Implications of Global Risk
In the World Risk Report 2022 by the World Economic Forum, which was released in January, geopolitical risk is not at all a public concern.
“The pandemic is a portal” from one world to another. That is how Indian novelist Arundhati Roy (Financial Times, 4/4/2020) described the bitterness and hope of the Covid-19 outbreak that befell human civilization.
The post-pandemic world is filled with unexpected surprises. Most recently, Russia's invasion of Ukraine has caused various changes in the world’s geopolitical constellation.
In the World Risk Report 2022 by the World Economic Forum, which was released in January, geopolitical risk is not at all a public concern. Among the 10 risks over the next 10 years, geopolitical risk only appears once and in 10th place, namely as geoeconomic (not geopolitical) confrontation. This risk refers to tensions due to escalation of the trade war and unbalanced post-pandemic economic recovery.
The issue of geopolitics has completely escaped the attention of the public, which is still focused on the pandemic and its social and economic implications.
As the report shows, the ranks of one to three on the global risk map are dominated by environmental aspects, namely climate action failure, extreme weather, and biodiversity loss. Ranks four to six are dominated by social issues, namely erosion of social cohesion, job crisis, and infectious diseases. Economic risk, namely the debt crisis, is ranked ninth. The issue of geopolitics has completely escaped the attention of the public, which is still focused on the pandemic and its social and economic implications.
The public feels that since the pandemic emerged, social cohesion has declined 27.8 percent, environmental management has worsened 24.5 percent, and the risk of a debt crisis has increased 13.8 percent.
The survey results also showed that the risk of the use of weapons of mass destruction had increased just 0.3 percent. In fact, since the Russian invasion of Ukraine, which was followed by the imposition of heavy sanctions against Russia, the fear of a nuclear war has increased. Many European citizens, especially Germans, have even started equipping themselves with masks and other equipment to protect themselves from nuclear radiation. If the risk of launching nuclear weapons increases, anti-radiation shields will be mass-produced to replace Covid-19 face shields.
The change in the global risk map has implications for the domestic economy, so various anticipatory measures are needed by consolidating and reorienting policies. Change is coming so fast. Therefore, continuous policy improvisation is needed.
Anticipating policies
Our economy is relatively isolated from the direct impacts of the Russian-Ukrainian war. However, the resulting geopolitical changes will soon spell trouble for Indonesia's leadership of the Group of Twenty (G20) this year. United States Treasury Secretary Janet Yellen has said she will not attend and will boycott any G20 meetings attended by the Russian delegation.
Meanwhile China, India, and several Latin American countries support Russia's presence in the G20 forum. Global political polarization is very dynamic and challenging, and demands consolidation and improvisation of those policies that relate to Indonesia's G20 presidency.
The crises resulting from the Russian-Ukrainian War have pushed up the prices of commodities, both energy and food. According to a report from the Food and Agriculture Organization (FAO), the global food price index in March 2022 increased 12.6 percent compared to the previous month, or an increase of 33.6 percent from the previous year.
In March, US inflation is projected to hit 8.4 percent, the highest since the 1981 oil crisis.
Even though the price of West Texas Intermediate (WTI) crude oil fell to US$98 per barrel after peaking at $120 per barrel, the future of the energy market remains highly uncertain. The energy and food crises have the potential to resemble the 2008 financial crisis, or could be even worse. The increase in the food and energy prices in the midst of increasingly segmented global supply chains has led to a surge in prices. February inflation in the United States reached 7.9 percent, even though the Ukraine war had just started. In March, US inflation is projected to hit 8.4 percent, the highest since the 1981 oil crisis.
In order to face the changing situation, the US Federal Reserve (Fed) will take aggressive policies. First, the Fed will begin to release ownership of debt securities that have accumulated on its balance sheet through quantitative tightening (QT), as opposed to quantitative easing (QE).
Since the pandemic, the Fed has made gradual purchases of $3.3 trillion in debt securities and $1.3 trillion in mortgage-backed securities. It had to take this policy because the Fed will soon raise its benchmark interest rate by 50 basis points. If it doesn’t start to reduce debt securities, the interest rate hike will burden the Fed itself.
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The implication is that the financial markets tend to be unmotivated. Ever since the Ukrainian war erupted, the Dow Jones has not risen again after declining 600 points in mid-February. Investors seem inclined to leave the US financial markets. Furthermore, many speculate that the US economy is starting to lose competitiveness and will continue on a decline in the future.
In order to anticipate this surprising change in an uncertain situation, our government must be aware of its complicated developments in the country. First, the increase in the global food and energy prices will certainly push inflation as it is carried over through an increase in imported products (imported inflation).
Second, even though there will be an overflow of liquidity that will strengthen the capital market in the near future — the Jakarta Composite Index (JCI) reached a record high of 7,127 at the close of trading last week (8/4/2022) — the risk of foreign capital flow reversals is also high.
Domestic complications can occur in several ways, namely in the imposition of 11 percent value added tax (VAT) as well as in several political issues, such as the relocation of the nation’s capital city (IKN), the proposal to postpone the 2024 general election or to extend the presidential term to three terms. The cooking oil crisis and the flip-flopping restrictions on coal exports are only a small part of the bureaucracy's inaccurate reading of the situation as well as mitigating maneuvers.
A policy is never isolated from the context. Good policies must be accompanied by the right timing. This recent change in the situation at the global level has resulted in a change in context. This may make the timing less precise, so adjustments are needed.
Changes in the global risk map accompanied by accelerated change require strong political legitimacy. The issues of postponing the general elections and extending the presidency to three terms have undermined the unity of the bureaucracy and public trust. Therefore, serious efforts are needed to restore this, particularly by controlling these issues at the grassroots level.
Meanwhile, the IKN relocation plan, the 11 percent VAT, and various price stability policies can still be managed if political legitimacy is maintained.
A. PRASETYANTOKO, Rector of Atma Jaya Catholic University
(This article was translated by Hyginus Hardoyo)