For decades, political risk has been synonymous with developing countries and emerging markets in Africa, Asia and Latin America. The rise of populism in the Western world redefines the notion of political risk and teaches that risk has no permanent address.
Mitigating the risk requires avoiding arrogance toward those embracing populism. A dismissive response delegitimises the phenomenon, leaving us unable to manage implications for democracy and all issues of economic development in poor countries, and the very idea of political risk itself. Those who oppose populism must engage with it rationally in the political space with the force of their own ideas.
Political populism, characterised by a desire to assert domestic democratic sovereignty and rejection of the “cult of the expert”, owes its rise to increasing rejection of the conventional wisdom by citizens who feel left behind by globalisation trends favouring the elite that gained ascendance over the past 30 years.
The backlash was inevitable. To the extent that the idea of a “borderless” world diminished the voices of local populations and amplified the powers of bureaucratic global elites in Brussels or Washington, there was bound to be a reckoning between local and global forces for the control of the destinies of nations. These tensions, especially as they affect immigration, jobs and trade, have been long in the making, brought to the fore in an explosive manner by the Brexit referendum. The British vote to leave the European Union confounded conventional wisdom and strengthened the hand of the anti-globalists.
Globalisation and populism
The phenomenon of globalisation, while not dead, is in decline in political and economic life, with China’s Xi Jinping left as its unlikely champion. For globalisation, whatever its virtues, was neither a benign phenomenon nor an agnostic one. It’s an agenda with global winners and losers, facing challenges from within industrialised countries, once prior champions, because large populations found themselves on the wrong side of globalisation’s inescapable logic – the cost-benefit analyses of labour and supply chain costs and technologies that are the chief culprit in the death of the salaryman with lifelong job security.
The rise of populism and its many implications flow from concerns about international forces supplanting the sovereignty of nations. Scholars such as Hedley Bull advanced the theory of international relations known as the “English School” in the 1970s. The theory holds that the contemporary history of the world – and relations among nations – is marked by a tension among three phases: in the international system, nations interacted in a formalistic manner, mainly through trade, military alliances and traditional diplomacy. Sovereignty was sacrosanct. The international society emerged in the late 19th century as technology broke down geographic distances, and maintaining global stability, not through a balance of power but through multilateral cooperation, seemed a superior path. Despite the rhetoric, competition and threats to global order continued among nations inside and outside these frameworks for cooperation – whether the Cold War or the “unipolar world” dominated by America after Communism’s fall. Aspirations to a cosmopolitan world society sought to limit sovereignty and create a “borderless” world, a civitas maxima prioritising human rights over national interests. This worldview fuelled economic globalisation, regional integration, the free movement of people and international humanitarian law led by “norm entrepreneurs”.
Populism seeks to reverse the power of the international community by utilising the democratic legitimacy of the majority to re-assert primacy of the national interest – seen by liberals as isolationism or “nativism” – in public policy.
Home-country multinationals that ship production – and jobs – abroad can anticipate a backlash. Multinationals will no longer receive benign preferences and protections in populist countries if they cannot prove their value to local economies, especially by creating jobs.
Designing corporate initiatives to curry political favour erodes the free enterprise ethic. Business decisions may no longer be taken on the basis of market efficiency, injecting a heavy dose of partisan political considerations into corporate organisations, as shareholders react and chief executive officers align with populist governments.
Such trends hasten the decline of the global corporation as a business model. As The Economist recently noted, multinationals’ profits have dropped by 25% in the past five years, and 40% of such firms now make a return on equity of less than 10%. Global corporations may have United States President Donald Trump to thank for providing cover for a retreat from the failing original logic of profits driving the ascendance of multinationals over the past half-century. Trump’s populist movement focuses on global trade as functioning to the detriment of American interests, and this leaves the World Trade Organisation squarely in the sights of populism.
But, if a tariff war breaks out and US companies become the losers – a real risk – numbers will impose discipline on populism. Moreover, as US Commerce Secretary Wilbur Ross asserted, several European and Asian nations are also guilty of protectionist policies even as they proclaim the gospel of free trade.
Likewise, the European Union, which challenged domestic sovereignty, will be hardest hit as populism rises in France, Italy and the Netherlands. The European Union is the most radical embodiment of the cosmopolitan world society worldview, a political project masquerading as an economic one but primarily formed to advance the great-power aspirations of France and Germany.
Developing nations
For developing nations, especially those in Africa, populism’s rise in the Western world may ultimately be beneficial, despite negative short-term impacts. These countries will be forced to confront mistaken assumptions about development that relies on the “benevolence” of foreign aid. They must reconsider unquestioning acceptance of the inevitability of globalisation and their status as markets, not factory. And they have already seen that efforts to model the African Union on the basis of the European Union, complete with common currency, may not be wise in light of challenges facing the European Union over the past decade.
African nations must embrace an inside-out perspective on economic transformation rather than the exclusively outside-in model that, in reality, robbed them of opportunity to control their destiny.
Industrialised countries, aided by technological superiority which produced value-added goods at competitive prices and the World Trade Organisation treaty regime, flooded the markets of developing countries, leaving them import-dependent. Considering that more than 50% of world trade is based on manufactured goods and the rude awakening offered by populism’s rise in the West, these nations should pursue the idea of “smart protectionism” – by deploying the “special and differentiated” provisions of the World Trade Organisation treaty that can apply to less developed nations to prevent the dumping of Chinese goods in their markets and create enabling environments for modest industrial growth and intra-African trade. At 13% of its total global trade, Africa’s intraregional trade is the lowest in the world compared to North America, Europe and other regions.
The risks
The process of global unwinding must be managed carefully. If chaotic, it raises the risk of other knock-on effects, and the risks of populism must be clear:
First, attempts to substitute facts and empirical foundations with conviction as a basis for public policy create sub-optimal outcomes.
Second, populism, in its quest for favourable outcomes, threatens the independence of impartial institutions that safeguard the integrity of democracy and democratic states. Electoral victories should not become mob rule or a tyranny of the majority.
Third, populism, based on its binary convictions about bad and good guys and nations, as well as possible weakening of institutional frameworks, runs the risk of promoting instability in a nuclear world in which several weaker and irrational states possess weapons of mass destruction.
Populism, a product of democratic choice, can create mixed outcomes. Some, like the uprooting of corrupt and dictatorial regimes, are good. But in some cases, autocratic corruption can be replaced with a similar weakening of institutions and the conflation of populist sentiment with competent public policy, not to speak of new forms of corruption. Populism will likely co-exist uncomfortably with globalisation – perhaps a scaled-back version – colliding with realities of the world and public policy. One of these is that experts matter, even if they are not always right.
This article first appeared on YaleGlobal Online.