Is This the Dawning of a New Era?

The post-Cold War environment, with the consolidation of the Washington Consensus1 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. 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, from the drama around raising the US debt ceiling and the “fiscal cliff”, to the timing of German regional elections as a key indicator for Eurozone bailout votes. In Citi Research’s Political Analysis unit, we now spend at least as much time monitoring non-mainstream party politics in advanced economies as we do emerging market-based geopolitical risks, for the first time in 20 years.

What’s more, we see little sign of this trend of political risk cutting across advanced and emerging economies reversing. We think it’s unlikely that the moderate global growth that Citi’s economists forecast as their central scenario will dampen these risks. If anything, the data we have analyzed for this report, combined with our combined expertise in comparative political science and international relations and security and defense analysis, underscores how, by many measures, these risks are on the rise and indeed could endanger even the already modest prospects for global growth.

In this paper, we identify and outline a new danger, that traditional “Old Geopolitical Risks”, e.g. military conflict, weak and failing states, unconventional weapons risk, etc. and what we call “New Socio-Economic Risks”, which includes Citi Research’s concept of Vox Populi risk2, the rise of new and non-mainstream parties, populism, sectarianism and tribalism and more protests and referenda, are increasingly converging in an environment where global growth is stagnating while public expectations remain high and government capacity to effect positive change through reforms is low.

A prime example of this phenomenon, which we first referred to as "Everything that Rises Must Converge3”, is evident in the extent to which the Syria conflict, now entering its fifth year, had initially not been deemed as being “systemically significant” according to traditional criteria (meaning having the potential to generate either a growth or an oil price shock).

Yet the displacement of as much as half of Syria’s population, on top of a burgeoning population of forcibly displaced people globally (60 million according to UNHCR, the highest number since WWII4) has led to a “great migration”, as people increasingly globalize themselves. This has in turn led to unprecedented migration from the Mediterranean basin into Europe, resulting in a spike in political risk as a slow growing European economy tries to absorb refugees, subsequently damaging the standing of one of the most popular and powerful leaders in the world — German Chancellor Angela Merkel. In this context, recent events that could further aggravate Saudi-Iranian tensions, may well complicate the efforts to resolve the Syria conflict. A further increase in the flow of refugees to Europe could also have an acute impact upon the UK Brexit debate and German and French elections in 2017 — and therefore the future of the European project. Geopolitical events far away and in areas that seem of only modest economic or financial significance could next arrive at the doorstep of major economies — and financial markets.

While we note in our section on “Silver Linings” numerous examples of positive changes and resolutions to longstanding political challenges, we also observe how many of these were achieved some decades after the initial crises, and typically with little involvement from legislative bodies. Having said that, 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. If undertaken at all, the process and outcome of these reforms often resemble that of crisis management. In sum, policy-makers have few tools in their arsenal and limited political capital to facilitate the domestic reforms that might restore growth or address gaps in human capital formation.

One growing temptation may be to try to shift burdens abroad, by ‘scapegoating’ foreign actors and powers, using exchange rates and more or less obvious signs of protectionism to protect domestic firms and workers and by shirking responsibilities for policy measures that will have a global and not just local payoff. In general, that means the prospects for international collaboration and coordination in many areas are rather poor (even though recent progress around efforts to fight climate change and nuclear proliferation show that the outlook for international cooperation is not universally bleak). Beyond a handful of specific issues, the maneuvering space for thorough statecraft has almost completely vanished.

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. 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.

Yet most political and business leaders and investors today have largely “grown up” in the post-1991 era, often described as the most peaceful and prosperous in human history and characterized by a host of pro-globalization developments and effective US hegemony. With this in mind, hopes for a reversion to the pre-global financial crisis mean, and with it, a return to some semblance of linear progress, may be misplaced.

If all political regimes, save the most repressive and autocratic, are reliant upon delivering economic growth in order to maintain popular legitimacy, the current weak growth outlook suggests we may be in for a bumpy ride. Meanwhile, the wealth effect suggests that momentum in terms of improving living standards and social mobility, not just net income levels, may be necessary to ensure political stability. Finally, just as political risks seem to reach boiling point, the faith of financial markets in the saving grace provided by central banks seems to be waning.

In our view, political and business leaders will need to be more attuned to the new shape of global political risk, a paradigm shift that means that previous policies will fail to keep pace and uncertainty will remain high, with the potential to interact in unexpected ways. Among the key implications of this more fragile and inter-connected risk outlook is that so-called Black Swan events — in this case, geopolitical events producing instability spanning several orders of magnitude — may be both more likely and more difficult for leaders and global financial institutions to resolve.

We hope that this analysis will help deconstruct the global political risk outlook, not just for 2016, a year with comparatively few important elections, but for the next decade and beyond.

Read the full text of the report on Citi’s website.


1 The Washington Consensus refers to a set of economic ideas supported by prominent economics and international organizations, which advocate free trade, floating exchange rates, free markets and macroeconomic stability.

2 Citi defines Vox Populi risk as shifting and more volatile public opinion that poses ongoing, fast-moving risks to the business and investment environment. Citi classifies Vox Populi risk events into four main categories: 1) election risk; 2) “flash mob democracy” mass protest risk; 3) referendum risk; and 4) geopolitical risk. See:

3 Citi Research. ‘2016 Global Political Outlook: Everything that Rises Must Converge’. 7 December 2015. See:

4 United Nations High Commissioner for Refugees (UNHCR): Global Trends – Forced Displacement 2014.