Like many governments around the world, UK politics currently appear somewhat unstable. And the UK’s problems are a reflection of the world, where established views and beliefs are suddenly no longer the unassailable certainties they have seemed to be for decades.
Davos met this week for the first time in two years against this very unsettled backdrop. A few thoughts and reflections on discussions there follow…
Conversation seemed to centre around emerging trends which challenge the apparent established order of the postwar years. Liberalised economies, increasing globalisation and spreading democracy have been remarkably successful at lifting many millions of people out of poverty and providing them access to electricity, clean water, food and economic opportunity.
Yet now the acceptance of the universality of that approach appears to be under challenge and the world economy teeters on the edge of a downturn…
Covid laid bare the vulnerability of a globalised world heavily (perhaps over) -reliant on supply chains originating in China. For its part, China’s zero Covid response has had the unintended consequence of walling the country off from the rest of the world economy, stalling its economy and exacerbating strains on already stressed supply chains. In response, companies and countries are looking to shorten their supply chains through plans to onshore or near-shore their production as a way of insuring them against possible future disruption. For some countries (in particular North African countries, near to Europe) this development offers an opportunity. For others, it means the withdrawal of investment and employment and a lost developmental opportunity
At the end of February, the Times published an article entitled The Perma-Crisis. The article noted the accumulation of accelerating crises besetting the world – the 2008 financial crisis, which fed the Arab spring uprisings in North Africa and across the Middle East. The lengthy collapse of Syria into chaos and civil war, led to the rise of Isis. The horrific barbarity of that regime caused a refugee crisis which placed additional stress on the coherence of the European Union, which was at the same time trying to deal with the fallout of the 2016 Brexit vote. The world seemed hardly to have time to breathe before we were thrust into the depths of the coronavirus pandemic and then almost immediately the Russia-Ukraine crisis.
This succession of crises has been attritional for global, national and individual resilience. Coffers were emptied to mitigate the worst impacts of lockdowns. Economies were shuttered. Companies furloughed. The economic rebound had already led to stretched supply chains and inconsistent cross-sector international supply of goods meant inflation was already on the way up – even before Russia invaded Ukraine…
And whilst world attention was focused on responding to the perma-crisis, inexorably global weather was deteriorating, caused by climate change and the slower than required energy transition, presenting an even greater threat to the established economic order and to developing countries’ social, economic and political progress. Such a distraction could not have come at a worse time with the IPCC warning that 2020s is the key decade for tackling climate change if there is to be any prospect of limiting global warming to 2°, let alone 1.5°.
Whilst India and Pakistan roast in sustained temperatures of above 50 degrees, France recently recorded its 40th consecutive day of above average temperatures. Average temperatures across France are 3° above the norm for this time of year. The soil saturation scale of 0 to one is a measure of how much water the soil holds. At this time of the year in France, the average soil saturation level should be 0.85: it is 0.55. This matters since France, as the sixth largest producer of wheat, could have an important swing-production role to play in addressing the global shortfall of wheat. But the temperature and lack of rain means France is already facing a 10% drop in its wheat harvest: if the drought continues for another fortnight, some are predicting that will rise to 40%.
These crises are connected in what could be termed a Stress-Nexus. The Russian invasion of Ukraine has exposed the fragility of the post-Communism world order. The war has compounded the impact of Covid and challenged the orthodoxy that free-market capitalism promotes global development and encourages democratic institutions and, through trade, prevents conflict. The fact that a number of countries have been reluctant to condemn Russia’s invasion of Ukraine (in particular in Africa) suggests that they may have ever only been, at best, unwilling converts to the West’s view of the world. Perhaps the Washington Consensus actually only really worked for countries whose political and economic systems and comparative wealth aligned.
This conclusion also suggests perhaps that the Russia Ukraine war is not an isolated aberration, but part of an ongoing and broader realignment of world powers and systems of political control and a reduction in globalisation. Even before Covid, populist governments were on the rise around the world – blaming the enduring economic scarring of the 2008 financial crisis and globalisation for lost economic opportunities and offering protectionism and isolationism as solutions.
This tendency is likely to be accentuated by the looming energy and food crises which would result in new large-scale migration from Africa (the total number of people facing acute food insecurity and requiring urgent food assistance has nearly doubled since 2016 and 60% of the world’s hungry now live in conflict zones). Migration which, in turn will further feed right-wing populism especially in Europe with a circular impact of protectionism and withdrawal of investment from countries seen as fragile or vulnerable, further accelerating economic slowdown in the same countries that are migration sources.
And that is before we get onto the dangers of a global recession caused by the over-correction of central banks to inflationary pressures (six out of eight of the times the Fed has raised interest rates in response to inflation have resulted in a global recession…)
In all, conversations in Davos felt downbeat. Talk of recession merged with fears of a depression. The challenge to accepted norms flagging the fragility of the democratic, liberalized, globalized model of economic development with which we are familiar.
Against that backdrop, companies will need to plan carefully. Investments need to be calibrated against the risk of an economic slowdown/downturn and new market entry will have to be tested against emerging instability and uncertainty. Covington’s mixed teams of public policy experts and legal and regulatory lawyers is ideally placed to help companies assess these risks and navigate an increasingly complicated and (possibly) disparate world.