Global Cooperation

Is this a pivotal moment for the rise of the 'middle powers'?

A full container ship out at sea, illustrating how middle powers could benefit from global trade

Middle powers are looking to benefit from shifts in global trade and geopolitics. Image: Photo by Ian Taylor on Unsplash

Alejo Czerwonko
Chief Investment Officer, Emerging Markets, Americas, UBS AG
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Global Cooperation

  • Global trade, supply chains and security alliances are all shifting to deal with geopolitical changes.
  • 'Middle powers' and 'geopolitical swing states' are looking to leverage their positions to take advantage of this.
  • Global investors are watching how these manoeuvres are playing out.

The global geopolitical map is experiencing its deepest reconfiguration in decades. Global trade is being rerouted, supply chains are being redesigned and new security alliances are being forged. All of this is happening as the world is being forced to acknowledge the need to accelerate the energy transition and harness the power of artificial intelligence.

Some countries have more to gain than others in this quickly evolving order — if they play their cards right. What they have in common is an opportunity to leverage their spot in a multipolar world as 'middle powers' and 'geopolitical swing states' — terms that describe countries that are using their ability to avoid picking sides to their advantage, ultimately to pursue their domestic interests with flexibility.


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India: The quintessential middle power

India is a good example. The country can enjoy a red-carpet reception at the White House one day, then later sit at the same table with China at a summit of the BRICS grouping of emergent economic powers. It may be argued that this self-assurance has contributed to India’s ability to attract investment interest from many of the world’s most powerful multinational companies.

The country seems keenly aware of some of its limitations, however, and is working on overcoming them. A priority of Prime Minister Narendra Modi’s administration — in power for 10 years and seeking a third five-year term during this year’s general elections — has been to boost the country’s productivity through a series of ambitious economic reforms and initiatives.

Foremost among these are efforts to modernize the country’s fiscal management, financial systems and business environment. A goods and services tax, which replaced several indirect taxes with a single levy, has helped increase tax compliance and institutionalize the informal economy. A locally developed instant payment system, launched to facilitate interbank peer-to-peer and person-to-merchant transactions, has put QR code-based payments on track to reach 1 billion transactions per day by 2026. An insolvency and bankruptcy code has provided a unified and time-bound process for insolvency resolution and a production-linked incentive scheme aims to spur domestic manufacturing through export subsidies. These varied initiatives broadly illustrate the country’s efforts to make it easier to do business.

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Gulf countries: Strategic thinkers

Another group of nations taking a more active role in determining its future belongs to the region making up the Gulf Cooperation Council. Many of these energy-rich countries are attempting to remodel their economic structures away from fossil fuel extraction towards professional services, technology and tourism.

Saudi Arabia is a key example. The kingdom is throwing financial backing for its Vision 2030 blueprint towards diversifying its sources of revenue by increasing the share of foreign direct investments and non-oil exports, among others. Meanwhile, the United Arab Emirates has incorporated AI into its strategy, creating the world’s first Ministry of Artificial Intelligence that local authorities see as having a similar future to the world’s first-ever energy ministries created a century ago. An early foray is in education: The UAE government has introduced a GPT-powered personalized tutor for every student in the country.

This drive towards greater control is playing out in foreign policy as well. Countries in the region have stepped up their efforts to increase stability and reestablish relations. Before October 7, Saudi Arabia had re-engaged with Israel through the Abraham Accords, reinstated diplomatic ties with Iran and worked on a permanent cease-fire with the Houthis in Yemen. Notwithstanding the Israel-Hamas war, the region’s efforts to mould its future with its own hands are unlikely to be reversed.


Latin America: Not too late to wake up

At present, everything seems to be falling into place for Latin America to start to enjoy a more symmetric relationship with the rest of the world. The region has always needed support from abroad, but it is only relatively recently that other countries have increasingly looked at Latin America as a reliable provider of commodities, a leader in the energy transition and a potential hub for manufacturing.

Countries, such as Brazil and Mexico, are already reaping the benefits of this reality. One need look no further than to Brazil’s booming agribusiness sector or the palpable excitement in Nuevo Leon, Mexico’s most advanced manufacturing centre. The key challenge is that these benefits are often accruing despite — rather than thanks to — domestic policy choices. Most political leaders in the region still have different sets of policy priorities and have yet to devise a convincing strategic plan to seize the opportunities before them.

All told, the willingness of some of these middle powers to design and implement multidecade transformation plans makes them likely winners of the evolving global order. For global investors, this means an investment portfolio that doesn’t recognize this reality is not future-proof. The largest opportunities lie in the intersection of those countries that are offered the chance, and those taking concrete steps, to convert their potential into reality.

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