Assessments of the state of the world and its immediate future are multiplying as it approaches the end of the first quarter of the 21st century.

Regarding the economy, escalating geopolitical tensions and conflicts top the list of concerns. The AXA Insurance Future Risks Report for 2024 ranks geopolitical instability second after climate change as the greatest threat, according to a survey of experts worldwide. Risks related to cybersecurity, artificial intelligence (AI), and social tensions rank third, fourth, and fifth, respectively.

When the same survey was conducted among general public, climate change again ranked first, and security and terrorism-related threats ranked second. These were followed in third, fourth, and fifth place, by AI and cybersecurity risks, social tensions, and pandemics. Geopolitical instability ranked sixth.

Despite the differences in rankings, experts and the wider public largely agree on the list of risks, which are clearly closely interconnected as they share common causal factors such as cybersecurity, geopolitical disruptions, and social repercussions. While the rankings of the five most serious risks vary from one part of the world to the next, geopolitical disruptions repeatedly appear towards the top.

This should come as no surprise given the relentless rampage of the machinery of war, reaping hundreds of thousands of innocent lives, massive physical destruction, and untold ruin for development and livelihoods. The war in Ukraine is soon to enter its fourth year. The Arab region remains a hub of humanitarian catastrophe, with Palestine, Lebanon, and Syria both before and after the collapse of the regime at the centre of the storm specially since October 2023. Civil strife and domestic instability are to be found elsewhere in the world, but parts of the Middle East and Africa take the lion’s share.

Forecasts do not offer a rosy prognosis. Given a global economic growth rate that stayed at 3.2 per cent in 2023 and 2024, and is expected to remain the same in 2025, they concur that this is occurring against a backdrop of increasing economic fragmentation. Economists attribute the cause of this fragmentation to increasing restrictions on trade, investment, technological cooperation, and the movement of labour.

They further agree that this deterioration is a facet of the waning era of globalisation, which gained momentum following the fall of the Berlin Wall in 1989 and reached a peak after China opened up to the global economy and joined the World Trade Organisation (WTO) in 2001.

Some analysts believe that protectionist measures have triggered geopolitical conflicts. As I see it, however, the bonds of international economic cooperation and collaboration are unravelling one after the other due to what began as geopolitical strains between the traditional and emergent economic powers. These strains have translated into protectionist trade measures that have reached 3,000 restrictions, up from 900 before 2020.

The world is witnessing more than just trade wars between traditional and emerging powers, however, as these are full-scale economic wars. International trade is declining. Tariff and other restrictions are disrupting supply chains. The multilateral international order is fraying, as evidenced by the crisis preventing the WTO from performing the functions for which it was established.

Its international dispute resolution mechanism has been stymied since 2018, and its ministerial meetings over recent years have failed to live up to expectations on key areas of reform related to trade rules, transparency and notification systems, and expanding opportunities for new markets.

GLOBAL SOUTH: The dangers of this situation for countries in the Global South cannot be overstated.

The progress many of them have made in development, job creation, and poverty reduction since the 1990s was only possible because of the expansion in international trade and investment. This enabled them to import production components, increase exports, improve the quality of locally produced goods and services for export, and increase their competitiveness. They were therefore able to attract further investments with plenty of financing for projects, knowledge and technological development.

If the benefits of international economic transactions are important to major economies, they are indispensable for countries with smaller markets, which cannot generate sufficient jobs or income opportunities for their people with their domestic resources alone. Their only alternative is to increase export and investment opportunities as drivers of growth.

Import-substitution measures can only begin to remedy trade and balance of payment deficits in sectors where countries have a relative competitive edge. By leveraging the advantages of international economic transactions, developing economies that have pursued industrial policies in frameworks of integrated development strategies and with disciplined investment financing have achieved growth rates of no less than seven per cent. They were thus able to lift themselves out from extreme poverty to the foremost ranks in the global economy in some cases.

Unfortunately, amidst all the geopolitical upheaval, international cooperation has become slow and underfunded. The lack of cooperation has obstructed the development of international financial and development organisations and undermined their governance and their ability to perform their roles in fighting poverty and helping developing countries address their crises.

To make matters worse, some measures adopted by the developed countries as part of their new industrial policies and transitions to a green economy have included protectionist components that inhibit the flow of trade. As a result, the developing countries today are caught between the negative impacts of the developed countries’ support for competing projects and the constraints those countries are imposing on exports from developing nations on the pretext of the green transition.

For example, the generous subsidies the US government has made available to domestic enterprises in sustainability and digital transformation under the Inflation Reduction Act of 2022 make it very difficult for developing countries to compete. Another example is the European Carbon Border Adjustment Mechanism (CBAM), which will begin to impose tax burdens on some crucial export sectors of the developing countries, such as steel, fertilisers, and aluminium, in 2026.

In a series of articles on “Wars, debt, and hard currency,” I discussed how the international currencies have been politicised and weaponised as never before. The pre-eminence of the dollar since World War II as a reserve currency has been described by some analysts as a “financial nuclear weapon.” If the power of a nuclear weapon resides in its deterrent capacity, they argue, the power of the dollar resides in its being used as a pillar of monetary and financial stability. Once weaponised, it initiates the collapse of the dollar-based system, much as deploying a nuclear weapon would end the system of nuclear deterrence.  

