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10/11/16

The New Age of Political Discontent: Hammering Hard on Global Businesses

The new global era has created discontent
Around the world, people are unhappy with politics.

In the United States, only 18 percent of Gallup respondents approve of how Congress is doing its job. Across Europe, only 33 percent of Eurobarometer respondents say they trust the European Union policies. Over the past year, violent labor protests have erupted in South Korea and France. In Latin America, prominent politicians are harassed in restaurants, malls, and airports, and their humiliations are posted on YouTube.

This intense public unrest is driving global politics and policy making in powerful ways, and the consequences for multinational companies are significant. And, like Tolstoy’s unhappy families, each unhappy policy is different.

Understanding the whys and hows of each national family’s unhappiness is essential if corporate executives are to navigate the risks and opportunities of this new era.

Globalization Reaches Its Tipping Point

Underneath this worldwide frustration, there are some common elements: slow economic growth and rising inequality, structural unemployment, political incompetence, and venality. The financial crisis of 2008 - 2009 was not the beginning of this new era of discontent, but it did catalyze some of the responses. That crisis began in the developed markets of the United States and Europe. But as these economies slowed, the fall in demand for commodities and manufactured exports quickly spread the pain to emerging markets. And while global economic downturns have occurred before, this time disruptive technologies and digital communications intensified and magnified popular angst.

But while the underlying conditions may be similar, political and policy responses to it have been strikingly different, particularly between developed and developing countries. In developed countries, popular frustration is leading to increasingly unpredictable populist politics and policies that are often anti-trade and challenging for businesses. In developing countries, popular discontent is driving a more business-friendly set of responses.

The most compelling explanation for the difference in policy responses in developed and developing countries is their differing experiences with globalization – the movement of goods, money, people, and ideas across borders. While globalization has lifted millions out of poverty in developing countries, the Western middle class has suffered as manufacturing and blue collar jobs moved abroad. And while globalization has led to new opportunities for large numbers of newly mobile immigrants from the developing world, their arrival has stirred up fear, anger, and prejudice in many parts of the West.

Globalization has opened a rift between the developed and developing world.

In the developed world, anxiety over the economy has translated into the view among some citizens that the political establishment does not care about their welfare. The financial crisis and the threat of terrorism have convinced them that their leaders have failed to provide either effective economic management or public safety. The result has been a populist and nationalist surge across the United States and Europe. As a result, ideas that were previously out of bounds have now entered the marketplace of ideas.

In Western countries where politics is dominated by two parties, anti-establishment sentiment has propelled the rise of fringe candidates within the main parties, including Bernie Sanders and Donald Trump in the United States and Jeremy Corbyn of the UK’s Labour party. This has hollowed out the political center, increased partisanship, and widened the array of possible policy outcomes.

Among many developing countries, the story is different. The developing world benefited from the commodities supercycle, in which natural resource extraction supported economic growth that swelled government coffers. It also allowed governments to avoid hard policy choices and structural reforms, creating an environment in which corruption could flourish. Today, with exports and commodity prices in the doldrums, those economies are suffering, and the reckoning has arrived.

To be sure, there is plenty of anger directed at politicians in the developing world for sins ranging from indifference to corruption to incompetence. In Brazil, the president was impeached and removed from office; in Mexico, South Africa, and South Korea, incumbent presidents are suffering dismally low approval ratings; and in Taiwan, Nigeria, Indonesia, and India, voters rejected establishment parties in favor of new leadership. But in all these cases, the response by policymakers has been to pursue market-friendly reforms. Why has there been such a relatively orthodox set of policy initiatives across such a diverse set of countries even as the developed world is rushing pell-mell in the opposite direction?

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