Library/CFA (Chartered Financial Analyst)/ECONOMICS: CFA® Program Curriculum 2026 • LEVEL I • VOLUME 2/Learning Module 5 Introduction to Geopolitics

Learning Module 5 Introduction to Geopolitics

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Introduction and Actors5 min

Introduction: Geopolitics studies how geography affects politics and international relations, focusing on actors (state and non-state) and their interactions. State actors (governments, political institutions) and non-state actors (NGOs, multinational firms, influential individuals) shape cooperation and conflict. Cooperation is defined by rules standardization, tariff harmonization, free movement, reciprocation, and technology exchange; non-cooperation by inconsistent rules, retaliation, and restricted flows. National interests (security, economic, cultural) form a hierarchy guiding state choices. Geographic factors (landlocked status, trade-route position) and resource endowment affect incentives to cooperate. Institutions (rule of law, property rights) increase cooperation durability.

Key Points

State and non-state actors jointly shape international relations.
Political cooperation centers on rules standardization and reciprocity.
A country's resource endowment and geography influence its incentives.

Globalization: Forces, Benefits, and Costs6 min

Globalization: Globalization is economic and financial cooperation across borders—trade in goods/services, capital flows, currency exchange, and cultural/information exchange—mostly driven by non-state actors. Motivations include increasing profits (expand sales, reduce costs), access to resources and markets, and intrinsic gains (knowledge, cultural exchange). Benefits: specialization, economies of scale, product variety, competition, efficiency, productivity spillovers. Costs: unequal gains, supply-chain interdependence, environmental/social externalities, political backlash. Trade interruptions (e.g., COVID-19 semiconductor shortages) illustrate vulnerabilities and prompt tactics such as reshoring, reglobalizing production, or doubling down on key markets.

Key Points

Globalization is primarily driven by firms and individuals seeking profits and resources.
Trade brings aggregate gains but can impose concentrated costs and inequality.
Supply-chain disruptions highlight interdependence and the need for resilience strategies.

International Institutions (IMF, World Bank, WTO)4 min

International Trade Organizations: Postwar institutions (IMF, World Bank, WTO/GATT) structure global cooperation. IMF stabilizes the international monetary system and provides conditional lending and surveillance. World Bank finances development, capacity building, and infrastructure; IBRD and IDA provide concessional loans. WTO (successor to GATT) provides rules, dispute settlement, and trade negotiation fora.

Key Points

IMF focuses on exchange rate stability, surveillance, and conditional lending.
World Bank provides development finance and technical assistance.
WTO establishes trade rules and dispute settlement among members.

Archetypes of Country Behavior5 min

Assessing Geopolitical Actors and Risk: A two-axis framework (cooperation vs. non-cooperation and globalization vs. nationalism) yields four archetypes—autarky, hegemony, multilateralism, bilateralism—each with different trade-offs and vulnerabilities. Autarky: self-sufficiency, state control, limited trade. Hegemony: dominant power controls rules and resources; may coerce or stabilize. Multilateralism: integrated markets and rule harmonization (e.g., EU, Singapore); benefits but heightened exposure to shocks. Bilateralism/regionalism: one-on-one agreements or regional blocs with tailored rules.

Key Points

Four archetypes (autarky, hegemony, multilateralism, bilateralism) help classify country strategies.
More integration often increases exposure to external shocks while increasing benefits.
Movement among archetypes signals changing geopolitical risk.

Tools of Geopolitics5 min

Tools of Geopolitics: Three categories—national security tools (armed conflict, alliances, espionage), economic tools (tariffs, nationalization, trade agreements), and financial tools (sanctions, capital controls, currency regimes). Tools can be cooperative (common markets, free exchange) or non-cooperative (export controls, nationalization, sanctions). Multifaceted strategies and international organizations (e.g., ASEAN, EU) can combine tools to deter conflict and deepen ties.

Key Points

National security, economic, and financial tools are the main policy instruments.
Tools can be used cooperatively (integration) or non-cooperatively (sanctions).
Combined tools and institutions reduce the chance of direct conflict among members.

Geopolitical Risk, Assessment, and Scenarios6 min

Geopolitical Risk Types and Assessment: Event risk builds around known dates (elections, referenda); exogenous risk is sudden and unanticipated (natural disasters, invasions); thematic risk evolves over time (climate change, cyber threats). Investors assess each risk by likelihood, velocity (speed), and size/nature of impact. Scenario analysis and signposting (early indicators) help prepare responses. Geopolitical Risk and Investment Process: Geopolitical shocks affect macro variables (growth, interest rates, volatility), asset allocation, sector selection, and firm-level valuations. High-velocity risks typically cause immediate market volatility; low-velocity risks can alter long-term cash flows and required returns. Investors use top-down allocation, scenario analysis, hedging, and signposts to manage exposures.

Key Points

Classify risks as event, exogenous, or thematic for assessment.
Evaluate risks by likelihood, velocity, and impact size and nature.
Scenario analysis and signposts enable timely portfolio actions and hedges.

Policy Interactions and Investment Implications5 min

Policy Responses and Trade/Capital Regimes: Exchange-rate targeting, inflation targeting, and central bank independence affect how political choices translate into market outcomes; similarly, capital controls, dollarization, and monetary unions are tools states use to shape financial interactions. Geopolitical developments shape required returns, risk premia, and capital allocation choices. Investors must translate geopolitical analysis into asset allocation, sector tilts, and individual security selection while recognizing that highly integrated markets can transmit shocks rapidly across regions.

Key Points

Monetary frameworks and exchange regimes shape country vulnerabilities and policy space.
Capital controls may provide short-term relief but can reduce long-term investor confidence.
Investors must integrate geopolitical views into top-down and bottom-up portfolio decisions.

Questions

Question 1

Which of the following best describes a 'state actor' as used in Learning Module 5?

Learning Module 5 Introduction to Geopolitics

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