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The Top Geopolitical Risks of 2013

Posted on January 7, 2013

It’s 2013. We’ve made it. For those of us watching from the United States, the last few days of 2012 (to say nothing of the first couple of this year) were touch and go. But here we are.

Political risk has entered our vocabulary. Whether staring over the fiscal cliff, battling the eurozone crisis, trying to profit from a rising China, or taking cover from the Middle East; around the world, politics has come to dominate market outcomes. Geoeconomics now sits alongside geopolitics in matters of war, peace, and prosperity. Economic statecraft is a key component of global foreign policy. State capitalism is a principal challenge to the free market.

That’s been increasingly true for the last four years because of the way perceptions of political risk have spread across the developed world. Since the financial crisis, what did or didn’t happen in Washington has had an outsized impact on market outcomes. So too the reaction of European governments and pan-European political institutions to a crippling, systemic eurozone crisis. We’ve seen a succession of five governments in Japan digging out, first from the recession and then from the largest-scale natural disaster the world has seen in decades.

In responding to the worst economic slowdown since the great depression, it’s no surprise that political risk has come to the fore. Dramatic government action was called for, and global markets moved to price in the resulting uncertainty. But looking to 2013, political risk in the developed world is now overstated. Despite the chaos in Congress–which we’ll surely see much more of in the coming year–concerns about the fiscal cliff in the United States have been overplayed. So too the fragmentation of the eurozone. And the impact of continued zero growth in Japan. The takeaway: the world’s advanced industrialized democracies are much more resilient than feared, and their downside risk is “bounded.” Indeed, in the aftermath of a major crisis, most are even “anti-fragile.”

When I started Eurasia Group in 1998, we focused on emerging markets. My definition of emerging markets served just as well as a business plan: “those countries where politics matters at least as much as economics to market outcomes.” That definition has seemed quaint with the eurozone in crisis and US credit ratings downgraded. But it’s still the case.

Indeed, it’s more important now than ever before. For the past five years, emerging markets have accounted for two-thirds of the world’s growth. By 2020, that number is expected to grow to 75%. The heightened political risk resulting from that change would be a primary challenge even in a geopolitically stable context of US-led globalization. But in a G-Zero world with an absence of global leadership and geopolitics very much “in play,” everyone will face more volatility. That’s going to prove a much bigger problem for emerging markets than the developed world. In 2013, the first true post-financial crisis year, we’ll start to see that more clearly.

And so the top risk this year is:

Read more: The Top Geopolitical Risks of 2013 | World Future Society.

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