Politics is in a recession, but markets and economies are in recovery mode. In the future, the global political order is expected to change, notably driven by the reversal of the trend towards democratization, the threats from populist nationalism and the implications of the end of globalization. 

The Credit Suisse Research Institute (CSRI) commissioned some of the world’s foremost  academics and political experts to examine the outlook for global politics. The report finds that while the global economy and financial markets have emerged from an almost decade-long recession, liberal democracy is struggling. Former UK Prime Minister Sir John Major, alongside other experts, asks if politics as we know it will survive, as democracy appears in retreat, “stifled by its own virtues.” 

Urs Rohner, Chairman of the Credit Suisse Research Institute and Chairman of the Board of Directors of Credit Suisse Group, commented: “We see tensions arise between societies and the state. The number of new democracies stagnated in the mid-2000s and has since followed a downward path. International markets have proven quite resilient to individual geopolitical events, but the consequences of the changing political ecosystem are likely to be substantial going forward.” 

The contributions include current analysis and opinion pieces from former UK Prime Minister Sir John Major, former US Under Secretary of State Nicholas Burns, Professor Francis Fukuyama, Professor Michael M. Ting, as well as the CSRI’s Michael O’Sullivan. 

Among other topics, the report looks beyond the 2017 report on “Getting over Globalization”, which examined the passage from globalization to multipolarity, and asks if politics will recover from this difficult time. Michael O’Sullivan, Chief Investment Officer, International Wealth Management, Credit Suisse said: “In the next ten years, the key political trends will be the rise of regional exceptionalism, the need for governments in emerging markets to satisfy the related material and political aspirations of their populations and the emergence of more balanced development goals in many countries.” 

In his introductory article, Sir John Major argues that democracy is facing an uphill struggle in contrast to autocratic options as it has to persuade and seek consensus before acting. This, Major argues, can make autocracy seem more efficient, more decisive, more able to deliver its promises and more swift to act in crises. “The rise of non-democratic China to economic super-stardom is one of the great stories of history,” and an example of autocratic success, he says, while noting that “there is a price to pay for its success. The price is a lack of personal freedom for the masses.” Major warns that “in the democratic West, we have come to believe that our liberal, social and economic model of democracy is unchallengeable. It is not.” 

“Democratic recession” or longer-term downturn?

Professor Francis Fukuyama, senior fellow at Stanford’s Freeman Spogli Institute, in this report examines the rise of populist nationalism. He asks whether the phenomenon is merely a “democratic recession,” or a longer-term downturn in the fortunes of liberal democracy worldwide. Fukuyama analyzes populist regimes and how they are using democracy to weaken or undermine state and law. “The future of democratic government in both Europe and North America will very much depend on how their political systems adapt to the large social forces that have been unleashed by globalization and technology,” concludes Fukuyama in his chapter. 

Rational voting?

Professor Michael M. Ting from Columbia University takes the novel angle of applying lessons learned in behavioral economics to electoral behavior. Recent events, says Ting, have brought many questions about voters’ influences and motivations to light. While voters tend to behave rationally, standard economic accounts of human decision-making leave some conspicuous anomalies in the electoral setting. 

“Behavioral economics can provide psychologically grounded explanations for these quirks in voter behavior. Understanding how citizens approach voting is of vital importance to the endeavor of improving electoral processes,” notes Ting. “If consumers can make bad choices as a result of their cognitive limitations,” he comments further, “then why would voters not do so as well?” 

Capital markets and investment implications

Bob Parker, Chairman of the Asset Management and Investors Council, explores ten main political and social themes with an actual or potential impact on capital markets and asset class performance. Among these he discusses: the creation of new political parties and, where successful, the introduction of structural reforms; the rise of populism and related policies, covering a range of either “left-” or “right-” leaning stances; the USA’s global retreat, accompanied by a retracting globalization; widespread geopolitical tension; an increased political focus on inequality and migration and a crackdown on corruption; and greater use of social media/technology. 

“The world today appears to be shifting away from globalization and conventional US hegemony toward a more multipolar world economic order.” Parker argues that the investment implication is that regional markets will be more influenced by regional or local factors rather than global trends and that correlations between regions will break down – emphasizing the opportunity for more active investment management rather than global passive asset allocation. 

What to watch in 2018 – the year of Europe?

Nicholas Burns, Professor at Harvard University and former US Under Secretary of State, looks at what lies ahead for global politics as well as current geopolitical risks. “The world is experiencing the most profound leadership transition in a generation,” states Burns, who adds that 2018 promises to be a year of significant challenge to global stability and peace. 

He goes on to question if this may be the year of Europe as an uncertain USA under President Donald Trump continues to retreat from its traditional leadership role. Burns questions if other democratic powers, most notably Europe, India and Japan, can fill the vacuum created by an American Administration that is increasingly opting for policies leaning away from international engagement. 

Among the key issues to watch in the year ahead, Burns argues, include if a strengthening Europe can continue to cope with a multiplicity of serious internal and external threats, whether Middle East countries can manage to contain the powerful forces that make theirs the most volatile region in the world, and if China and the USA can find a balance in their complicated relationship as both partners and rivals while avoiding a possibly catastrophic conflict in North Korea.

Long-term vision

Credit Suisse’s Michael O’Sullivan and Krithika Subramanian ask whether politics matters to economic growth and vice versa. In the wake of the global financial crisis, economic growth is the main stated goal of most political leaders. But this has to change, they argue: “Governments need to be more disciplined in the attainment of other socio-economic goals.” 

For developing and emerging economies, they claim there are significant gains to be reaped from improvements in institutional quality. A growing trend, particularly in emerging markets, is institutionalizing economic progress with the help of long-term visions. “We increasingly see this as a driving force for more holistic changes. Most notable are Middle Eastern economies that are seeking diversification from oil dependency.” 

Afshin Molavi, Senior Fellow at the Johns Hopkins SAIS Foreign Policy Institute, focuses on the more than 85% of the world that lives outside of northern America and Europe. Rapid urbanization, growing middle classes and unprecedented connectivity is shaping and reshaping this “85 World” across Africa, Asia, Latin America and the Middle East. “The fate of our world lies heavily in what happens in this 85% of the non-Western world, with profound effects on business, politics and society,” says Molavi.

Given a choice between staying in their own region, or migrating further, young people from the non-Western world prefer staying close to home – if a city offers them meaningful opportunities to fulfill their aspirations. “The future of global politics,” argues Molavi, “lies in the future success or failure of emerging world cities.”

The report “Future of Politics”, published by the Credit Suisse Research Institute (CSRI) is available for download at www.credit-suisse.com/researchinstitute. 

About the Credit Suisse Research Institute

The Credit Suisse Research Institute is Credit Suisse's in-house think tank. The Institute was established in the aftermath of the 2008 financial crisis with the objective of studying long-term economic developments, which have – or promise to have – a global impact within and beyond the financial services. Further information about the Credit Suisse Research Institute can be found at www.credit-suisse.com/researchinstitute.