Rebalancing of Global Order - Potential Source of Current Conflicts!!!

- Vikram Kotak

Just in the past 24 months, a shocking number of armed conflicts have started, renewed, or escalated. Some had been fully frozen, meaning that the sides had not sustained direct war in years; others were long boiling, meaning that low-level fighting would intermittently go- off. All have now become active.

The list encompasses not just the wars in Gaza and Ukraine, but hostilities between Armenia and Azerbaijan in Nagorno-Karabakh, Serbian military measures against Kosovo, fighting in Eastern Congo, complete turmoil in Sudan since April, and a fragile cease-fire in Tigray that Ethiopia seems poised to break at any time. The clash between Isarel and Gaza has also spilled into Lebanon and the conflict between Isarel-Lebanon is not new. Syria and Yemen have not exactly been quiet during this period, and gangs and cartels continuously alarm governments, including those in Haiti and Mexico. All of this comes on top of other potential conflict situations which may arise in coming future including those in South and South-East Asia.

The Uppsala Conflict Data Program, which has been tracking wars globally since 1945, identified 2022 and 2023 as the most conflictual years in the world since the end of the Cold War.

Why is this happening? Is it coincidence or is it war for resources or multipolarity?

The first explanation holds that the ‘cascade is in the eye of the beholder'. People are too easily “Fooled by Randomness,” the essayist and statistician - Nassim Nicholas Taleb, cautioned in his year 2001 book of the same title, seeking intentional explanations for what may be coincidence. The outbreak of armed confrontations could be just such a phenomenon, hiding no deeper meaning: Some of the frozen conflicts, for instance, were due for flare-ups or had gone quiet only recently. Today's volume of wars, in other words, should be viewed as little more than a series of unfortunate events that could recur or worsen at any time.

Though this theory may be reasonable, it is not reassuring, nor does it help predict as to when such conflicts will arise or how large they will eventually become.

Although coincidences certainly do occur, the current onslaught happens to be taking place at a time of big changes in the international system. The era of Pax Americana appears to be over, and the United States is no longer poised to police the world. Not that Pax Americana was necessarily so peaceful. The 1990s were especially disputatious; civil wars arose on multiple continents, as did major wars in Europe and Africa. But the United States attempted to solve and contain many potential conflicts: Washington led a coalition to oust Saddam Hussein's Iraq from Kuwait, facilitated the Oslo Process to resolve the Israeli- Palestinian conflict, fostered improved relations between North and South Korea, and encouraged the growth of peacekeeping operations around the globe. Even following the 9/11 terrorist attacks on the United States, the invasion of Afghanistan was supported by many in the international community as necessary to remove a pariah regime and enable a long-troubled nation to rebuild. War was not over, but humanity seemed closer than ever to finding a formula for lasting peace.

Over the subsequent decades, the United States seemed to waste away both the goodwill needed to support such efforts and the means to carry them out. By the early 2010s, the United States was bogged down in two losing wars and recovering from a financial crisis.

Specifically, China has emerged as a great power seeking to influence the international system, whether by leveraging the economic allure of its Belt and Road Initiative or by militarily revising the status quo within its region. Russia does not have China's economic muscle, but it, too, seeks to dominate its region, establish itself as an influential global player, and revise the international order. Whether Russia or China is yet on an economic or military par with the United States hardly matters. Both are strong enough to challenge the U.S.-led international order by leveraging the revisionist sentiment they share with countries throughout the global South.

Great-power competition can be a recipe for disorder.

Multipolarity isn't the only systemic change preceding the present wave of conflicts. But the others, including climate change and the effects of the coronavirus pandemic, seem to point back toward multipolarity, if not as a cause, as a factor in the ineffectuality of the global response, and therefore the spiral towards more conflict. Global problems require cooperative solutions, but cooperation can be in short supply when the great powers are motivated to compete and deny, rather than collaborate and share.

Suppose, though, that the proliferation of wars doesn't have a systemic cause, but an entirely particular one. That the world owes its present state of unrest directly to Russia—and, even more specifically, to Russia's invasion of Ukraine in February of 2022 and its decision to continue fighting since.

Also consider the war in Gaza; With the major powers focusing their diplomatic and military resources on Ukraine, Hamas judged the international environment opportune for striking Israel. The deputy head of Hamas, Saleh al-Arouri, was explicit on this point back in September 2023, telling Al Jazeera: “Sensing the importance of the current battle with Russia over global influence, the United States places a priority on preventing the outbreak of other conflicts and maintaining global calm and stability until the end of the Ukraine battle … Our responsibility is to take advantage of this opportunity and escalate our resistance in a real and dangerous way that threatens the calm and stability they want.”

Even if none of these wars rise to the level of a third world war, they will be devastating all the same. We do not need to be in a world war to be in a world at war.

Wars were already a persistent feature of the international system. But they were not widespread. War was always happening somewhere, in other words, but war was not happening everywhere. The above dynamics could change that tendency. The prevalence of war, not just its persistence, could now be our future.

Cost Of War Can Be Crazy

After the war, Afghanistan has seen increases in the percentage of Afghans facing food insecurity, children under five experiencing acute malnutrition, and Afghans living in poverty. Women's rights continue to be heavily restricted. U.S. development aid to Afghanistan has amounted to $36.07 billion since 2001, while U.S. spending on the top five military contractors has amounted to $2.1 trillion. In 2022, there were 1.5 million Afghans living with physical disabilities and 2 million Afghan widows.

Risk To Fast Growing Nations Like India Can Be Multifold

The ongoing wars have amply demonstrated that like any other major economy India too isn't immune to the indirect impact of conflicts - price shocks, supply chain disruption, sanctions on suppliers of critical resources, obstruction to key shipping lanes, food security etc. Prolonged disturbance around any of these could have adverse impact on exporters and importers as well as have ramifications for the economy at large through inflation and interest rate channels. The early impact of frictions spawned by the Red Sea issue (since November 2023) have been felt across a wide range of sectors from autos, textile, building materials, logistics as highlighted by company managements in 3QFY24 commentaries. For the government with laser-focus on fiscal discipline, the domestic and global geo-conflicts of recent years have forced it's hand to increase spending on the defense sector - not the best of scenarios for a developing economy when the priorities are to walk the path of fiscal rectitude as well as deliver a sustainable developmental spending.

Modi's apt advice to Putin in the context of the Russia-Ukraine conflict “This is not an era of war” is so true if we realize that the world, we live in has never been so integrated, so inter- dependent. War isn't a zero-sum game - there will only be losers!

Immediate impact of war on stock market is always negative as future becomes unknowable. It can be easy to understand long term impact on a particular country and sector(s). The negative impact of such situations has been recently felt across many economies, however, some countries like India, have not had such an impact. It remains to be seen how long one can remain insulated as majority of the times the impact has a lead and lag in terms of timings.

Finally for Investors - War is an externality that investors can neither control nor forecast. So, the best thing is to ask oneself some pertinent questions 1) What you're invested in? 2) What your time horizon is? 3) Why you're invested in the first place? Historically, there have been a lot of grim geopolitical events, and if one weathered such situations and stayed invested through them, you've reaped the long-term gains of the stock market. So - as usual - stay focused on the long-term.