The dawn of a new year typically offers reason for good cheer and the hope that the future will be better than the past. Given the tumult that we witnessed around the world in 2011, with Jasmine Revolutions and anti-corruption protests and Occupy movements and deep-rooted economic problems and volatile markets that pushed continental economies to the brink of default, the bar has been set rather low. Even a middling-good 2012 would have been a vast improvement over 2011.
But as the sun rises on the new year, that fervent hope of a better future is clouded over by the realisation that much of the economic and political uncertainty will likely be accentuated, which will in turn heighten potential points of friction between - and within - countries. The churn and grind of geopolitics and geoeconomics will test the strength of the tectonic plates of history, and the risk is that even one small tremor in a remote corner will set off political earthquakes and economic tsunamis all the way around the world. Never was so much held at the mercy of so little.
Three defining trends will shape the course of events in 2012.
1. Political churn
The first is the scale of change in the political leadership that will be seen in countries around the world. Over the next year, as many as 12 countries and/or administrative regions around the world – which together account for 50 percent of the global economy – will either go in for national elections or see orderly leadership transitions.
Some of the elections – for instance, in the US – will be contested on campaign themes with rival contenders embracing economic philosophies that are poles apart; consequently, who wins and who loses will determine policy outcomes and worldviews that have a momentous impact across borders.
With the current crop of Republican contenders ranging from the an isolationist Ron Paul who would bring all US troops (and would additionally shut down the US Federal Reserve Board) to a Michele Bachman who has called for a US naval blockade of Iran—and plans to keep the powder dry for a war—to prevent it from going nuclear, the range of policy options is very wide. Even a re-election of Barack Obama may not break the political gridlock in Washington, which very nearly pushed the US to the brink of a technical default in 2011 and saw a sovereign rating downgrade. The risk of policy errors compounding the US economy and tipping it over into a recession, and dragging down the world with it is also high.
Across the world, China too will witness a sweeping leadership transition – of not just its President and Premier, but the Communist Party leadership and the Politburo - at a time when its economy is facing its severest test in three decades, and social unrest is spreading across the country. China-watcher Gordon Chang in fact goes so far as predict that the Communist Party of China will collapse in 2012 under the weight of an economic crash or a sharp decline; widespread social upheaval; and a Communist Party that, for all its appearance of working together is deeply divided.
As Chang himself acknowledges, he has been wrong on the "China collapse" theory. And the recent experience of Wukan, where the Communist Party negotiated a peaceful settlement to a village uprising, shows that not all social unrest in China ends in a crackdown. But even if Chang's grim forewarning doesn’t materialise, the leadership transition will likely set off tremors (as it already has) in China’s neighbourhood, with the People Liberation Army leadership jockeying for positions of power and flexing its military muscle in the South China Sea and elsewhere.
2. Economic turmoil
The overarching lesson from 2011 is that even when leaders know what the right response to an economic crisis ought to be, they will not always opt for it for fear of a political backlash. All of this year, as the eurozone crisis went further and further into a downward spiral, European leaders repeatedly announced that they had a plan in place, but at each stage they failed to deliver. The promise of greater fiscal union went unkept, as did the frequent invocations of a bazooka to fix the debt crisis.
In 2012, the preoccupation with domestic politics in all the 12 countries and administrative regions comes with the risk of heightened trade friction, and perhaps outright trade wars, as leaders embrace economic nationalism in these difficult times.
For a global economy that’s already teetering on the edge, that counts as one more channel of bad news.
3. Authoritarian uprising
One of the most defining characteristics of last year was the upsurge in popular protest movements around the world, channelling the widespread anger of large masses of people over everything from iniquitous economic systems (as with the Occupy Wall Street movement) to corruption (as with the Anna Hazare –led movement in India) to dictatorships (as with the Arab Spring movement).
Not all these movements made material progress last year: for instance, the Occupy Wall Street movement has failed to articulate a cohesive agenda for action, and to that extent has not made a meaningful impact on the polity.
As for the Arab Spring movement, the experience in Egypt demonstrated that even when a dictator is overthrown, what you might end up with is not demonstrably better. The continuing crackdown on the movement in Syria shows up the limits of these uprising when faced with brute force.
And for all the high-decibel campaign of the Anna Hazare-led movement in India, by the end of the year, it had experienced a momentary let-down in popular appeal, and now risks being politically sidelined.
The fact that some of these movements have something of a leadership vacuum also renders them susceptible to being hijacked by demagogues wth an authoritarian agenda. In fact, the initial enthusiasm in Western capitals over the prospect of seeing Arab dictators being overthrown has given way to concerns since radical Islamists have filled the vacuum in Egypt.
Other tail risks and Black Swan events
For India, too, the coming year will likely pose political and economic challenges, which will be accentuated by troubles in its neighbourhood. A slowing economy and the heightened political polarisation bode ill, particularly if—as is the case now—the government is paralysed into continued inaction owing to its own timidity, its inability to marshall its coalition partners and the cussedness of the Opposition that thwart even the half-hearted efforts to implement policy.
The political situation in Pakistan, with tensions escalating between the civilian government and the Army-ISI establishment, is another source of worry. A reassertion of Army-ISI control over power will compound India’s problems in restoring normalcy in Kashmir. The fraying of relations between the US and Pakistan could alter the security dynamics in Afghanistan, and halt the counter-terrorism operations in Pakistan, both of which have negative consequences for India.
Additionally, since India’s engagement in East Asia, particularly with Vietnam, has needled an already prickly China, it is susceptible to more provocations and pressure tactics of the sort that it saw in 2011.
Add to that the domino effect on India of Black Swan events such as a US war on Iran or tensions between the US and China in the South China Sea, and the outlook for 2012 looks decidedly grim.
Not all of these geopolitical risks will play true to form, but given the extraordinary times we are living in, the prospect of powerful political and economic forces colliding and spinning out of control seems very real. Enlightened leadership around the world can avert all of these potential faultlines from rupturing, but that’s one department in which the world is decidedly deficient.