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The World in 2016

Dec. 2, 2015 We look ahead at the major geopolitical developments the world can expect to see in 2016. These include fragmentation in the European Union, as a result of the continuing refugee and financial crises, and a reluctant confrontation between Turkey and the Islamic State.

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The United States
Europe
Russia
Asia
The Middle East
Peripheral Regions

An Introduction

The fundamental reality of the world is that Eurasia, understood as the vast land mass stretching from the Atlantic to Pacific oceans and the Arctic to the Indian oceans, is increasingly unsettled and even chaotic. In the meantime, North America remains relatively stable and operating from a different paradigm. It is this model that will define and drive events globally in 2016.

A quick glance at Eurasia will give you a sense of its instability. In Europe, the ongoing Greek and refugee crises both provide a sense of the fragility of the European Union and the deep divisions that have emerged. Russia is facing a simultaneous strategic crisis in Ukraine and other regions on its frontier, as well as a financial crisis driven by the decline in oil prices. China is struggling with the decline in economic growth, the danger of social unrest and an increasingly repressive government. Finally, in the Middle East, the rise of the Islamic State group has not only endangered the continued existence of Syria and Iraq, but has seen the creation of a new military force holding large amounts of territory in both countries. India is the only region where disorder has not intensified but in many areas it has been disorderly for a while.

North America, on the other hand, has been stable, not to say there have been no significant economic problems, normal political conflict, or engagement in wars abroad by the United States. However, none of the three regimes on the continent are threatened by social forces, there are no dangers of secession and national collapse, and there are no large scale military operations underway. It is not the absence of these conditions from North America that is striking, but the contrast between North America and Eurasia.

An important factor in the differentiation between countries in Eurasia and North America is exports. For several generations, one of the measures of national economic well-being has been exports. Following the 2008 financial crisis, the vulnerability of exporting countries became clear. That year took the United States and the European Union into sharp contractions in appetite for imports. This threw exporting countries off balance. Some, such as China, have not yet recovered. Others, such as Germany, have not yet suffered from their exposure. The economic decline in China and other exporting countries diminished their appetites for industrial commodities. This in turn damaged exporters of these commodities, particularly countries like Russia and Australia. In 2015, the cost of both interdependence and excessive reliance on exports of any sort was revealed. The inability to export struck at European countries, as well as Russia and China, and was a piece of the Middle Eastern puzzle, since the export of oil is central to the region.

One of the consequences of the economic crisis was a surge in nationalism and parochialism throughout Eurasia. The EU crisis has its roots in nationalism but has also exacerbated it. Russia and China have both experienced substantial increases in nationalism, much of it fanned by government attempts to generate support from the public. Nationalism rose and fell in the Middle East, but what became more important than nationalism, was the trans-national Islamic movement embodied in the Islamic State.

This is the framework that allows us to forecast the coming year. Our view of 2016 is that the instability in Eurasia will intensify. The United States will seek to avoid being drawn into these conflicts, militarily and politically, trying to maintain balance within the regions without major entanglement. Most importantly, these discrete regional conflicts will intersect and interact, so that the regional and national stovepipes that we are used to thinking in terms of, and are always illusions, become obviously inadequate. Still, they are useful for organizing our thoughts. As important is the fact that what happens in one region affects other regions. Therefore, we will be discussing the future of each region multiple times, sometimes directly, sometimes through the prism of others.

The United States

It would be reasonable to begin our analysis of the United States in 2016 by considering the implications of the upcoming election. It is a foundational view in geopolitics that personalities matter little in the broadest sense. Barack Obama had a very different foreign policy than he expected. The tensions in the Middle East existed because of geopolitical realities, not as a result of his personal views or character. George W. Bush expected a very different presidency, focused on domestic affairs. However, that was not for him to decide but for al-Qaida, and Bill Clinton’s failure to destroy it. Bill Clinton never expected to have to deal with al-Qaida. That problem was bequeathed to him by George H.W. Bush and by Desert Storm, which was the impetus for al-Qaida’s formation. Therefore, it is not only that elections can rarely be predicted, but, even more, that they rarely matter. Presidents don’t make history. History defines presidents. We approach 2016 with this in mind.

A Shift in American Foreign Policy

The central problem for the United States since the end of the Cold War has been how to manage its enormous power effectively. The U.S. remains the leading global power, still producing nearly a quarter of the world’s GDP, controlling the world’s oceans and continually engaged somewhere in the Eastern Hemisphere. In 2016, the United States will remain engaged in the Eastern Hemisphere but the extent and method will change.

The lesson of Afghanistan and Iraq is that the United States can defeat a military force but it cannot occupy and pacify a country except at a cost so extreme that it would force the U.S. to completely change the structure of American society economically and socially, through conscription. It would force a state of permanent national emergency on the United States, similar to World War II, but with enormously less at stake. An approach to Eurasia in which the United States constantly applies military force to problems that are neither soluble nor worth the effort if they were soluble, is impossible. This was a lesson known to the British, Roman and Persian Empires. It is something that the United States is now beginning to learn in practice, if not yet in theory, and it is a lesson that would have been applied regardless of who was or will be president because it is an unavoidable response to an irresistible reality. Next year will be a year where the United States will increasingly apply this teaching, in the case of the Middle East, Russia and China.

The failure of 2015 was the inability of the United States to create a significant and effective fighting force as the foundation of its long-held strategy of dealing with problems with direct interventions. That strategy has failed too often to be viable. This is not a new problem but one that is not easily soluble. In Vietnam, Afghanistan and Iraq, the American goal was to create a large, conventional army loyal to a pro-American regime and able to both guarantee the territorial integrity of these countries and pacify them. This strategy has consistently failed for two obvious reasons. The first is that the governments the U.S. tried to create had no reason to be loyal to the United States and, if it used the United States to protect it, the state would lose legitimacy with the public. The army had the same problem. Loyalty of many was not to the government and certainly not to the Americans. Therefore, the Americans were arming their own long-term enemies. The second problem is that, as soon as the Americans began recruiting for these new armies, the first enlistees were members of hostile forces, who provided intelligence on every move the army carried out. It was, therefore, a strategy designed to fail.

