Recently, we have seen startling rises in the price of food, particularly grains. Apart from higher prices, there have been disruptions in the availability of food as governments limit food exports and as hoarding increases in anticipation of even higher prices.

Oil and food differ from other commodities in that they are indispensable for the functioning of society. Food obviously is the more immediately essential. Food shortages can trigger social and political instability with startling swiftness. It does not take long to starve to death. Oil has a less-immediate — but perhaps broader — impact. Everything, including growing and marketing food, depends on energy; and oil is the world’s primary source of energy, particularly in transportation. Oil and grains — where the shortages hit hardest — are not merely strategic commodities. They are geopolitical commodities. All nations require them, and a shift in the price or availability of either triggers shifts in relationships within and among nations.

It is not altogether clear to us why oil and grains have behaved as they have. The question for us is what impact this generalized rise in commodity prices — particularly energy and food — will have on the international system. We understand that it is possible that the price of both will plunge. There is certainly a speculative element in both. Nevertheless, based on the realities of supply conditions, we do not expect the price of either to fall to levels that existed in 2003. We will proceed in this analysis on the assumption that these prices will fluctuate, but that they will remain dramatically higher than prices were from the 1980s to the mid-2000s.

If that assumption is true and we continue to see elevated commodity prices, perhaps rising substantially higher than they are now, then it seems to us that we have entered a new geopolitical era. Since the end of World War II, we have lived in three geopolitical regimes, broadly understood:

• The Cold War between the United States and the Soviet Union, in which the focus was on the military balance between those two countries, particularly on the nuclear balance. During this period, all countries, in some way or another, defined their behavior in terms of the U.S.-Soviet competition.
• The period from the fall of the Berlin Wall until 9/11, when the primary focus of the world was on economic development. This was the period in which former communist countries redefined themselves, East and Southeast Asian economies surged and collapsed, and China grew dramatically. It was a period in which politico-military power was secondary and economic power primary.
• The period from 9/11 until today that has been defined in terms of the increasing complexity of the U.S.-jihadist war — a reality that supplanted the second phase and redefined the international system dramatically.

With the U.S.-jihadist war in either a stalemate or a long-term evolution, its impact on the international system is diminishing. First, it has lost its dynamism. The conflict is no longer drawing other countries into it. Second, it is becoming an endemic reality rather than an urgent crisis. The international system has accommodated itself to the conflict, and its claims on that system are lessening.

The surge in commodity prices — particularly oil — has superseded the U.S.-jihadist war, much as the war superseded the period in which economic issues dominated the global system. This does not mean that the U.S.-jihadist war will not continue to rage, any more than 9/11 abolished economic issues. Rather, it means that a new dynamic has inserted itself into the international system and is in the process of transforming it.

It is a cliche that money and power are linked. It is nevertheless true. Economic power creates political and military power, just as political and military power can create economic power. The rise in the price of oil is triggering shifts in economic power that are in turn creating changes in the international order. This was not apparent until now because of three reasons. First, oil prices had not risen to the level where they had geopolitical impact. The system was ignoring higher prices. Second, they had not been joined in crisis condition by grain prices. Third, the permanence of higher prices had not been clear. When $70-a-barrel oil seemed impermanent, and likely to fall below $50, oil was viewed very differently than it was at $130, where a decline to $100 would be dramatic and a fall to $70 beyond the calculation of most. As oil passed $120 a barrel, the international system, in our view, started to reshape itself in what will be a long-term process.

Obviously, the winners in this game are those who export oil, and the losers are those who import it. The victory is not only economic but political as well. The ability to control where exports go and where they don’t go transforms into political power. The ability to export in a seller’s market not only increases wealth but also increases the ability to coerce, if that is desired.

The game is somewhat more complex than this. The real winners are countries that can export and generate cash in excess of what they need domestically. So countries such as Venezuela, Indonesia and Nigeria might benefit from higher prices, but they absorb all the wealth that is transferred to them. Countries such as Saudi Arabia do not need to use so much of their wealth for domestic needs. They control huge and increasing pools of cash that they can use for everything from achieving domestic political stability to influencing regional governments and the global economic system. Indeed, the entire Arabian Peninsula is in this position.

The big losers are countries that not only have to import oil but also are heavily industrialized relative to their economy. Countries in which service makes up a larger sector than manufacturing obviously use less oil for critical economic functions than do countries that are heavily manufacturing-oriented. Certainly, consumers in countries such as the United States are hurt by rising prices. And these countries’ economies might slow. But higher oil prices simply do not have the same impact that they do on countries that both are primarily manufacturing-oriented and have a consumer base driving cars.

“Asia will not be immune to the global slowdown, neither will it be hostage to it. It remains tied to global activity through traditional trade channels, and increasingly, through its closer integration in international financial markets,” says ADB Chief Economist Ifzal Ali.

Despite government controls, the ADB predicts that inflation will spike to 5.1% in 2008 – possibly hitting a decade-long high – before cooling to 4.6% in 2009. Prices will be highest in central Asia, where inflation will remain in the double digits. China is the country most at risk, as inflation is running at an 11-year high. But economic growth in neighboring countries, such as Vietnam, is also at risk.

The report urges policymakers to tackle the problem at its root.

“For some economies, this may mean a more flexible exchange rate, while in others it may need a scrutiny of fiscal spending and priorities and, in some cases, targeted measures may be warranted to ease supply pressures that are piling on to cost pressures,” the report said.

In an interview with Reuters, Ali took on a stronger tone.

“If this genie gets out of the bottle and inflation becomes ingrained, it could bring the growth process to a grinding halt,” Ali said.

Decelerating Growth

The ADB said that growth in India and China is expected to moderate as their governments tighten policies to control inflation and accommodate “blistering” demand.

India’s economy is expected to expand by 8% and China’s is expected to grow 10%. The slowdowns in the United States, Europe and Japan will hurt China more because it’s more reliant on foreign trade.

East Asia is expected to slow from 9.3% in 2007 to 8.1% in 2008. Southeast Asia will slow from 6.5% last year to 5.7% – among the region’s countries, only Thailand is expected to post higher growth.

Growth in Central Asia is expected to decelerate sharply from double digits last year to 7.5% in 2008 because of weaker expansion in the region’s largest economy, Kazakhstan.

In the Pacific Islands – from Papua New Guinea to Fiji – growth is expected to rebound in 2008.

However, all of the developing Asian countries, collectively and individually, face the task of integrating into the global economy, sharing growth, creating conducive business and investment climates and maintaining macroeconomic stability, Ali said.

“Looking beyond the immediate bumps in the road, Asia’s long-term growth prospects will depend on how successfully countries tackle” those structural constraints facing them, says Mr. Ali.

Headquartered in Manila and financed by 67 countries, the ADB fights poverty with low-interest loans, grants, private sector investments and research about the region that is home to two-thirds of the world’s poor.