Once largely confined to less-transparent emerging market economies, the post-global financial crisis saw the return of political risks to the advanced democracies as well, while challengers to Western liberalism continue to gain in strength, notes a new report from Citi GPS: Global Perspectives & Solutions.
“2016 has begun, as 2015 ended, amid a significant worsening of the global political climate,” it begins, stressing “the need to understand the drivers and the implications of a greater level of event risk exacerbated by shifting social patterns.”
The post-Cold War environment, with the consolidation of the Washington Consensus and constellation of pro-globalization trends — from the rise in the number of democracies to the adherence to free trade and other global norms by an increasing number of countries — strengthened hopes that political risk would decline in frequency and significance, according to Global Political Risk: The New Convergence Between Geopolitical and Vox Populi Risks, and Why It Matters:
After all, leading theorists observed that democracies do not tend to go to war with one another, while new middle classes with enhanced purchasing power and greater economic opportunity would ensure more countries would prioritize growth and stability over the shabby clientelism, power-mongering and sheer unpredictability of the 20th century (the most violent century in human history) through the Cold War era.
Instead, the sense that political risks have actually increased in a more globalized and inter-connected world — in number if not in terms of scale — is hard to escape. Once largely confined to less-transparent emerging market countries, the post-global financial crisis saw the return of political risks to advanced economies as well.
Advanced liberal democracies are increasingly vulnerable to Vox Populi risk – shifting and volatile public opinion shifts or ‘risk events’ that fall into four main categories: 1) election risk; 2) “flash mob democracy” mass protest risk; 3) referendum risk; and 4) geopolitical risk, the report suggests:
Non-democratic regimes appear to have largely learned from recent conflicts and the events of the “Arab Spring” that political and social change — and all the upheaval it may bring — are best avoided. Meanwhile, access to social media and the role of technology in accelerating the pace of change, whether to labor markets or to social attitudes, are acting to drive these factors more quickly. As a result, national and international policy-makers tend to be absorbed almost entirely by short-termist, reactive crisis management. Rarely is there patience for time- and political capital-consuming “structural” reform.
International institutions, once the great hope for maintaining the stability of the international system, have also seen an erosion in their capacity to address global challenges, while the international standing of the US has been steadily eroding since the “Sole Superpower” era of the 1990s, Citi GPS adds:
Likewise, the classic national institutions designed to legitimize and control executive action, especially parliaments, have often felt sidelined and struggled to keep up with the pace of political developments, the urgency of which has decidedly shifted the power balance in favor of the executive branch. In the long term, such lopsided political practice can create severe legitimacy issues for government as a whole. Where executive action is not properly bound back to the will of the body politic, democracy suffers, and Vox Populi risks are further aggravated.
Illiberal powers arming
Importantly for geopolitical risk, while the US has seen a fall in military expenditure in real terms China, Russia and Saudi Arabia have continued to make substantial increases, the report adds:
Saudi Arabia’s 17% increase in 2014 was the highest yearly increase of any country in the top 15 military spenders in 2014. Furthermore, 20 countries (concentrated in Eastern Europe, the Middle East and Africa), spent more than 4% of their GDP on the military in 2014, compared to 15 in 2013. Only three of the 20 countries are functioning democracies, and the majority were involved in armed conflict in 2013-2014 or had a recent history of armed conflict.
For the world order underpinned by Pax Americana, these trends do not bode well, particularly if US allies continue to under-resource their militaries or indeed if they are less amenable to deploying those assets under the direction of the US. While we believe the US is and will remain the most potent military power in the world for some time to come, its assets will be stretched thinner in a world that requires more balancing and mediating, and in which the challengers of Western liberalism continue to gain in strength. Military expenditure is, of course, only one power indicator among many. But it is perhaps the one most visibly illustrating the changing nature of global order.
Vox Populi Risks Continue, Evolve
There have been fewer mass protests in the last couple of years compared to 2011- 2012. However, over the past two years we have seen continued constitutional crises, such as in Brazil, highly uncertain election outcomes and referendum risks, the report adds:
Elections continue to highlight fragmentation risk, more frequently producing fragile multi-party governments. ….. Non-mainstream parties have also continued to grow in strength, especially in Europe, but also non-mainstream candidates have seen sustained support in the US presidential race. Anti-establishment sentiment has been high in advanced economies due to a number of reasons such as lack of trust in elites, income inequality concern and middle class anxiety.
The EU’s Double Divide
It is natural that the 28 members of the eye don’t see eye to eye on all issues. But apart from longstanding differences, two more structural divides have emerged in the EU in recent years that will continue to make unified decision-making on substantial issues difficult in our view:
One is the dividing line on general economics between the north and the south. This became visible in the Euro crisis, when the northern countries supported a strategy of fiscal consolidation, reform, and austerity, while the southern parts advocated transfers and deficit spending. France sits right in the middle between the two, torn in two directions. This divide will become important again, and potentially lead to deep divisions, as the root causes of the Euro crisis have not been resolved.
The second dividing line is between east and west. This divide has become obvious in the refugee crisis and, more generally, concerning attitudes towards the basic tenets of the European model of liberal democracy. In Poland, Hungary, and, to a lesser degree, in the Czech Republic, governments are in power that are now openly challenging the codified values-based consensus of the EU. Their socially conservative agendas are increasingly in conflict with Western European ideas of gender equality, minority rights and more recently, media freedom. Their understanding of democratic government, checks and balances and pluralism often is at odds with that of their EU peers. The popular support these governments often enjoy highlights the Vox Populi risks that exist in the EU.
“Neither divide is capable of breaking the EU as such,” Citi GPS notes. “But with both economics and identity/values issues being at the core of the debate over the future of the EU, they have the potential to aggravate the already tedious compromise-finding processes.”