Geopolitical Impacts of the Global Financial Crisis Posted by Ilan Goldenberg

I had the opportunity, earlier this week, to sit in on a fascinating discussion on the geopolitical impacts of the global financial crisis with a bunch of economists and national security experts.  The implications are generally unknowable and brutally complex, but here are some observations I took out of the discussion.

There are a lot of countries whose economies could potentially collapse, throwing their political systems into total chaos (We're getting a little preview right now with Moldova).  In my view the three most frightening from a U.S. national security perspective are Pakistan, Mexico and Ukraine.  Pakistan is an obvious member on the short list with its nuclear weapons, political instability, active insurgency and the fact that it also got a pretty significant IMF infusion just a few months ago.  Mexico is simply frightening because of its proximity to the United States and the increased violence it is facing from the drug cartels.  Ukraine could also be highly problematic. If it finds itself on the cusp, the Russians may have an opportunity to swoop in and bailout the Ukrainian economy and in exchange essentially move it back into the Russian sphere of influence.  The Russians aren't exactly in great financial shape themselves, but an opportunity to essentially buy Ukraine for cheap may be the geopolitical bargain of a lifetime and too tempting for them to resist.  The resulting crisis between Russia and the West could get pretty ugly. 

Of course, there are other potential dangers.  If the Europeans were to let one of the Eastern European economies fail that could cause contagion throughout Europe.  But this scenario seems less likely, which is why I wouldn't put at the top of the list.  One of the commodity producers may go under, with oil dropping so much so fast.  South Africa and Argentina are two other important countries that are in some trouble right now.  Or for all we know, it could be something that we don't even see coming.  But for my money it's hard to argue with putting Pakistan, Mexico and Ukraine at the top of the list.

Another disturbing trend is that as bad as things are at the center, the periphery is being brutalized.  The last ten years have seen unprecedented growth in international aid and you may now see those funds dry up.  Poor countries, such as Mozambique, who have been doing pretty well but are completely dependent on international support may have the rug pulled out from under them.  The result could be increased misery for the poorest segments of the world population, which of course would likely be coupled with greater instability.

Finally, there is the question of great power relations.  On the one hand, the United States is actually much better off than many of the other countries in the world that have been impacted by the crisis, most notably the Europeans.  On the other, American credibility has been horribly damaged by the crisis, which in view of the rest of the world as our fault.  China seems to be in a pretty powerful position, but nobody knows for sure how badly its economy has suffered and it is stuck with a trillion dollars in U.S. treasury bills.  It is making noises about diversification and creating some alternative international currency, but it is still putting all its money into U.S. treasury bonds because it doesn't see any other safe options.  So, it still has great leverage over the U.S. but since it has no reasonable alternative investment options, the U.S also has great leverage over China.  On this question in particular it is way too early to tell.

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