Publisher’s Note

The Path to Minimizing Geopolitical Risks
By Masakazu Toyoda
The cover story of this year's White Paper on International
Economy and Trade prepared by METI is, unsurprisingly, theimpact of Russia’s aggression in Ukraine. Until last year, “risinggeopolitical risks” in general terms were considered as only one
among about four major trends (the others being “digitaltransformation”, “emphasis on common values” such as climatechange, and “shifts in government industrial policy”). The
geopolitical risks quickly moved to the top of the list.
Why are geopolitical risks rising? What are the implications?
What should be done in the future?
Although the White Paper itself does not analyze the causes of
the Ukrainian crisis, the consensus among experts seems to bethat they reflect the contradictions inherent in an authoritarianstate. What are those contradictions?
First, criticism of the regime is not allowed. Opposition parties
are not nurtured, and the media are controlled by various means
to restrict criticism of the regime. Second, the provision ofinformation is controlled. Only information that is favorable tothe regime is disseminated in such a way that the public mindset
is gradually manipulated to suit the regime. Social media, which
can be an important means of control, are allowed only if
considered useful to the regime.
Third, as criticisms of the regime become scarce, the leaders
are surrounded by nothing but “yes-men”. Before long, the world,
as seen by the regime, becomes detached from reality. With
statements such as “Ukraine is invaded by neo-Nazis and must beliberated”, ”NATO’s expansion is a threat to Russia” or “Ukraineis a threat”, Russia is failing to understand that it is itself a threat
to the world. The method of defending the regime determines thepath it will take and the current crisis in Ukraine is a typicalexample of this process. Unfortunately, the resulting economic
sanctions will severely impede the development of the global
economy.
The White Paper on International Economy and Trade presents
the IMF’s latest economic outlook for 2022. Relative to previous
estimates, the world economy in 2022 will decline by 0.8% to3.6%. The Russian economy will be negatively affected by morethan 10%, from a growth of 2.8% to a negative growth of 8.5%.
For Ukraine it is even worse. In addition to the loss of civilian
lives and a destroyed infrastructure, the Ukrainian economy isprojected to drop by nearly 40%, from a previously anticipatedgrowth of 3.6% to minus 35%. Is this really what the Russian
administration has set out to achieve?
Democracies, however, also suffer from many contradictions
and social divisions. In the United States, for example, the gap
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between the rich and the poor is widening, while the middle classis shrinking. As the rich and the poor seek different policies, themagnitude of the differences in positions on globalization andclimate change is astonishing. Moreover, a president’s own
refusal to recognize the results of an election could lead to adenial of democracy itself. Europe is facing a similar situation as
the spread of social media appears to be fueling widening social
divisions between the right and the left. Japan is no exception interms of social fragmentation. The major ruling party, the Liberal
Democratic Party (LDP), has rarely won a majority in the Upper
House, in particular over the past 10 years. But in the House ofCouncilors election held on July 10 this year, the LDP secured
slightly more than 50%, some 63 seats out of the 125 seats up forgrabs. It was the first time in eight years it had reached the60-seat level.
So what can be done about these differences between
democratic and authoritarian regimes?
In the first place, we should assess if the division between
democracy and authoritarianism is appropriate and classify
regimes according to whether they are rules-oriented or not. Eachcountry’s social system has evolved and been built up based on
its own history, national characteristics, and geographicaltensions. Both democracy and authoritarianism present their own
sets of problems.
In the midst of geopolitical uncertainties, it is very important
to coexist peacefully, respect international rules and avoid
needless confrontations, let alone needless wars. A natural
strategy for companies to avoid risk and make long supply chainsstrong and flexible is to decentralize manufacturing bases andsuppliers. Governments need to dig much further than simply
decentralizing supply chains. They need to adhere to internationalrules to overcome the differences in social regimes and must
recognize the different directions in which countries are heading.
In areas where international rules are inadequate or insufficient, it
is important to speed up the process of rule-making itself.
The cover story of the White Paper sends a clear message about
the dire consequences of downplaying geopolitical risks.
Governments should find ways to minimize geopolitical risks
themselves by adhering to international rules.
Some say “Today’s Ukraine is tomorrow’s Asia.” Those of us
living in Asia need to keep this in mind.
Masakazu Toyoda is chairman and CEO of the Japan Economic Foundation(JEF). He previously served as chairman and CEO of the Institute of Energy
Economics, Japan, after having been vice minister for International Affairs at theMinistry of Economy, Trade and Industry.
Japan SPOTLIGHT • September / October 20221