In the Middle East, the United States has an apparently contradictory goal. On the one hand, it wants to destroy the Islamic State and recreate stable nation-states in Iraq and Syria. On the other hand, it does not want to engage in extensive ground warfare. Therefore, in 2016 the United States will be moving to a broad implementation of a new strategy, one dependent on existing viable nation-states in the region, capable of dealing with the problem. There are four major countries surrounding the area of conflict: Turkey, Iran, Saudi Arabia and Israel. Each distrusts the others in some way, and none work openly together. At the same time, each is afraid that some other will gain an advantage in the region that would threaten their national security, yet none are eager to get overly involved in the conflict. The United States is prepared to offer political and logistical support, supplies and air power, which will give these countries the ability to destroy targets with minimal risk to the Americans. It is also willing to provide special operations forces to support military operations fighting IS and other potential opponents involved in the region. The goal, put simply, is to achieve American political goals at minimal cost and using the least amount of American personnel possible.

The Americans are redefining their task away from using their own forces and directing it towards inducing or creating circumstances in which these nations have no choice but to act. Each of these countries is in close proximity to Iraq or Syria and the violence in the war zone is sufficiently intense that it might spill over into their own national territories or pose other significant threats. Each also has significant force it can bring to bear. None of them want to take the risk of action, but in the end, none can take the risk of the violence spreading or developing in dangerous directions. Unlike the United States, the fighting is a direct and immediate threat to their national interest.

The American strategy will be to induce at least some of these nations to assume the burden of defeating IS and stabilizing the region, but will have the benefit of these nations so distrusting each other that they will balance one another out. This will give the United States a strong position in the region after the fighting, while not having to do the fighting itself.

In order to achieve this, the United States has been balancing its relations in the region, loosening ties with some, strengthening them with others. Thus, the United States has strengthened ties with Iran, which are far from warm but also far from being as acrimonious as before. It has loosened but not broken the ties with Israel and Saudi Arabia and maintained a tense but not impossible relationship with Turkey. During 2015, the U.S. cooperated at a distance with Iran in Iraq and helped convince Turkey to involve itself in Syria.

This is emerging as a balance of power strategy. Whatever differences the United States has with Iran on nuclear weapons, the strategic situation in the region drove both countries to cooperate. We expect this cooperation to continue and deepen without any change in atmospherics. Similarly, we expect Turkey will be forced to take steps to protect its interest inside of Syria, in conjunction with the United States. It will take these steps under American prodding and the pressure of increasingly aggressive actions by IS along the southern Turkish border, as well as a rise in terror attacks inside Turkey. In the meantime, the United States will seek to limit Israeli actions in order not to generate a unifying response in the Islamic world, which would turn the group into a more broadly supported force than it is now.

American Strategy Towards Russia and China

The balance of power strategy will similarly be used against the Russians. We expect the Ukrainian situation to reach an implicit or explicit settlement in 2016, which will actually be a temporary affirmation of the current situation. The United States, understanding that that the Russians are unable for strategic reasons to abandon Ukraine, will try to recruit allies unable to ignore the Russian threat. In this way, Poland and Romania have already chosen to align with the United States and we would expect other frontline powers to also seek a relationship. This would represent for the United States, a long-term, low-cost management of any potential Russian threat, similar to the U.S.’s approach to the Middle East.

The U.S. will take a modified strategy towards China. The Chinese are caught in a serious long-term economic decline. The economic discussions that have dominated U.S.-Chinese relations during this time are of little consequence and certainly not at the heart of the matter. The Chinese will seek to create a sense of embattlement to unite the public. Its actions in the South China Sea allow China to be seen as both a victim and resister. However, although the Chinese navy has been increasingly active, it is far from able to engage the U.S. Navy. This is a case where the U.S. can bring overwhelming force to bear. Therefore, the Chinese will feint but decline to create a significant or dangerous confrontation. The U.S. will bring its clout into the region as a demonstration of intent to resist China’s strategy, but will avoid engagement as well. Unlike other regions, most American allies in East Asia lack either military capability or political desire to confront China. Therefore, the United States cannot apply its new strategy of relying on regional partners to confront aggression here. Still, we regard the possibility of significant conflict as extremely low.

Conclusions

In 2016, we will see the United States reducing its use of military might to shape global affairs in favor of relying on regional actors to handle some of the most pressing international issues. This includes depending on Middle Eastern countries, particularly Turkey, to deal with the growing challenge presented by the Islamic State, with the support of the Americans. Similarly, the U.S. will have no appetite for confrontation with Russia over Ukraine and will seek a settlement. It will apply the same balance of power strategy it will use in the Middle East by recruiting allies in the region intimidated by the Russian threat.

In addition, although 2016 will see an election in the United States, a change in the presidency will have little impact on American strategy. No matter who is elected, decisions on foreign policy will be made based on circumstances and events out of the U.S. president’s control.

Europe

Europe faces three interlocking issues in 2016. The first is the ongoing economic problems of the European Union. The second is the migration problem and the attendant terrorism threat. The third is Russia’s relationship to Europe and, alongside that, its relations with the United States. Underlying the three obvious problems is the fundamental predicament of Europe: To what extent is there such a thing as a European Union? If it exists, what decisions is it obligated to make and to what extent are nation-states obligated to follow its decisions? To what extent do European countries have a common interest in a European decision-making process? All three of these issues devolve to the core issue of the European Union and it is this institution that, having been tested in the past, will face the most intense tests in 2016. These tests may involve the formal secession of some member states from the EU. More likely, the central apparatus – the EU itself – will appear irrelevant or even hostile to various nation-states.

The Union’s Economic Constraints

Europe’s economic issues remain fundamental. While Germany is enjoying full employment, Mediterranean Europe is experiencing staggering rates of unemployment, with some nations over 20 percent, all over 10 percent. The 2008 crisis had highly differentiated impacts. This is because of the fundamental reality of Europe, which is that its center of gravity, Germany, is the largest economy in Europe, the fourth largest economy in the world and depends on exports to sustain this position. Without those exports, Germany would not be able to maintain full employment. Germany is fully aware not only of its vulnerability but that the percent of GDP export is far more likely to fall than to rise. Therefore, Germany, key to all three of the EU’s dilemmas, is exceptionally vulnerable economically and, understanding this, must play a complex game.

For the Germans, the Greek economic crisis must be dealt with in two contradictory ways. On the one hand, Germany cannot afford to unilaterally solve the Greek problem as it would set a precedent Germany cannot live with. It must compel the Greeks to be primarily responsible for its own debts. On the other hand, it cannot afford to see Greece default or leave the European Union. Germany relies on the European free trade zone for nearly half of its exports. It is terrified of a breakdown. Default would lead Greece to leave the eurozone and leaving the eurozone would set a precedent for leaving the free trade zone.

