We are living in an age of unprecedented risks

Business faces political upheaval while politics grapples with disruption

Henry Paulson

Over the course of my 50-year career, with the exception of the 2008 financial crisis, I have never seen the public and private sectors buffeted by so much risk. These new risks are not financial, but they are unprecedented in their character, not just their scope.

Businesses face heightened political risks. While this is not new, in the past such risks simply shaped the context in which global firms operated. Successful companies could navigate through them. Now, politics threatens to disturb the foundations of the global system.

Governments, meanwhile, confront unprecedented business risk because the private sector generates so much disruptive innovation. Even authoritarian governments can no longer expect to exercise exclusive control over their domestic economies. This is not just due to hardware innovation. Communication and data flowing through privately controlled platforms have enabled social and political mobilisation that challenges the state’s role.

This week in Singapore, the Bloomberg New Economy Forum launches an effort to foster growth and development, especially in emerging markets. It hopes to help government and business better understand the risks each generates. A strengthened and sustainable global economy requires mitigation of these risks and joint solutions.

Three risks posed by government to business stand out. The most apparent is the power of populism and nationalism in advanced democracies. For a generation, market participants presumed these were emerging markets issues. Europe and the US were viewed as stable business and investment environments with robust institutions and predictable shifts at the ballot box among established political parties.

No longer. Today, advanced economies are generating the most disruptive political risks to businesses. Washington’s shift to protectionism is one example. But it is hardly alone: Italy’s fiscal choices could yet roil the markets. The need to build coalitions in Sweden and Germany, and the weakening of traditional parties, such as the German Social Democrats, looks set to do the same, as populist entrants erode political norms.

A second risk of regulatory chaos has already begun to constrict opportunities for cross-border transactions. That is ironic, as global mergers and acquisitions have hit a record at $3.3tn in 2018.

But turbulent politics are making antitrust issues more complicated and uncertain in the US, Europe, and now China. Regulators weigh in on major transactions using different criteria, often with little transparency. In recent years, we have seen competition regulators outside of a multinational firm’s domestic market kill some transactions, delay others for many months and force divestures when there seemed to be little evidence of monopoly.

A third risk is the increasingly elastic definition of “national security”. Regulators once construed it narrowly to avoid disrupting markets. Now government competition around security issues, not least between Washington and Beijing, threatens economic integration and has blurred the line between defence and commerce.

National security reviews are disrupting trade, investment, and supply chains. More important, the threat of enhanced regulatory constraints is making it almost impossible for some multinationals to plan for the long term.

The landscape is also changing for governments, including both democracies and authoritarian regimes. Multinational business has changed in recent years and corporate executives have many more levers they can pull.

That means governments must navigate business risks, lest they find their hands tied or their objectives thwarted. “Multinational” companies are just that. They can move headquarters, diffuse operations and disperse capital.

States have some tools to prevent this, including strict capital controls and tariffs. But, as US president Donald Trump has discovered with steel tariffs, companies may respond by investing in operations overseas. This turns nations into rivals. Competition for capital investment has sharpened: businesses play countries off against each other, enticing them to offer incentives.

This risks a race to the bottom in which corporate profits determine policies.

That highlights an even bigger business risk to governments. Chief executives can mobilise employees and customers and they have the money to back campaigns. So they are driving political and social change. But they are also motivated by market forces. They will invest where political risk is manageable and they can achieve the best shareholder returns. Politicians must ask whether a laissez faire policy that lets business do this is in a nation’s interest.

Government and business have different goals, divergent incentives and answer to distinct constituencies. But they have one thing in common: they need to grapple with risk. That means they are stuck with each other.

Successful governments will protect their nations from business risk while offering an attractive home for successful multinational companies. Astute businesses will adapt to changing political landscapes. Sometimes the two sides will co-operate. More often, they will win or lose by finding opportunities as they assess, manage and navigate the risks they pose to each other.

The writer served as US Treasury secretary 2006-09

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