Fighting in the Gaza Strip between Hamas and Israel continues to escalate and the humanitarian crisis continues to worsen especially as hospitals and other civilian infrastructure have become stages for the conflict. This week, we assess the possibility of a two-state solution and the global consequences of the war. Later on in our newsletter, we take a look at the humanitarian crisis and growing military conflict in the Democratic Republic of the Congo (DRC). Also this week, we cover some of the factors shifting the global economy towards a decline in GDP growth.

The Middle East’s Day After

Another Step Toward International War

Ray Dalio, Principled Perspectives

Is a two-state solution possible after the Gaza war?

The Economist

As we have covered in this newsletter over the last several weeks, the Israel/Hamas war playing out in Gaza has developed into a humanitarian crisis, with potential spillover effects for both the region and abroad. What can be done to halt this calamity? The world is looking to past proposals for answers: President Biden, as well as the Arab League, have both called for serious steps towards a two-state solution. This may sound far-fetched, as both military and political leaders in Israel expect months of fighting, and the last two decades of talks towards such a solution have been grounded since 2014. But there will be a “day after” in Gaza. Then, if Israel transfers authority over the strip to the Palestinian Authority (which many in the international community hope for), it may engender an environment where serious negotiations may recommence. The idea of the two-state solution has looked the same for decades: Palestine would, as a sovereign country, control Gaza and the West Bank; Israel would give territory in return for acquiring settlements it built in the West Bank; and Jerusalem would have some sort of joint control.

But the world has changed, including the situation in the Holy Land. The world is more volatile, with renewed great power competition between the US, Russia, and China, and Iran is close to nuclear breakout. On the ground, Israel has vastly expanded its settlements in the West Bank to the detriment of the Palestinians. Non-state actors supported by Iran in the region threaten any lasting peace between Israel and its Arab neighbors. Most importantly, there is no political will for such a peace from either side at the moment. Israel’s Prime Minister Benjamin Netanyahu leads the country’s most extreme right-wing government ever. Hamas, for its part, is a radical Islamist group that has spoiled past attempts at peace. And who would mediate it? China nor Russia have neither the leverage or credibility, and President Biden faces an election next year. While a two-state solution may be the only way to change the course of the Middle East, its prospects are poor as of late.

Israel and a Crumbling World Order

I Have Never Been to This Israel Before

Thomas L. Friedman, The New York Times

From Gaza to Ukraine, wars and crises are piling up

The Economist

The Global Consequences of the Israel-Hamas War

Mark Leonard, Project Syndicate

The outbreak of war between Israel and Gaza has created significant risk for Israel and further exacerbated an international order that was already increasingly under duress. For Israel itself, that stress poses an existential threat, as zealots threaten not just from Hamas in Gaza, but also from Hezbollah in Lebanon, backed by Iran. The failure of Netanyahu’s regime to develop a solution to the Palestinian question and instead exacerbate it through settlements in Palestine and the development of a Jewish supremacist state certainly has laid the groundwork for the conflict today. In response, Israel has launched an all-out assault that has alienated large parts of the world, especially in the Middle East, while bringing to the surface tensions in Europe as well, where large numbers of Muslims live.

Still, Israel is not alone in the conflict. US support has provided Israel the blanket it needs to conduct its operations, creating the grounds for charges of hypocrisy over a perceived double standard with Israeli actions in Gaza being compared to Russian actions in Ukraine, with only the Russian case receiving significant criticism. China and Russia have both capitalized, weakening the US position diplomatically, as both countries are making use of US distraction in the Middle East to forward their aims in Taiwan and Ukraine, respectively. Ultimately, it is not clear that America will maintain the bandwidth to manage all of these potential conflicts, making 2023 a highly tumultuous year, with the potential for more to come.

World Economy Shifts

These Five Countries Are Key Economic ‘Connectors’ in a Fragmenting World

Enda Curran, Shawn Donnan, Maeva Cousin, Nguyen Dieu Tu Uyen, Quynh Nguyen, Maciej Martewicz, Maya Averbuch, Brendan Murray, Annie Lee, Grace Sihombing, & Claire Jiao, Bloomberg

The coming battle between world leaders and bond vigilantes

Ruchir Sharma, Financial Times

The world economy is shifting and GDP is in the crosshairs. For instance, as supply chains shift to accommodate “de-risking” between China and other countries, globalized connections are actually maintained through “connector” countries – such as Vietnam, Mexico, and Morocco – where China, America, and European countries do business through an intermediary. For example, in the case of Mexico, China has broadened its business investment significantly to get around tariffs imposed against it under the Trump administration, while benefitting from provisions within the USMCA trade agreement via trade between the US and Mexico. In that way, the US and China are continuing to do business, but indirectly. The resulting inefficiencies are expected to reduce GDP growth overall.

Government deficits are likewise expected to drag down GDP, especially as many countries enter election season. Rather than working to ameliorate that issue, however, the expectation is for greater government disbursals as incumbents seek to improve their numbers given they are seeing, on average, poll ratings below the watermark. Such a strategy bears significant risk in the bond market, as evinced by bond vigilantes selling off bonds in the UK, Turkey, and Brazil, which prompted greater fiscal prudence in the end. Still, the US has shown no sign of getting the message. As its debt rate reaches the highest of any developed country at 6% of GDP, the expectation continues to be that US bonds will always be in demand. It remains to be seen whether that is the case, or if significant pain in the bond market is to come.

The Tragedy Playing Out in the DRC

Kamage’s Revenge

Michela Wrong, Foreign Affairs

A record 6.9 million people are internally displaced in DR Congo, says UN

France 24

Conflict in the Democratic Republic of Congo

Council on Foreign Relations

A new UN report estimated that rising violence in the resource-rich eastern provinces of the Democratic Republic of Congo has driven the number of internally displaced people to a record 6.9 million. Violence between the M23 rebel group and Congolese militias has intensified, driving citizens out of their homes and drastically increasing the need for humanitarian aid. UN peacekeepers, which have been present in the DRC since 1999 and have an annual budget of $1 billion, have become deeply unpopular due to their perceived failure to halt the conflict. The government in Kinshasa has asked the force to leave as a highly contested election in December looms.

Conflict in the eastern DRC has led to six million deaths since 1996. What continues to drive it? The DRC’s tiny eastern neighbor, Rwanda, is the primary culprit. Paul Kagame, who has led the small, landlocked state since winning the Rwandan civil war in the mid-90s, has continuously destabilized his country’s western neighbor ever since. Kagame, an ethnic Tutsi, claims that exiled Hutus (the ethnic group formerly in control of Rwanda that partook in the Rwandan genocide against the Tutsis) lead a militia called the FDLR in the eastern DRC – a militia that threatens both Rwanda’s security and the lives of ethnic Tutsis living in the DRC. Kagame uses the M23 group as a proxy force to assert his dominance over the region’s politics. Western donors, who have the power to hold Kagame’s feet to the fire by cutting off aid, are dithering. The cause of this is twofold: the lingering guilt for their late response to Rwanda’s genocide, and their current use of Rwanda. France appreciates Rwanda’s position as a regional military power, which helps police former French colonial subjects in Africa. The UK government is attempting to get a deal out of its courts to ship asylum seekers to Rwanda instead of hosting them itself. The United States seems to be the only country willing to offer substantial criticism, albeit not enough to change the situation on the ground. In time, the West will regret this – it conjures uncomfortable parallels to the West’s ignoring of the Rwandan genocide which is one of the seeds of the current humanitarian catastrophe.