Therefore, Germany has been playing a double game with Greece, forging deals that the Greeks cannot and will not abide by. In 2016, this game will likely shift from the Greeks to a far more daunting challenge: Italy. Italy already has a major unemployment problem in the south. It is now facing a rising rate of non-performing loans, loans that are not being paid back. Businesses that have survived on reserves have exhausted those reserves. Whatever the cause, Italy will be facing serious banking problems in 2016. How serious they are will depend in large measure on how rapidly the rest of Europe recognizes the problem and is willing to create solutions. Given Europe’s track record, speed is unlikely and this can create a crisis far more challenging than Greece’s later in the year.

The track record does not derive from incompetence. It derives from the fact that European states have different interests and, therefore, it is impossible for Europe to create solutions to problems. On top of this fundamental issue, there is the German problem. Germany itself has competing interests that it cannot reconcile. It does not want to cover bad debts. It does not want to create a situation where leaving the EU’s free trade zone is more advantageous to a country than staying in it. These competing interests on the part of Europe’s leading power compound the problem of creating a coherent policy. If, as we expect, Italy will face significant problems, this will force Germany to make extremely painful and politically unpopular decisions.

Migrant Crisis Challenges Open Borders

The ongoing saga of Europe’s financial crisis will add to a broader discussion of borders triggered by both the refugee crisis and the Nov. 13 Paris attacks. Free trade does not require unmonitored borders but it facilitates the supply chain. However, at a time when the entire question of relations within the EU on economic matters has come to the fore, the events in Paris will dramatically compound the border issues generated by the refugee problem. The refugee crisis already had led to the temporary closing of borders by some countries. This included the erection of fences by some. In the immediate aftermath of the attacks, some countries also re-instituted border checks, although France physically does not have the infrastructure anymore to close borders and they would take time to rebuild if France chooses to do so. Maintaining open borders in the face of the refugees was difficult enough. It becomes impossible when the refugee problem is conflated with the terrorist threats. The fear that IS operatives could be among the refugees means that security has to be guaranteed and that can only be done by preventing refugees from entering Europe.

The logical solution for the Europeans would be to not only create a single, coherent refugee policy, but to create a force to patrol Europe’s external borders, including, for example, a permanent coast guard. Any European border patrol would, therefore, be taking control of border regulation for the countries with external borders, such as Greece. There are already agencies tasked with this responsibility, but none have the committed resources to execute the mission. Moreover, other countries do not want the burden of patrolling the Greek coast, nor will they welcome a general European policy on refugees that would leave them unable to manage their borders to their satisfaction. So the idea that Hungary, Slovakia, Poland, Spain, Italy and Greece, or France for that matter, would all cede control of their borders to a European force is dubious. Even a force that would only patrol the borders of weaker powers, such as Greece or Hungary, would be unacceptable.

The border issue and financial issue intersect with the European approach towards Russia. The Ukrainian crisis united most of Europe in principle in favor of blocking Russia, but not in practice. The Germans had no desire to see the resurrection of the Cold War, let alone a hot one. The Poles and Romanians were left to guard their own borders against Russian threats they took very seriously, as additional NATO forces were insufficient and made little difference. The rest of Europe was preoccupied by other matters.

This was another dimension of European fragmentation. During the last year, the United States has become a major presence in the Baltics, Poland and Romania, in many ways supplanting German political influence. These countries still have important and friendly relations, but it is the United States, not Germany, that provides what are seen in the region as existential guarantees. This divides Europe along another axis, Central Europe and Western Europe, and leaves open the question of how to manage the Ukrainian issue and Europe’s other border threats.

Conclusions

There has already been significant fragmentation in Europe on economic matters. But the core issue, political union and what it means, is going to be tested in 2016. The EU has tried to have its cake and eat it too by creating a union without abandoning sovereignty. What has been a theoretical discussion on the whole now turns into a very practical question. European countries will be asked to take on military and quasi-military functions far from home and some countries will be asked to cede some degree of autonomy over their borders. There is an absolute necessity for both, but no appetite for either. Therefore, whereas the economic question is whether there will be withdrawal from the eurozone, the political question is whether borders will remain open to the free flow of people and goods, and if so, who will control them. Since there will be no agreement on the second, Europe will become a crazy quilt of opened borders, conditionally open borders and tightly controlled borders. And the advocates of a Europe open to all refugees will be not only on the defensive, but will have to agree to tightly controlled residences for any refugees — in other words, camps. Combining this and the economic crisis, 2016 will be a year of not complete but very significant fragmentation in Europe.

Russia

Russia has strategic and economic problems that overlap. The strategic problem is that the buffer that Russia had maintained between itself and the European Peninsula is disintegrating. The Baltic states have joined NATO and the European Union. Ukraine reversed its orientation from being a moderately pro-Russian state, to being firmly in the Western camp. At the same time, the price of oil has plunged and with it Russia’s economic cushion. The failure of Russia to convert its vast flow of oil revenues into a more modern economy now leaves Russia in the dangerous position of having its economic viability being heavily dependent on a commodity whose price it does not control.

The two are linked in this way. Europe was heavily reliant on Russian supplies of natural gas and oil. When energy costs were high, Russia could use these commodities as a strategic tool. Europe — particularly the countries of Central Europe — needed the energy, while Russia, having substantial reserves of cash, could choose to disrupt the flow of oil without massive disruption to its economy. This forced European states to act cautiously toward Russia as it had the option to cut energy supplies to Europe — as well as to other countries, such as Turkey.

With oil prices more than halved, cash flow from energy has been slashed as well and the Russians now had to redirect their cash reserves toward filling the gap between Russia’s needs and unexpectedly low oil prices. The Europeans still need Russian energy, but the Russians are not in a position to use energy supplies as a strategic weapon. To overstate it, but only by a bit, what has been a gun at Europe’s head has become a case of mutually assured destruction. Energy flows remain the same, but they cease to be a Russian weapon.

The Ukraine Question

At the beginning of regime change in Ukraine and its shift to a pro-Western stance, Russia found both its intelligence and covert operations capabilities to be limited. Prior to the shift, Russia loosely controlled Ukraine. After the shift, Russia controlled only Crimea, which it had dominated before Ukraine’s rising, and, in addition, a fairly small area in eastern Ukraine. The Russians retained fragments of what was once theirs. Clearly, they had experienced a massive intelligence misstep, failing to anticipate events in Kiev, failing to understand what was happening while it went on and failing to find effective pressure points on the new government. In addition, their attempted uprising in the east failed to ignite a broader uprising and the Russian-supported forces could not overwhelm the Ukrainians.

Indeed, a more reasonable way to put this is that they were fought to a standstill. There was no direct military intervention by the Russians, partly because of their fear of the consequences and partly because the Russian army lacks the ability to execute a large-scale operation even if it were to face limited resistance. This was followed by the decline in oil prices and the Russians found themselves, through most of 2015, in an extremely difficult position.

