Growth in China, India and other deve-loping countries has increased the size of their middle classes.
In the past four years, we have witnessed the worst financial market meltdown in decades, the sharpest global slowdown since World War II, an existential crisis in Europe and a wave of unrest across the Middle East. Any one of these events would send shock waves through global markets. Together, they mark a historic moment of international turmoil and transition – and one that’s far from finished.
What’s next? The global economy will face more such volatility over the next decade, in part because it will rely for much of its strength and resilience on inherently less predictable emerging market countries.
The United States will (eventually) address its debt problems, even if it takes a new crisis to force Republicans and Democrats to agree, and the US economy will continue to profit from both a culture that begets innovators and entrepreneurs and a system that rewards them. Europe will stumble slowly toward a more perfect union, strengthening the euro by mending many of its original design flaws. But for the next few years, neither America nor Europe will do much to fuel global growth.
Bad news
That will leave the major emerging markets to get things going. And that’s bad news, because these nations, already less predictable and mature than their developed world counterparts, face many new forms of political risk.
First, there are the hot spots. From new rivalries in Asia to the next wave of upheaval in the Middle East, the risk of confrontation is growing. In Asia, China and many of its neighbors are increasingly at odds over maritime borders and access to the natural wealth that lies beneath the waves.
China and the United States face frictions too. The United States’ increased focus on security in Asia and its progress toward a US-led trans-Pacific trade partnership (a deal virtually certain to exclude China) will combine with political transitions in both countries to heighten tensions between Washington and Beijing. Fights over trade and investment rules, cybersecurity, and the collision of state-driven and market-driven capitalism will intensify in coming years, and it will become more difficult for Asian states to maintain both close commercial relations with China and tight security ties with America.
In the Middle East, the unwillingness of outsiders to intervene directly in emerging conflicts will stoke local rivalries. Turkey, Iran and Saudi Arabia – governments that offer radically different models for the region – will compete to shape its future. Recent attacks on US targets in Libya, Egypt, Yemen and elsewhere have heightened Washington’s already considerable aversion to direct involvement in the region’s conflicts. Sanctions threaten to destabilize Iran, and sectarian tensions have stoked violence in Iraq. Syria’s civil war churns on, generating anxiety in nearby countries like Turkey, Iran, Iraq, Jordan, Lebanon and Saudi Arabia.
But there are also important sources of political risk inside many of the emerging market powerhouses. Growth over the past two decades in China, India, Indonesia, Brazil, South Africa, Turkey, Russia and other developing countries has increased the size of their middle classes. In Brazil alone, 31 million people joined the middle class between 2001 and 2009. According to the Organisation for Economic Co-operation and Development, Asia now accounts for less than a quarter of the world’s middle class – but by 2020, that share could very well double.
The bottom line: Citizen-consumers now have the means and mobility to demand more from their governments – even in authoritarian countries.
In China, the growth of the middle class coincides with an enormously ambitious reform project, one that pits officials who want to transfer wealth toward Chinese consumers, so they can buy more locally made products, against exporters and state-owned companies that profit mightily from the current system. In Russia, the urban middle class is turning on President Vladimir Putin, testing his, and its own, strength.
In India, middle-class voters are newly empowered to challenge national and local officials over corruption charges. In Brazil, middle-class consumers now demand better public services and a more transparent government. There are similar examples in Turkey, South Africa, Mexico and a dozen more developing countries.
Adding to the risk, these newly empowered citizens are finding their voices just as growth is slowing in most of the leading emerging market economies. And even a modest slowdown could impose plenty of pressure on political leaders. An expected reduction in average emerging market growth rates from 7.5-8.5 per cent before the financial crisis, to a rate closer to 5-7 per cent over the next several years could have serious social and political repercussions.
In short, as the global economy’s trajectory depends more heavily on decisions made by developing world leaders, we can expect a lot more political risk – and more unwelcome surprises – in years to come.
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