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A small sigh of relief

6 January 2014 By Edward Hadas

Suicide bombs in Russia, a possible government collapse in Turkey and the threat of civil war in Iraq. The political headlines from the end of 2013 sound grim. But for the financial world, the global political trends are clearly positive – on average.

Political risks faded last year in both the European Union and the United States, which each account for almost a quarter of the world’s output, according to the most recent World Bank data. The euro crisis has not ended, but it is receding. While American politics are still bitter, they look a little less deadlocked after a two-year budget deal.

China, with 11 percent of world GDP, will be high risk for many years, as it deals with the consequences of rapid economic development, an ageing population and regional political aspirations, not to mention the challenges of single-party rule, excessive debt and debilitating pollution. For now, though, the country’s politics remain remarkably calm. In its first full year in power, the new regime has done nothing too startling. Economic reforms appear to be significant enough to be encouraging, but not so radical to be frightening.

Then there is Japan, which still accounts for 8.5 percent of global output by the World Bank measure. Shinzo Abe seems to have some militaristic dreams – much to the alarm of the country’s Asian neighbours – but as yet the prime minister has focused on quite peaceful economic reform.

Many of the countries contributing the remaining third of global GDP are not in great shape. Still, investors need not be alarmed at the situations in the three largest economies in the group – Brazil, Russia, and India, which together generate about the same output as Japan. Brazil can look forward to peaceful elections this year and the Russian government is stable, despite terrorism, corruption and inefficiency. Religious and social tension make India’s 2014 election more worrying, but whichever government emerges will have democratic legitimacy.

The list of countries where politics are stable – if not better – includes Canada, Australia, Mexico, South Korea, Indonesia, Switzerland and Norway. Added together, that’s another 10 percent of the world economy.

The problems

The exceptions to the global trend towards more investor-pleasing politics are mostly found in the countries that make up the remaining 15 percent of output. While some of them are in fine or passable condition, Turkey, Thailand and Iraq – which in total produce about 2 percent of global output – look seriously unstable. The situation in South Africa (0.5 percent) is deteriorating and Nigeria (0.3 percent) remains all too typically troubled.

Geopolitical pessimists generally cite the one region – the Middle East and North Africa – where the overall situation deteriorated last year. They point out that although Syria, several years into dreadful civil war, has a tiny economy (0.1 percent of global output), disorder could easily spread from there to the main regional backers of the two sides of that conflict – Iran and Saudi Arabia. The region’s oil and gas exports magnify its global importance.

The pessimists can also note that even where the current trends are favourable, good political order often rests on a fairly weak foundation. Political extremists remain popular in some developed countries. American anti-government zealots could easily create a more debilitating fiscal crisis, and European ultra-nationalists could do well enough in this year’s European Parliament elections to disrupt the always fragile regional consensus.

There are also legitimate worries about the destabilising effect of China’s global rise and America’s relative decline. The People’s Republic is still learning about foreign policy. Like Japan, it alarms neighbouring countries with militaristic territorial claims. The United States has had longer to learn, but it still seems to have trouble using its military power, by far the greatest in the world, to promote global stability.

The worries are justified, if only because human beings are always liable to make a mess of things. No government is ever sufficiently wise and no society is ever sufficiently harmonious to banish the prospect of economically debilitating disorder. Still, for investors, politics have rarely been less of a global threat.

 

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