Gaining Leverage in Syria

Historically, the Russians have seen the Middle East as an area of interest to them and also a vulnerability to great power adversaries. The Russian strategy in the Middle East in jousting with the Ottomans, British and Americans was to find a pressure point that would hurt sufficiently and cause the other side to make concessions in areas more important to the Russians.

The Russian intervention in Syria served both purposes. On the one hand, the Russians complicated an already complex situation, intending to demonstrate their military capability to the Americans and the Russian public. They also intended to do a service for the Americans. The United States opposed the Bashar al-Assad regime but given the power of the Islamic State, the fall of Assad might mean the fall of Damascus. The U.S. could not afford this. The Russian intervention on behalf of Assad helped in two ways. First and most importantly, it provided Assad with support the U.S. could not give him. Second, it provided additional firepower, however limited, against IS.

The Russian maneuver was to both irritate and help the Americans, showing them not to underestimate Russia’s military capabilities and convincing them that Russia was providing assistance to the Americans. The ultimate goal of this maneuver did not have to do with Syria, which was always secondary to the Russians, but Ukraine. Given Russian capabilities in the Middle East, and given Russian willingness to cooperate, the United States might consider a compromise over what was, after all, of secondary interest to the Americans.

From the American point of view, the United States has demonstrated its ability to outduel Russia in Ukraine. At the same time, the U.S. does not intend to undertake a major military operation there. It is too large, too distant and too far outside core American interests. Those interests include limiting Russian military adventures west of Ukraine. The United States will be willing to reach some accommodation on Ukraine, while continuing to deploy resources from the Baltic to the Black Sea. As for the other European states, they naturally have a variety of views. The American defensive line, including the Baltics, Poland and Romania, will fear this accommodation is a preface to a Russian-dominated Ukraine. Germany will be delighted to have the additional fear of a confrontation to its east eliminated. And the rest of Europe, preoccupied with other problems, will be indifferent.

Conclusions

We predict there will be a settlement in Ukraine in 2016, whether formal or informal. The situation in Ukraine has reached a sort of stability, with an intact government in Kiev, a stalemate in the east and Russian control of Crimea. What the Russians want ultimately is a guarantee that Kiev will remain militarily neutral. What the United States and Europe want is to maintain the unity of Ukraine. This can be achieved by a variety of arrangements. For example, there can be a limit on western military aid such that it does not become a danger to Russia. Some degree of autonomy can be given to the east. Some agreement on Russian status in Crimea can be reached. Ultimately, the precise structure of the agreement is unclear and, in a way, unimportant. It will defuse the situation.

However, we do not see this as a permanent solution. The Russians will build up their military and the United States will continue to strengthen the containment line. In due course, the Ukrainian question, along with the general question of the buffer states between Europe and Russia, will be reopened. But not in 2016, with economic and strategic problems weighing Russia down.

Asia

Any forecast for Asia must begin with and focus on China and attempt to understand the precedents for what is occurring in the country now. China was on a path comparable to Japan’s in the 1980s. The reason for their upswing was similar. Both were low-wage high-growth countries, occupying similar niches in the global economy. Both had a high dependence on exports. Both had a policy of maintaining full employment. Both worked hard to avoid recessions and keep the supply of jobs high by providing credit from their banking system to increasingly inefficient companies for political or social reasons. These were debt, not equity driven, companies, meaning their boards were composed of bankers and managers, not investors. Therefore, what they were after was cash flow to pay back debts, not total return on investment.

The focus on full employment meant that economic growth — output of goods and services — did not necessarily correlate with profits. This meant that the economy, defined as GDP, could be growing in the double digits and the banks were being paid back, but the rate of new capital formation was lacking. And in due course, when companies could not repay their debt to banks, banks lent them more money to avoid having non-performing loans on their books and to avoid causing unemployment, as per state policy. Part of this picture was to encourage exports at little profit, or even at no profit at all, to keep the system running. As this went on, the economy, measured as output, continued to grow and cash kept flowing, yet the financial system was being hollowed out. Similarly, Japan’s GDP growth was as high as 10 percent per quarter just before its financial system collapsed. It is important to understand the parallels between China and Japan to understand what is happening and will happen in China.

Chinese Fallout from the 2008 Crisis

It is also important to look at an event, the 2008 financial crisis, that took China’s economy to its climax perhaps more quickly than might have been the case otherwise. It was the year that revealed the vulnerability of all exporting powerhouses. The ability to export depends in large part on the appetite of the consumers. In the short term, 2008 shattered demand in Europe and the United States and, in the long term, changed consumption patterns in both continents to reflect slower economic growth. This limited the ability of China to export at any price. However, 2008 opened the door to other issues. Most importantly, the rapid growth of credit designed to stabilize the economy not only created the inevitable bubbles but also increased inflation, including for the cost of labor.

As a result, China lost its competitiveness, as the cost of its products rose above, for example, Mexico. The Chinese faced two choices. One was shifting their exports to higher value products such as technology. Of course, that would bring them into competition with various countries such as Germany, Japan, South Korea and the United States. China could not enter such a competitive environment quickly. The other alternative was increasing demand in China’s interior. However, in a region where daily household income could be below $3 a day, increasing demand to purchase the types of products China was geared to produce was impossible. The Chinese continued to slow down, claiming GDP rose by 6.9 percent in the third quarter in 2015. But even if true, as we saw in Japan, GDP is not a measure of economic health in a debt-based economy.

This is a normal process for high-growth countries. Inevitably, economic forces compel them to become normal economies. But for China, there are three problems. The first is that the vast majority of Chinese have been excluded from the benefits of the rapid growth period and are realizing that waiting their turn will not work. Second, people in the coastal region, where growth was most intense because of its international links, see the rest of China increasingly as a threat to their economic interests and, as in prior cycles, see their interests more aligned with the global economy than the Chinese. And finally, whereas China used to be based on tradition, or on Maoism, today’s China is based on the promise of prosperity and, when that prosperity declines, the legitimacy of the Communist Party declines as well.

China’s Dictatorship Intensifies

This is where Japan and China’s experiences diverge. Japan had a high degree of social solidarity and a regime with legitimacy. China’s regime is much more fragile. The threat of social unrest, regionalism and anger at the Communist Party is real. Regionalism was the norm for centuries prior to the triumph of communism. The Chinese Communist Party is well aware of this and, therefore, is taking steps to control it. Current President Xi Jinping’s crackdown on corrupt officials is intended to limit corruption, which undermines the party’s authority, but it is also a purge of the Communist Party itself. This purge has reached into the party’s upper ranks, designed to make certain that any internal threats are controlled, either by getting rid of challengers or by creating an atmosphere that deters opposition.

