Megatrends revisited: is the West backed into a corner?

Published: Apr 2015

In 2011, ECR Research identified the eight megatrends that defined the markets. Now, as these trends continue to determine both the global politico-economic and geopolitical climates – and with that, movements in the financial markets – it is important to revisit their significance. These megatrends are:

  1. The emergence of new (great) powers and how the ‘old guard’ reacts.
  2. The shortcomings of the international economic system.
  3. The West’s unsustainable debt burden.
  4. Ageing populations, which take a heavy toll on public finances.
  5. Wars as a result of competition over limited resources, food and water.
  6. New media and technology.
  7. General distrust of the establishment.
  8. Non-state players – such as multinationals, NGOs and popular movements, on the global stage.

Four years on, these eight developments are perhaps even more relevant than ever before since the trends in question are making things increasingly difficult for Western countries. Based on Purchasing Power Parity (PPP), China has overtaken the US as the world’s largest economy. The Eurozone, on the other hand, has not regained the economic strength it demonstrated before the Great Recession. At the global political table, the positions of the US and Europe are being systematically undermined.

China, however, is not excluded from the issues global financial markets face. Failures of the international economic system are yet to be addressed and debts are irresponsibly high in the public and the private sectors. As Martin Wolf, British journalist and influential writer on economics, recently explained, the aggregate debt of Chinese businesses and households has increased by 70% in the period 2007-2014. If indebtedness in the financial sector is added to this figure, the amount increases to 111%; and in combination with public debt, the grand total runs to 124%.

With the exception of Israel, debt as a percentage of GDP has increased in all high income countries. Additionally, the inequality – an inevitable result of the way the system operates – leads to more unrest and dissatisfaction for local populations. French economist, Thomas Piketty, has pushed the topic of inequality high up political agendas but it remains difficult to determine whether the response is purely superficial. In other words, will the politicians really try hard to counter inequality? For now, the answer isn’t clear.

Resources: a balancing act

ECR Research predicts that the debt mountains and weaknesses of the international economy will become glaringly evident in the coming years. As more employees retire, the ratio between workers and non-workers will also become increasingly out of kilter – and the result will be increased spending on social security, healthcare, and pensions that is unsustainable for the majority of countries.

It must be noted that although the world has not seen large-scale wars over resources in recent years, in various regions throughout the developing world, tensions often mount during prolonged periods of drought and over the burden of population increases. Researchers have pointed to drought as a major factor in the violent uprising that began in Syria in 2011. Countries across the globe also have to juggle the fight against climate change which is, in some peoples’ view, not addressed often enough. Currently, the shift towards sustainable energy falls short of projections.

Turning the volume up

A trend that has exceeded all expectations is that of media and communication developments. Whereas the world may have shrunk, the economic opportunities have increased. The result, however, is something of a double-edged sword because, at the same time, such developments have enabled certain regimes with authoritarian tendencies to further suppress their citizens.

In Western countries, the populations are in no mood to keep quiet. They grow increasingly suspicious of those in control and support for populist movements has been accumulating proportionally. As reported in Treasury Today last month, populist parties may be refreshing, but they can also be dangerous. According to journalist and author, Philip Stephens, “it leaves a vacuum of legitimacy, one being filled by the ‘antis’: the anti-elite, the anti-European, the anti-immigrant and the anti-capitalist.” These ‘antis’ are now in power in Greece and the same could potentially happen in other EU states in the course of the year. In fact, ECR Research predicts that the anti-establishment trend will undoubtedly continue as nationalism, populism, and a focus on sovereignty continue to be at the heart of (inter)national politics.

Additional forces

The last megatrend on ECR’s list is the growing importance of non-state actors: ISIS, the rebels in Ukraine, hackers collectives, large multinationals (including banks) are a few examples which bring with them uncertainty and instability. As such, nation states are again coming to the fore as voters force politicians to steer an isolationist course – perhaps, in the idle hope that the dangerous outside world ceases to exist if you close the curtains and hide.

ECR Research predicts that the anti-establishment trend will undoubtedly continue as nationalism, populism, and a focus on sovereignty continue to be at the heart of (inter)national politics.

It is not easy for capitalist democracies to find – and maintain – their place in a tumultuous world. Simultaneously, the aforementioned megatrends cast doubt on the superiority of the Western model of liberal democracy. Countries such as Russia and China are not inclined to impassively wait until the West gives them a more prominent place at the table – quite the opposite.

Western countries are plagued by uncertainty due to doubts about capitalism, the ageing population, and the fact that many believe the political and economic elite have failed to deliver.

Time for change?

The prevailing idea in the West is that every state is inclined towards the capitalist model but ECR suggest this may well be delusional. To quote a Financial Times article, “instead of viewing Putin’s Russia as a democracy in the process of failing, we should view it as an authoritarian project in the process of succeeding.” Indeed, various other countries are moving towards authoritarianism and dictatorship – although some are more successful in this respect than others.

China’s Xi Jinping has become the most powerful leader since Deng and is playing all sorts of power games to safeguard his position. Elsewhere – in countries like Venezuela, Turkey, Ecuador, Thailand, Egypt, and Hungary – democracy is not that important to the leaders (to put it mildly). Occasionally, such countries may talk the democratic talk, so to speak, but only to further their authoritarian goals. Legal systems are used to eliminate or hamper opposition leaders while parliamentary elections tend to be a fig leaf to cover up the propaganda machinery. Likewise, many populist parties in the European democracies claim to champion unfortunate citizens. However, in reality they trample on democracy and accountability.

The struggle isn’t over

Nothing suggests that the undemocratic trends and the advance of the ‘antis’ will be short-lived. The question of concern here is: how will this affect the markets? There are two sides to this story. For years, the West has been doing business and forging ties with nations such as Saudi Arabia, for instance, because of the country’s apparent stability and the fact that it supplies a large amount of fuel that powers the global economy. Naturally, the markets prefer a steady authoritarian regime, which allows foreign companies to enter and embraces market thinking (up to a point) compared to unpredictable, chaotic, and half-baked democracy. In other words – as long as authoritarian leaders have their financial houses in order (and open their doors to Western businesses and capital flows) politicians seem perfectly happy to set morals aside.

Yet, it remains to be seen how long the leaders in question manage to keep their economies on the rails. And in any case, will such countries aim for profitable trade relations with the West or seek confrontation? Russia exemplifies an authoritarian state that is steering a confrontational course and tries to stir up trouble for the West in any way possible.

For the moment, it appears that the West is unable to respond adequately to the authoritarian trends and the advance of the populists. The eight megatrends we described may even strengthen the hand of the authoritarian regimes as well as the populists. The resulting tensions are fuelling expectations that the West will struggle to achieve the growth rates that were customary in the days before the Great Recession. If Western countries have been backed into a corner, as it seems, now is the time to start reversing the negative effects of the eight megatrends – more needs to be done than has been achieved in the last four years.

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