Learning To Live With Geopolitical Shocks

Geopolitical shocks are reasonably frequent occurrences, but most are mitigated by prudent behaviour on the part of the main decision-makers, and very few crises escalate into regional wars.

The fact that there haven’t been any global conflicts for almost seventy years demonstrates the extent to which policymakers have learned to step back from the brink. Even large-scale conventional wars between the superpowers in Korea (1950-1953) and Vietnam (1960s-1970s) did not escalate to a nuclear level. Moreover, now that the Cold War is behind us, the world is generally not at risk of a superpower nuclear exchange. Meanwhile, the mantra that ‘cooler heads will prevail’ in inter-state crises has taken generally hold, especially since the world’s major powers are now so economically interlinked.

Nonetheless, it would be premature to preclude the risk of a ‘great power’ conflict over the coming decade or so. Furthermore, the rise of non-state actors and the shift from a unipolar to multipolar world will bring more risks of conflict, not least because more players will mean more scope for reckless decisions or miscalculation.

What Is A Geopolitical Shock?

A geopolitical shock is an event or series of events that threatens to disrupt the international or regional politico-economic order, through the initiation of hostilities between global or regional powers (with the latter sometimes acting as proxies for the former), or an event that threatens to cause international tensions to rise in anticipation of such conflict. Unsurprisingly, the biggest geopolitical crises are events that threaten to trigger world wars, such as the Cuban Missile Crisis of 1962 or the heightened Cold War tensions of 1983. There is usually an economic dimension too, because conflict threatens to disrupt trade or the flow of essential natural resources (e.g. oil) to markets.

In a recent article in Business Monitor Online, we reviewed previous geopolitical crises, assessed their consequences, and the lessons to be learned. In several cases, seemingly negative shocks have led to more positive long-term outcomes. Geopolitical shocks thus present opportunities as well as risks.

The crises we covered were as follows:

  • The Arab-Israeli War of 1973
  • The Soviet Invasion of Afghanistan (1979)
  • Heightened Cold War Tensions (1983)
  • North Korea Nuclear Crisis (1994)
  • The Kosovo Crisis (1999)
  • The 9/11 Terror Attacks (2001)
  • The India-Pakistan Nuclear Standoff (2001-2002)

World Has High Stress Tolerance

Overall, previous geopolitical crises, including the threat of war between superpowers, have demonstrated that the world has a very high tolerance for geopolitical shocks. Quite simply, ‘the world goes on’. Part of the reason is that the world has little choice but to go about its business, because there is little that most governments, companies, and organisations can do to affect the outcome of the crisis in question. However, there also comes a point when a ‘crisis’, if extended long enough, becomes the new norm.

Thus, twenty years ago the nuclearisation of North Korea represented a ‘nightmare scenario’ for the South, yet by 2012 it had been a manageable status quo for several years. Indeed, the Seoul stock market and Korean won currency have been remarkably resilient to the Northern threat. Similarly, a decade ago the notion of oil prices trading in the US$80-100/bbl range for a sustained period seemed intolerable, yet the world economy has learned to live with this (although it could be argued that high prices are constraining the present economic recovery).

Meanwhile, residents of the world’s major metropolises and international air travelers have largely adapted to the risk of terrorism. Furthermore, there do not appear to be any major anti-systemic movements visible on the horizon.