Josh Cochran

The Disintegration of the World

The postwar geopolitical system is breaking down, and what comes next could be highly volatile—especially for big corporations.

Leon Trotsky is not often invoked as a management guru, but a line frequently attributed to him would surely resonate with many business leaders today. “You may not be interested in war,” the Bolshevik revolutionary is said to have warned, “but war is interested in you.” War, or at least geopolitics, is figuring more and more prominently in the thinking and fortunes of large businesses.

Of course, multinational companies such as Shell and GE have long cultivated an expertise in geopolitics. But the intensity of concern over global instability is much higher now than in any recent period. In 2013, the private-equity colossus KKR named the retired general and CIA director David Petraeus as the chairman of its global institute, which informs the firm’s investment decisions. Earlier this year, Sir John Sawers, the former head of MI6, Britain’s CIA, became the chairman of Macro Advisory Partners, a firm that advises businesses and governments on geopolitics. Both appointments are high-profile examples of a much wider trend: an increasing number of corporations are hiring political scientists, starting their board meetings with geopolitical briefings, and seeking the advice of former diplomats, spymasters, and military leaders.“The last three years have definitely been a wake-up call for business on geopolitics,” Dominic Barton, the managing director of McKinsey, told me. “I’ve not seen anything like it. Since the Second World War, I don’t think you’ve seen such volatility.” Most businesses haven’t pulled back meaningfully from globalized operation, Barton said. “But they are thinking, Gosh, what’s next?”

Ian Bremmer, the founder of the Eurasia Group, which advises companies on geopolitical issues, told me that convincing companies of the value of his firm’s services was, until recently, a challenge. “There used to be a level of skepticism among top executives: ‘This is interesting, this is fun to talk about, but does it matter for my business?’ ” But they don’t say that anymore. “We no longer have to make a business case as to why what we do is relevant.”

The headline reasons are obvious. Russia has annexed Crimea. A new, self-proclaimed state has arisen in the Middle East, and the region’s turmoil has deepened. China’s rhetoric has grown more martial. The eurozone experiment is foundering.

At heart, though, business’s growing focus on geopolitics is driven by a more fundamental shift. When the Berlin Wall collapsed, we entered a world in which two big things were happening, as viewed from the executive suites of Western companies. The first was globalization—more and more of the world’s population was joining a highly interconnected global economy largely governed by Western rules and institutions. The second trend, closely related, was the movement of more and more countries, at varying paces, toward market democracy. You might call it a mash-up of The World Is Flat and The End of History and the Last Man. A golden age of “free markets and free people,” as The Wall Street Journal’s motto has it, seemed to be dawning worldwide.An important corollary to these sunny assumptions was the belief that as we all got richer and closer together, we would stop fighting. Hence Thomas Friedman’s 1999 “Golden Arches” theory: “No two countries that both had McDonald’s had fought a war against each other since each got its McDonald’s.”

Consider this assertion by Condoleezza Rice in Foreign Affairs in 2000:

Powerful secular trends are moving the world toward economic openness and—more unevenly—democracy and individual liberty … Some states still hope to find a way to decouple democracy and economic progress. Some hold on to old hatreds as diversions from the modernizing task at hand. But the United States and its allies are on the right side of history.

What’s most striking here is the language of inevitability: “powerful secular trends,” “the modernizing task at hand,” “the right side of history.”

For businesses, these trends meant vast new opportunities, and with seemingly little risk. The expected windfall from globalization was memorably summarized in 2001 by Jim O’Neill, then the chief economist for Goldman Sachs, in an acronym that made him a business superstar: BRIC. That term referred to the emerging-market powerhouses of Brazil, Russia, India, and China, whose embrace of the global market economy, O’Neill believed, was one of the most important transformations of our time and would earn fortunes for smart business leaders along the way.

Since then, fortunes have been made, of course, and the world has grown more economically integrated. Western companies have diversified their operations globally to find cost efficiencies and to serve new markets. The tragedy of 9/11 and the bloody scrambling-up of the Middle East were painful reminders that the world had not yet reached any end-of-history ideal. But these events mattered less to the assumptions and strategies of huge multinational companies than one might guess.

