There are numerous accounts of geo political conflicts. Geopolitical conflicts are complex and multidimensional disputes between sovereign states or political bodies resulting from their attempts to gain control, authority, and dominance over particular regions of the World or significant resources.These conflicts can take many different forms, from diplomatic disagreements to armed confrontations, and they are defined by the intricate interaction of political, economic, social, and military elements. Geopolitical disputes are significant because of their tremendous ability to influence international relations and the global order.
Drivers of Geo-political conflicts
Wars have been fought for a wide variety of reasons, but they can be divided into three basic categories: political objectives, economic drivers, and ideological disagreement. The competition over natural resources due to their critical role in economic growth leads to conflicts between countries. When natural resources are shared by two nations, the likelihood of conflict increases if those resources are distributed unevenly.Such fragmentation was observed during the 17th century industrialization. The rise of industrialism led to competition for raw materials between nation-states.
Geo Economic fragmentation
The geo political conflicts lead to geo-economic fragmentation. Geo economic fragmentation refers to the increasing disintegration or division of the global economic landscape into various regional or national spheres of influence, trade blocs, or economic alliances, often driven by political, security, or strategic considerations. This concept involves the idea that economic relationships and interactions are becoming more segmented and less integrated on a global scale. As result it hampers the macroeconomic stability leading to widening growth divergences across regions. Inflationary escalation becomes a predominant phenomenon. Countries lose their fiscal space. Investment pessimism leads to reduced private investment thereby affecting output and employment. Global value chains are also disrupted in this globalized times.
During the last 30 years or so, commodity markets have become more integrated as a result of trade liberalization, technological innovations and decline in transportation costs. The war between Russia and Ukraine has put this process in reverse first time after 1970s as crude oil, natural gas and wheat were used to put price pressures. These developments contributed significantly to surging inflation in many parts of World in 2022 leading to food insecurity in developing countries and slower global growth. Commodities are vulnerable in the events of fragmentations vis-à-vis geo-political developments as 70% of minerals supplies are dominated by three biggest giants. For many commodity dependent countries, the fragmentation leads to sizeable macro-economic impacts.
Thus, the effect channels in three steps. One is that increased costs for necessities like food and energy exacerbate inflation, which reduces the purchasing power of incomes and burden demand. Two, an unprecedented increase in the number of refugee cause significant disruptions to supply networks, trade, and remittances, especially for nearby economies. Third, asset values impact by lower investor confidence and business confidence, which might lead to tighter financial conditions and even capital outflows from many economies.
War War-II and Geo Economic fragmentation
In the aftermath of world war-II, the cold war between United States and Soviet Union and their respective allies led to the creation of Eastern and Western Bloc. Both the blocs engaged in creating their own economic blocs fashioning bilateralism and own tariff structure. Countries may align economically with those they perceive as strategic allies or as a response to security threats, even if it means distancing themselves from other nations with whom they previously had strong economic ties.
Impact of geopolitical tensions on World GDP
There are threats to the global expansion in such situations. According to the IMF, World Economic Outlook, the global GDP for 2020 and 2021 was-4.4% and 6% respectively. Following the impact of geo-political developments, the world GDP grew at 3.5% in 2022, 1.5% lower than the 2021. Following the intensification of crisis between Russia and Ukraine, estimates for the world GDP in 2023 are at 3% which is 0.5% lower than those for 2022.The effect of Russia- Ukraine conflict can be gauged by the real GDP of Russia and Ukraine from 2020 to 2023. During the conflict year 2022, the GDP of Ukraine dropped to (-29.1%) and that of Russia fell to (-2.6%).
Source: IMF data mapper
As war is continuously intensifying between Russia and Ukraine and inflation trajectory is still high in some major economies, high costs of finances are impacting the debt costs of many economies and their potential investments in developmental activities are also impacted, the World GDP growth rate is projected at 2.9% for the next year which is 0.1% lower than the GDP growth rate of current year 2023 at 3%.
Source: IMF World Economic Outlook 2020, 2022, 2023
However, these estimates have not factored the impact of most recent Israel-Gaza conflict, which again will have its repercussions on World GDP through psychological and confidence channels as geo political developments spread one after one. Though the size of Israel and Palestine GDP is not that much significant as % of World GDP, USD 525 billion and USD 18 billion respectively. Israel’s exports to the World were USD 132 billion (2021) and imports from World are USD 124 billion (2021) whereas Palestine exports were at USD 1.5 billion and imports at USD 6.4 billion in 2021. Israel majorly exports and imports in diamonds, integrated circuits, refined petroleum and medical instruments and Palestine exports and imports building stones, scrap iron, plastic lids and furniture. Israel attracts around USD 27 billion FDI inflows whereas Palestine FDIs are less than USED 1 billion. But conflict between the two will have certain economic repercussions on world economy such as volatile financial markets and commodity markets which may again stoke inflationary pressures.
The Indian economy has proven to be remarkably resilient and capable of recovering in the face of unprecedented challenges. India has seen several ups and downs in the last few years, including the COVID-19 pandemic's effects and changes in the dynamics of the world economy. According to IMF World Economic Outlook 2023, growth in India is projected to remain strong, at 6.3% in both 2023 and 2024, with an upward revision of 0.2 percentage point for 2023. However, if global conditions improve and conflicts are settled along with reduced inflationary pressures, then India has potential to attain a much higher rate of real GDP growth. India’s strong resilience is affirmed by the recently released report by S&P Global Market Intelligence that India will surpass Japan and become the second-largest economy in the Asia-Pacific region, with a projected GDP of $7.3 trillion by 2030. The economic fundamentals are strong and ease of doing business is improving in a significant way. Businesses are enthusiastic to expand their production possibilities. Strong FDI inflows, Government and private CAPEX, significant investments from global technology multinationals are drawn to India's large and rapidly expanding domestic consumer market which create a strong resilience of Indian economy.
In conclusion, wars are disruptive in nature, trillions of dollars are lost as a result of geopolitical conflicts. Geopolitical conflicts, irrespective of their magnitude, possess the potential to exert profound and far-reaching consequences on the nations involved and the broader international community. The world is integrated, no one country acts in isolation. Markets are becoming increasingly integrated with the expanding horizons of trade and investments. Wars vis-à-vis geo-political conflicts end of the day severely impact the wealth of nations and reduce economic welfare.
(Dr. S.P. Sharma is Chief Economist & Director of Research • PHDCCI (PHD Chamber of Commerce and industry, India)
Disclaimer: The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of Indiastat and Indiastat does not assume any responsibility or liability for the same.
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