The foundation of China is the People’s Liberation Army, which, under Communist Party control, guarantees the stability of China and the party’s dominance. The security apparatus takes care of immediate threats, but it is the PLA that is the ultimate guarantor of the party’s power. If the PLA splits or turns against it, party units would shift their loyalty from Beijing to regional leaders. But unless this happens, the party is secure. And under the current circumstances, we see little threat to the survival of the regime.

Our forecast for the coming year in China is that the current growing dictatorship will moderately intensify and the underlying economic problems will grow as well, with more spasmodic events, such as the 2015 stock market collapse or sudden revaluation. The Chinese will use the South China Sea as a means of increasing nationalism in the country and legitimizing the Communist Party’s rule, even though China is struggling to maintain its status as a regional power. Its navy is no match for the U.S. and it is aware that beyond a certain point, the U.S. will intervene — and this, unlike Iraq, is a battle that would favor the United States many fold. Therefore, we do not expect the South China Sea to consist of more than demonstrations and feints on either side.

china-sea-choke-points

This continuity does not mean that 2016 will be an insignificant year for China. The country is in economic imbalance. The government does not have the power to solve that imbalance, but can influence where the imbalance will show itself most. It could deflate the stock market or devalue the yuan. China’s precise actions are unpredictable because they are frequently based on internal political struggles. But the unpredictability of the precise crisis is itself telling, as is the fact that, without question, there will be crises, unexpected, that will be triggered in large part by the attempt of the government to manage the effects of a weakening economy, unable to repair it. It is precisely that the specific crisis is unknowable that is the problem. China is not operating by any rational economic rules, but by a range of ad hoc solutions. Announcements are made, occasionally implemented, followed by new announcements as part of an ongoing balancing act.

Implications for East Asia, Central Asia and India

This poses a particular problem for economies dependent on exporting to China. These economies divide into two groups. One is the exporters of industrial minerals, such as Australia. The other consists of exporters of industrial products, such as Japan or South Korea. There has been, as with Japan, the fantasy that China’s economy will expand permanently. Obviously, that was not going to happen. Many economies, particularly in Asia and Oceania, oriented their economies to take advantage of China’s long-term growth. These economies are now paying the price and we expect 2016 to be a year of great difficulty for the periphery of East Asia. Industrial exporters and mineral exporters will suffer from the same dilemma. Their orientation toward China paid off for many years, but no plans were made for after China’s boom.

The impact of China’s weakening can be seen globally in the energy markets. Pricing oil at or above $100 a barrel was based on expectations that China’s economy would continue to grow and, therefore, demand would increase. But the economic weakness of China’s customers continued and, in due course, it was realized that not only had new technology changed the economics of energy supply, but China had changed the economics of consumption. As a result, energy declined to a more rational and sustainable price that we do not anticipate rising dramatically or permanently in 2016, unless the underlying economic dynamic shifts, which we do not anticipate. In fact, prices may decline. Energy prices are hard to predict but the fact is that Europe is in economic malaise, the U.S. is performing better but has ample oil supplies, and the Chinese economy along with the rest of East Asia is weakening and shuddering. The demand for energy just is not there and until a new high-growth low-wage economy emerges, there will not be a recovery.

This is something also affecting Central Asia. Indeed, Central Asia is being hit by multiple forces. Russia’s economic troubles, coupled with China’s slowdown, will have a negative effect on the economies of all Central Asian countries. Large energy exporters such as Kazakhstan and Turkmenistan will be especially affected. However, these countries will be unable to diversify away from Russia and China in 2016. Protests over weak currencies and job cuts may take place, but economic downturn appears not to fundamentally threaten the position of Central Asian regimes, which have proven successful at using a mix of incentives and coercive tools to maintain power.

India, on the other hand, will feel the crisis in China less intensely than the rest of Asia. India is performing well and not only relative to other countries in the region. It is the only member of the once up-and-coming BRICS countries – Brazil, Russia, India, China and South Africa – that has not seen its economy tank in the last two years. Of Asia’s major economies, India is somewhat insulated from the regional downturn because only less than 10 percent of total Indian exports go to China. India’s growth rate overtook China in 2015 and the World Bank expects India to grow at a rate of 7.5 percent in 2015-2016, with favorable forecasts for future years as well. The government of Narendra Modi has made relaxing restrictions on foreign direct investment a priority and India benefits from low-priced commodities, in particular oil. These advantages set India up for an economically counter-cyclical period as the rest of Asia attempts to manage China’s instability.

Politically, India will also be stable in the sense that none of its usual internal issues will worsen or challenge New Delhi’s status quo. India is still a vast country with many different cultures, religions, ideologies and castes. Clashes between these groups occur often – there is an ongoing Maoist insurgency in eastern Indian being carried out by the Naxalites, for example. The only new variable in India’s usual state of disorder is growing concern that Modi’s Hindu nationalist party, the Bharatiya Janata Party, could divide the country’s Hindu majority and also worsen relations between Indian Muslims and Hindus. Next year, however, is not a year that will see major civil unrest as a result of such tensions. In addition, although India is always on guard for attacks from jihadists, India’s chief rival and main strategic threat – Pakistan – will be so focused on containing chaos in Afghanistan that it will not have the bandwidth to cause any problems for India in the coming year.

DPRK’s Strategic Irrationality

In forecasting Asia, it is necessary to discuss Korea and particularly the Democratic People’s Republic of Korea. This is not because it is significant to the overall global system but because it has, with great care and skill, created a sense of itself as a significant and dangerous power. The DPRK has crafted an image of itself as a “crazy fearsome cripple,” as George Friedman has argued in previous writing. The DPRK’s primary goal is regime preservation. It wants to survive as a nation and state when it is remarkably weak. It does not deny its underlying weakness. Instead, North Korea uses this to make itself appear crippled and harmless. It simultaneously makes itself look fearsome, by developing nuclear weapons and sometimes engaging in what appears to be random and irrational violence. Finally, it behaves in a way that seems utterly unpredictable and counterproductive — even crazy.

By doing this, the DPRK positions itself as weak, and thereby shows that attacks are unjustified. Left alone, it will collapse. Should that argument not suffice, it shows a contradictory appearance of being fearsome. It may be fundamentally weak but it has nuclear weapons and any threat will result in a fearsome response. Finally, the DPRK shows itself to be crazy — utterly unpredictable and prone to risk-taking. As such, even minor threats can be met with dangerous responses, such as threats of nuclear war if criticisms are made against the regime. The three faces of the DPRK appear to be contradictory but in fact are a consistent architecture designed to protect it from foreign attack or destabilization attempts.

