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24 December 2022

The Top Ten Global Risks of 2023

Mathew Burrows,  Robert A. Manning

Drawing on our many years of experience in forecasting global risks and trends at the U.S. Intelligence Community’s National Intelligence Council, where we were tasked with providing U.S. leaders with long-range analysis and insights, we have identified the top global risks in 2023 from a U.S. and global perspective. Our track record is pretty good based on the risks we identified for 2022. COVID variants were indeed a source of concern, particularly in China, holding down Chinese economic growth, as we also predicted. We forecasted a Russian invasion of Ukraine and oil prices reaching $100 a barrel, which occurred earlier this year, although energy prices have declined somewhat in the second half of 2022. Food shortages, economic crises, and growing debt problems among developing countries were all highlighted last year, as they are this year. Some economists anticipate the debt crisis may not be as widespread as we and others have projected, but low- and middle-income countries, such as Sri Lanka and Pakistan, are already facing this reality. Last year’s prediction about a shortfall in fighting climate change was borne out at the underwhelming COP27 gathering in Cairo, Egypt, in November; we assess this trend will continue in 2023. Finally, owing to the growing tensions surrounding Taiwan, as well as the U.S. embargo on the export of high-end semiconductor designs and equipment, Sino-U.S. differences will persist in 2023.

Each risk is assigned a probability. A medium probability means there is a 50/50 chance that the risk will play out as we anticipate this year. Making such projections has become more difficult because so many of the risks are interlocked with one another. Polycrisis is the term being used to describe the interwoven nature of one crisis embedded in others. Although polycrises have existed before, the Ukraine War has highlighted the current set of interdependent crises facing the world. The food crisis was exacerbated by Ukraine’s inability to export its grains until recently. The energy crisis is rooted in Western efforts to deny energy profits to the Russian war machine and Vladimir Putin’s retaliation in cutting gas supplies to Europe. Inflation has been boosted owing to energy- and food-price hikes, but it is also linked to supply chain disruptions resulting from the pandemic. As with debt, inflation is also rooted in the increasing prices of commodities because of the war in Ukraine, as well as the strong dollar and fiscal outlays by states to combat the economic downturn caused by the pandemic. The fact that most of the risks are interrelated means that the reduction in risk of any single one will depend on many other risks decreasing concurrently. Similarly, the severity of any single risk is linked to and often aggravates others. Nevertheless, we think it useful to examine each risk individually, keeping in mind the interlocked nature of all risks, and forecasting the direction that each will move in terms of probability—higher or lower—even though any individual risk cannot completely diminish while the others have not been resolved.

The Risks

1) Polycrisis from the Ukraine War: The endgame in Ukraine, and how and when it will occur remain a mystery. Yet the polycrisis loop cascading from the war—energy and food insecurity, inflation, economic slowdown—may be generating “Ukraine fatigue” in the West, threatening vital support. As winter sets in, and the war slows, Putin will undoubtedly step up his strategy of attrition, attacking Ukraine’s energy and water infrastructure, seeking to make Ukraine collapse as a functioning state before his losses force him to accept some degree of defeat.

Kyiv’s taking of Kherson in the south and parts of the Donbas in the northeast—more than 50% of the land that Moscow once occupied—since February 24 strengthens its hand. A negotiated resolution—or even a ceasefire and stable armistice—is still premature because both sides feel they can win. Kyiv issued a 10-point peace plan at the November G-20 meeting. It demanded that Russia withdraw from all of Ukraine’s sovereign territory and pay damages; in effect, it calls for Putin’s total surrender. Conflicting pressures are pushing and pulling: on the one hand, Kyiv is asking for U.S./NATO to send more advanced, including long-range weapons like Army tactical missile systems and missile defenses; meanwhile, some members of the U.S. Congress want to curb support for Ukraine.

