How can executives move forward in the face of this geopolitical volatility? By going behind the headlines and taking into account what we call the “primary forces of disruption.” Although these four forces have existed for millennia, they are now evolving in high-speed, interconnected and complex ways. The geopolitical outlook for 2020 and beyond will be shaped by these forces — at both the global and regional levels.
1. Globalization: Emergence of a new regionalism
There is an accelerating shift from ever-expanding globalization toward rising regionalization of the global economic and political systems. On the one hand, the new regionalism reflects a continuation of cross-border economic integration. Witness East Asia becoming a driver of regionalization — first with the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and now with the Regional and Comprehensive Economic Partnership (RCEP). On the other hand, regionalism represents the increasing fragmentation of the global economy into smaller blocs. The global trading environment is increasingly characterized by geostrategic competition and rivalry between the three major economic blocs – led by the US, China, and the EU – trumping the rules-based global trading system.
2. Technology: Accelerating global competition
The fourth industrial revolution promises long-term gains in productivity. Artificial Intelligence, 5G wireless networks, and other digital technologies will form the backbone of the 21st century digital economy. Yet, these technologies also accelerate geopolitical competition. Governments – aided by companies headquartered within their borders – that have the capability to build these crucial technologies will be poised to achieve technological sovereignty and determine the “rules of the road” for political and economic cooperation. Indeed, technology encompasses many aspects of the tensions infusing the US-China relationship. China and the US are seeking to effectively disentangle bilateral technology linkages through efforts to prohibit the acquisition of each other’s technology products.
3. Demographics: Aging catalyzes global rebalancing
The global population is aging, with the worldwide median age set to surpass 30 years for the first time in 2020. But this aging is not equally distributed, and risks to domestic political stability are rising in countries with either extremely old or young populations. Europe, where 19% of its residents are 65 years of age or older, is the region with by far the oldest population. In contrast, the youngest region in the world is Sub-Saharan Africa, where the median age is just 18.7 years. The geopolitical balance of power will increasingly shift in favor of economies with sustainable working-age populations—if they are able to successfully integrate large youth populations into the workforce. Without such supportive policies, a youth bulge increases political risk.
4. Environment: Racing against the clock
Climate change is becoming a race against time for government, business and society to develop solutions that prevent the worst consequences of this pre-eminent global risk to materialize. Climate change is a transnational issue that requires a globally collaborative policy response. But global rebalancing from a unipolar to a multipolar world complicates efforts to mitigate climate change because no single country can lead the world on this issue. Climate change also holds the potential to cause large-scale migration flows in the future, which could increase the likelihood of armed conflict.
Geopolitical forces in a world of regions
These primary forces manifest themselves differently across regions around the world, shaping the operating environment for companies. For example, while many regions are turning inward to promote cross-border trade and investment within their own regions, Eurasia is embracing its role in globalization as the bridge between Asia and Europe. Additionally, the race for sovereignty in 5G, AI, and other fourth industrial revolution technologies is becoming fierce in markets throughout East Asia and Pacific, North America and Europe. Technology standards – and the regulations that govern their use – could evolve differently in each region. Companies will need to consider how these trends will impact their global supply chains and operations.
Companies also need to take demographics into account. Older, more mature populations in Europe, Japan, and parts of Eurasia may limit future opportunities for growth, especially if plans call for hiring more workers in the future. In contrast, South Asia, Sub-Saharan Africa and the Middle East and North Africa have large young populations. Companies entering or expanding in these markets will find plenty of labor. But they may need to team with local educational institutions and help younger workers develop the necessary skills for the digital economy.
Although it is a global phenomenon, climate change also has different effects depending on geography. Parts of East Asia and Pacific, South Asia, Sub-Saharan Africa, and Latin America are likely to be hardest-hit by hotter temperatures, rising sea levels and more intense and frequent storms. While companies need to address sustainability concerns across their global footprint, operations in these regions may require special attention to ensure resilience to the effects of climate change in the coming years.
How companies can manage geopolitical volatility
The pace of change in today’s global business environment can be overwhelming at times. Geopolitical volatility can be especially challenging to manage because it often seems unpredictable. Focusing on these four primary forces of disruption enables executives to make sense of the geopolitical environment and better anticipate the risks – both upside and downside – that are likely to occur. To thrive amidst this new era of geopolitical disruption, companies need to incorporate geopolitics into their strategy – what we call geostrategy. Executives who do so will be better equipped to set strategies that will help their organizations navigate through geopolitical volatility in 2020 and beyond.