Geopolitics In 2024
The Multidimensional Crisis in the Middle East
The following is a guest post by EconVue expert & economist Karim Pakravan. After a long career in international banking, he currently teaches global finance at DePaul University and Loyola University of Chicago. His fields of expertise include global financial architecture, bank regulation, foreign exchange, and financial markets with a focus on China, Europe and the Middle East. His views on geopolitical risks are nuanced, and laced with historical examples.
We plan to feature additional EconVue experts in a variety of fields over the coming year. Please feel free to share this post and to comment. We welcome your questions!
The past is never dead, it’s not even past. William Faulkner
2023 was the Year of Geopolitics. The world faced the continuation of current crises— the war in Ukraine, US-China tensions over Taiwan, and the challenge posed by populist forces to Western democracies—and the new and unexpected, a bloody Israel-Hamas war.
Geopolitics Is with Us in Good Times and Bad
These events provide the template for global risks in 2024, with both 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 is not a one-off event, but a constant factor in the background of the global economy, in good times and bad.
For example, the 1973 Yom Kippur war triggered a global stagflation that reshaped the industrial nations economics and politics—the demise of Keynesian economics and the rise of the neo-liberal economic template, and the election of Ronald Reagan and Margaret Thatcher, among other changes. Moreover, while analysts usually underscore geopolitics in times of crisis and stress, geopolitics works both ways, explaining 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. The on-going and seemingly endless crises in the Middle East provide a good illustration of these points.
The Crisis in the Middle East
How can we bring geopolitics in our economic and financial analysis? In former Secretary of Defense Rumsfeld’s immortal words, which he stated as he tried to justify the debacle that was the Iraq invasion of 2003, “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 third.
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. Third, national politics in both Iran and the United States underscores the darkening history between the two countries. The Iran hostage crisis cost President Carter his reelection, the Obama administration was able to reach a nuclear deal with Iran, while the election of President Trump in 2016 led to another era of tensions. On the Iranian side, the elections of President Khatami and Rowhani led to an easing of tensions, while the latest presidential election brought to power another hardliner.
Similarly, we cannot look at the potential Western military responses to the Houthi attacks on shipping in the Red Sea without considering 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.
The Iraq war of 2003 also offers another vivid illustration of the role of history, as well as its unintended consequences. The US invasion of Iraq was based on ignorance of the country’s history as well as wrong assumptions and wishful thinking—there were in fact very few Iraq specialists in academia or government. An unintended consequence of the war was the rise of Iran as the major winner in the conflict—US forces dislodged one of Iran’s major foes and opened the way for friendly Shi’ite governments. Once again, the lack of understanding of the historical links between Shi’ites in the two countries has led to a situation where, twenty years after the war, US forces are still battling Iran-backed militias in Iraq.
Listen to Lyric Hughes Hale and Karim Pakravan on The Hale Report Episode 38: The Order is Rapidly Fading
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 is the worst case and should drive policies. When dealing with the unknown unknowns, the keys are flexibility in response and contingency planning.
As an example of an unknown unknown, the impact of Houthi attacks on shipping in the Red Sea have to be evaluated in the context of shipping costs and potential supply disruptions. While we are seeing a surge in shipping costs, the impact of the attacks seems minimal in a world which is back to normal in the post-COVID era. The real impact would come from a major disruption in oil flows from the Middle East. In each case, shipping disruptions and oil supply interruptions, governments and businesses can evaluate the worst case scenarios and build their defenses.
2024 is expected to be a turbulent year. In addition to the aforementioned catalog of geopolitical risks, we are facing a busy electoral cycle— fifty elections worldwide—including the all-important US presidential contest. The potential for an expanded conflict in the Middle East is almost certainly in the cards.
Quite a few known unknowns and unknown unknowns! One thing we do know for certain. History matters.