The times they are a changing
BSSB.BE youtube 15/11/2018
* No risks, no fun! Political and geopolitical risks are no longer a tail risk for business.
Many recent shocks to markets – from Brexit to the increasing risk of a China-US trade war – are political in nature. It is no coincidence that these upheavals are increasingly frequent: they are the ripple effects of major shifts in the world’s political and geopolitical paradigms. A number of factors have converged to bring to an end the era of relative global stability that characterized the Western world after World War II and to open a new period of political, geopolitical and economic flux.
Paramount among them is the fragmentation of the international world order brought about by the retrenchment of the US, which commenced under President Obama and is intensifying under President Trump, as well as the rise of new global powers, most noticeably China but also, in different ways, states such as Russia or Turkey.
This has coincided with a moment where the process of economic globalization is coming face to face with some of the less positive consequences of its inner logic, particularly its deflationary impact on wages among large segments of the workforce in developed economies, helped along by the impact of technology on employment. In fact, what makes this era particularly problematic is that it is the first time in recent history that a global economic dislocation and a global geopolitical rearrangement have coincided.
The collapse of the USSR in the early 1990s was made less destabilizing by a steady international economic context, while previous economic shocks such as the 1973 crisis took place in a context of relative geopolitical stability.
The convergence of these mutually reinforcing economic and geopolitical dislocdislocations provides fertile ground for continuing shocks to markets. The question is what impact they will have on corporations and investors, but the answer is not evident. On the one hand, there is evidence that business executives are quickly waking up to the salience and potential negative impact of these shocks.
On the other hand, the current increase in political instability has not, at least for the time being, hurt markets or corporate earnings. Political and geopolitical uncertainty have increased by most measures, yet corporate profits and stock markets in both developed and developing markets have continued their upward trajectory. Although one could argue that the potential negative consequences of these events are yet to materialise, markets should have discounted them and this should have been reflected in valuations.
When trying to explain why this has not been the case, the most sanguine analysts argue that ‘we have seen it all before’, that these shocks always entail opportunities, and that markets have proved their resilience. They point to the fact that the doomsday scenarios that many – including respected economists such as Paul Krugman – painted should Brexit or a Trump presidency materialize, did not come to bear. There is however an alternative scenario: that markets are not pricing the impact of these risks correctly. That is the argument this paper will make. In order to do so it will first identify some of today’s most significant risks and then suggest reasons why markets may not be pricing them appropriately.
The current period will likely be seen, in hindsight, as a turning point in contemporary history. Whether this point represents the end of the US hegemony, the true beginning of the 21st century or any other characterization, what is clear is that we are experiencing, in real time, the transition from one world order to another. This shift had been incubating since the global economic crisis of 2008, 9/11, or even the collapse of the USSR. At a political and geopolitical level, this new reality is characterized by set of drivers, a few of which stand out
Globalization plateaus and protectionism is on the rise
This geopolitical fragmentation has important consequences for economic globalization. As Findlay and O’Rourke have explored in their magisterial Power and Plenty: Trade, War and the World Economy in the Second Millennium,2 it is no coincidence that the three great periods of economic globalization of the last millennium – the Mongol Empire, Pax Britannica and Pax Americana – have coincided with the presence of a hegemon. These hegemons guaranteed the safety of trade routes and provided an anchoring point to establish international orders that included global trading norms and standards capable of reducing transaction costs and enabling international economic integration.
This will of course not come as a surprise to students of International Relations, who have long been familiar with Hegemonic Stability Theory and its quite reasonable hypothesis that the presence of a hegemon is a prerequisite for stability in the international order. It follows that the geopolitical fragmentation we are witnessing today will have an economic corollary.
This is already apparent in the Trump administration’s withdrawal from Trans-Pacific Partnership and its increasing adoption of tariffs. In sum, one of the key obstacles to globalization is not economic but geopolitical in nature: geopolitical fragmentation and the absence of a hegemon.
- The publication is not an editorial. It reflects solely the point of view and argumentation of the author. The publication is presented in the presentation. Start in the previous issue. The original is available at: youtube