From the fall of the Berlin Wall to the financial collapse, globalization recast the postwar economic order: middle-class incomes surged in emerging markets and fell in industrialized nations. (Lakner and Milanovic, "Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession," World Bank, Dec. 2013) (Annotations by James Plunkett)

Russia’s annexation of Crimea and its hybrid war in eastern Ukraine are different. A nuclear-armed former superpower, Russia was the R in BRIC, a member of the G8 while that still existed, and, according to the International Monetary Fund, the world’s eighth-largest economy in 2013. (Egypt ranked 40th, Iraq 46th, and Libya 70th.)Moreover, Russia’s irredentism has overturned much more than the hopeful post–Cold War beliefs about modernization and convergence. It has upset even the assumptions that followed the 1975 Helsinki Accords. That historic pact laid out a peaceful modus vivendi, complete with stable borders, for the West and the U.S.S.R., which was firmly committed to its separate economic and ideological sphere. We now seem to be moving back toward the age of Metternich, in which might was right: instead of the end of history, we have history’s revenge.

As a result, the optimistic inevitability expressed by Rice in 2000 is far removed from the worries articulated by another Republican foreign-policy thought leader, Robert Kagan, in an essay published in the Journal of Democracy at the beginning of this year. The issue title set out the problem bleakly enough—“Is Democracy in Decline?”Kagan seeks to directly refute the inevitability argument:

Who is to say that Putinism in Russia or China’s particular brand of authoritarianism will not survive as far into the future as European democracy, which, after all, is less than a century old on most of the continent? Autocracy in Russia and China has certainly been around longer than any Western democracy. Indeed, it is autocracy, not democracy, that has been the norm in human history.

The end-of-history thesis may be right in an intellectual sense—I believe that capitalist democracy has proved itself to be the only compelling, universalist vision of how to live the good life. But the stable world order many of us assumed this thesis foretold has not come to pass.

“Was ExxonMobil worried about a skirmish in Georgia? I doubt it,” Michael A. McFaul, the former U.S. ambassador to Russia, told me, referring to the 2008 Russian military intervention in Abkhazia and South Ossetia. “But now companies like that one care a lot about the details of the conflict in eastern Ukraine. The conflict in Donetsk is being closely watched day by day by multinational corporations and is influencing their decisions.”

That doesn’t mean the age of globalization or of the multinational company is over—even as it announced a $1 billion loss as a result of Western sanctions against Russia, Exxon has been buying up long-term Russian drilling rights, in a bet that eventually the country will return to the world economy. But some companies are beginning to question their breadth of operations and their vulnerability to regional instability, even in places that haven’t recently been unstable.

The global middle class is projected to more than double over the next 15 years, with almost all of that growth in the fast-developing economies of China and India. As Western economies stagnate, the balance of world power is poised for a profound shift. (Kharas and Gertz, "The New Global Middle Class," in China's Emerging Middle Class, 2010) (Percentages may not add up to 100 because of rounding)

Indeed, one consequence of the evolution of the global economy toward openness and dense interconnection is that states can now deploy more-powerful economic weapons against one another—sometimes resulting in sizable private-sector casualties. An obvious example is Amy Pascal, Sony Pictures’ top film executive, who was forced to resign after a comedy about North Korea’s leader, Kim Jong Un, provoked an embarrassing hack of the company’s e-mails and confidential data.Another is Western companies, like Exxon, whose growing Russian businesses have been frozen by the financial and economic sanctions, the kinds of measures that a World Economic Forum report from early this year described as “the drones of the future—highly targeted weapons that can be deployed to devastating effect.” Several Western oil companies have been hit, including BP, which owns a 20 percent stake in Rosneft, the Russian oil producer controlled by the Putin confidant Igor Sechin and subject to some of the toughest sanctions. So have industrial companies like Siemens and GE, which had been expanding aggressively in Russia. Companies that may have assumed they were acting as ambassadors of a sort, and working with the same broad interests as their Western governments, have been bitten hard not only by Russian aggression but by the West’s political reaction.