The war is generating multiple interconnected risks: these include an ongoing, stalemated conflict; escalation if the U.S./NATO sends additional advanced weapons to Kyiv in response to Putin’s bombings; Russian use of nuclear weapons if Kyiv tries to take Crimea; “Ukraine fatigue” in Europe as recession sets in; and a U.S.-EU divide over the quantity and quality of military assistance to continue to provide to Kyiv.

Probability:


2) Growing Food Insecurity: The World Food Program (WFP) has highlighted a “ring of fire” of hunger and malnutrition stretching across the globe from Central America and Haiti, through North Africa, the Sahel, Ghana, the Central African Republic, and South Sudan and then eastward to the Horn of Africa, Syria, and Yemen and extending to Pakistan and Afghanistan. The number of people facing acute food insecurity has soared from 135 million to 345 million since 2019. Even if the war in Ukraine is resolved peacefully and future grain shipments from Ukraine are not in peril, food shortages will still exist. In addition to conflict, climate change—which is causing more severe droughts and changing precipitation patterns—is a major driver of food insecurity and is unlikely to be effectively mitigated in 2023. Soaring diesel fuel and fertilizer costs, exacerbated by the Ukraine war and supply chain issues (getting crops to market and meat/poultry processing), have increased costs for feeding livestock and dairy animals. Costs for humanitarian relief are increasing because of inflation: The extra amount that the WFP now spends on operating costs would have previously fed 4 million people for one month.

Probability:


3) Upheaval and Confrontation with Iran: As with the Ukraine war, the unprecedented popular uprising could turn Iran into a polycrisis. The stars are already aligned for a dangerous new U.S. and/or Israeli conflict with Tehran. The Iran nuclear deal—on the brink of success just a few months ago—is now dormant, if not dead. Iran is accelerating production of near-bomb-grade highly enriched uranium (HEU, it has 60% of the 90% required for a bomb) and is only weeks away from having enough to produce a bomb and will have a deliverable warhead in two years or less.

Iran’s provision of drones and missiles to Russia add a new dimension to the confrontation and an impetus for new sanctions. The depleted legitimacy of the theocracy and repression of the unprecedented popular uprising adds uncertainty. Iran may be one mass strike away from a political revolution—a low-probability, high-consequence event.

A new far-right government in Israel and a Republican House of Representatives in the United States will intensify pressure to bomb or sabotage Tehran’s enrichment plant at Fordow as well as Iran’s missile and drone facilities. In response, Iran could strike Saudi oil facilities or oil tankers in the Gulf of Hormuz, disrupting oil traffic as the risk of an escalatory conflict grows. Popular protests bringing down the theocracy is a low-probability, very high-consequence event that could transform the geopolitics in an already troubled Middle East.

Probability of confrontation:


4) Worsening Debt Crises in Developing World: The UN Development Program (UNDP) has warned that 54 low- and middle-income countries have “severe debt problems.” These countries account for 18% of the global population, more than 50% of people living in extreme poverty, and 28 of the world’s top-50 most climate-vulnerable countries. Historically, debt relief has come “too little too late.” Solvency problems have initially often been mistaken for liquidity problems, leading to protracted debt crises with severe economic consequences. Low-income countries, such as Somalia and Zimbabwe, are at the top of UNDP’s economically distressed countries list, but Oxford Economics assesses that many emerging market countries will weather the storm, having already cut back on expenditures early in the downward cycle. The dire fiscal circumstances of most developing states is a bad omen for reaching the UN’s sustainable development goals by 2030. Instead, the developing world is likely to experience more poverty, less educational improvement, and decreased ability to fight climate change in 2023.

