Geopolitical volatility is the new normal and is not going away anytime soon.
While the news features the rise of protectionism everyday, an energy crisis due to a conflict in the Middle East or the spread of water and food insecurity, could equally disrupt the world. Should any of these situations deteriorate further, the impacts would be earth shattering for how the world governs and does business.
A new Atlantic Council study, released today, looks at the implications of these global risks on global gross domestic product (GDP), extreme poverty, middle-class growth, and country instability. This report tests the proposition that global risks are increasing faster than global growth.
To help decision makers understand these global risks and their implications, the report identifies six future scenarios the world might experience in 2035:
|PROTECTIONISM||WATER AND FOOD SCARCITIES||ENERGY CRISIS|
|Global Resurgence: a rebound in trade in goods and services and foreign direct investment (FDI).||Arid Earth: an increase in water scarcity and slow advances in agricultural technology.||Constrained Energy: massive cuts to available energy supplies due to a conflict in the Middle East; other sources of energy, including renewables, cannot make up for the loss.|
|Protectionist Victory: a significant reduction in trade in goods and services, and in FDI as a share of GDP.||Severe Weather: an increase in erratic and extreme weather events.||Accelerated Renewables: renewable energy becomes more competitive because oil production is significantly reduced.|
Impacts to Global GDP
In Constrained Energy, Middle Eastern energy production flattens, reducing world supplies. This energy crisis would have the biggest negative impact on global GDP. Even if the development of renewable energy sources increases (in a scenario labelled Accelerated Renewables), global GDP loses more than a cumulative $46 trillion by 2035.
The Protectionist Victory scenario could see a loss of $18 trillion compared to base line assumptions made about global GDP in 2035. However, that loss is more substantial if compared with what could be achieved in the Globalism Resurgence scenario; the potential loss is almost $44 trillion.
Global GDP losses in the Arid Earth and Severe Weather scenarios are relatively restrained compared to the others because the biggest losses would be in poor countries on the margin of the world economy. By contrast, China—which also suffers severe water shortages—has shown it has the political will and means to try to overcome the potential challenges outlined in these scenarios. The World Bank, in fact, believes China could boost growth 2 percent per year by 2050 if it adopts efficient water policies.
Impacts to Extreme Poverty
The 2000 United Nations (UN) Millennial Development Goals called for halving extreme poverty and hunger rates by the end of 2015, and achieved that objective five years earlier. The UN’s 2016 Sustainable Development Goals want to eradicate extreme poverty everywhere by 2030.
If the world experiences a Protectionist Victory scenario in 2035, it would kill this prospect for complete poverty eradication, as this scenario indicates thirty-three million people would be added to the ranks of those in extreme poverty. Constrained Energy and Accelerated Renewables would see twenty-three and sixteen million, respectively, added to poverty. Arid Earth and Severe Weather interestingly see the smallest additions to extreme poverty, but the numbers are nevertheless significant—6.8 and 21 million people, respectively, would be added.
Water and food scarcities are a significant factor for why there are millions of people living in poverty today, and why extreme poverty will not be completely eradicated by 2035, despite continued economic growth. For example, the World Bank’s study of climate change and eradication of poverty found that many more poor people than rich people are exposed to droughts, higher temperatures (which are often detrimental to agricultural yields), natural disasters, and, to a lesser extent, rivers flooding. Their pre-existing exposure to these conditions makes it harder to move out of poverty.
Impacts to Middle-Class Growth
The expansion of the middle class was also a big achievement of the past several decades. Constrained Energy would see the largest number—ninety-three million people—drop out of the middle class, followed by Accelerated Renewables (seventy-six million) and Protectionist Victory (fifty-four million). Severe Weather (thirty-eight million) and Arid Earth (11.5 million) would also see declines in the global middle class.
Impacts to Country Instability
The Protectionist Victory and both energy crisis scenarios demonstrate the close links between trade and growth, and their impacts on instability. Trade encourages growth, and a breakdown in trade—whether from protectionist policies or a shutdown in energy supplies—lowers growth potential. With the loss in growth, countries could see sharp reductions in health, education, and infrastructure spending, making instability more likely (as a snowball effect).
But, the water and food scarcity scenarios pose a different kind of threat because they are already happening today. Syria and Sudan have already experienced what the effects of drought can produce on instability, which was not contained in either case, and led to dangerous regional, if not global, threats.
Geopolitical risks are, by their nature, difficult to shape, because they are driven by forces beyond the control of com¬panies or single governments. Nevertheless, in the face of the growing geopolitical volatility, governments and companies need to examine the disruptions that could result from these scenarios.
The report is the latest study in the Atlantic Council’s multi-year collaboration with Zurich Insurance Group and makes extensive use of the International Futures (IFs) quantitative model pioneered by the University of Denver’s Pardee Center for International Futures. Earlier AC-Zurich collaboration focused on the economic costs and benefits of cyber and the growing fiscal burdens from demographic aging.