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New world: new rules or no rules

New world: new rules or no rules?

In the past, high politics would play out over months and years of negotiations at the United Nations, or the G20. There were rules of engagement and competing interests to be balanced. When all else failed, the country with the upper hand could simply impose its will. For businesses caught in the middle, they had time to react and reposition - and often could insure away core business risks like civil war or political violence.  

Today, politics moves at the speed of social media. Rifts are instantly public, and opinions are shifted and shaped in hours. Politically expedient labelling of other countries can fundamentally change the playing field for an entire sector virtually overnight. Even within a nation's boundaries, shock-and-awe political moves like demonetization in South Asia or a corruption purge in the Middle East can unleash a decade's worth of change in days.  

In essence, the global economy is more exposed to political instability than at any point in recent memory. The figure below is one way to think about this. The line represents whether the impact of politics on the business environment in countries that make up most of the world's GDP is improving or worsening. Admittedly, it is a small slice of data in a particularly turbulent political time, but the variability and trajectory may not be far off the new normal for the short-to-medium term.

The Impact of Politics on the Global Economy

Impact of Politics on the Global Economy

While opinion may be diverging on the current speed and future forecasts for globalization, it has undoubtedly added to the complexity of today's corporate world. Companies have transitioned from national, to multinational and for some, to global corporations. CEOs find themselves facing new, unfamiliar and complex situations -- often resulting from geopolitical issues -- which they may have had limited exposure to in their previous core markets.

Exposure to this political instability can be particularly marked for businesses that have expanded into frontier and emerging countries with potentially weaker institutions, civil unrest and low resilience. At the same time, previously `stable' developed markets can also become politically turbulent from the rise of populism, nationalism and country-first approaches to international trade. For the global CEO, the odds are increasing that it is a geopolitical event they must explain as the root cause for a performance challenge.

Read the full report: The CEO as Chief Geopolitical Officer (PDF 785 KB)

“Investors today are confronted with a dramatic increase in the political risk profile of what were supposedly low-risk, or indeed risk-free, developed markets. A dozen years ago it seemed geopolitical risk was a thing of the past, and that the apparent dominance of the liberal economic and political model had indeed heralded the end of history. Now geopolitical risk has returned as a great shadow on the horizon of all significant investment decisions.” Duncan Wales, CEO of Exotix

Footnotes

aThe line graph summarizes a GDP-weighted diffusion index of all Political Trajectories. At points above 0, most of global GDP is represented by countries with improving Political Trajectories (month/month); below 0, most of global GDP is represented by countries with declining Political Trajectories (month/month).

1Eurasia Group analysis of proprietary, International Monetary Fund (IMF) and World Economic Outlook (WEO) data.

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