Global Risks and Opportunities Ahead
Volume 1, 31 January 2023
Â
Crisis as opportunity
Every crisis contains seeds of opportunity for change and progress. As we settle into 2023, the shadows of the old hazards will continue to lurk on the horizon. The Russia-Ukraine war is escalating as the US and a few European countries ramp up military support for Ukraine, casting doubt on the cessation of hostilities in the foreseeable future.
Â
The US and its partners, Japan and the Netherlands, with possibly more Western countries following, are escalating hostilities with China by throttling microchip supplies to that country to curtail its technological advancement. These geopolitical tensions intensify in ways that pose a grave risk to global stability and growth.
Â
Countries have different capabilities and degrees of resilience to withstand global headwinds. Several African countries are grappling with debt distress. Due to the Ukraine war, many are still bearing the brunt of food shortages resulting from the disruption of critical inputs and commodities. New challenges are on the horizon.
Â
El Nino is set to return and may worsen at the end of 2023, presenting climate-related risks to Africa’s food security. The rising interest rates across the world will continue to put pressure on businesses and households.
Â
In the past, business leaders and entrepreneurs have found sources of innovation in perplexing circumstances. At times they worked closely with governments, such as when military technologies – space surveillance and missile technologies – came to life at the end of World War Two. Crises can only be turned into opportunities when leaders demonstrate the capacity for farsighted planning and use critical moments of change to the advantage of their societies.
Â
This post-war period yielded technological breakthroughs, spawning innovations suited for civilian applications. The embers of the war gave life to the age of the transistor in 1947 and the integrated circuit in 1958. That era was the cradle of modern-day technology powered by microchips.
Â
As the world continues to face economic turbulence in the year ahead, it is well to bear in mind that crises also contain seeds of innovation.Â
Â
Top Risks 2023 Risks
In its Global Risks Report 2023, the World Economic Forum has highlighted several risks that face the world today. The top 5 risks include the cost of living crisis, natural disasters and extreme weather events, geoeconomics confrontations, failure to mitigate climate change, and societal polarisation. Persistent inflationary pressures that may force central bankers to sustain a hawkish monetary policy will strain middle-class households and businesses.
Â
New global inequality
This new dispensation of multiplied crises could also accentuate socio-economic divergences within countries, with the elite becoming more affluent; while the middle class and the marginalised sections of society converging in their opposition to orthodoxy and mainstream political parties.
Â
Perhaps the area ripe for new thinking is economic policy. There is a need for governments to calibrate economic policy instruments to respond to the immediate socio-economic pressures while defining the building blocks for new, innovation-led economic activities in the face of the imperative to achieve net zero.
Â
In these harsh conditions, those countries with the fiscal headroom – mainly advanced industrial economies – can protect their citizens through energy subsidies and tie fiscal support to green industries that meet local content thresholds. America’s Inflation Reduction Act (IRA) aims to bolster green industries at home to forestall deindustrialisation and social discontent.
Â
The European Union’s answer is the proposed EU Sovereign Fund to promote upstream research, innovation, and strategic industrial projects, which it hopes to support through the revised emissions trading system that will raise about 700 billion Euros by 2030. Both schemes will introduce new protectionism, which lean on using emissions standards or local content requirements to discipline imports, especially from developing countries and those countries perceived to be taking hostile foreign policy stances.
Â
These forces will dampen global growth and further widen global inequalities. According to the Boston Consulting Group, “trade will grow at a slower average rate [2.3%] than GDP in the coming nine years, reversing the pattern of trade-related global growth that has prevailed in recent decades”. The WEF Global Risks Report makes similar observations about the possible reversal of global convergence that resulted from an open global economy and relatively favourable international trading conditions.
Â
Finding new sources of economic vitality
New thinking about economic interventions and global stability is required more than ever before: the multilateral system is ripe for redesign to prioritise global development and equity alongside other priorities to promote global growth and an open trading system. At the domestic level, the state must be actively involved in co-creating new growth sectors, promoting green industrialisation and supporting digital innovation while providing social transfers for the most vulnerable.
Â
African countries have an opportunity to collaborate on developing new value chains on strategic minerals that will play a pivotal role in new green industries, especially electric vehicles. China is the fastest growing market for electric vehicles. Rising demand for electric vehicles will set off a new resource rush that African countries must exploit to shore up their tax revenues and to build intergenerational equity using well-governed sovereign wealth funds. The demand will surge, particularly, for strategic minerals such as lithium, nickel, cobalt, manganese, graphite, and metals such as copper.
Â
The US government has adopted the Inflation Reduction Act with a significant component of electric vehicle support to accelerate the shift away from combustion engines, achieve high localisation content, and create new jobs. In light of these developments, African countries may need to reorient their trade strategies, engage in smart economic diplomacy built on promoting value chains, and maximise developmental benefits from bilateral and multilateral trade.
Â
The Africa Growth and Opportunity Act (AGOA), America’s unilateral trade preference scheme, expires in 2025, and renewal is uncertain. The US will likely link the continuation of market access opportunities to realising its geoeconomics interests; bilateral free trade agreements could be its preferred instrument for future trade relations with African countries. African countries will do well to agglomerate their bargaining power around strategic minerals.
Â
If African countries turn their potential into smart power, they stand to reap success from the present crises. African countries, however, will need to overcome old challenges related to governance and institutional weaknesses and bolster their capabilities to manage economic change while responding to evolving patterns of international relations that are increasingly shaped by considerations of geoeconomics.