The world in 2022: Geopolitical risks and opportunities

The pandemic turned politics in many parts of the world upside down. The coming year will mark an important step back to normality, but COVID-19 retains the ability to change the course of countries, regions and people, says Nick Redman, Editor in Chief and Director of Analysis at Oxford Analytica.
Nick Redman
Nick Redman
Editor in Chief and Director of Analysis, Oxford Analytica

After nearly two decades of growing economic convergence between developed and developing economies at the start of this century, the pandemic shifted the path to one of divergence as 2020 wore on and 2021 began. This pattern is likely to continue in 2022, not least because the richer world is more advanced in vaccinating people against COVID-19. That blanket statement masks important differences among the richest states: it matters greatly for the course of the virus whether a country can vaccinate 85% of its people, rather than 70% or 75%. Those at the lower end of the range will find it more difficult to strike a balance between easing restrictions on individual freedom and economic activity on one hand, and ensuring their hospitals are not overwhelmed by infected people on the other.

As northern states emerge from their winter, further opening of economies will be possible. The availability of booster jabs and anti-virals, to treat those admitted to hospital with COVID-19, will mark a further step on their route out of the pandemic. Yet that winter will pose new strains for some developed states, as publics press for increased freedom of movement and governments seek to press the vaccine-hesitant and the vaccine opposed to either accept the jab or suffer limits on their ability to work and move. Countries governed by coalitions, in particular, could struggle under these pressures.

For the majority of states, beyond the developed world, there is less reason to look to mid-2022 as a point when the virus no longer consumes all political attention. The World Health Organization target is for states to have vaccinated 40% of their population by the end of 2021 and 70% by mid-2022. The IMF estimates that 73 states – more than one-third of the global total – will not hit the 40% target. As a consequence, many developing states will continue to face agonising trade-offs between lockdowns and other restrictions to check the spread of the virus, especially now the more transmissible Delta variant dominates, and efforts to keep economies open.

Although it is true that many states in the developing world have a capacity constraint that will limit their ability to roll out vaccines, the major impediment remains a lack of access to vaccines. With richer states tending towards booster shots, availability will not increase as quickly as many in the developing world might hope.

Divergence in economic prospects

The divergence on vaccine progress between developed and developing countries, and to some extent within them, is mirrored by their economic prospects. The US and some other developed economies are recovering fast and have already made up the ground lost during the pandemic. Within a broader group of developed states, there has been a shift from the consumption of personal services to goods that will persist for some time. The labour force is likely to be somewhat smaller for years ahead, as an unprecedented number of workers chose early retirement during early lockdowns while others seem reluctant ever to return to jobs they regard as high-risk in light of the pandemic.

The weakening of the euro against the US dollar – a consequence of Europe’s weaker recovery and its less forward leaning approach to monetary tightening – will be a boon for EU exporters, while dampening inflationary pressure in the US. While developed states will continue to be buoyed by strong household savings, cheap money and supportive fiscal policy, they will nevertheless be subject to turbulence. In the two decades before the pandemic, global supply chains became sophisticated, low margin and highly vulnerable as companies drove down costs, relying on just-in-time models and sole suppliers.

Very few companies foresaw the risks that a pandemic would pose. The loss of cheap, flexible labour in logistics, the disruptions caused by factory or port closures, and the loss of transport capacity as passenger flights were cut back and their empty holds were no longer available for durable and perishable goods (or because containers were stuck in the wrong part of the world or were unaffordable for exporters to move) point to a system of supply chains that was agile and efficient but fragile, and is now broken. Reconstructing it will take time, and the process will be hampered by governments, and companies, far more interested in the security of supply than they were prior to 2020. Some reconstituted supply chains will be shorter, thicker and have greater redundancy. The main losers will be those most distant from demand centres in North America, Western Europe and East Asia.

The next year will see a marked divergence in performance among developing economies. Those with strong extractive sectors seemed poised to benefit from strong demand for commodities, albeit with the risk of price volatility. Those reliant on tourism will have a more difficult time, and all will to varying extents be constrained by the restrictions on movement required to control COVID-19. China has started to deleverage its property sector, and while this will eventually put the country on a more solid financial footing it will certainly result in weaker GDP growth. The commodity-hungry engine of the early 21st century world economy will be less of a motor for global growth next year than in the last two decades.

Debt threat

A further threat looming over developing economies concerns debt and access to credit. The start of monetary tightening in the US could cause an increase in borrowing costs for emerging markets. Emerging market corporate borrowers could suffer as a result. So too could low-income states, who on average face debt-servicing costs equal to 21% of budget revenue in 2022, compared with the single-digit burdens they had in 2008. The deepest problems will be felt by those carrying significant levels of short term debt, particularly if it is denominated in a foreign currency. Rising US interest rates could complicate the task of rolling over this short term debt and also push up the cost of servicing debt through local currency depreciation. Some states facing these threats could step away from full convertibility and embrace capital controls.

Western states, benefitting from anaesthetised debt markets, will face no such challenges. Yet beyond 2022, this will potentially store up troubles. Governments that can easily service their debts, at a time when investment needs are considerable, have an incentive to borrow still more. Further increases in the volume of sovereign debt, at a time of unprecedently low real interest rates, means the servicing burden will be larger still when eventually rates do rise.