This was taken for granted during the Cold War and for a while afterwards. But the current era appears to have jettisoned such givens and all red lines. What now prevails is a lack of wise leadership, a dearth of trust, and a surplus of crises.

The world’s nuclear powers have been making nuclear threats since the beginning of the war in Ukraine. The dollar was weaponised against Russia at the outset of that war, and even before that talk of banning Russia from the SWIFT transfer system began as soon as it annexed Crimea in 2014, initiating the urgent search for alternatives.

What has kept the dollar in its role as the premier reserve currency, with the abundant privileges that come with it for the US economy? The answer can be summarised by citing three people.

The first is Brazilian President Luiz Inácio Lula da Silva, whose answer to the question was force of habit and fear of change. The second is US Secretary of the Treasury Janet Yellen, who said that “there are reasons why the dollar is used widely in trade – the US has deep, liquid, open capital markets, a strong rule of law, and well-developed financial instruments.” The third is economist Eswar Prasad, who argues that the role of the US dollar persists because alternatives, from traditional currencies to innovative ones, lack its stability and reliability. This is despite the unprecedented inflation in the US economy, its greater debt risk, and the increased use of the dollar as a tool of war.

In this regard, US President-elect Donald Trump’s recent threat to impose tariffs on countries seeking alternatives to the dollar is far from useful, in my opinion. The negative effects of tariffs on consumers in the US, especially given mounting inflation, mean that they should not be overused. That is presuming that they are even effective in their intended aim of deterring the search for alternatives to the dollar.

The above observations by Lula, Yellen, and Prasad suggest that changes in circumstances could produce alternatives to the dollar. They just need to be backed by sound economic performance, diverse and open capital markets, a credible legal system, and proper governance. Then all it will take is a bit of time until traders, investors, organisations and the public get used to the practical alternative. But until such pivotal moments arrive, the dollar will continue to play its role, not because of the threats of sanctions for not using the dollar but because of the relative advantages of using it.

OPPORTUNITIES: What opportunities exist today for the developing nations amid the global geopolitical turmoil?

The arenas of international economic warfare have expanded beyond trade to direct foreign investment and technological cooperation. New laws and regulations restricting investment and collaboration in certain fields with other countries have narrowed the scope for competition.

The measures go further to restrict trade, training, technical cooperation, and labour recruitment. The justifications vary, from maintaining global dominance and strengthening local supply chains to climate change and national security considerations. The focal sectors of economic warfare include high-tech industries, semiconductors, critical minerals, steel and aluminium, pharmaceuticals, low-carbon products, and activities with dual military and civilian applications.

In the light of the foregoing developments and the consequent global economic fragmentation, action is needed in five areas.

The first begins with the recognition that a country’s economic progress starts at home. It is the product of the interactions among people in their capacities as producers, consumers, investors, and exporters in the frameworks of the state’s institutions, policies, and markets. If these institutions lose their effectiveness due to poor governance, if public policies falter due to poor coordination or unclear objectives, and if market efficacy is undermined by distorted rules of competition or the conflation of the private sector with governmental functions due to insufficient regulation, it will be impossible to achieve significant progress, specially under the current global conditions.

The second is maintaining and building on existing relationships. The state’s relations with its economic partners should not be taken for granted. These relations should be reviewed in terms of the balance between their component parts and the extent to which the private sector is involved in driving them.

The third is reviving regional cooperation blocs. The evolution of the Association of Southeast Asian Nations (ASEAN) has much to teach us as a model for the development of trade, investment, and cooperation in training labour, skill-building, and technology. Promising opportunities are still to be found, despite the hurdles, in regional groupings in Africa, the Arab region, and the Mediterranean thanks to geographic proximity.

The fourth is localising development. This entails prioritising investment in villages, townships  and cities to develop human capital, infrastructure, technology, sustainable development, and the green economy.

Lastly, there are opportunities through continuous effective engagement in international forums. These forums still sustain the virtues of international cooperation through multilateral channels with realistic expectations of their outcomes.

Recently, the UN General Assembly approved the outcomes of the UN Future Summit by adopting the Pact for the Future with its five chapters: sustainable development and financing for development; international peace and security; science, technology and innovation, and digital cooperation; youth and future generations; and transforming global governance.

There was a strong emphasis on successful follow-up, specifically in events to be held in our broader neighbourhood: the Fourth International Conference on Financing for Development, to be held in Spain in June 2025, and the Second World Social Development Summit, scheduled for Qatar in November 2025.

In addition, South Africa will chair and host the G20 Summit meeting in 2025. If these events do not bring significant tangible benefits to the developing countries, they should at least contribute to alleviating harms. Foremost among these are the debt crisis that is sapping resources and energies, poverty and income and wealth disparities, and sharp international polarisation.

* A version of this article appears in print in the 26 December, 2024 edition of Al-Ahram Weekly