Library/CFA (Chartered Financial Analyst)/JuiceNotes 2024: Economics (CFA Level I)/Introduction to Geopolitics

Introduction to Geopolitics

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Actors and Motivations in Geopolitics5 min

Geopolitics analyzes the interaction between state actors, who control national security, and non-state actors, who participate in global affairs without such control. Cooperation between these entities is driven by the need for national security, economic stability, and access to geophysical resources. Uneven resource distribution creates power dynamics where resource-rich nations may wield leverage over dependent ones. Standardization of rules and soft power serve as non-coercive means to foster international collaboration.

Key Points

State actors control national security; non-state actors do not.
Motivations for cooperation include military security and economic interests.
Geophysical resource endowments create interdependence and power imbalances.
Soft power influences decisions through culture and shared values.

Institutions and Hierarchy of Interests5 min

Institutions, whether formal laws or informal customs, provide stability and enhance the durability of cooperative relationships. National interests follow a hierarchy, typically prioritizing survival and self-determination above other goals. However, this hierarchy is subjective and influenced by political cycles, where short-term goals may overshadow long-term risks. The psychology of decision-makers introduces unpredictability into geopolitical relationships.

Key Points

Strong institutions increase government accountability and stability.
National interests are hierarchical, with survival at the top.
Political cycles can lead to short-termism in policy making.
Decision-maker psychology adds non-predictability to geopolitics.

Globalization: Drivers, Costs, and Counter-Movements6 min

Globalization is driven by the pursuit of profit through increased sales and reduced costs, access to resources, and intrinsic gains. However, it brings costs such as unequal economic distribution, potential lowering of standards, and risks associated with interdependence. Nationalism and anti-globalization movements focus on domestic interests, often restricting cross-border activities. Companies respond to de-globalization threats by reinforcing supply chains through reshoring and localization strategies.

Key Points

Globalization aims for profit maximization and resource access.
Costs include inequality and supply chain vulnerability.
Nationalism restricts cross-border flows to protect local interests.
Supply chain fortification involves reshoring and redundant production.

Country Archetypes and Geopolitical Tools5 min

Countries are categorized based on their orientation toward cooperation and globalization. The four archetypes are Hegemony, Multilateralism, Autarky, and Bilateralism. International organizations like the IMF and WTO facilitate multilateral cooperation. Geopolitical tools—national security, economic, and financial—are used to enforce stances. Specific mechanisms like nationalization of industries or restrictions on cabotage illustrate how these tools are applied in practice.

Key Points

Archetypes: Hegemony, Multilateralism, Autarky, Bilateralism.
IMF and WTO serve as pillars for international trade and finance.
Tools include armed conflict (security) and sanctions (financial).
Nationalization transfers control from private to state hands.

Geopolitical Risk Assessment5 min

Geopolitical risks are classified into three types: Event risk (known dates), Exogenous risk (sudden shocks), and Thematic risk (evolving trends). Assessment involves evaluating the likelihood, velocity, and impact of these risks. High-velocity risks cause immediate market volatility, while long-term risks affect asset allocation. Investors use scenario analysis and signposts to navigate these uncertainties and adjust portfolios accordingly.

Key Points

Risk types: Event (elections), Exogenous (disasters), Thematic (climate change).
Assessment metrics: Likelihood, Velocity, and Impact.
Impacts can be discrete (company-specific) or broad (market-wide).
Scenario analysis helps investors prepare for non-linear risk development.

Questions

Question 1

Which of the following best defines state actors in the context of geopolitics?

Introduction to Geopolitics

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