The Changing Global Order: The World in 2014

All good forecasts, particularly in the complex realm of global political and security risk, have a solid historical foundation and learn from past outcomes. This RiskMap 2014 outlook draws on a decade of risk analysis to identify underlying trends and assess how they are likely to evolve.

Looking Back: 2003-13

 

The 10 years from 2003 to 2013 were bracketed by the invasion of Iraq and US withdrawal from Afghanistan, enlargement of the EU and the eurozone crisis, SARS in East Asia and a similar outbreak in the Middle East, the relinquishment of chemical weapons by Libya and their use in Syria, and the decision to build a nuclear bomb in North Korea and renewed negotiations to preclude the possibility in Iran.
 
It was a decade of unprecedented opportunity and historic shifts of capital from the advanced to the developing world, tempered by rapidly evolving threats, a new emphasis on transparency and accountability, and rising concern about the sustainability of the post-war liberal democratic world order. With these shifts introducing unprecedented complexity and uncertainty into global affairs, managing security and political risks became more directly relevant to how companies do business.
 
All good forecasts, particularly in the complex realm of global political and security risk, have a solid historical foundation and learn from past outcomes. This RiskMap 2014 outlook draws on a decade of risk analysis to identify underlying trends and assess how they are likely to evolve.
 
Despite the fluid security and political environment of the last 10 years, business thrived as opportunities appeared in fast-growing emerging and developing economies. Since 2003, emerging and developing countries’ share of nominal global output has doubled, from 20% to 40%. Nominal output in emerging Asia alone, powered by China, has increased by 700%, surpassing that of the eurozone in 2012. As a result, by 2013, the proportion of global output generated by countries at medium or high political and security risk had more than doubled. Our data also suggest that this is largely because of faster growth in medium and high-risk countries, rather than increased risk in key economies. These trends are likely to persist in 2014.
 
 

Looking Forward: 2014 and Beyond

 
 
These trends place the world in a novel situation. The last time the current set of emerging and developing countries – China, India, Brazil, Turkey and so on – had such weight in the global economy was probably in the late 19th century, under radically different social, political and geopolitical circumstances. Charting the risk landscape ahead therefore requires identifying and assessing how these fundamental economic shifts are likely to play out for security and political risk.
 
The mass social protests since 2011 – including the Arab spring, Occupy and Indignados movements, and anti-government unrest in Turkey, Brazil and Bulgaria – reflect how economic change has greatly outpaced political change during the emerging market era. Rising middle classes, armed with the trappings and ambitions of technological modernity, remain saddled with antiquated, opaque, inefficient and frequently corrupt governments and bureaucracies.
 
However, emerging-market growth models are under pressure. Before the financial crisis, they relied on debt-fuelled consumption by the US and other Western countries. Since the crisis, growth has floated on a flood of cheap money, courtesy of rock-bottom interest rates in the US and Europe, and generous fiscal and financial stimuli at home. Moreover, emerging markets are still too reliant on relatively narrow bases of economic activity: manufactured exports, cheap credit and domestic investment in China; high oil and gas prices in the Gulf, Middle East and Russia; and mineral and agricultural commodity demand in South America. These sources of growth are already unsustainable: inflation, asset bubbles and overcapacity are increasingly problematic, the outlook for commodity prices is negative, consumption in the US and Europe is flat, and monetary tightening is inevitable. Indeed, a timely reminder of the inherent dangers of overreliance on cheap capital occurred in late 2013, when mere consideration of US Federal Reserve ‘tapering’ caused emerging-market currencies to plunge, and raised the spectre of crises from India to Indonesia to Brazil. That was a dress rehearsal: tapering will be a reality by the end of 2014.
 
With the pillars of rapid emerging market growth eroding, political settlements founded on so-called ‘performance legitimacy’ – based on delivering rapid growth and achieving concrete policy objectives – are increasingly brittle. To stay in power, many emerging market governments will need to both find new ways of delivering growth and cultivate more durable sources of political legitimacy. The mass social protests since 2011 – including the Arab spring, Occupy and Indignados movements, and anti-government unrest in Turkey, Brazil and Bulgaria – reflect how economic change has greatly outpaced political change during the emerging market era. Rising middle classes, armed with the trappings and ambitions of technological modernity, remain saddled with antiquated, opaque, inefficient and frequently corrupt governments and bureaucracies.
 
This is where political risk enters the outlook. It is impossible to restructure a large, complex economy without politicising the process. Many well-intentioned reforms have floundered in the face of well-organised political opposition. There is always an incentive to adopt populist policies or ideological frameworks that deflect attention away from slowing growth.
 

Looking Ahead

 
Over the last 10 years the global economy has shifted up the political and security risk scales, changing the types of threats companies are likely to face today and in the future. A decade of rapid growth in the emerging world has fundamentally altered social arrangements and is beginning to put pressure on political systems, particularly in terms of how governments justify their authority. In certain regions, such as the Middle East and North Africa, this has provoked change that the current global power balance is ill-equipped to manage, introducing security threats that will cast a shadow over the coming year. These developments are coinciding with fundamental and long term shifts in strategic incentives, often linked to resources, that are likely to rewrite the global distribution of power as much as economic change has revised the global balance of power. These factors put upward pressure on both global political and security risks in 2014.
 
But this comes at a time when opportunities for business are diverse and improving in some fundamental ways. Ten years ago, HIV/AIDS threatened economic and social coherence in much of the developing world. Today, access to treatment has expanded exponentially and annual new infections have fallen by 25%. Over the same timeframe, extreme poverty fell by more than 400 million people, even as the global population rose by nearly one billion, sending poverty rates to historic lows. Meanwhile, over the next year more people in developing countries will access broadband on mobile devices than there were global Internet users in 2003, and more children will have access to education than ever before. The hangover of the global financial crisis is fading, even in the US and Europe, Japan is at its most bullish in 20 years, and emerging markets in general are much better equipped to face economic challenges than during the 1990s. In this light, risk seems more attractive than ever.
 
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