Probability:


5) Spiraling Global Debt: Both the corporate debt of nonfinancial companies ($88 trillion, about 98% of global GDP), as well as combined government, corporate, and household debt ($290 trillion by the third quarter of 2022), have been increasing during the past four-to-five years according to the International Institute of Finance. Several years of low—in some cases, negative—interest rates, fueling easy money, help to explain this situation. Although the total has declined slightly, the polycrisis of heightened interest rates, a strong dollar, a recession in Europe, a weak Chinese economy, and uncertainties over Ukraine is likely to spark another regional or even global financial crisis. The magnitude of debt is substantially larger than that during the 2007-08 financial crisis, and the fiscal conditions in major OECD countries are more problematic. Still more troubling is the declining level of international cooperation, which is much less favorable than in 2008. A Republican Congress is less likely to approve expanding IMF and World Bank resources needed to prevent defaults and reschedule debt, particularly in developing countries, but also potentially in Italy. The G-20 played a key role in the 2007-08 financial crisis but judging from the November G-20 meeting in Bali, coordinating efforts to manage debt are inadequate. China, the largest creditor to developing countries, prefers to manage debt bilaterally, and fraught U.S.-China ties suggest that Beijing will be unlikely to cooperate with Washington as it did in 2008. Sparks triggering a new major financial crisis could come via default threats from one or more developing states or Italy, a Lehman Brothers-type corporate collapse, or panic if the war in Ukraine escalates to the nuclear level.

Probability: Regional crisis: Medium+; global crisis: Medium


6) Deepening Global Cooperation Deficit: Global risks, ranging from climate change and least developed countries (LDC) debt to outer space debris, are growing as increasing major-power competition is making it harder to achieve cooperation on common global problems. After the November G-20 meeting between President Joe Biden and Chinese President Xi Jinping, the two leaders agreed to resume bilateral talks on climate change. However, another clash over Taiwan will probably halt that effort. The multilateral trading system is fraying badly, as WTO Director-General Ngozi Okonjo-Iweala recently warned, even though the costs of protectionism and self-sufficiency efforts by major powers will slow economic growth for all countries. Other institutions are proving ineffective: The G-20 has been slow to defuse growing debt crises among the hardest-hit countries, such as Bangladesh, Pakistan, Sri Lanka, and others, while the World Bank has come under stiff criticism by developing countries for not shifting more financing to the fight against climate change. Absent more action by multilateral institutions to confront today’s challenges, the legitimacy of the post-World-War-II Western liberal order will erode, particularly in the eyes of many Global South countries, which are now seeing their chances for rapid economic development diminish. Another consequence of economic nationalism driving a failure to cooperate in reforming and updating global institution is fragmentation of the international order into regional clusters and inefficient competing norms and standards. A breakdown in the multilateral system will only increase the risks of greater poverty, nationalism, and conflict.

Probability:


7) A Technopolarized and Fragmented System: Boston Consulting Group estimates that if major powers try to achieve full-scale self-sufficiency in semiconductors as the Biden administration wants to do, up-front investment could reach $1 trillion and chips would cost 35-to-65% more. As the Sino-U.S. tech war heats up, China will not have access to many foreign products and will need to substitute China-made items, undermining the incentive for adherence to global standards. A McKinsey Global Institute study found in an examination of 81 technologies under development that China has so far been using global standards for more than 90% of them. In many of those cases, Beijing has been relying on foreign multinational companies for 20-40% of needed inputs. Because semiconductors are playing an increasing role in all consumer goods, not just electronics or high-end technological equipment, the markets for all manufacturing goods are likely to fragment with more costs (read inflation) and less choice for consumers. Over the longer term, a decoupling of the world economy into two self-contained Western and Chinese blocs would see global GDP decrease by at least 5%—worse than the damage from the financial crisis in 2007-08, according to the WTO. IMF modeling shows “growth prospects for developing economies under that scenario would darken, with some facing double-digit welfare losses.”