The World Economic Forum, whose annual meeting in Davos, Switzerland, is a gathering of globalization’s winners, is worried. Its recent report captured the new anxiety among international CEOs: “As tensions between great powers rage, the global businesses that once saw themselves as masters of the universe now feel like pawns in a game over which they have little control.” Business leaders are being reminded of the extent to which the global markets and labor forces they have so enthusiastically embraced over the past three decades are a political construct. They exist only thanks to the geopolitical order that the West set up for itself after the Second World War and that the former Soviet Union, China, and the other BRICs joined after the fall of the Berlin Wall.The snarling bellicosity of a fading Russia and the chaotic remaking of the Middle East suggest that this geopolitical order is fraying. And these same events have caused some observers to look with new eyes at the continuing rise of China—the country that most clearly symbolizes globalization’s business promise, but also one that is ambivalent about Western power and increasingly aggressive toward its neighbors in the Pacific. Ian Bremmer described these times as “a period of geopolitical creative destruction—the glue that is holding the world together no longer sticks.” The postwar geopolitical system is breaking down, and we don’t yet know what will take its place. “The last time this happened was the end of World War II,” Bremmer said. “The level of geopolitical risk as a consequence of this transition—which is just starting—is absolutely going to be a big deal.”

As national economies have become more interconnected, a second source of business instability—or at least business unease—has also developed. Unaddressed, it may prove more disruptive than the first. In 2004, Ben Bernanke declared that we were living in the age of the Great Moderation: “One of the most striking features of the economic landscape over the past 20 years or so has been a substantial decline in macroeconomic volatility.”

Not anymore. Nearly seven years after the global financial crisis, the Western industrialized economies are still struggling to grow, and even those countries whose GDP is expanding are failing to raise middle-class incomes and create enough middle-class jobs. In Europe, the political expression of this economic malaise is the rise of radical parties on the left and right; in the United States, it is polarization and gridlock. The struggles of the middle class in rich nations are not attributable solely to globalization, but neither are they unrelated to it.“I think, in a 300-year time frame, this 20 or 30 years will be looked on as a pretty amazing period,” McKinsey’s Dominic Barton said, referring to the past five years and the coming decades. “People are asking, ‘How does the capitalist system work? Is it right? Is democracy right?’ There are a lot of people asking fundamental questions.”These kinds of questions, which used to be the province of Occupy Wall Street, are beginning to circulate among the business elite. Here’s how the World Economic Forum set out the problem ahead of its meeting in Davos this year:

Not long ago those who worried about inequality were accused of partaking in the politics of envy. In the past year this concern officially became mainstream as voices from the Pope to Christine Lagarde to President Obama cautioned of its impacts. The mounting consensus: left unchecked, economic inequality will set back the fight against poverty and threaten global stability.

Today’s corporate executives built their careers in the age of the Milton Friedman–inspired adage “The business of business is business” and Michael Jensen’s theory that maximizing shareholder value was all a business should care about. The technological revolution, and the Silicon Valley libertarian ethos that came with it, intensified the corporate conviction that what mattered was the private sector and making it work—politics and public policy were secondary.

That’s not to say business has stopped trying to influence specific political decisions—quite the contrary. Nonetheless, as Mark S. Mizruchi, a sociology professor at the University of Michigan, documented in The Fracturing of the American Corporate Elite, a book published in 2013, business leaders in recent decades have stepped back from broader engagement with the big political issues of our time.

But the forces of globalization have created pressures at home that businesses can no longer safely ignore. One symptom of our era of change is an erosion of trust in major institutions, prominently including corporations: in 2015, the public-relations firm Edelman found that, for the first time since 2008, trust in business broadly declined, falling in 16 of the 27 countries included in the firm’s annual trust survey.

As we grope our way toward a new domestic and international order, successful businesses will be the ones that recognize a truism that should have been obvious from the start: business and politics are in fact inseparable, and the latter makes ever greater economic integration less certain than business leaders might wish. Companies not only need to account for this internationally—planning carefully for contingencies—they also need to show that they are invested in the greater good wherever they operate, and are not just working for their own narrow self-interest.

Margaret Thatcher famously said, “There is no such thing as society,” arguing that individuals should look out for themselves. That may have been the right message for the decade that ended with the fall of the Berlin Wall. But today, with the entire post–Cold War world order freshly in flux, society is back, and business needs to recognize that.

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