IN both of the previous Global Trends reports, Paradoxes of Progress and A More Contested World, the National Intelligence Council highlights front-and-centre that perhaps one of the greatest threats to Western countries doesn’t actually come from terrorism or, to the extent to which it may be seen as an independent variable, even a shifting balance of power between great powers. Instead, it comes from the West’s own internal dynamics, fiscal foremost.
Quite simply: the United States, which for decades has been able to enjoy the ‘exorbitant privilege’ of being the leading global reserve currency, alongside many Western states, may soon spend more on servicing debt than on defence.
Bond investors have been enduring a bear market based on rising US interest rates. As bond prices and yields are inversely related, it’s bad for bond investors and the government as the cost of financing America’s debt also rises along with it.
Indebted To People
Much of that debt, in turn, hasn’t been accumulated by spending on infrastructure, or research and development but by what may ultimately be called populist appeasement to bypass political deadlock. Indeed, the overall situation has deteriorated enough that Robert Gates, the former Secretary of Defense, recently called America a ‘dysfunctional superpower’.
In turn, once that spending becomes fiscally untenable, it would not be out of the realm of imagination to assume a rise in populism. For the business community, that translates into the risk of higher taxes, trade instability, uncertain immigration regulation, the possibility of higher inflation, and, in no small part, a potential for economic instability.
None of that may be seen as particularly good news for business but there are upsides to more or less everything.
When the environment changes, those who adapt the fastest have an advantage over the rest.
Global Impact
One could think that this assessment concerns only Western countries. However, economically thriving communities, exemplified by Singapore and other Southeast Asian countries, must not underestimate the significance of populism. Political history vividly illustrates that issues that gain prominence in the US public discourse eventually have a global impact, albeit often adapted to suit the local milieu.
Consequently, no region (including Southeast Asia) is immune to the polarising repercussions of populism. Hence, to adeptly navigate potentially tumultuous periods, it is imperative for political and business leaders to make investments in comprehending and effectively addressing the illiberal (and sometimes anti-democratic) trends.
The Politics Of Populism
Populism can have profound real-world effects on societies, often leading to division, polarisation, and a range of social and political consequences, including a reduced institutional capacity to deal with crises.
One of the significant impacts of populism is the erosion of trust in institutions and the political establishment. When populist leaders or movements exploit grievances and stoke the flames of discontent, they can undermine faith in democratic processes and the rule of law.
For example, the rise of populist leaders in several countries, including the United States and the United Kingdom, has contributed to growing skepticism about the integrity of elections and the effectiveness of government institutions. This can lead to political instability, as seen in the storming of the US Capitol on January 6, 2021, when supporters of former President Donald Trump contested the results of the presidential election.
Remedial Consideration
To counter populism’s effects, it’s essential to promote inclusive and fact-based public discourse, invest in education that fosters critical thinking and empathy, and support leaders who prioritise unity and consensus-building rather than exploiting divisions for political gain.
Additionally, it’s crucial to encourage civic participation and strengthen democratic institutions to ensure accountability and transparency, as robust democracies are more resilient to the corrosive effects of populism. Ultimately, fostering a culture of dialogue, understanding, and cooperation is key to mitigating the divisive impact of populism and promoting a healthier, more united society.
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Risk Management: Qualitatively And Quantitatively
The rise of populism should be on the agenda of every business leader. A business cannot fully guard against risk, in particular the sort of systemic and multi-faceted risk under discussion. In a financial context, it points towards a cascading failure in the financial sector, resulting in a severe economic downturn. Partially, this is because the standard methods of quantitative risk management are based on distributions and parameters which themselves change. However, there are simple steps to prepare and develop resilience in terms of qualitative risk management: identification, assessment, prioritisation, and management.
The qualitative risk management process begins with risk identification. This phase involves open discussions, brainstorming sessions, interviews, and workshops with relevant stakeholders.
Participants, drawing from their expertise and experience, explore potential risks that may affect an organisation. The emphasis here is on diversity of thought, bringing together individuals from different departments and backgrounds to create a comprehensive risk profile.
Risk Assessment
Then comes assessment. Once the risks have been identified, they are duly assessed. This assessment, however, is subjective, involving the application of qualitative descriptors rather than numerical values. Assessors, usually experts in their respective fields, employ their judgement to estimate the likelihood and impact of each risk. Risk severity is typically categorised as low, medium, or high, and likelihood is similarly described. For example, it is expected that a company gathers intelligence on the political climate of the host country, including any recent policy changes, historical instances of political instability, and industry-specific risks. This comprehensive evaluation can form the basis for informed decision-making in the face of political risk, especially when multiple perspectives are employed in an integrated manner.
Following the risk assessment, the risks are then prioritised based on their potential impact and likelihood. Risks that are both highly likely and highly impactful are considered top priorities, while those with a lower likelihood or impact may be lower on the list. This prioritisation enables organisations to focus their resources on mitigating or exploiting the most critical risks.
For instance, a company may conclude that a sudden shift in tax policy is a high-impact, high-likelihood risk, while political protests might be of lower priority, given their moderate impact and reduced likelihood. At the same time, a company may see political unrest as disruptive for certain business processes, especially those related to supply chains, and need to immediately adapt its dialogue with the most relevant stakeholders.
Next-step Considerations
The political situation in many Western countries has involved ‘buying peace’ using debt for the better part of a few decades. The fiscal limit of that process is being reached and populism may be expected to rise in response. However, economically successful countries, such as those in Southeast Asia, are not insulated from the dangers of populism, which could take a different form than in the West.
Businesses may need to embrace resilience and anti-fragility as core to their function, even when quantitative data may not be reliable, through qualitative risk management — and even look at the bright side: many competitors might not prepare.
Radu Magdin is a global analyst, consultant, trainer and think tanker. He worked as a honorary advisor to the Romanian Prime Minister (2014-2015) and advised the Moldovan PM (2016-2017) on a range of strategic issues, from political strategy and communications to reforms implementation and external affairs.
