Jan 2nd 2017

2017: The Beginning of the Era of Disruption

by Daniel Wagner

Daniel Wagner is CEO of Country Risk Solutions, a Connecticut-based cross-border risk advisory firm and author of the book Managing Country Risk. CRS provides a range of services related to the management of cross-border risk. He is also Senior Advisor with Gnarus Advisors.

In this era of dramatic, rampant, and incessant political change, predictions about the future can no longer be based either on conventional wisdom or historical precedent. We are, after all, in the middle of a paradigm shift that is shredding prognosticators and their prognostications with voraciousness. Just as virtually all of those highly paid political pundits missed by a mile the Brexit and Trump’s electoral victory, economic pundits accustomed to predicting the future based on past performance are getting it equally wrong, falling victim to the seemingly endless stream of unanticipated news, based on fallacious assumptions.

Plainly and simply, historical performance can no longer serve as a guidepost to the future. Indeed, today there is great danger in presuming that anything that may have happened in the past is necessarily any indication of what will happen in the future. Wasn’t the stock market supposed to go down in response to Trump’s election? Wasn’t the Colombian peace deal supposed to be approved the first time? Wasn’t the price of oil supposed to see a dramatic rise in response to the OPEC agreement? Wasn’t Putin supposed to respond in kind to the diplomat expulsions in the U.S.?

This has a lot to do (among other things) with a tendency to perhaps over-rely on the lessons of history, the growing impact of instant communication, and the inclusion of voters who were previously either shut out or not heard (for whatever reason) having become integrated into political processes around the world. It is also the result of a change in global economic dynamics, with a gradual transition away from developed country domination of the global economy in favor of emerging economies. And it is evidence that technology, innovation and creativity, which are so vibrant in the many parts of the global economy, are translating into extended economic gains that literally swim against the tide of history.

It turns out that all those ‘know-it-alls’ who think they’ve got it all figured out, just don’t. Those political pundits who proclaimed that they knew the outcome of the U.S. presidential election, now proclaim to know what Trump’s next move will be. Those stock market prognosticators who swear to their brethren that they know the future movement of stocks or the market, will be wrong again. And those global leaders who honestly believe that they are in tune with the pulse of their people are often mistaken.

In the process, whether we realize it or not, the ‘pyramid’ we have all become so accustomed to is being turned upside down before our eyes. Decades of foreign policy ‘norms’ are about to be rewritten, some hard-fought multilateral treaties are about to be upended, and some of the things we have taken for granted as ‘the gospel’ are about to become a thing of the past. The net result is that scenarios that were previously considered little more than a pipe dream may now be within reach. Consider, for example, the following scenarios for 2017 and beyond:

1.    A real U.S./Russia reset: The ‘bromance’ between Putin and Trump blossoms into a full-fledged reset, the U.S. sanctions are lifted, the two powers become partners fighting the Islamic State in Syria, and 75 years of enmity between them becomes largely a thing of the past. What might have seemed far-fetched (or even delusional) a year ago becomes a reality as Trump ramps up his self-designated ‘Disrupter-in-Chief’ role and pushes legislative changes through Congress making Russia a partner of the U.S. politically, militarily, and economically. Russia becomes a preferred investment destination and regains its previous position as a global player.

2.    China steps up to the plate: China acts more like the superpower that it is, significantly increasing its foreign aid flows, implementing diplomatic initiatives that challenge both Russia and the U.S. in international forums, and building a blue water navy that can begin to back up its claims to sovereignty over the islands of the South China Sea and project its power beyond Asia. Chinese GDP growth – the engine of global growth -- falls below 6% and heads toward 4% (one third of its previously sustained peak) by the end of the next decade, placing huge economic pressure on natural resource producing nations.

3.    Global alliances shift: This is already under way vis-à-vis China, Russia and the U.S., with Turkey having pivoted toward Russia, and the Philippines and Malaysia having signaled their willingness to do the same with China. More of this will come, as the balance between these three powers continues to vacillate. U.S. dominance in the global economy gradually yields to China, Europe rescinds sanctions against Russia, and the balance of power that has evolved since World War II is gradually eroded, with unforeseen consequences.

4.    The Right takes charge in Europe: National Front movements throughout Europe are elected, dramatically altering the political landscape, significantly curbing immigration, and resulting in widespread repudiation of the Left. This may not prove to be a short-term orientation, but rather, a sea change in global politics. The world enters an extended period of unease and uncertainty, resulting in a swing further in the direction of economic nationalism, and in gyrating investment climates.

5.    Multilateralism slowly dies: In the Post-War era, Wilsonianism (liberal internationalism) and Rooseveltism (collective action based on alliances and mutual respect) have been the cornerstone of international relations. Trump succeeds in weakening many of the pillars of Post-War stability and prosperity, such as NATO, the WTO and the UN, and declares war on free trade agreements. Alliances become dependent not on a common set of values, but on perceived short-term interests. The price of natural resources and food can skyrocket at any given time because of spot shortages, resulting in riots and increased global political and economic instability.

In short, in four years’ time we may be witness to a world that is barely recognizable, based on what we know as standard operating procedure today. Should one or more of these scenarios come to pass, just imagine the implications for investors, lenders, traders, risk managers and policy makers. In a world in which foreign policy is reduced to a series of business transactions (based on relative costs and benefits), policy making ability becomes the domain of the highest bidder, investment climates may cease to be the domain of equal treatment under the law, and trade policy becomes even more dependent on bilateral treaties, rather than multilateral arrangements.


This article first appeared in the Huffington Post.

 

Daniel Wagner is Managing Director of Risk Cooperative and co-author of the book “Global Risk Agility and Decision Making”.

Daniel Wagner can be reached at: dwagner@riskcooperative.com or 1-203-570-1005.





 


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