Risk managers today still face challenges derived from traditional risks, like credit and market, but there are new ones emerging, the most mysterious and complex one of which is geopolitical risk. Extremism is on the rise and in power in demographic societies, so where will the will of the people and authoritarian political figures lead us? In this interview with Yascha Mounk, Associate Professor at John Hopkins and author of The People vs. Democracy, we find out as much as we can about how our world is changing and what businesses can do to prepare for the future.
What does the current political landscape say about our society?
What we’re seeing is a rise of extremist movements of very different kinds and shapes around the world. Part of this is that demagogues for all of human history have often been successful in whipping up anger, offering simplistic solutions, and finally, gaining power this way. This has been true for the Roman Republic, the medieval city states of Europe, even for 20th century Europe, and now recent decades around the world.
There is something very specific about this particular moment, which is that the very rapid economic growth, which many countries experienced in the post-war period, has come to an end. But many people have not felt economic gain in their lifetime and they are quite worried about a set of cultural and demographic transformation that feel out of their control. So when you have huge amount of changes and continue to add to it, for example with the arrival of new technologies like the internet, you get a lot of insecurity and discontent – both of which can be exploited by demagogues.
What does this demographic change mean for global economies and markets?
I don’t think this is specifically about the demographic change. But the rise of populism is very dangerous to a well-functioning economy because one of the key attributes of populists is a deep aversion to the rule of law. They want to be the only centre of power in society because they alone represent the people. And therefore, any institution that might limit their power, whether it be independent thoughts or the free media, are illegitimate.
That is a huge long-term problem to businesses because they rely on the idea that their earnings will depend on how good their products are, how to produce them the best way, and at what price they could sell them. Once there are no independent thoughts or once you see the concentration of power in the hands of authoritarian figures, whether it be Recep Erdogan in Turkey or Nicolas Maduro in Venezuela, you’ll see that the people who make money are the ones who have good connections to the regime. So there’s no incentive for efficiency or improving product quality. All the incentives go in the direction of corruption, so ultimately, that is the big problem.
Populism has been present for many years now in various parts of the world, so is this movement not limited to the past few years?
Well, it is a relatively new phenomenon. Populists existed for a long time but these kinds of figures now rule in many countries in the Western world and in some of the most developed economies. They are in power in the heart of Europe, in the heart of North America, and in some of the largest developing markets. It’s certainly a radical change from 4 or 5 years ago and it poses a serious strategic challenge to global businesses.
What could global businesses expect in the next 5-10 years? How could they prepare?
The first thing they need to expect is surprises, which is a big challenge in itself. Businesses, for a good reason, like predictability. They like to know what the macroeconomic conditions might look like, and they would like to know what kind of trade agreements are going to be in place.
What we will see as these erratic, often very nationalistic, figures come to power is that long-standing trade agreements are going to be called into question. There may be a change in story about the kinds of tariffs that businesses have to deal with from one day to the next. And increasingly, the things that we took for granted, like the rule of law, may be challenged.
It is hard to give a specific prediction, like “the trade between Mexico and the United States would cease”. That’s not necessarily going to be the case! But the one certainty is that there will be a lot less certainty. That in itself is a big problem for businesses.
With all of this in mind, where is human history headed? Is there a new world order we need to get ready for?
It’s too early to tell what the new world order is. What we are potentially seeing is the weakening and perhaps, eventually, collapse of the existing world order. We are in a moment of condition, in which it’s becoming obvious that there are going to be big changes. But the shape of what comes after is not yet accessible to us. And this, of course, speaks to the point of uncertainty. If it was just a matter of conditioning to the world that we know is around the corner, that would be relatively easy to do. What businesses need to do at this point, is to prepare for a new world without knowing exactly what it is going to be.
As we might expect a new world order, does that mean a new business order? Would businesses transform along with society and politics?
Yes of course! The supply chain is so important to businesses and they rely on a lot of assumptions. They rely on knowing what the tariffs are going to be; knowing that there are trading agreements in place; and knowing that if they invest in facilities in a foreign nation, they can expect to use them without having to pay huge prices or massive tariffs 10 years from now. I think all of this is now in question the way that it hasn’t been in 5 or 6 decades. That is going to transform how companies will do business and how they decide to invest.