainly political

I had a post in August, following the crash in China, saying that I did not think the Chinese slowdown was not the primary reason for market jitters. I said the primary reason was worsening geo-politics, in particular, the resumption of the Cold War between Russia and the west and the heating up of the Middle East.

I was happy to see my position echoed by Martin Feldstein in a recent article. He sees the primary geo-political risks as emanating from four sources: Russia, China, West Asia and cyberspace. I agree with his analysis in respect of three of these sources. China's flexing its muscles as it grows in economic strength is certainly a problem. The Sunni-Shia conflict epitomised by the rivalry between Saudi Arabia and Iran is a source of tension. And the potentially crippling effects on infrastructure, physical and financial, of cyber attacks should not be under-estimated.

However, Feldstein's portraying Russia as a threat thanks a loose cannon called Putin is a travesty of the truth. Russia has demonstrated its willingness to be a disciplined member of a multilateral fraternity such as the UN. In the case of Syria, in particular, it has repeatedly asked for a UN-led coalition against ISIS. It is the West's ambitions in the Middle East, as much as those of Nato in relation to the Russia periphery, that has led to the estrangement between Russia and the West. This is what poses the biggest danger at the moment.

The West hopes that tightening sanctions and an economic collapse will bring about Putin's fall. This could turn out to be a serious miscalculation with grave consequences for the world order. It is hard to see the world economy -and world markets- return to an even keel as long as the rift between Russia and the west continues.


Anonymous said...

Very true.
Digressing a bit from the topic, I was watching the developments in recent natural gas procurement deals in India.
Just a warm handshake and better bargaining power due to weaker oil prices made the 1.5 billion dollar 'take or pay' penalty on importers like GAIL etc. disappear.
When I read this news, I couldn't stop myself from smiling at the agony of poor McKinsey consultant and Goldman Sachs analyst who would have to redo all of its calculations again in its spreadsheet.
As many scenarios we may plan, the geo-politics and politics always mean longer nights and weekend work for young IIM passouts.

T T Ram Mohan said...


Well, we shouldn't be shedding too many tears for our graduates- they seem to like long nights and weekend work, almost as if it's a sign they are doing something worthwhile!