Probability:


8) Worsening Impacts of Climate Change: COP27 ended with more frustration than a sense of achievement. Calls to phase out fossil fuels were blocked by oil-producing states even as limiting the temperature rise to the 1.5C was kept as a goal. Most scientists think the world will soon reach that 1.5-degree Celsius increase and that we are on track for an eventual 2.2-degree Celsius rise unless countries commit to a 43% cut in total greenhouse gas emissions. A hotter climate means more extended droughts and floods, as well as dangerous changes in precipitation patterns that are set to disrupt agricultural yields. The only semi-bright spot at COP27 was agreement on a new “loss-and-damage” fund to help developing countries cover the costs of climate-change impacts. Nevertheless, no decision was made on how much funding the industrialized world would promise to pay. Western countries are already on the hook for providing financial assistance to developing countries with their transition to a lower carbon world and have not fulfilled those promises. Republicans, now in control of the House, have already said they do not want to pay others to fight climate change. The rightward, more nationalistic shift in European politics may also endanger the funding of “loss-and-damage” in future years. Despite the growing frequency of extreme weather events -- which affect all countries, not just poor ones -- climate change is yet to be an overriding priority for the industrialized West.

Probability:


9) Deepening U.S.-China Tensions: Despite the November Biden-Xi Summit, where both leaders launched an effort to stabilize relations, fundamental differences remain over Taiwan, technology rules and standards, trade, human rights, and Beijing’s aggression based on discredited territorial claims in the South and East China Seas. An initial resumption of trade, climate, and military-to-military dialogues has begun, but volatile nationalism on both sides could disrupt any substantive achievements. Beijing’s response so far to the Biden administration’s export ban on artificial intelligence and supercomputer chips and chip-making equipment has been to file a WTO complaint against it, and plan to invest an additional $143 billion in subsidies to its semiconductor industry. The measures seek to choke off China’s development of top-end tech. While there is a bipartisan antipathy toward China, the incoming GOP-controlled House plans to undertake a still more aggressive China-bashing agenda on Taiwan, trade, and human rights, which risks undermining Biden’s agenda. Although we judge the probability of China’s trying to coerce Taiwan into unification in 2023 or several years beyond to be extremely low, the pending Taiwan Policy Act, which aims to boost military and political ties to Taiwan, would reignite the tit-for-tat shows of resolve and mutual demonization. The effort to stabilize the relationship faces serious speed bumps ahead and may be derailed.

Probability:


10) A More Dangerous Predicament on the Korean Peninsula: Pyongyang’s relentless testing of a full spectrum of ballistic missiles (86 tests in 2022); cruise missiles; tactical nuke-capable, mobile, medium-range missiles; and ICBMs is part of North Korea’s agenda to create a survivable second-strike arsenal and provide more options for coercion and possible attack. Preparations for a seventh nuclear test have been in place for months, as the U.S. and South Korean governments have been warning. A possible aid-for-restraint understanding between Pyongyang and Beijing may explain why such a test has not occurred. Nevertheless, if a seventh test occurs and Beijing vetoes UN Security Council sanctions aimed at punishing North Korea, the rift in U.S.-China ties will probably deepen. Pyongyang’s arsenal is already far more than needed for mutual deterrence with the U.S. and ROK. President Kim Jung Un may be tempted to take provocative actions based on miscalculation that could foment a crisis and/or North-South clash.

Probability:


Unknown-Unknown Risks

The risks discussed above are, in former Defense Secretary Donald Rumsfeld’s term, “known unknowns”—discernable developments or trends whose possible trajectories can be assessed. In addition, there are a range of “unknown unknowns”—events we cannot anticipate that would have catastrophic consequences. Among them: a supervolcano eruption (Yellowstone, Indonesia, Japan); a giant asteroid of 6 miles wide, a magnitude that killed off dinosaurs 66 million years ago; a solar storm—coronal mass injection—hurling large amounts of magnetically charged particles at Earth that could disable grids for weeks or months; and radioactive gamma ray bursts from deep space. As we have seen from the COVID-19 pandemic, thousands of viruses on our planet could spark future pandemics, some more difficult to counter than COVID.

All are low-probability, very high-impact disasters.

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