Davos 2023: geopolitics gets real

These themes are different, of course, from the official conference topics, but buried even in the formal programmes you can see the motifs ominously raising their unwelcome head. This year’s conference, for example, is tagged “Cooperation in a Fragmented World”, which sounds to me like a way of putting the most positive spin possible the reality. I don’t suppose they could have gone with "global non-cooperation in an increasingly fragmented world”, or the more plaintive, “Why can’t we just get along?”, but that might be closer to the truth.

The 2020 programme was entitled, incidentally, “Stakeholders for a cohesive and sustainable world” and you can see the environmental crisis peeking out there. The environmental theme hasn’t gone away; about a quarter of the 500-odd forums at Davos still explore it. But you do sense that global leaders are putting a peg in the environmental debate for it bit, which in itself reflects how serious they consider the current geopolitical crisis.

The 2022 theme at the Summer Davos held only eight months ago was “History at a Turning Point: Government Policies and Business Strategies”. Or, to put it another way, “WTF is happening in Ukraine?! What is that about?!” In some ways, the 2023 theme derives from this bewilderment.

The conference hasn’t even started yet, and already a new word for this geopolitical focus has been proposed: polycrisis. The term arose out of a pre-conference report called The Global Risks Report 2023, which actually bore the title, “Welcome to the age of the polycrisis”.  The idea has come up before, particularly during the financial crisis, but more recently it was adapted by UK historian Adam Tooze. In a piece in the Financial Times, Tooze quoted former US Treasury secretary Lawrence Summers’s recent remark, “This is the most complex, disparate and cross-cutting set of challenges that I can remember in the 40 years that I have been paying attention to such things.”

Normally, the Global Risks Report asks participants to do a simple thing: categorise their top risks, and consequently, it isn’t so much of a forum report as a report on the views of participants. And it should be said the Global Risks Report has come in for some stick over the years for being a bit flat-footed. The most cited failing has, almost inevitably, been around the issue of climate change.

Climate-related issues have been frequently mentioned over the years, but climate change as a concept has only ranked as one of the top five global risks since 2010. That would be 20 years after the Intergovernmental Panel on Climate Change, established by the World Meteorological Organisation and the UN Environmental Programme, put out its first paper on what is now an incontrovertible crisis. It must be said, the forum is making up for a slow start with a continual focus on the issue, which remains its top 10-year danger in this year’s report.

So what is a “polycrisis”? The report defines it as “a cluster of related global risks with compounding effects, such that the overall impact exceeds the sum of each part”. Currently, the constituent components of the polycrisis are resource competition, global cooperation, and, of course, climate change.

And it’s easy to see the logic here: resource competition leads to resource shortages, leads to global competition, causing global cooperation with issues of global concern like climate change to suffer. The same sort of logic is evident in geoeconomic confrontation; evidence of that issue has become very clear with things like restrictions on the international sale of computer chips. But it's visible too in more basic issues like water stress. And it’s extremely visible in the missiles smashing into buildings in Ukraine. “At times one feels as if one is losing one’s sense of reality,” Tooze wrote. You don't say.

There is an economic background here too. Much of the West experienced something called “the great moderation” over the past 25 years, in which volatility in the business cycle flattened out. Markets always seem to be in full craziness mode for one reason or another, and the great moderation was rudely punctured by the 2008 financial crisis. But the stats do show remarkably lower volatility in, for example, US GDP growth, particularly comparing the period 1985 and 2007 to the period before 1985. After 2008, the business cycle largely returned in the developed world to the moderation framework.

Until last year, that is, when everything fell off the bus. One way to look at this is to compare bond yields with equity market growth. Mostly they balance each other out, which is why “balanced” portfolios" like to have a bit of both, usually tipped 60-40 toward equities. But last year, both equities and bonds unwound simultaneously, while inflation increased. And now the IMF and the World Bank suspect the world will go into recession this year. In short, there are now arguments, or at least fears, that the great moderation is over.

And the reason (or at least one of the reasons) all this is happening is that global cooperation is fraying. You could put it this way; we hate globalisation. Except, of course, when it goes away. And then, like the ugly old boot we didn’t like the look of but regret throwing out because it fit so well, we want it back.

Good investing,

Tim Cohen