As such, three things can be predicted. First, at some point in 2016, it is highly likely that the DPRK will carry out some seemingly irrational action, from a nuclear test to sinking a ship. It will certainly engage in making bizarre threats. Second, the global media will become intensely concerned, feeling as if the world is on the brink of war. Third, no war will begin. It will all be part of the concerted and effective strategy the DPRK has pursued since the fall of the Soviet Union.

Conclusions

The Chinese government has been responding to its economic downturn by tightening its grip on the country and, in 2016, this will intensify. The growing dictatorship will be accompanied by an expansion of the underlying economic problems that have led to China’s slowing growth. The government will use superficial aggression in the South China Sea to increase nationalist sentiment and legitimize the party’s rule, however, these actions will not lead to confrontation. In addition, other countries in East Asia will experience a difficult year in 2016 due to their heavy dependence on the Chinese economy. Central Asia has also been impacted by the country’s economic woes and the subsequence decline in energy prices. Energy exporters in this region will especially feel the effects, however, the political ramifications will be minimal. India, on the other hand, will be relatively insulated from the Chinese crisis. In 2016, India will remain mostly stable – as in unchanged – economically and politically, in comparison to other countries in the region. Finally, the DPRK will maintain its appearance of being weak yet dangerous, however, nothing substantial will come of its threats.

The Middle East

The dynamic in the rest of Eurasia is driven by economic processes originating in the United States and developing into fundamental questions about the future of the political order. The Middle East’s disorder certainly involves economic questions, since oil prices are of vital importance in this region, but this is not the fundamental question. The fundamental question is the intersection between the nations created by France and Britain after World War I, and a deep ideological flow that envisions the creation of a transnational Islamist regime — the caliphate — to replace the artificial states that were created by European imperialism. That struggle will be entering a decisive phase in 2016.

Genesis of Middle Eastern States

After World War 1, the Middle East was divided between France and Britain and a series of new states emerged in the areas south of Turkey. These included Syria (the remnant of the Ottoman province of Greater Syria), Lebanon, Palestine, Jordan, Iraq and the Saudi tribe domination of the Arabian Peninsula. Add to this, after World War II, Israel was carved out of Palestine.

Middle East

Many of these countries were created as republics and were generally secular. Others as monarchies, traditional and religious. Over time, in the context of the Cold War in particular, secularism spread, with the overthrow of the Iraqi, Egyptian and Libyan monarchies, and those new states tended to be pro-Soviet, adopting a variety of socialist ideology. With the end of the Cold War, these states were left without great power allies or any coherent ideology beyond personalized dictatorships. Since these entities were cobbled together out of diverse groups, to whom most owed their primary legitimacy, they only held together under a tyrant. Absent the tyrant, there was nothing to prevent these states from fragmenting. Therefore, a period of non-ideological tyrannies ensued. The monarchies that survived, particularly on the Arabian Peninsula, were legitimized by their relations with their religious establishments. On the perimeter of this process was Iran, which had created something radical not only in intent but in practice: an Islamic Republic, merging Shiite Islam and the French Revolutionary tradition. There was also Turkey, which was founded as a purely secular republic, implicitly hostile to Islam.

With the collapse of the Soviet Union, a new dynamic emerged. Iraq invaded Kuwait and the United States built a coalition based in Saudi Arabia to repel it. This set off a reaction in Saudi Arabia against the United States, the secular regional dictatorships and even the regime in Saudi Arabia itself. Consisting of, to a great extent, veterans from the war in Afghanistan, it evolved into the terrorist group al-Qaida, whose primary interest was creating the caliphate. And as they knew, in order to create the caliphate, they had to begin with one state — in the region — that would be organized according to their interpretation of Sharia law.

The attacks on the United States, culminating in 9/11, had two goals. One was to demonstrate American vulnerability to the Islamic masses. The second was to argue, if the U.S. did not act, that the U.S. was weak. If the Americans did act, al-Qaida would argue that the they were the enemy of Islam. But the group’s goal was not focused on the United States. Their goal was to trigger an uprising against regimes in the region. In this, they failed.

Islamic State Supersedes Al-Qaida

Al-Qaida’s successor, the Islamic State, has gone far beyond anything al-Qaida could do. It has established control over extensive parts of Iraqi and Syrian territory. The ability to take and hold territory represents a totally new reality. Al-Qaida simply carried out attacks. IS has in effect created a territory and a state that they can claim is the core of the caliphate while also carrying out terrorist attacks to shape the the psychology of both the Islamic and non-Islamic worlds. IS’ public stance is to project terrifying power. Its internal stance is to use that perception to overwhelm enemies and cause non-Islamic states to make errors, such as carrying out a strategic response with insufficient and inappropriate forces. They expect war and are shaping the psychological battlefield.

In the coming year, IS will continue to be the single largest force in the Syrian-Iraqi theater. We can expect the group to expand its activities in countries such as Saudi Arabia, Egypt, Yemen and Libya. At the same time, it may even increase its presence beyond the Arab world in sub-Saharan Africa and southwest Asia. IS’ focus, however, will be to defend its core turf in the Levantine-Mesopotamian battlespace where it will be able to hold on to most of the areas it currently holds and even push into areas that are either held by the Bashar al-Assad regime or by rival rebel groups.

What is most interesting is that after several years of being under the global spotlight, no one seems to know the Islamic State’s exact size and the estimates range from the low tens of thousands to the low hundreds of thousands. For the group to be able to control areas that run from eastern districts of the Syrian province of Aleppo to the districts of Iraq’s Kirkuk governorate (even if they are not contiguous) and continue to expand westwards in Syria requires a significantly large military force, as well as a large pool of civil administrators. Providing services, selling crude and replenishing its weapons arsenal require a highly well-oiled military command structure with a civilian administrative component. Therefore, its total strength is likely closer to the 100,000 mark. In other words, what we have in IS is the most powerful Arab military force in the region, which represents the center of gravity of regional geopolitics in the Middle East.

American efforts against the group are unlikely to yield the desired results in the coming year. It is possible that IS could suffer tactical setbacks but strategically dislodging it will be extremely difficult because there are limits to how much air power can accomplish and Washington lacks reliable partners on the ground. The single most powerful arrestor in the path towards uprooting IS from its current strongholds is the fact that its opponents continue to underestimate its capabilities by treating it as an insurgent force when in fact IS has behaved as a professional conventional military force. The best test of a military is how it responds to defeat and retreat. When faced with defeat, IS has not shattered, as many such forces do. It has retreated, reformed, bided its time and countered in some location, not necessarily where it first attacked.

