People are starting to talk about war again.
Article written Leonardo di Blasio, member of Liuc Finance & Investment Club.
Where it all began
At the beginning of 2022, the world is slowly emerging from the Covid-19 pandemic and talks of economic growth have resumed. Optimism is once again in the air, and the much-awaited light at the end of the tunnel is starting to become visible. On February 24th, the Russian Federation begins its invasion of Donbass, marking the definitive move of the Kremlin away from the West and the complete break from the USA/Europe block. Russia is now definitively heading towards the East (under China economic vision). The world is overcoming the pandemic problem and moving towards a new world order, with all the consequences that come with it.
The rest of the world?
An international environment that is at greater risk of conflict and the less transparent attribution of unconventional engagement may weaken the shared moral, political, and reputational costs that serve as a partial deterrent to the use of destructive weapons, including nuclear involvement, may be weakened by a more unstable international context and the less transparent attribution of unconventional engagement. Transparency must undoubtedly be achieved by the development of agreements and standards on arms control, disarmament, and non-proliferation that apply to both older and more modern types of military technology.
However, it will be considerably harder than in the past to achieve effective arms control. Given the multiple uses of many of these technologies, involvement with a wider variety of players, such as academic researchers and the corporate sector, will be necessary. Global governance mechanisms are being fast overtaken by developments.
Collaboration will be further hampered by an intensifying arms race, but only international cooperation will allow for the regulation of emerging weapon technology to limit their use and proliferation. Increased global power acknowledgment of the agreements on crucial weapons control issues' strategic relevance should be the first step.
Southeast Pacific's eastern scenario, the hottest one
Due to their relatively strong economic dynamics (the IMF projects annual growth of over 7%) and relatively low population growth rates (1%), Southeast Asian countries will present interesting opportunities for the expansion of commercial ties and direct investments in the ensuing decades.
This will result in further increases in per capita income and, consequently, greater demand. With a combined population of more than 650 million and a gross domestic product (GDP) of more than $3 trillion, these nations constitute a reasonably homogeneous market with advantages over South America's or Africa's entire continents in terms of infrastructure, logistics, and skilled labor.
With a population comparable to both industrialized and developing nations in East Asia, including China, South Asia, and especially India, represent a tremendous potential pool of both demand and productive capacity. The lack of adequate urban energy infrastructure, transportation, the low skill level of the workforce, which is primarily rural, and the extensive bureaucracy that makes conducting business more difficult are notable barriers to development.
The government has supported industrial development with the "Make in India" program and other reform initiatives, and as a result, the manufacturing sector increased at a pace of 7% yearly between 2014 and 2018, prior to the pandemic. The supply still mostly focuses on the domestic market, even though the service industry expanded even more quickly and reached excellence peaks (for instance, in the software and related computer services sector).
Dawn of a new hegemonic power?
In terms of economic size and purchasing power, Europe and the United States continue to be significant markets. However, Asia and the Pacific continue to be the most dynamic, potentially expansive, and diverse market region, with per capita income levels (US$8,615 in 2021) comparable to those of Latin America (US$8,396) but with a much larger and continuously growing population and level of economic activity.
Even the medium-term (5-year) IMF predictions point to average annual economic growth rates (7.3%) greater than the global average (6%), despite a slowing in population growth (0.7% yearly compared to the global average of 0.96%).
The geopolitical necessity for military protection will cause the industrialized nations of East Asia (Japan, South Korea) and the Pacific (Australia) to lean more toward the United States, reinforcing the links encouraged by free trade agreements signed between 2004 and 2019.
Due to technological complementarities and China's demand for raw materials, these pressures will not be able to balance China's dominance as a trading partner and in investment flows for these countries. High levels of per capita income are correlated with high levels of technological specialization and demand sophistication.
World military spending
It can be noted how the global geopolitical framework is changing by observing, among other factors, the importance that states' military power is having in international politics. Global military spending increased in the 2010s in pace with the GDP and government budgets (5% of total spending, down from 12% in the early 1990s) reaching an all-time high of $2.1 trillion. This was the seventh consecutive year that spending increased.
Nonetheless, the United States of America, the Islamic Republic of Iran, Russia, India, China, and Saudi Arabia are mostly responsible for the increase in global military spending as a percentage of GDP, together accounting for 62 per cent of expenditure. In May of last year, Japan proposed doubling its defense spending to $105 billion (2% of its GDP), and Qatar has boosted spending by 434% since 2010 as a result of blockades.
Recent vows by NATO members to reach or exceed the aim of 2% of GDP have been prompted by the war in Ukraine. The conflict in Ukraine, as well as the muted denunciation of it by a few significant geopolitical.
The private sector is expected to play a bigger role in the development of military technologies going forward, leading to improvements in fields like nuclear fusion, artificial intelligence, quantum computing, biotechnology, and semiconductor manufacturing, among others.
To prevent the relative ascent of foreign rivals, emerging technologies will be more frequently subject to state-imposed restrictions on cross-border flows of talent, intellectual property (IP), data, and supporting technologies (like extreme ultraviolet lithography equipment) and resources (such as critical metals and minerals), to constrain the comparative rise of foreign rivals.
What awaits us?
It is very complex to accurately predict what will happen in 5-10 years, but we can certainly guess the direction in which the world is heading, a world increasingly driven by the East, led by the Asian giant, China.
All the untapped potential of this global region will begin to assert itself with the help and push of the ambitious and titanic Chinese project "Belt and Road Initiative" known as the new Silk Road.
The marriage between Beijing, the rest of Asia, and a large part of African countries, will see an incredible imbalance towards the Indian Ocean and the Pacific, leaving the importance of the Atlantic marginal. What will the West do? Will it try to contain this advance? This is really impossible to predict, but one thing is certain, soon the East will definitely have the power to have its say, questioning the Western economic model.