Inflation concerns

A more immediate concern is inflation. Central banks in developed markets insist that the elevated inflation seen in late-2021 is a temporary phenomenon, and so they are not rushing to tighten monetary policy. It is notable that their counterparts in larger economies such as Brazil, Russia and South Korea have already started to tighten. If rising consumer prices persist in the major economies into the second half of 2022, hurting consumers, then a mix of political and public pressure might push one major central bank to hike rates faster than expected, unsettling markets.

The geopolitical dimension

How will all of this affect politics and international relations globally? Leaders in both the US and China, if given the choice, would prefer to focus on domestic matters. US President Joe Biden enters 2022 with low approval ratings, with voters blaming his government rather than the Fed for elevated inflation. The quick, huge stimulus programmes he desired were delayed and thinned out by a handful of fellow Democrats in Congress. The impact of those programmes is unlikely to be felt by the time the November midterms come around. He will hope that economic recovery and the taming of COVID-19 will revive his fortunes and so spare him the midterm Congressional reverses that are common for a sitting president. Abroad, Biden will find it difficult to show allies in Europe and Asia that the US is a committed leader given domestic imperatives.

China also will be in election mode, in its own way. The 20th Party Congress is likely to mark the start of Xi Jinping’s third term in office. Top-level appointments will consolidate his power. In the run-up to the congress, the authorities will be keener than usual to maintain tight control and to crack down on those threatening social stability or seeming to challenge the Party’s control. The policy course set out in 2021 – a determination to bring the country’s tech giants to heel, to limit the ability of richer citizens to cement their wealth and position through private tutoring, and a cultural crackdown on those who deviate from social conservatism – will continue.

If these measures result in slower growth, Xi will not care. His government will deploy all the resources necessary to ensure that troubles in the property sector do not blow up the economy. He will take further steps to develop a dual-circulation economy less reliant on foreign inputs. Despite continued sparring with the US, 2022 should not be a year of crisis because of China’s domestic agenda – provided that the authorities in Taiwan do not provoke Beijing’s ire by taking steps towards declaring independence.

Asia’s other giant, India, will enter 2022 expecting a vigorous economic rebound and the lifting of restrictions as it eventually gets to grips with COVID-19. Prime Minister Narendra Modi will be one of the few leaders actively seeking trade deals and energy partnerships around the world, though he will worry that rising interest rates and oil prices could trigger a capital outflow and send the rupee tumbling, which would strain Indian corporations who have borrowed in foreign currency.

Brazil will spend much of 2022 in campaign mode, with President Jair Bolsonaro aiming to break legal restrictions on state finances to keep millions of his citizens out of poverty and his slim re-election prospects alive. His inflation and COVID-19 mismanagement has stripped him of all but his most ardent supporters. He disappointed economic liberals, big business, the military and those who looked to him to root out corruption. His predecessor, Luiz Inácio Lula da Silva, looks certain to top the first-round presidential poll and potentially to win it outright. Bolsonaro’s hopes rest partly on centre-right parties not coalescing around a single candidate.


Russia, by contrast, will not be troubled by questions over who will be president. Vladimir Putin has cleared away the
impediments that prevent him from remaining in power after 2024, and the politicking that accompanied uncertainty has died down. Although Russia developed its own COVID-19 vaccine early, it struggled to persuade its people to take it and non-medical interventions to curb the virus were poorly coordinated. Unlike Iran, it refuses to import foreign vaccines for those citizens suspicious of the native jab. Consequently, Russia’s authorities will grind their way through the early months of 2022 amid high COVID-19 case numbers and fatalities, as well as popular dissatisfaction over high inflation. Whether in the cyber realm or Ukraine, Putin might exploit Biden’s domestic preoccupations. The desire to prevent Ukraine falling into NATO’s orbit remains as strong as ever in Moscow. What has weakened, perhaps, is the conviction that Western punishment for military action against Ukraine will extend beyond economic sanctions.

Conflict will continue to blight East Africa, with Ethiopia struggling to bring an end to the fighting that began in Tigray but now ranges well beyond it. Sudan’s political transition has been derailed and will not easily be set aright, while Kenya and Somalia face elections in 2022 that seem certain to threaten stability. Nigeria too will struggle to arrest the trend of insecurity that has spread from its northeast to its northwest, and the challenge to central authority that has emerged in the south.

Oil producing nations
Oil producers across the world will greet with relief the prospect of higher prices, but not all are well-placed to benefit. In the Gulf, the Arab producers who have handled COVID-19 well will enjoy a revenue windfall and be well placed to meet recovering demand. Iran, by contrast, faces continued restrictions on its ability to sell oil and will face a difficult choice as to whether to reach a deal with Biden – knowing that it could be reversed in little over two years – or to press on with plans to build a resistance economy.

In Europe, governments will map out the next stage of their plans for decarbonisation. In Canada, with the election now behind him, Prime Minister Justin Trudeau will make efforts to curb the oil and gas industry. In Mexico, by contrast, President Andres Manuel Lopez Obrador will seek to entrench the role of fossil fuels and to turn back the private capital so sorely needed to achieve the energy transition. Argentina will focus on an IMF deal and Turkish President Recep Tayyip Erdogan will prepare the ground for a titanic election struggle in 2023.

The pandemic turned politics in many parts of the world upside down. The year 2022 will mark an important step back to normality, but COVID-19 retains the ability to change the course of countries, regions and people.

This article was published in the Berne Union Yearbook, December 2021

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