The American strategy has been to supply air power, logistical support and intelligence to regional forces. There is no expectation that air power alone will defeat IS. Air power can support ground forces or destroy particular targets, but a force like IS cannot be defeated without a ground component, which the U.S. will not commit. Part of the reason for this is domestic politics, but the bulk is strategy. We see IS as a fighting force somewhat in excess of 100,000 men. The U.S. could deploy about 150,000 troops to Iraq. Of those, most would be support troops given the logistic challenges of projecting power that far, and given U.S. doctrine. An offensive against a quasi-conventional force that is highly motivated over an extended period of time and space is likely to fail. Therefore, the U.S. must have allies.

Turkey’s Role Against Islamic State

The Kurds are useful but limited allies. Their militia is highly praised but it has not been able to launch a decisive offensive toward Mosul since the city’s fall. There are only two forces able to operate against IS: Iran and Turkey. Iran is already operating in Iraq advising Shiite forces. The reason the nuclear issue with Iran has subsided is that IS is a much more important problem for the United States compared to an Iranian nuclear weapon that will take years to produce. At the same time, while Iran can help in Iraq, the United States would not like to see an Iranian occupied Iraq, nor is it clear that Iraq’s military is in a position to take on such a multi-staged operation.

This leaves Turkey, which is the center of gravity of the strategic problem because it is the only regional power with the available force to engage IS. Turkey does not want to engage the group for several reasons. The first is that it fears it might be defeated or, just as bad, might shatter IS and find itself bogged down in an insurgency it can neither abandon nor win. In addition, it is particularly hostile toward the Assad regime, which has at various points in its history posed serious challenges to Turkey. IS is the enemy of Assad’s secular regime. All things being equal, Turkey wants to see Assad’s regime destroyed.

There are, however, problems with this wish. First, IS has become the enemy of the United States. Therefore, regardless of rhetoric, the United States does not want to see Assad removed, not because it wants to save him, but because IS is now the priority. Turkey has demanded that the U.S. act with it against Assad, but that is not going to happen now. Second, the Russian intervention to protect the Assad regime — which incidentally saves the U.S. from trying to justify protecting Assad when it has historically opposed him — would put Turkey and Russia on opposing sides. Opposing both the Americans and Russians on its own border is inherently dangerous.

We do not think the Turks want to deal with IS. But we also do not think the Turks will have a choice. They must engage IS, which is evolving in directions Ankara did not anticipate. The U.S. has enough air power in place to impose a cost on IS and conduct limited operations with the Kurds. The Russians have enough force to protect Assad and conduct limited operations against Assad’s enemies. But neither will insert enough force to defeat IS and the group has shown it can endure limited pressure, while striking back as it has in Paris, Lebanon and Sharm el-Sheikh. It has also struck Turkey. There is a reason for these strikes. After the rage dies down, the desire to engage IS will also decline, or so the Islamic State hopes.

For Turkey, this is a strategic problem. First, the fighting along its border could spill over not only as terrorism but as loss of territory. Second, Turkey is facing Russian and American demands for involvement. Given Turkish dependence on Russian energy and its ultimate strategic dependence on the U.S., resisting both of these countries will be impossible. The process of engaging IS will not be a sudden overwhelming move into Syria, however, we expect a slow but steady increase in Turkish operations. Turkey is constrained by its limited capabilities and risk aversion, but simultaneously it has an imperative to push the fighting away from its borders. Turkey has resisted this imperative for the most part, but 2016 will be the year when its imperatives overcome its constraints. And once it crosses the border with ground forces, as Turkey knows well, it will find it extremely difficult to return to its prior stance.

Conclusions

Turkey’s engagement with Islamic State will be the key event in the coming year in the Middle East, not only because it addresses IS, but also because it will mark the emergence of Turkey as a regional power. Israel will continue to live in low level violence without changing its strategy, Saudi Arabia will continue to test its strength without taking undue risks, and North Africa will continue to seethe without dramatic change. We also expect to see an expansion of IS’ operations in the Middle East and beyond the Arab world, into parts of Africa and Asia. IS has set the agenda for 2016 and the manner in which Turkey changes its posture will be a defining shift.

Peripheral Regions

When we speak of the periphery, we do not necessarily mean the less important. We mean regions that are not driving the international system at the moment. Countries not on the Eurasian land mass or in North America are not at this moment defining what will be happening to the global system in 2016. Nor are they under the overwhelming constraints of the rest of the system. However, there is some room for maneuver and, in the end, they remain part of the global structure on which this forecast is focused.

Shift Towards Center-Right Politics in Latin America

Latin America will continue to endure and confront the negative financial impacts brought on by simultaneous slowing Chinese demand, a stronger American dollar, economic reliance on raw materials exports and low commodity prices. Members of the Pacific Alliance – Chile, Colombia, Mexico and Peru – will be able to weather a year of slow growth with their open market policies, financial resources and other political tools. This will be particularly true for Mexico, which enjoys NAFTA trade privileges and is home for many European and Asian companies wanting access to both North American and Latin American markets.

At the same time, the region’s major left-leaning economies – namely Argentina and Brazil, which are part of the Mercosur bloc – have particularly struggled to deal with the economic slowdown. They have the added challenges posed by distorted domestic markets and prices and unsustainable social spending programs that have been in place for over a decade. In 2016, these governments will start gradual political and economic reforms towards more center-right policies, such as opening up trade, providing incentives to attract investment, simplifying currency and tax systems and gradually reigning in public spending.

This shift in policy primarily stems from the need to address economic and fiscal problems facing these economies. The governments of both Argentina and Brazil currently find themselves under heavy political and social pressure to take measures that will help stabilize their economies and stimulate growth. The more political capital a government has, the faster it will be able to usher in the needed reforms. These reforms will be put in place throughout the year and some results should be visible by the end of 2016. Others related to more macro, long-term issues will not show results until 2017 or later.

While the governments will adopt these measures for internal reasons, the reforms will also produce the secondary effect of making these countries more attractive destinations for foreign direct investment – a trend already visible across much of Latin America. For the past three years, the region has steadily captured 12.5-13 percent of global FDI inflows. In addition, as mentioned earlier, the Western Hemisphere will remain relatively more stable than the rest of the world. This includes Latin America where, although there are problems, the geopolitical status quo is considerably less volatile and chaotic than other places in the world. Therefore, in part by default, the region will become more attractive for FDI. Additionally, there are already some very business-friendly, open market economies in the region, such as Panama, and groups that encourage trade, including the Pacific Alliance.

