The impact of populism on the global economic status quo

Populist movements and power shifts away from globalism threaten the global economic status quo. Why? AGCS sat down with Katinka Barysch (KB), Director of Political Relations, Allianz SE, for an opinion on when or if things will return to “normal”.

AGCS: The growing number of terror attacks, floods of refugees, an unpredictable US president, growing tensions with North Korea and Brexit. Is the world turning upside down? Can everything go back to how it once was?

KB: There are two viewpoints on this. One says that the situation involves an accumulation of unfortunate coincidences and that it will soon return to normal. The other presumes that it is a systemic shift, or a structural change.

AGCS:  What is your view?

KB: Numerous trends around the globe suggest there will be no turning back to the old reality. We will experience phenomena such as the rise of populism – driven by a combination of economic grievances, a cultural backlash and identity politics – for some time yet, before we return to stability.

AGCS: Which trends most worry you?

KB: The power shifts we are seeing on a global level. Today, 85% of the world’s population lives in emerging markets and developing countries. China will soon surpass the economic power of the US. But we still don’t give China and other aspiring powers enough room to develop in the international governance framework.

AGCS: What will the consequences be?

KB: If global institutions no longer work, it will increasingly be difficult for us to resolve international conflicts peacefully.  And Donald Trump, who isn’t interested in an established order but instead prefers to create uncertainty in order to negotiate a better ‘deal’ is making the current international situation extremely dangerous.

AGCS: Protectionism is increasing. Since 2014, around 700 new trade barriers have been added each year around the world. Will this trend continue?

KB: The consensus that liberalization and free trade are the best paths to pursue is crumbling. Now, more and more people are asking whether globalization, in general, is really such a good thing.

AGCS: So will there be a “de-globalization” process in the long term and a relocation of jobs back to domestic markets? 

KB: We know that the number of manufacturing jobs has declined steadily in the US since the 1970s. Since 2010, the number of jobs in US industry has begun to rise again. In addition, there are the Organization for Economic Co-operation and Development (OECD) Global Value Chains indicators, which analyze international trade, and grew by 4% per year from the 1990s into the next decade. Since 2011, they have fallen each year. In Europe we lack clear figures, but offshoring has slowed. When it does occur, it is less about developing new supply chains and more about serving local markets in emerging economies. There is also technological change. Automation is becoming cheaper and more efficient – and will replace many jobs in emerging markets.

AGCS: Are companies prepared for the disruption caused by abrupt and massive political and legal change?

KB: Even large companies find it difficult to monitor such broad trends because they traditionally rely more on country analysts. For example, initially, populism in Greece was attributed to the Euro crisis, in Germany to the refugee crisis, in the US to the decline of the Caucasian middle class, and in Austria to political cronyism. It then occurred to us that if we were observing the same trend in many Western democracies, there must be a common driving force. This transnational consideration is still quite new to some. Precise forecasts are becoming less useful in an uncertain environment. Global companies should avoid being lured into a false sense of security. It is more important to create scenarios that first consider the limits of plausibility and conceivability and then to test the hypotheses. We are coming out of a long period of extraordinary political stability and therefore must question the assumption that everything will return to normal. Stress tests can then be carried out on the basis of these scenarios. One thing is clear: It is more difficult to make long-term investments in such an environment.

AGCS: How can businesses find encouragement and what advice would you offer

KB: Companies shouldn’t be reduced to despair. If structures are disrupted, it is not always bad – the outcome can be good, also. We shouldn’t overlook the good news. We have a Chinese president who stands against Trump and says: “Don’t worry, if this man abandons globalization, we will maintain it”. We are witnessing a disintegration of established structures in Western democracies. That sometimes leads to populism, but it has also led to an election victory for Emmanuel Macron, for example, who is setting out to reform France and to strengthen the Eurozone.

Businesses must adapt to a new environment of increased political uncertainty. They shouldn’t assume that everything will soon return to normal. They must stay alert and constantly observe the global situation. This will require more investment in political risk analysis and management in order to create more awareness within the company through scenario analyses.

 

Katinka Barysch is a German economist and financial commentator and the Director of Political Affairs for Allianz SE. She gained a BA in Political Science, Economics and Law from Ludwig Maximilian University in Munich and later attended the London School of Economics  where she gained a Master’s of Science in International Political Economy. From 1997-2001, she worked at the Economist Intelligence Unit; and at the Centre for European Reform (CER) from 2001, as Chief Economist then becoming Deputy Director.