However, the region will have one major outlier in 2016 – Venezuela. The country is an outlier due to the extreme, and often volatile, economic and political turmoil it faces. This plight will continue into next year. President Nicolas Maduro has never enjoyed strong levels of popular support and has repeatedly held off making structural reforms in the economy. The National Assembly elections to be held on Dec. 6 will give the electorate the opportunity to challenge and possibly replace the ruling PSUV party’s majority in the legislature with opposition party members. Even if the opposition gains seats in the legislature, the end result will most likely be a government in gridlock, given the opposition will be faced with the dual challenge of confronting Maduro and maintaining unity in the opposition coalition.

Overall, 2016 will not be a breakout year, but it will be a year of redefinition, setting the stage for a potential future breakout. Our view of Latin America is moderately positive in the sense that, except for Venezuela, the region’s politics are reasonably stable. The extreme populist movements have significantly lost their momentum and are starting to subside throughout the region. The populist policies that came with this movement have dominated the governments of Venezuela, Argentina, Brazil, Ecuador, Nicaragua and Bolivia for over a decade. Without a huge, prolonged spike in commodity prices or the immediate appearance of a Chavez-like leader – both of which seem unlikely – these countries will be forced to shift their policies to accommodate their new economic realities. Such shifts will include initial measures to make these economies more attractive to foreign investment. While wary due to such a prolonged period of populist policies, investors should be slowly won over by these changes. The key to keep in mind is that the changes will not take place overnight but rather begin slowly and continue gradually – hence 2016 not being a breakout year. Too large a shift too fast would cause economic shocks to these countries and would be counter-productive.

Mixed Outlook for Sub-Saharan Africa

Sub-Saharan Africa’s outlook is bleaker than Latin America but not without some progress. Favorable commodity prices in the early 2000s, traditional investment sources such as the UK and U.S., along with the introduction of new major investors like China, have helped these economies gain momentum. However, China’s slowing economy and the recent drop in commodity prices now threaten growth in some African countries. Oil giants Nigeria and Angola have taken financial blows this year and last due to lower oil prices. Nigeria’s oil and gas sector accounts for about 35 percent of GDP, which has dropped from 7 percent growth in 2013 to an estimated 5 percent in 2015. Oil production and related activities account for about 45 percent of Angola’s GDP, whose growth was 6.8 percent in 2013 and dropped to an estimated 3.8 percent in 2015. Oil and petrol exports account for 90-95 percent of exports in both countries.

Other commodity prices that have tanked in the last year include gold, iron ore, platinum and copper. Production of these materials figure prominently in the GDP of South Africa, the Democratic Republic of Congo (DRC), Zimbabwe, Zambia and Mozambique. The economic woes for countries like Zambia, the DRC and Angola are further exacerbated by China’s slowing economy. Exports account for 39 percent of Zambia’s GDP and China is Zambia’s second largest trade partner, a relationship that is based almost exclusively on copper. In the case of Angola and the DRC, China is their leading trade partner, accounting for nearly 50 percent of exports from each country.

However, one can find a bright spot in sub-Sahara Africa’s economy in East African countries, including Ethiopia, Kenya and Tanzania. These three rank as the fourth, fifth and sixth largest economies in sub-Sahara Africa, behind Nigeria, South Africa and Angola. Ethiopia has managed to average a 10 percent growth rate for a decade. Tanzania’s growth rate has been relatively steady near 7 percent over the past few years, while Kenya has regularly grown at 5-6 percent. In addition to high growth, these countries have large, low-wage working populations. The combination of these two factors makes these countries attractive and promising locations for a basic manufacturing industry.

We have focused on the economic rather than the political situation in sub-Saharan Africa because, although there may be particular shifts in the political situation, we see no general transformation likely to take place in 2016. On the one hand, the decline of commodity prices makes the internal political battles less high-stake. On the other hand, the decline in prices will create social and political pressures, as there will be less revenue available for the state to distribute. However, we do not see any fundamental political shift arising from this.

Australia’s Dependency on Exports

Australia is definitely part of the First World, but we treat it in this section because it is an outlier due to both its geography and its heavy dependence on the export of industrial commodities. In a sense, Australia has two economies. One is a service or technology economy similar to those in any advanced industrial society. The other is a mineral economy that serves emerging economies, such as China and India. Given that Australia’s mineral economy has been dependent on demand from the main emerging economies, including Japan in the 1980s and China now, the cyclical maturation of these economies leaves Australia off balance, as there is a tendency to overestimate the long-term possibilities. At the same time, Australia will continue to sell as many commodities for as long as it can, and it will not change its behavior even if excessive exuberance is eliminated.

As we have said, we regard the decline in commodity prices to be driven by the decline of China’s appetite for minerals, which is in turn driven by the deep weakness of the European economy and the insularity of the American economy. China will not return to its old high-growth period any more than Japan did. Therefore, until demand increases in the European and American markets for low-priced commodities, and other regions of the world reach a level of economic development that allows them to satisfy these needs, the demand for commodities will not return. In the case of oil, which is not directly critical to Australia, this is compounded by excessive production. In the case of coal, iron ore and other industrial minerals, we expect more rapid recovery, but not until Europe solves its structural problems, and certainly not until after 2016.

At the same time, Australia will continue to depend on its export markets, however large they are. Australia is like a creature whose circulatory system is located outside its body. Regardless of declines in prices, it lives as an international trader and its network of international trade is beyond the capacity of its navy to protect. It has chosen a strategy of aligning with the major global trading partners, once Britain and now the United States, and it is willing to support military adventures for guarantees of its maritime interest. Although Australia has moved away from this approach on occasion, this is at the core of the country’s strategy. It will certainly be the core in 2016.

Conclusions

Next year will be a year of mixed results in countries on the periphery of the global system. In Latin America, a shift will emerge in some countries towards center-right policies. This region has been known for producing left-leaning governments, therefore, the move towards open market systems will help Latin America attract foreign investment. In sub-Saharan Africa, China’s slowing economic growth, as well as declining commodity prices, will take a toll on some African countries. Amidst the negative outlook, however, there is a sign of hope in East Africa, particularly in Ethiopia, Kenya and Tanzania, all of which have shown high growth. As for Australia, we foresee no change in its heavy reliance on the export market. Although global demand for exports has waned, Australia is unable to make significant changes to its export-oriented economy.